Pizza Hut 2002 Annual Report Download

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up
Pull
seat
a
for a serving of customer mania.
Yum! Brands
2002 ANNUAL REPORT
®

Table of contents

  • Page 1
    seat for a serving of up a Pull customer mania. Yum! Brands 2002 ANNUAL REPORT ®

  • Page 2

  • Page 3
    1.

  • Page 4
    ... stores Total revenues U.S. ongoing operating profit International ongoing operating profit Unallocated and corporate expenses Unallocated other income (expense) Ongoing operating profit Facility actions net (loss) Unusual items income Operating profit Net income Diluted earnings per common share...

  • Page 5
    ... set a new record for traditional restaurant openings, 1,051 to be exact, and grew international ongoing operating profits 22%. Worldwide restaurant margins also reached an all time high at 16%, up 1.2 points versus last year. Our Return on Invested Capital was 18%, the highest in the quick-service...

  • Page 6
    ... new restaurant development increasing gradually, we are not predicting a more rapid increase because to do so could threaten the high standards we have for our returns. We're focusing our international company operations in seven countries that account for about 70% of our ongoing operating profit...

  • Page 7
    .... We are building a powerful international business and our goal is to be nothing less than the premier global restaurant company. We intend to grow our international profits at a mid-teens rate, with great returns for years to come. #2 MULTIBRANDING GREAT BRANDS. The question I get asked...

  • Page 8
    ...existing U.S. asset base by adding a second brand. This will help us dramatically change our U.S. business over the next five years. We are also opening high return new restaurants in trade areas that used to be too expensive or did not have enough population density to allow us to go to market with...

  • Page 9
    ... is to ultimately offer two brands in the vast majority of our restaurant locations. We added almost 350 multibrand locations this year. With over 1,975 multibranded restaurants, multibranding now represents nearly 6% of our worldwide system and about $2 billion in annual system sales. Impor tantly...

  • Page 10
    ... the customer service ladder. We can and must get better. Our goal is to be the best restaurant operator in our industry. OUR TABLE IS SET FOR FUTURE GROWTH: On October 7 of 2002, we celebrated our fifth anniversary as a public company. We've nearly tripled our ongoing operating earnings per share...

  • Page 11
    ... over $860 million in franchise fees with minimal capital investment. We expect to grow fees 4-6% each year. 5) Return on Invested Capital...at 18%, we are leading the quick-service restaurant industry. We expect to maintain our high returns by continuing to drive 16% margins in stores we own and by...

  • Page 12
    Setting around the the table world.

  • Page 13
    ...to build incredible teams and a strong franchise system. In the early '90s before our spin-off as a public company, the international division planted too many flags in too many countries. We were spread too thin, we didn't have proper resources in each country and we incurred large operating losses...

  • Page 14
    ... about our international opportunity. The table is set for us to become the premier global restaurant company. Above left Around the world Yum!'s Customer Maniacs are busy introducing exciting new products like the KFC Pocket Meal in the U.K. Above right Celebrations marking the 100th Pizza Hut in...

  • Page 15
    Below left We are currently opening more than 200 restaurants each year in China. Pictured here, the first store in Shangxi Province. Below right KFC Mexico opened this landmark 400th restaurant in Ensenada. 13.

  • Page 16
    branded Bringing convenience to the choice & table.

  • Page 17
    ... in our restaurants for customers and Team Members and helps leverage the cost of land, buildings and equipment. That ensures us a better return on our investment. When you're adding a recognized second brand, it increases sales a lot faster than if you just add new products to your primary...

  • Page 18
    alone we're delicious. Together we're YUM! 16. Multibranding allows us to give more choice and variety to our customers. That's how we demonstrate our Customer Mania - fish, pizza, wings, burritos or chili dogs, anyone? Yum!

  • Page 19
    ... because you've got two restaurants instead of one, and it's fast. That's because you've got a new store with the latest in equipment so you're able to do things faster. We are working to maximize the service time on the drive-thru to make sure customers get their food quickly. That brings the focus...

  • Page 20
    ... do is totally bury indifference and make themselves feel as if their customers are guests in their homes. When we explain it to Team Members like that and they try it, they become believers. Al: Customer Mania from the restaurant point of view is contagious. I have seen managers develop their teams...

  • Page 21
    1+1= 19. 3

  • Page 22
    Serving up 100% CHAMPS with a yes!

  • Page 23
    ... his team to perfect CHAMPS scores, while driving his same store sales $19,000 a week! 2JR Pizza Enterprises 4. 5. As President, Chief Multibranding and Operating Officer, Aylwin regularly holds roundtable discussions with RGMs. Here's one he recently had with several Taco Bell RGMs in Florida. 21...

  • Page 24
    ...'re creating and it makes a big difference in the store day to day and makes people want to stay. Alfredo: I agree. We have a very positive at titude in our restaurant, due largely to Customer Mania. My job is different with Customer Mania and the Team Members feel more positive about their jobs too...

  • Page 25
    ... I train my team to do the same, every day." Bruce Taylor, Assistant Manager, KFC/Long John Silver's DeVonne: Selection is the key, I think. When it comes to hiring great new Customer Maniacs, I go through 50 applications just to get one Team Member. It's a time-consuming, always-uncer tain process...

  • Page 26
    .... And I can. Our Customer Mania training taught us that. It's also about being polite to the customer and trying to make them feel that he or she is our #1 priority." Elizabeth Parkerson, Team Member, Taco Bell, Southern Multifoods Inc. help us run our restaurants better. We talked about reducing...

  • Page 27
    ... Out 58% • Dine In 42% Sources of System Sales in International Restaurants* • Dinner 26% • Lunch 47% • Snacks/Breakfast 27% SOURCE: CREST * System sales represents the combined sales of Company, unconsolidated affiliates, franchise and license restaurants. • Dine Out 48% • Dine In 52...

  • Page 28
    ...-service franchise chain in America. To better reflect this expanded portfolio and our New York Stock Exchange ticker symbol (NYSE:YUM), we received shareholder approval to change our corporate name to Yum! Brands from Tricon Global Restaurants. HERE'S HOW WE SET OUR TABLE IN 2002: TACO BELL Taco...

  • Page 29
    ... So thick, you need a fork to enjoy our new Chicago-style pizza - The Dish. The thick, flaky crust is golden ...a grilled tor tilla. HOME-STYLE MEALS: KFC's advantage is that it offers a satisfying, complete meal - perfect for moms who care about the meals they serve their family. FISH PLATTER: It's ...

  • Page 30
    ...units from Taco Bell U.S. to Taco Bell International in 2002. BREAKDOWN OF WORLDWIDE SYSTEM UNITS Unconsolidated Affiliate Year-end 2002 Company Franchised Licensed Total United States KFC Pizza Hut Taco Bell Long John Silver's A&W Total U.S.(a) International KFC Pizza Hut Taco Bell Long John...

  • Page 31
    ... same day, Tricon Restaurants International changed its name to YUM! Restaurants International. YUM! Brands, Inc. and Subsidiaries (collectively referred to as "YUM" or the "Company") comprises the worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver's ("LJS") and A&W AllAmerican Food...

  • Page 32
    ... an annual basis through the comparison of fair value of our reporting units to their carrying values. Our reporting units are our operating segments in the U.S. and our business management units internationally (typically individual countries). Fair value is the price a willing buyer would pay for...

  • Page 33
    ... in our Company sales, restaurant margin dollars and general and administrative ("G&A") expenses as well as higher franchise fees. We also record equity income (loss) from investments in unconsolidated affiliates ("equity income") and, in Canada, higher franchise fees since the royalty rate was...

  • Page 34
    ... 2002 2001 2000 2002 International Worldwide Number of units closed Store closure costs Impairment charges for stores to be closed 224 $ 15 $ 9 270 $ 17 $ 5 208 $ 10 $ 6 Decreased restaurant margin Increased franchise fees Decreased G&A (Decrease) increase in ongoing operating profit $ (23...

  • Page 35
    ... vs. 2000 Revenues Company sales Franchise and license fees Total revenues Company restaurant margin % of Company sales Ongoing operating profit Facility actions net (loss) gain Unusual items income Operating profit Interest expense, net Income tax provision Net income Diluted earnings per share...

  • Page 36
    ... franchise and license restaurants result in franchise and license fees for us but are not included in the Company sales figure we present on the Consolidated Statements of Income. However, we believe that system sales is useful to investors as a significant indicator of our Concepts' market share...

  • Page 37
    ...increase was primarily due to support costs related to the financial restructuring of certain Taco Bell franchisees. The increase was partially offset by lower allowances for doubtful franchise and license fee receivables. The changes in U.S. and International ongoing operating profit for 2002 and...

  • Page 38
    ... the effects of facility actions net loss (gain) and unusual items (income) expense. See Note 7 for a discussion of these items. Revenues Company sales Franchise and license fees Total revenues Company restaurant margin % of Company sales Ongoing operating profit $ 4,778 569 $ 5,347 $ $ 764...

  • Page 39
    ...an increase in transactions. Same store sales at both Pizza Hut and Taco Bell were flat. A 2% increase in the average guest check at Pizza Hut and a 3% increase in the average guest check at Taco Bell were both offset by transaction declines. Franchise and license fees increased $29 million or 5% in...

  • Page 40
    ... Taco Bell franchisees. The decrease was partially offset by same store sales growth and new unit development. INTERNATIONAL RESULTS OF OPERATIONS 2002 % B(W) vs. 2001 2001 % B(W) vs. 2000 Revenues Company sales Franchise and license fees Total revenues Company restaurant margin % of Company sales...

  • Page 41
    ... points in 2001. The decrease was primarily attributable to higher restaurant operating costs and the acquisition of below average margin stores from franchisees. The decrease was partially offset by the favorable impact of same store sales growth. INTERNATIONAL ONGOING OPERATING PROFIT Ongoing...

  • Page 42
    ...report gross proceeds in our Consolidated Statements of Cash Flows, we also consider refranchising proceeds on an "after-tax" basis. We define after-tax proceeds as gross refranchising proceeds less the settlement of working capital liabilities (primarily accounts payable and property taxes) related...

  • Page 43
    ...350 LJS units. As a result of liens held by the buyer/lessor on certain personal property within the units, the sale-leaseback agreements have been accounted for as financings and are reflected as debt in our Consolidated Financial Statements as of December 28, 2002. Rental payments made under these...

  • Page 44
    ... this discount rate would have increased our PBO by approximately $56 million at September 30, 2002. Due to recent stock market declines, our pension plan assets have experienced losses in value in 2002 and 2001 totaling approximately $75 million. We changed our expected long-term rate of return on...

  • Page 45
    ...to ensure adequate supply of restaurant products and equipment in our stores; the ongoing financial viability of our franchisees and licensees; volatility of actuarially determined losses and loss estimates; and adoption of new or changes in accounting policies and practices including pronouncements...

  • Page 46
    ... OF INCOME Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 (in millions, except per share data) 2002 2001 2000 Revenues Company sales Franchise and license fees $ 6,891 866 7,757 $ 6,138 815 6,953 $ 6,305 788 7,093 Costs and Expenses, net Company restaurants Food...

  • Page 47
    ...of long-term debt Short-term borrowings-three months or less, net Repurchase shares of common stock Employee stock option proceeds Other, net Net Cash Used in Financing Activities Effect of Exchange Rate on Cash and Cash Equivalents Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash...

  • Page 48
    ... Total Current Assets Property, plant and equipment, net Goodwill, net Intangible assets, net Investments in unconsolidated affiliates Other assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities Income taxes payable Short-term...

  • Page 49
    ... Other Comprehensive Income (Loss) Total Balance at December 25, 1999 Net income Foreign currency translation adjustment Comprehensive Income Repurchase of shares of common stock Employee stock option exercises (includes tax benefits of $5 million) Compensation-related events Balance at December...

  • Page 50
    ...-recognized Concepts, we develop, operate, franchise and license a system of both traditional and non-traditional quick service restaurants. Each Concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients as well as unique recipes and special seasonings...

  • Page 51
    ... fees collected upon the sale of a restaurant to a franchisee in refranchising gains (losses). Fees for development rights are capitalized and amortized over the life of the development agreement. We incur expenses that benefit both our franchise and license communities and their representative...

  • Page 52
    ... gains or losses from the sales of our restaurants to new and existing franchisees and the related initial franchise fees, reduced by transaction costs and direct administrative costs of refranchising. In executing our refranchising initiatives, we most often offer groups of restaurants. We classify...

  • Page 53
    ... No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reï¬,ected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The...

  • Page 54
    ... fair value information related to debt and interest rate swaps. New Accounting Pronouncements Not Yet Adopted In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial accounting...

  • Page 55
    ...the date of acquisition. Current assets Property, plant and equipment Intangible assets Goodwill Other assets Total assets acquired Current liabilities Long-term debt, including current portion Future rent obligations related to sale-leaseback agreements Other long-term liabilities Total liabilities...

  • Page 56
    ... Financial Statements since the date of acquisition. If the acquisition had been completed as of the beginning of the years ended December 28, 2002 and December 29, 2001, pro forma Company sales, and franchise and license fees would have been as follows: 2002 2001 Unexercised employee stock options...

  • Page 57
    ... mark to market the net assets of the Singapore business, which was held for sale. The Singapore business was subsequently sold during the third quarter of 2002. (c) Represents a $5 million charge related to the impairment of the goodwill of our Pizza Hut reporting unit. (d) Store impairment charges...

  • Page 58
    .... Unusual Items (Income) Expense 2002 2001 2000 U.S. International Unallocated Worldwide $ 3 (1) (29) $ 15 - (18) $ (3) $ 29 8 167 $ 204 Cash Paid for: Interest Income taxes Significant Non-Cash Investing and Financing Activities: Assumption of debt and capital leases related to the...

  • Page 59
    ... of the Pizza Hut France reporting unit during 2002. (c) Includes goodwill related to the YGR purchase price allocation. For International, includes a $13 million transfer of goodwill to assets held for sale (see Note 7). The Company's business combinations have included acquiring restaurants from...

  • Page 60
    ... classified as short-term borrowings in the Consolidated Balance Sheet at December 29, 2001. On December 27, 2002, we voluntarily reduced our maximum borrowing limit under the New Credit Facility to $1.2 billion. The New Credit Facility matures on June 25, 2005. We used the initial borrowings under...

  • Page 61
    ... accounted for as financings and are reflected as debt in our Consolidated Financial Statements as of December 28, 2002. Rental payments made under these agreements will be made on a monthly basis through 2019 with an effective interest rate of approximately 11%. The annual maturities of long-term...

  • Page 62
    ... 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 taxes, maintenance and insurance. Future minimum...

  • Page 63
    ..., in part, by the large number of franchisees and licensees of each Concept and the short-term nature of the franchise and license fee receivables. Fair Value At December 28, 2002 and December 29, 2001, the fair values of cash and cash equivalents, short-term investments, accounts receivable, and...

  • Page 64
    ... of net periodic benefit cost are set forth below: Pension Benefits 2002 2001 2000 Pension Benefits We sponsor noncontributory defined benefit pension plans covering substantially all full-time U.S. salaried employees, certain hourly employees and certain international employees. During 2001, the...

  • Page 65
    ...actuarial loss Unrecognized prior service cost Net amount recognized at year-end (a) Reï¬,ects a contribution made between the September 30, 2002 measurement date and December 28, 2002. Amounts recognized in the statement of financial position consist of: Accrued benefit liability Intangible asset...

  • Page 66
    ... assumed health care cost trend rates would have increased or decreased our accumulated postretirement benefit obligation at December 28, 2002 by approximately $2 million. The impact on our 2002 benefit cost would not have been significant. 18 STOCK-BASED EMPLOYEE COMPENSATION NOTE At year-end...

  • Page 67
    ...salary. The participant's balances will remain in the RDC Plan until their scheduled distribution dates. As defined by the RDC Plan, we credit the amounts deferred with earnings based on the investment options selected by the participants. Investment options in the RDC Plan consist of phantom shares...

  • Page 68
    .... These investment options are limited to cash and phantom shares of our Common Stock. The EID Plan allows participants to defer incentive compensation to purchase phantom shares of our Common Stock at a 25% discount from the average market price at the date of deferral (the "Discount Stock Account...

  • Page 69
    ... with the Internal Revenue Service relating to the deductibility of reacquired franchise rights and other intangibles offset by an $8 million reduction in deferred and accrued taxes payable. In 2002, valuation allowances related to deferred tax assets in certain states and foreign countries were...

  • Page 70
    ...) are set forth below: 2002 2001 Intangible assets and property, plant and equipment Other Gross deferred tax liabilities Net operating loss and tax credit carryforwards Employee benefits Self-insured casualty claims Capital leases and future rent obligations related to sale-leaseback agreements...

  • Page 71
    ... items income (expense). (c) Includes investment in unconsolidated affiliates of $225 million, $213 million and $257 million for 2002, 2001 and 2000, respectively. (d) Primarily includes deferred tax assets, fair value of derivative instruments, and property, plant and equipment, net, related...

  • Page 72
    ..." the unpaid wage and hour allegations by opening a claims process to all putative class members prior to certification of the class. In this cure process, Taco Bell paid out less than $1 million. On January 26, 1999, the Court certified a class of all current and former shift managers and crew...

  • Page 73
    ...to be required. Additionally, PepsiCo is entitled to the federal income tax benefits related to the exercise after the Spin-off of vested PepsiCo options held by our employees. We expense the payroll taxes related to the exercise of these options as incurred. NOTE 25 PROCESS AMERISERVE BANKRUPTCY...

  • Page 74
    ... NOTE 2002 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenues: Company sales Franchise and license fees Total revenues Total costs and expenses, net Operating profit Net income Diluted earnings per common share Operating pro...

  • Page 75
    ... Brands Inc. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS TO OUR SHAREHOLDERS: We are responsible for the preparation, integrity and fair presentation of the Consolidated Financial Statements, related notes and other information included in this annual report. The financial statements were...

  • Page 76
    ... Data System sales (f) U.S. International Total Number of stores at year end Company Unconsolidated Affiliates Franchisees Licensees System U.S. Company same store sales growth KFC Pizza Hut Taco Bell Blended (g) Shares outstanding at year end (in millions) (d) Market price per share at year end...

  • Page 77
    ... Officer, KFC, U.S.A. Peter A. Bassi 53 President, Yum! Restaurants International Jonathan D. Blum 44 Senior Vice President, Public Affairs, Yum! Brands, Inc. Emil J. Brolick 55 President and Chief Concept Officer, Taco Bell, U.S.A. Anne P. Byerlein 44 Chief People Officer, Yum! Brands, Inc...

  • Page 78
    ...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 Stock Trading Symbol - YUM The New York Stock Exchange is the principal market for YUM Common Stock...

  • Page 79
    ... Clubs of America, Taco Bell has established a mentoring program for at-risk teens, offering a safe haven and recreational activities to keep kids off the street. To date, over $11 million has been donated to the Boys & Girls Clubs for TEENSupreme programming. From left to right Ashleigh Keister...

  • Page 80
    Yum! to you! Alone we're delicious. Together we're ®