Kentucky Fried Chicken 2012 Annual Report Download

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China and a Whole Lot More
Staying the Course
2012 Yum! Brands Annual
Customer Mania Report

Table of contents

  • Page 1
    Staying the Course China and a Whole Lot More 2012 Yum! Brands Annual Customer Mania Report

  • Page 2
    ..., except for per share amounts) Year-end 2012 2011 % B/(W) change Company sales Franchise and license fees and income Total revenues Operating Profit Net Income - Yum! Brands, Inc. Diluted Earnings Per Common Share before Special Items Special Items Earnings Per Common Share (a) (a) $ 11,833 1,800...

  • Page 3
    ... group of highgrowth companies. We set a new record for international development by opening nearly 2,000 new restaurants in 2012. We also grew worldwide system sales 5% and operating profit 12%, both prior to foreign currency translation and special items. We generated $1.6 billion in net income...

  • Page 4
    ... around the world. The theme of our 2012 meeting was "On the Ground Floor of Global Growth: China and a Whole Lot More." No statement could better describe Yum! Brands. We, of course, highlighted our 11-year track record but, even more importantly, the future growth prospects of our company. We have...

  • Page 5
    ... operating and development teams in the world. We are really in tune with the consumer and infrastructure development trends that will accelerate our brands' penetration across the country. At Yum! China, we crossed the billion dollar profit mark in 2012, opened our 4,000th KFC, our 800th Pizza Hut...

  • Page 6
    ...to grow. And remember, I'm only talking about KFC. Pizza Hut Casual Dining, with its dramatic sales increase and strong margins in the past few years, is far and away the largest and most successful full-scale restaurant in China with fantastic new-unit returns. Yet, as I write this letter, there is...

  • Page 7
    ...top 10 emerging markets, compared to 58 restaurants per million in the U.S. In 2012, Yum! Restaurants International (YRI) which includes all countries outside the U.S., China and India Divisions, grew system sales 5%, before foreign currency translation, and developed a record 949 new units, with 65...

  • Page 8
    ... U.S. and China by 2030. For the past two years, Russia has had the highest same-store sales growth out of our 20 business units around the world. System sales grew 46% in 2012 and we opened approximately 40 new restaurants. After buying the Rostik's business (Russia's leading chicken chain) in 2010...

  • Page 9
    ... even greater growth in the future. In the U.S. this year, we made major headway building each of our brands. Operating profit grew 13%, and same-store sales increased 5% for the year, including growth of 8% at Taco Bell, 3% at Pizza Hut and 3% at KFC. Taco Bell earned its place in QSR and social...

  • Page 10
    ...units at Pizza Hut and over 30 net new units at Taco Bell. With improved unit-level economics and strong growth at all three brands, our U.S. business is now firmly positioned for more consistent profit growth in the years ahead. Our long-term goal is for Taco Bell to Product innovations helped KFC...

  • Page 11
    ... these lines, as we entered 2013, we agreed on terms to acquire the operations of our franchise partner in Turkey, a highgrowth emerging market that has over 100 KFC and Pizza Hut restaurants. Our success executing our strategies has driven our Return on Invested Capital to 22%, placing us among...

  • Page 12
    .... I want to thank all our team members, restaurant general managers, franchisees, community partners and restaurant support leaders who are giving their all to win customers and drive our growth around the world. Yum! to You! David C. Novak Chairman & Chief Executive Officer, Yum! Brands, Inc. 10

  • Page 13
    ... as our foundathon Make Customer Mania come alive for every customer in every restaurant Build dynasties in every country Always connect with customers, always reach, always lead a company whtx a xuge xeart Open doors and grow each other Truly care about the world...and save lives with the...

  • Page 14
    ... how we grow Build leading brands in China in every significant category Drive aggressive, International expansion and build strong brands everywhere Dramatically improve U.S. brand positions, consistency and returns Drive industryleading, long-term shareholder and franchisee value how we win...

  • Page 15
    ... of the Board and Chief Executive Officer Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to Be Held on May 15, 2013-this Notice and the proxy statement are available at www.yum.com/investors/investor_materials. asp. The Annual Report on Form 10-K is...

  • Page 16

  • Page 17
    ...you were a shareholder of record as of the close of business on March 18, 2013. ANNUAL REPORT: A copy of our 2012 Annual Report on Form 10-K is included with this proxy statement. WEBSITE: You may also read the Company's Annual Report and this Notice and proxy statement on our website at www.yum.com...

  • Page 18
    ... Benefits ...51 Nonqualified Deferred Compensation ...53 Potential Payments Upon Termination or Change in Control ...55 DIRECTOR COMPENSATION EQUITY COMPENSATION PLAN INFORMATION AUDIT COMMITTEE REPORT ADDITIONAL INFORMATION APPENDIX A YUM! BRANDS INC. LONG TERM INCENTIVE PLAN 58 59 61 63 A-1

  • Page 19
    ... INC. 1441 Gardiner Lane Louisville, Kentucky 40213 PROXY STATEMENT For Annual Meeting of Shareholders To Be Held On May 15, 2013 The Board of Directors (the "Board of Directors" or the "Board") of YUM! Brands, Inc., a North Carolina corporation ("YUM" or the "Company"), solicits the enclosed proxy...

  • Page 20
    ... executive compensation; • The re-approval of the performance measures available under the YUM! Brands, Inc. Long Term Incentive Plan for 162(m) purposes; and • One (1) shareholder proposal. We will also consider other business that properly comes before the meeting. 2 YUM! BRANDS, INC. - 2013...

  • Page 21
    ... regarding an advisory vote on executive compensation; • FOR the proposal to re-approve the performance measures of the YUM! Brands, Inc. Long Term Incentive Plan for 162(m) purposes; and • AGAINST the shareholder proposal. How do I vote before the Annual Meeting? There are three ways to...

  • Page 22
    ... year 2013 (Item 2); • FOR the proposal regarding an advisory vote on executive compensation (Item 3); • FOR the proposal to re-approve the performance measures available under the YUM! Brands, Inc. Long Term Incentive Plan for 162(m) purposes (Item 4); and • AGAINST the shareholder proposal...

  • Page 23
    ... of shareholders, validly executed proxies in the enclosed form returned to us will be voted in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in accordance with the judgment of the proxy holders. Proxy Statement YUM! BRANDS, INC. - 2013...

  • Page 24
    ... 12 directors whose terms expire at this Annual Meeting. As discussed in more detail later in this section, the Board has determined that 9 of the 12 current and continuing directors are independent under the rules of the New York Stock Exchange ("NYSE"). 6 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 25
    ... The Nominating and Governance Committee reviews the Board's leadership structure annually together with an evaluation of the performance and effectiveness of the Board of Directors. In August 2012, the Board created a new position of lead director, after YUM! BRANDS, INC. - 2013 Proxy Statement 7

  • Page 26
    ... has adopted a number of governance practices discussed below. What are the Company's governance policies and ethical guidelines? • Board Committee Charters. The Audit, Management Planning and Development and Nominating and Governance Committees of the YUM Board of Directors operate pursuant to...

  • Page 27
    ... and shareholder return, emphasize long-term incentives and require executives to personally invest in Company stock. In 2013, the Management Planning and Development Committee of the Board of Directors oversaw the performance of a risk assessment of our compensation programs for all employees to...

  • Page 28
    ... on reporting concerns regarding accounting and other matters in addition to our policy on communicating with our non-management directors. Any person, whether or not an employee, who has a concern about the conduct of the Company or any of our people, with respect to accounting, internal accounting...

  • Page 29
    .... Management Planning and Development: Robert D. Walter, Chair David W. Dorman Massimo Ferragamo Thomas M. Ryan • Oversees the Company's executive compensation plans and programs and reviews 5 and recommends changes to these plans and programs • Monitors the performance of the chief executive of...

  • Page 30
    ... revenues and the related person is not an executive officer of the other company. Does the Company require stock ownership by directors? Yes, the Company requires stock ownership by directors. The Board of Directors expects non-management directors to hold a meaningful number of shares of Company...

  • Page 31
    ... nominees below contains information regarding the person's service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences...

  • Page 32
    ... Services business, one of the world's largest cash management providers and a leading global custodian. From 2004 to 2010, Mr. Cavanagh was Chief Financial Officer of JPMorgan Chase & Co. • Expertise in finance, strategic planning and public company executive compensation • Public company...

  • Page 33
    ... president and chief executive officer of global travel-related services company • Expertise in finance, marketing and international business development • Public company directorship and committee experience • Independent of Company Proxy Statement Bonnie G. Hill Age 71 Director since 2003...

  • Page 34
    ..., including as chief executive officer of global pharmacy healthcare business • Expertise in finance, strategic planning and public company executive compensation • Public company directorship and committee experience • Independent of Company 16 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 35
    ...the election of directors can be found in our Corporate Governance Principles at www.yum.com/investors/ governance/principles.asp and at page 8 under "What other significant Board practices does the Company have?-Majority Voting Policy." Proxy Statement YUM! BRANDS, INC. - 2013 Proxy Statement 17

  • Page 36
    ... of financial statements of certain employee benefit plans, agreed upon procedures and other attestations. (3) Tax fees consist principally of fees for international tax compliance, VAT services and tax audit assistance. (4) All other fees consist of fees for advisory services related to the Company...

  • Page 37
    ...at least 10% • Opened a record 1,976 new restaurants outside the United States • Grew operating profits by 12% (prior to special items and foreign currency translation) • Generated $1.6 billion in net income-a new high Our Performance-Based Executive Compensation Program Attracts and Retains...

  • Page 38
    ... of shares present in person or represented by proxy and entitled to vote at the Annual Meeting. While this vote is advisory and non-binding on the Company, the Board of Directors and the Management Planning and Development Committee will review the voting results and consider shareholder concerns...

  • Page 39
    ... available under the YUM! Brands, Inc. Long Term Incentive Plan ("LTIP"), as required by the performance-based compensation rules under Section 162(m) of the Internal Revenue Code ("Section 162(m)"). IMPORTANT: This proposal does not seek to increase the number of shares of common stock that may be...

  • Page 40
    ... years for awards granted in the form of restricted shares. These awards are granted as a settlement of earned annual cash incentives and are designed to encourage employee stock ownership. In addition, employees are permitted to defer their salary or annual cash incentive into stock units payable...

  • Page 41
    ... OF YUM! BRANDS, INC. LONG TERM INCENTIVE PLAN PERFORMANCE MEASURES subsidiary, operating unit or division performance measures: cash ï¬,ow; earnings; earnings per share; market value added or economic value added; profits; return on assets; return on equity; return on investment; revenues; stock...

  • Page 42
    ITEM 4 RE-APPROVAL OF YUM! BRANDS, INC. LONG TERM INCENTIVE PLAN PERFORMANCE MEASURES Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in such stock equal to the fair market value of the shares at the time of exercise. • INCENTIVE STOCK ...

  • Page 43
    ... 1, 2013 on the company's efforts to implement this strategy. The report, to be prepared at reasonable cost, may omit confidential information. SUPPORTING STATEMENT We believe the requested report is in the best interest of YUM! and its shareholders. Leadership in this area will protect our brand...

  • Page 44
    ... RECYCLING Management Statement in Opposition to Shareholder Proposal What is the Company's position regarding this proposal? The Board of Directors recommends that shareholders vote AGAINST this proposal. YUM is committed to being a responsible global citizen and developing a long-term strategy to...

  • Page 45
    ... the executive officers named in the Summary Compensation Table on page 44, and • all directors and executive officers as a group. Unless we note otherwise, each of the following persons and their family members has sole voting and investment power with respect to the shares of common stock bene...

  • Page 46
    ...equivalents held in deferred compensation accounts for each of the named persons under our Director Deferred Compensation Plan or our Executive Income Deferral Program. Amounts payable under these plans will be paid in shares of YUM common stock at termination of directorship/employment or within 60...

  • Page 47
    ... on a review of the copies of such reports furnished to YUM and representations that no other reports were required, all of our directors and executive officers complied with all Section 16(a) filing requirements during fiscal 2012. Proxy Statement YUM! BRANDS, INC. - 2013 Proxy Statement 29

  • Page 48
    ... new restaurants outside the United States • Grew operating profits by 12% (prior to special items and foreign currency translation) • Generated $1.6 billion in net income-a new high Our shareholders benefited from our strong year as our total shareholder return during the 2012 calendar year...

  • Page 49
    EXECUTIVE COMPENSATION The success of our strategy is evidenced by our consistent year-over-year EPS growth and the related increase in our stock price and Total Shareholder Return ("TSR") over the past ten years. EARNINGS PER SHARE* - TEN YEAR GROWTH +534% Total Shareholder Return 17% 15% 14% 13% ...

  • Page 50
    ...% 99% Proxy Statement 9% Yum! Yum!'s Executive Peer Group S&P 500 Yum! Yum!'s Executive Peer Group S&P 500 As the chart below demonstrates, our Chief Executive Officer's total direct compensation, comprised of base salary, bonus paid and annual long-term incentive award value has remained...

  • Page 51
    ... Company's Executive Peer Group to better align the size of the peer group companies with YUM • Eliminated use of similar metrics in short-term incentive ("STI") and long-term incentive ("LTI") programs by re-designing 2013-2015 performance share plan to measure relative total shareholder return...

  • Page 52
    ... by far the largest portion of target direct compensation for our Named Executive Officers: CHIEF EXECUTIVE OFFICER TARGET PAY MIX-2012 ALL OTHER NAMED EXECUTIVE OFFICERS TARGET PAY MIX-2012 21% Proxy Statement 13% 21% 58% 21% 66% Base Salary Annual Bonus Long-Term Equity Incentive Base...

  • Page 53
    ..., PepsiCo and Kraft from the Executive Peer Group in order to better align the size of the peer group companies with YUM. Revenue size often correlates with the market value of compensation for senior executive positions. For companies with significant franchise operations, measuring size is a more...

  • Page 54
    ... provided the Executive Peer Group compensation data to the Committee and it was used as a frame of reference for establishing compensation targets for base salary, annual bonus and long-term incentives for all of the Named Executive Officers. The Committee uses this market information as a point...

  • Page 55
    ... 2012 based on recommendations from management. The objectives were also reviewed by the Board to ensure the goals support the Company's overall strategic objectives. The performance targets were developed through the Company's annual financial planning process, which takes into account division...

  • Page 56
    ...' Team Factors (1) 50% 75 Earnings Per Share Growth 10% 50% 77 (excluding special items) TOTAL WEIGHTED TEAM PERFORMANCE - YUM BRANDS 152 Su Operating Profit Growth (excluding impact of foreign exchange) 12% 9% 48 50% 24 System Sales Growth 15% 20% 200 20% 40 System Gross New Builds 550 889 200 20...

  • Page 57
    ... reward employees only if the stock price increases. For each Named Executive Officer, the breakdown between SARs/ stock option award and performance share unit award values can be found under the Summary Compensation Table, page 44 at columns d and e. YUM! BRANDS, INC. - 2013 Proxy Statement 39

  • Page 58
    ... benefits similar to, and pursuant to the same terms and conditions as, the Retirement Plan without regard to Internal Revenue Service limitations on amounts of includible compensation and maximum benefits. Mr. Su is the only Named Executive Officer 40 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 59
    ... the Company's Executive Income Deferral Program. (2) Based on YUM closing stock price of $66.40 as of December 31, 2012. (3) Mr. Grismer's ownership guidelines will increase by 10,000 shares each of the next three years until 50,000 shares are reached. YUM! BRANDS, INC. - 2013 Proxy Statement 41

  • Page 60
    ... terms of these change in control agreements are described beginning on page 56. Effective March 15, 2013, the Company eliminated tax gross-ups for executives, including the Named Executive Officers, for any excise tax due under Section 4999 of the Internal Revenue Code and implemented a "best net...

  • Page 61
    ... qualify most compensation paid to the Named Executive Officers as tax deductible. Proxy Statement Management Planning and Development Committee Report The Management Planning and Development Committee of the Board of Directors reports that it has reviewed and discussed with management the section...

  • Page 62
    ... our 2012 fiscal year. The Company's Named Executive Officers are our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated officers for our 2012 fiscal year determined in accordance with SEC rules. Summary Compensation Table Change in Pension Value and...

  • Page 63
    ... used to value the awards reported in column (d) and column (e), please see the discussion of stock awards and option awards contained in Part II, Item 8, "Financial Statements and Supplementary Data" of the 2012 Annual Report in Notes to Consolidated Financial Statements at Note 15, "Share...

  • Page 64
    ... allowance for the portion of 2012 during which he was not a Named Executive Officer. The Company discontinued providing several perquisites including a car allowance and perquisite allowance to its Named Executive Officers in 2011. Proxy Statement 46 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 65
    ...that will be recognized by the Named Executive Officers. The grant date fair value is the amount that the Company is expensing in its financial statements over the award's vesting schedule. For PSUs, fair value was calculated using the closing price of the Company's common stock on the date of grant...

  • Page 66
    ... Outstanding Equity Awards at Fiscal Year-End The following table shows the number of shares covered by exercisable and unexercisable stock options, SARs, and unvested RSUs and PSUs held by the Company's Named Executive Officers on December 31, 2012. Option/SAR Awards(1) Number of Number of...

  • Page 67
    ...that vests after five years. (3) The market value of these awards are calculated by multiplying the number of shares covered by the award by $66.40, the closing price of YUM stock on the NYSE on December 31, 2012. (4) The awards reflected in this column are unvested performance-based PSUs with three...

  • Page 68
    ... to report for him. (3) The amounts in column (e) represent the value realized on RSUs and PSUs that became vested in 2012. The value realized for the PSUs of each Named Executive Officer was calculated based on the closing price of $66.40 for YUM common stock on December 31, 2012 (December 29, 2012...

  • Page 69
    ...ts payable to each of the Named Executive Officers, including the number of years of service credited to each such Named Executive Officer, under the YUM! Brands Retirement Plan ("Retirement Plan") 2012 FISCAL YEAR PENSION BENEFITS TABLE Number of Years of Present Value of Payments During Credited...

  • Page 70
    ... more of the group of corporations that is controlled by the Company. Benefits are payable under the same terms and conditions as the Retirement Plan without regard to Internal Revenue Service limitations on amounts of includible compensation and maximum benefits. (4) Present Value of Accumulated...

  • Page 71
    ... for a performance share unit award upon his promotion to Chief Financial Officer in May 2012. RSUs attributable to annual incentive deferrals into the YUM! Matching Stock Fund and matching contributions vest on the second anniversary of the grant (or upon a change of control of the Company, if...

  • Page 72
    ... of the year-end balance for each executive which has previously been reported as compensation to the executive in the Company's Summary Compensation Table for 2012 and prior years or would have been reported as compensation if the executive had been a Named Executive Officer in those previous...

  • Page 73
    ... become payable under existing plans and arrangements if the Named Executive Officer's employment had terminated on December 31, 2012, given the Named Executive Officer's compensation and service levels as of such date and, if applicable, based on the Company's closing stock price on that date...

  • Page 74
    ... portion of the performance period after the change in control. The change in control severance agreements have a three-year term and are automatically renewable each January 1 for another three-year term. An executive whose employment is not terminated within two years of a change in control will...

  • Page 75
    ... if the executive is employed on the date of the change in control of the Company and is is involuntarily terminated (other than by the Company for cause) on or within two years following the change in control ("double trigger" vesting). Proxy Statement YUM! BRANDS, INC. - 2013 Proxy Statement 57

  • Page 76
    ... Statements and Supplementary Data" of the 2012 Annual Report in Notes to Consolidated Financial Statements at Note 15, "Share-based and Deferred Compensation Plans." (3) At December 31, 2012, the aggregate number of options and SARs awards outstanding for each non-management director was: Name...

  • Page 77
    EQUITY COMPENSATION PLAN INFORMATION Planning and Development Committee (Mr. Walter in 2012) receives an additional $15,000 stock retainer annually. Initial Stock Grant upon Joining Board. Non-employee directors also receive a one-time stock grant with a fair market value of $25,000 on the date of ...

  • Page 78
    ... and Development Committee of the Board of Directors, and the Management Planning and Development Committee has delegated its responsibilities to the Chief People Officer of the Company. The Board of Directors approved the RGM Plan on January 20, 1998. Proxy Statement 60 YUM! BRANDS, INC. - 2013...

  • Page 79
    ... a written charter adopted by the Board of Directors. The Committee's responsibilities are set forth in this charter, which was amended and restated effective November 16, 2012. The charter is reviewed by management at least annually, and any recommended changes are presented to the Audit Committee...

  • Page 80
    ..., the Committee recommended to the Board of Directors that it include the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012 for filing with the SEC. Who prepared this report? This report has been furnished by the...

  • Page 81
    ... "householding" which has been approved by the SEC. The Company and some brokers household proxy materials, delivering a single Notice and, if applicable, this proxy statement and Annual Report, to multiple shareholders sharing an address unless contrary instructions have been received from the...

  • Page 82
    ..., Kentucky 40213 by December 6, 2013. The proposal should be sent to the attention of the Corporate Secretary. Under our bylaws, certain procedures are provided that a shareholder must follow to nominate persons for election as directors or to introduce an item of business at an Annual Meeting of...

  • Page 83
    ... on) the excess of: (a) the Fair Market Value of a specified number of shares of Stock at the time of exercise; over (b) an Exercise Price established by the Committee. 2.3 Exercise. An Option and a SAR shall be exercisable in accordance with such terms and conditions and during such periods as may...

  • Page 84
    ... Company, Subsidiary, operating unit or division performance measures, as selected by the Committee: cash ï¬,ow; earnings; earnings per share; market value added or economic value added; profits; return on assets; return on equity; return on investment; revenues; stock price; total shareholder...

  • Page 85
    ...) shall be 12,000,000 shares except that Stock Units or Restricted Shares granted with respect to the deferral of annual cash incentive awards under the Company's deferral plan will not count towards this maximum. "performance-based compensation" (as that term is used for purposes of Code section...

  • Page 86
    ... section 409A, then neither the Company, the Board of Directors, the Committee nor its or their designees or agents, nor any of their affiliates, assigns or successors (each a "protected party") shall be liable to any Award recipient or other person A-4 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 87
    ... SARs granted under the Plan in replacement for awards under plans and arrangements of the Company, Subsidiaries, or other companies that are assumed in business combinations may provide for exercise prices that are less than the Fair Market Value of the Stock at the time of the replacement grants...

  • Page 88
    ... from among the Eligible Individuals those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of...

  • Page 89
    ... such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan. 6.5 Misconduct. If the Committee determines that a present or former employee has (i) used for profit or disclosed to unauthorized persons, confidential or trade secrets of YUM!; (ii...

  • Page 90
    ... under the Plan, including, without limitation, the grant of Options, SARs, Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Unit Awards, and Performance Share Awards. Board. The term "Board" shall mean the Board of Directors of the Company. Change in Control...

  • Page 91
    ... and SARs shall not be granted to employees or directors of Subsidiaries unless the ownership of the Subsidiary satisfies Treas. Reg. §1.409A-1(b)(5)(iii). (i) Stock. The term "Stock" shall mean shares of common stock of the Company. Proxy Statement YUM! BRANDS, INC. - 2013 Proxy Statement A-9

  • Page 92
    ...Kentucky 40213 (Address of principal executive offices) (Zip Code) (502) 874-8300 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Common Stock, no par value Name of Each Exchange on Which Registered New York Stock...

  • Page 93
    ... Executive Compensation ...72 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...72 Certain Relationships and Related Transactions, and Director Independence ...72 Principal Accountant Fees and Services ...72 PART IV ITEM 15 73 Exhibits and Financial...

  • Page 94
    ... included in Part I, Item 1A of this Form 10-K and (ii) the factors described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form 10-K. You should not place undue reliance on forward-looking statements, which speak only as...

  • Page 95
    ...our management reporting structure. While our consolidated results are not impacted, our historical segment information Form 10-K (B) Narrative Description of Business restaurants, primarily franchised KFCs and Pizza Huts, operating in over 120 countries outside the U.S., China and India. In 2012...

  • Page 96
    ... first franchise unit was opened. Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. • Pizza Hut operates in 97 countries and territories throughout the world. As of year end 2012, Pizza Hut had 987 units in China, 5,304 units in...

  • Page 97
    ... terms of number of system units or system sales, either on a worldwide or individual country basis. Research and Development ("R&D") The Company operates R&D facilities in Shanghai, China (China Division); Plano, Texas (Pizza Hut U.S. and YRI); Irvine, California (Taco Bell); Louisville, Kentucky...

  • Page 98
    ... to federal, state, local and international regulation of our business. Employees As of year end 2012, the Company and its Concepts employed approximately 523,000 persons, approximately 85 percent of whom were part-time. The Company believes that it provides working conditions and compensation that...

  • Page 99
    ... our reported earnings. There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash ï¬,ows. Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues. The products...

  • Page 100
    ... ownership mix of Company-operated and franchisee-operated restaurants allows us to meet our financial objectives. In addition, refranchising activity could vary significantly from quarter-to-quarter and year-to-year and that volatility could impact our reported earnings. Our business may be...

  • Page 101
    ...time we did not believe they were permanently invested outside the U.S. This could cause our worldwide effective tax rate to increase materially. We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property, withholding and franchise...

  • Page 102
    ... U.S. Division shared service center in Louisville, Kentucky. Additional information about the Company's properties is included in the Consolidated Financial Statements in Part II, Item 8, pages 36 through 70. The Company believes that its properties are generally in good operating condition and are...

  • Page 103
    ... 2008 and as Chief Operating and Development Officer - Designate of YUM from January 2008 until April 2008. From 2000 until January 2008, he was Senior Vice President/Managing Director of YUM Restaurants International South Pacific. Patrick Grismer, 51, is Chief Financial Officer of YUM. He has...

  • Page 104
    ...Paid 0.285 0.285 0.285 0.335 The Company's Common Stock trades under the symbol YUM and is listed on the New York Stock Exchange ("NYSE"). The following sets forth the high and low NYSE composite closing sale prices by quarter for the Company's Common Stock and dividends per common share. $ 2011...

  • Page 105
    ... price paid per share $ 66.55 $ 69.76 N/A 68.59 68.72 On November 18, 2011, our Board of Directors authorized share repurchases through May 2013 of up to $750 million (excluding applicable transaction fees) of our outstanding Common Stock. On November 16, 2012, our Board of Directors authorized...

  • Page 106
    PART II ITEM 6 Selected Financial Data YUM! BRANDS, INC. AND SUBSIDIARIES 2012 2011 Fiscal Year 2010 2009 2008 SELECTED FINANCIAL DATA (in millions, except per share and unit amounts) Summary of Operations Revenues Company sales Franchise and license fees and income Total Closures and ...

  • Page 107
    ...10-K Description of Business YUM is the world's largest quick-service restaurant company in terms of system restaurants with over 39,000 restaurants in more than 125 countries and territories operating primarily under the KFC, Pizza Hut or Taco Bell brands. In December of 2011 we sold our Long John...

  • Page 108
    ... and Build Strong Brands Everywhere - Outside the U.S. and China the Company and its franchisees opened over 1,000 new restaurants in 2012, representing 13 straight years of opening over 700 restaurants, and the Company is one of the leading international retail developers in terms of units opened...

  • Page 109
    ... Sheep in 2012, the losses associated with refranchising equity markets outside the U.S. and the losses, other costs and tax benefits in 2011 relating to our divestiture of the LJS and A&W brands. Other Special Items Income (Expense) includes the depreciation reductions from Pizza Hut UK and KFC...

  • Page 110
    ... II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Year 2012 Detail of Special Items U.S. Refranchising gain (loss) YUM Retirement Plan settlement charge Gain upon acquisition of Little Sheep Losses associated with refranchising equity markets outside...

  • Page 111
    ...anticipated future cash ï¬,ows from our Pizza Hut UK delivery business, which is part of the Pizza Hut UK reporting unit, and was not impacted by the dine-in refranchising. LJS and A&W Divestitures In 2011, we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise...

  • Page 112
    ... of Independent States. As a result, we acquired company ownership of 50 restaurants and gained full rights and responsibilities as franchisor of 81 restaurants, which our partner previously managed as master franchisee. We paid cash of $60 million, net of settlement of a long-term note receivable...

  • Page 113
    ... Company received a Revenue Agent Report (RAR) from the Internal Revenue Service (the "IRS") relating to its examination of our U.S. federal income tax returns for fiscal years 2004 through 2006. The IRS has proposed an adjustment to increase the taxable value of rights to intangibles used outside...

  • Page 114
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Restaurant Unit Activity Worldwide Balance at end of 2010 New Builds Acquisitions Refranchising Closures LJS & A&W Divestitures(b) Other Balance at end of 2011 New Builds Acquisitions(c) ...

  • Page 115
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations U.S. Balance at end of 2010 New Builds Acquisitions Refranchising Closures LJS & A&W Divestitures(b) Other Balance at end of 2011 New Builds Refranchising Closures Other BALANCE AT END OF 2012 % of...

  • Page 116
    ..., 2012. Company-Operated Store Results The following tables detail the key drivers of the year-over-year changes of Company sales and Restaurant profit for each reportable segment by year. Store portfolio actions represent the net impact of new unit openings, acquisitions, refranchisings and store...

  • Page 117
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2012, the increase in China Company sales associated with store portfolio actions was primarily driven by new unit development and the acquisition of Little Sheep, partially offset by restaurant...

  • Page 118
    ...China Franchise and license fees and income increased 25% and 38% in 2012 and 2011, respectively, excluding the impact of foreign currency translation. The increases were driven by refranchising, new unit development and positive franchise same-store sales. YRI Franchise and license fees and income...

  • Page 119
    ... for the year ended December 29, 2012 of deal costs related to the acquisition of Little Sheep that were allocated to the China Division for performance reporting purposes. Worldwide Closure and Impairment (Income) Expenses and Refranchising (Gain) Loss See the Store Portfolio Strategy section for...

  • Page 120
    ... United States Operating margin 2012 $ 1,015 715 666 (1) 16 (271) - 76 78 $ 2,294 14.7% 21.8% 19.9% China Division Operating Profit increased 9% in 2012, excluding foreign currency, driven by the impact of same-store sales growth and new unit development, partially offset by higher restaurant...

  • Page 121
    ... by timing of cash payments for operating expenses and higher income taxes paid. In 2011, net cash provided by operating activities was $2,170 million compared to $1,968 million in 2010. The increase was primarily driven by higher operating profit before Special Items. Net cash used in investing...

  • Page 122
    ... 16, 2012 our Board of Directors approved cash dividends of $0.335 per share of Common Stock to be distributed on February 1, 2013 to shareholders of record at the close of business on January 11, 2013. The Company targets an ongoing annual dividend payout ratio of 35% to 40% of net income. On...

  • Page 123
    ... to net income in its entirety in the same reporting period. ASU 2013-2 is effective for fiscal years beginning after December 15, 2012. The Company currently believes there will be no significant impact on its consolidated financial statements as a result of adopting this standard. YUM! BRANDS...

  • Page 124
    ... compared to its carrying value. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash ï¬,ows from company operations and franchise royalties. Future cash ï¬,ow estimates and the discount rate are the key...

  • Page 125
    ... a reporting unit's fair value is disposed of in a refranchising transaction. During 2012, the Company's reporting units with the most significant refranchising activity and recorded goodwill were our Taco Bell U.S. and KFC U.S. operating segments and our Pizza Hut United Kingdom ("U.K.") business...

  • Page 126
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations The assumption we make regarding our expected long-term rates of return on plan assets also impacts our pension expense. Our estimated longterm rate of return on U.S. plan assets represents the ...

  • Page 127
    ... market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors. YUM! BRANDS, INC. - 2012...

  • Page 128
    ... II ITEM 8 Financial Statements and Supplementary Data Index to Financial Information Page Reference Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for the fiscal years ended December 29, 2012, December 31, 2011 and...

  • Page 129
    ... II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders YUM! Brands, Inc. We have audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and Subsidiaries (YUM) as of December 29, 2012...

  • Page 130
    ... per share data) 2012 $ 11,833 1,800 13,633 $ 2011 10,893 1,733 12,626 $ 2010 9,783 1,560 11,343 Revenues Company sales Franchise and license fees and income Total revenues Costs and Expenses, Net Company restaurants Food and paper Payroll and employee benefits Occupancy and other operating...

  • Page 131
    ...31, 2011 AND DECEMBER 25, 2010 2012 1,608 Year Ended 2011 $ 1,335 2010 1,178 (in millions) Net income - including noncontrolling interests Other comprehensive income, net of tax: Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature Tax (expense...

  • Page 132
    ...OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR CASH AND CASH EQUIVALENTS - END OF YEAR See accompanying Notes to Consolidated Financial Statements. Form 10-K $ 40 YUM! BRANDS, INC. - 2012 Form 10-K

  • Page 133
    PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Balance Sheets YUM! BRANDS, INC. AND SUBSIDIARIES DECEMBER 29, 2012 AND DECEMBER 31, 2011 (in millions) 2012 2011 ASSETS Current Assets Cash and cash equivalents Accounts and notes receivable, net Inventories Prepaid ...

  • Page 134
    ... Stock Employee stock option and SARs exercises (includes tax impact of $71 million) Compensation-related events (includes tax impact of $5 million) Balance at December 31, 2011 Net Income Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net...

  • Page 135
    ... operations of KFC, Pizza Hut and Taco Bell (collectively the "Concepts"). YUM is the world's largest quick service restaurant company based on the number of system units, with over 39,000 units of which approximately 54% are located outside the U.S. in more than 125 countries and territories. YUM...

  • Page 136
    ...YRI business. The 53rd week in 2011 added $91 million to total revenues, $15 million to Restaurant profit and $25 million to Operating Profit in our 2011 Consolidated Statement of Income. The $25 million benefit was offset throughout 2011 by investments, including franchise development incentives...

  • Page 137
    ..., associated with a closed store, any gain or loss upon that sale is also recorded in Closures and impairment (income) expenses. Considerable management judgment is necessary to estimate future cash ï¬,ows, including cash ï¬,ows from continuing use, terminal value, sublease income and refranchising...

  • Page 138
    ... financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in...

  • Page 139
    ... value, then the reporting unit's fair value is compared to its carrying value. Fair value is the price a willing buyer would pay for a reporting unit, and is generally estimated using discounted expected future after-tax cash ï¬,ows from Company operations and franchise royalties. The discount rate...

  • Page 140
    ... performance reporting purposes as we do not believe they are indicative of our ongoing operations. Additionally, YUM Retirement Plan Settlement Charge During the fourth quarter of 2012, the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan ("the Plan...

  • Page 141
    PART II ITEM 8 Financial Statements and Supplementary Data LJS and A&W Divestitures In 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders and strategic investors in separate transactions. We recognized $86 million of pre-tax losses and other ...

  • Page 142
    ... 7 48 55 U.S. - $ 9 9 $ India - $ - - $ Worldwide 8 29 37 (a) 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...

  • Page 143
    ...Sheep that were allocated to the China Division for performance reporting purposes. NOTE 8 Supplemental Balance Sheet Information $ 2012 55 $ 56 161 272 $ 2011 150 24 164 338 Prepaid Expenses and Other Current Assets Income tax receivable Assets held for sale(a) Other prepaid expenses and current...

  • Page 144
    ...property, plant and equipment was $629 million, $599 million and $565 million in 2012, 2011 and 2010, respectively. Accounts Payable and Other Current Liabilities Accounts payable Accrued capital expenditures Accrued compensation and benefits Dividends payable Accrued taxes, other than income taxes...

  • Page 145
    ...8 Financial Statements and Supplementary Data Intangible assets, net for the years ended 2012 and 2011 are as follows: 2012 Gross Carrying Accumulated Amount Amortization Definite-lived intangible assets Reacquired franchise rights Franchise contract rights Lease tenancy rights Favorable operating...

  • Page 146
    ... as described in Note 12. The annual maturities of short-term borrowings and long-term debt as of December 29, 2012, excluding capital lease obligations of $170 million and fair value hedge accounting adjustments of $22 million, are as follows: Year ended: 2013 2014 2015 2016 2017 Thereafter TOTAL...

  • Page 147
    ... change in the fair value of the hedged item. At December 29, 2012, foreign currency forward contracts outstanding had a total notional amount of $525 million. The Company is exposed to certain market risks relating to its ongoing business operations. The primary market risks managed by using...

  • Page 148
    ... our Consolidated Balance Sheets and their fair value is determined based on the closing market prices of the respective mutual funds as of December 29, 2012 and December 31, 2011. At December 29, 2012 the carrying values of cash and cash equivalents, short-term investments, accounts receivable and...

  • Page 149
    ...in excess of settlement payments Special termination benefits Exchange rate changes Benefits paid Settlement payments(a) Actuarial (gain) loss Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions...

  • Page 150
    ... cost Amortization of prior service cost(a) Expected return on plan assets Amortization of net loss NET PERIODIC BENEFIT COST Additional loss recognized due to: Settlements(b) Special termination benefits(c) U.S. Pension Plans 2011 $ 24 64 1 (71) 31 $ 49 $ International Pension Plans 2012 2011...

  • Page 151
    ...-average assumptions used to determine the net periodic benefit cost for fiscal years: U.S. Pension Plans 2011 5.90% 7.75% 3.75% International Pension Plans 2012 2011 4.75% 5.40% 5.55% 6.64% 3.85% 4.41% Discount rate Long-term rate of return on plan assets Rate of compensation increase 2012 4.90...

  • Page 152
    ... the employee and therefore are classified in Common Stock on our Consolidated Balance Sheets. We do not recognize compensation expense for the appreciation or the depreciation, if any, of investments in phantom shares of our Common Stock. Our EID plan also allows 60 YUM! BRANDS, INC. - 2012 Form...

  • Page 153
    ...from employment during a vesting period that is two years from the date of deferral. We expense the intrinsic value of the match and the incentive compensation over the requisite service period which includes the vesting period. Historically, the Company has repurchased shares on the open market in...

  • Page 154
    ... II ITEM 8 Financial Statements and Supplementary Data Impact on Net Income The components of share-based compensation expense and the related income tax benefits are shown in the following table: 2012 42 5 3 50 15 5 2011 49 5 5 59 18 2 2010 40 5 2 47 13 4 Options and SARs Restricted Stock Units...

  • Page 155
    ... year earnings as well as U.S. tax credits and deductions. In 2012, this item was positively impacted by a one-time pre-tax gain of $74 million, with no related income tax expense, recognized on our acquisition of additional interest in, and consolidation of Little Sheep. Form 10-K YUM! BRANDS...

  • Page 156
    ...399) 440 2011 592 260 106 47 134 75 55 35 1,304 (368) 936 (167) (121) (48) (336) 600 Operating losses and tax credit carryforwards Employee benefits Share-based compensation Self-insured casualty claims Lease-related liabilities Various liabilities Property, plant and equipment Deferred income and...

  • Page 157
    ... and Taco Bell concepts. KFC, Pizza Hut and Taco Bell operate in 120, 97, and 27 countries and territories, respectively. Our five largest international markets based on operating profit in 2012 are China, Asia Franchise, United Kingdom, Australia and Latin America Franchise. China YRI U.S. India...

  • Page 158
    ...ITEM 8 Financial Statements and Supplementary Data China(b) YRI U.S. India Unallocated Occupancy and other(a)(c) Unallocated and corporate expenses(a)(d) Unallocated Closures and impairment expense(a)(e) Unallocated Other income (expense)(a)(f) Unallocated Refranchising gain (loss)(a)(g) Operating...

  • Page 159
    ...performance reporting purposes. (b) Includes equity income from investments in unconsolidated affiliates of $47 million, $47 million and $42 million in 2012, 2011 and 2010, respectively, for China. (c) 2012, 2011 and 2010 include depreciation reductions arising from the impairment of KFC restaurants...

  • Page 160
    ... poultry from suppliers to the Company's China operations. On February 8, 2013, another purported shareholder of the Company filed a derivative action in the United States District Court for the Central District of California against various officers and directors of the Company asserting breaches...

  • Page 161
    ..., LLC and Taco Bell Corp., was filed in the United States District Court for the Eastern District of New York. The plaintiff seeks to represent a nationwide class of salaried assistant general managers who were allegedly misclassified and did not receive compensation for all hours worked and did...

  • Page 162
    ... 0.285 First Quarter Second Quarter Revenues: Company sales Franchise and license fees and income Total revenues Restaurant profit Operating Profit(b) Net Income - YUM! Brands, Inc. Basic earnings per common share Diluted earnings per common share Dividends declared per common share $ 2,051 $ 374...

  • Page 163
    ...Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 29, 2012. KPMG LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and the...

  • Page 164
    ... proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2012. Form 10-K ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding equity compensation plans and...

  • Page 165
    ... 15 Exhibits and Financial Statement Schedules (a) (1) (2) Financial Statements: Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. Financial Statement Schedules: No schedules are required because either the required information is not...

  • Page 166
    ... executive officer) Chief Financial Officer (principal financial officer) Vice President, Finance and Corporate Controller (principal accounting officer) Director Director Director Director Director Director Director Director Director Vice-Chairman of the Board Director Date February 19, 2013...

  • Page 167
    ...Report on Form 10-Q for the quarter ended June 13, 2009. YUM 1997 Long Term Incentive Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.8 to YUM's Annual Report on Form 10-K for the fiscal year ended December 27, 1997. YUM Executive Incentive Compensation...

  • Page 168
    ... 2009, which is incorporated by reference from Exhibit 10.21.1 to YUM's Annual Report on Form 10-K for the fiscal year ended December 26, 2009. 1999 Long Term Incentive Plan Award (Restricted Stock Unit Agreement) by and between the Company and David C. Novak, dated as of January 24, 2008, which is...

  • Page 169
    Shareholder Information Inquiries Regarding Your YUM Holdings REGISTERED SHAREHOLDERS (those who hold YUM shares in their own names) should address communications concerning statements, address changes, lost certificates and other administrative matters to: American Stock Transfer & Trust Company, ...

  • Page 170
    ... market for YUM Common Stock, which trades under the symbol YUM. Franchise Inquiries ONLINE FRANCHISE INFORMATION Information about potential franchise opportunities is available at www.yumfranchises.com Yum! Brands' Annual Report contains many of the valuable trademarks owned and used by Yum...

  • Page 171
    ... Franchise Policy Officer, Yum! Brands, Inc. Richard T. Carucci 55 President, Yum! Brands, Inc. J. David Grissom 74 Chairman, Mayfair Capital, Inc. and Chairman, The Glenview Trust Company Niren Chaudhary 50 President, Yum! Restaurants India Greg Creed 55 Chief Executive Officer, Taco Bell John...

  • Page 172
    Alone We're Delicious. Together We're Yum!® Yum! Brands, Inc., trades under the symbol YUM and is proud to meet the listing requirements of the NYSE, the world's leading equities market.