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Beginning฀in฀2005,฀we฀also฀changed฀the฀China฀business฀
reporting฀calendar฀to฀more฀closely฀align฀the฀timing฀of฀the฀
reporting฀of฀its฀results฀of฀operations฀with฀our฀U.S.฀business.฀
Previously฀our฀China฀business,฀like฀the฀rest฀of฀our฀international฀
businesses,฀closed฀one฀month฀(or฀one฀period฀for฀certain฀of฀
our฀international฀businesses)฀earlier฀than฀YUM’s฀period฀end฀
date฀to฀facilitate฀consolidated฀reporting.฀To฀maintain฀compa-
rability฀of฀our฀consolidated฀results฀of฀operations,฀amounts฀
related฀to฀our฀China฀business฀for฀December฀2004฀have฀not฀
been฀reflected฀in฀our฀Consolidated฀Statements฀of฀Income฀
and฀net฀income฀of฀the฀China฀business฀of฀$6฀million฀for฀the฀
one฀month฀period฀ending฀December฀31,฀2004฀was฀recog-
nized฀ as฀ an฀ adjustment฀ directly฀ to฀ consolidated฀ retained฀
earnings฀ in฀ the฀ year฀ to฀ date฀ ended฀ December฀31,฀ 2005.฀
Our฀consolidated฀results฀of฀operations฀for฀the฀year฀to฀date฀
ended฀ December฀31,฀ 2005฀ include฀ the฀ results฀ of฀ opera-
tions฀of฀the฀China฀business฀for฀the฀months฀of฀January,฀2005฀
through฀December,฀2005.฀Our฀consolidated฀results฀of฀opera-
tions฀for฀the฀years฀to฀date฀ended฀December฀25,฀2004฀and฀
December฀27,฀2003฀continue฀to฀include฀the฀results฀of฀opera-
tions฀of฀the฀China฀business฀for฀the฀months฀December,฀2003฀
through฀ November,฀ 2004฀ and฀ December,฀ 2002฀ through฀
November,฀2003,฀respectively,฀as฀previously฀reported.
Adoption฀of฀Statement฀of฀Financial฀Accounting฀Standards฀
No.฀123R,฀“Share-Based฀Payment”฀ In฀the฀fourth฀quarter฀
2005,฀the฀Company฀adopted฀SFAS฀No.฀123฀(Revised฀2004),฀
“Share-Based฀ Payment”฀ (“SFAS฀123R”),฀ which฀ replaces฀
SFAS฀No.฀123฀“Accounting฀for฀Stock-Based฀Compensation”฀
(“SFAS฀123”),฀supersedes฀APB฀ 25,฀ “Accounting฀for฀Stock฀
Issued฀to฀Employees”฀and฀related฀interpretations฀and฀amends฀
SFAS฀No.฀ 95,฀“Statement฀ of฀ Cash฀ Flows.”฀ The฀ provisions฀
of฀ SFAS฀123R฀are฀similar฀to฀those฀of฀SFAS฀123,฀however,฀
SFAS฀123R฀requires฀all฀new,฀modified฀and฀unvested฀share-
based฀payments฀to฀employees,฀including฀grants฀of฀employee฀
stock฀options฀and฀restricted฀stock,฀be฀recognized฀in฀the฀finan-
cial฀statements฀as฀compensation฀cost฀over฀the฀service฀period฀
based฀on฀their฀fair฀value฀on฀the฀date฀of฀grant.฀Compensation฀
cost฀is฀recognized฀over฀the฀service฀period฀on฀a฀straight-line฀
basis฀for฀the฀fair฀value฀of฀awards฀that฀actually฀vest.
We฀adopted฀SFAS฀123R฀using฀the฀modified฀retrospec-
tive฀application฀transition฀ method฀effective฀September฀4,฀
2005,฀the฀beginning฀of฀our฀fourth฀quarter.฀As฀permitted฀by฀
SFAS฀123R,฀we฀applied฀the฀modified฀retrospective฀applica-
tion฀transition฀method฀to฀the฀beginning฀of฀the฀fiscal฀year฀of฀
adoption฀(our฀fiscal฀year฀2005).฀As฀such,฀the฀first฀three฀fiscal฀
quarters฀of฀2005฀are฀required฀to฀be฀adjusted฀to฀recognize฀
the฀compensation฀cost฀previously฀reported฀in฀the฀pro฀forma฀
footnote฀ disclosures฀ under฀ the฀ provisions฀ of฀ SFAS฀123.฀
However,฀years฀prior฀to฀2005฀have฀not฀been฀restated.
The฀ adoption฀ of฀ SFAS฀123R฀ in฀ 2005฀ resulted฀ in฀ the฀
reduction฀of฀operating฀profit฀of฀$58฀million฀($10฀million฀in฀
payroll฀ and฀employee฀benefits฀ and฀$48฀million฀ in฀general฀
and฀administrative฀expense),฀a฀reduction฀of฀net฀income฀of฀
$38฀million฀(net฀of฀tax฀benefits฀of฀$20฀million),฀a฀reduction฀
of฀both฀basic฀and฀diluted฀earnings฀per฀share฀of฀$0.13฀per฀
share,฀a฀reduction฀of฀$87฀million฀in฀cash฀flows฀from฀oper-
ating฀activities฀and฀an฀increase฀of฀$87฀million฀in฀cash฀flows฀
from฀financing฀activities.
The฀following฀table฀shows฀the฀2005฀quarterly฀after-tax฀
effect฀of฀adoption฀of฀SFAS฀123R฀on฀the฀previously฀reported฀
first฀three฀quarters฀of฀2005.
฀ First฀Quarter฀ Second฀Quarter฀ Third฀Quarter
฀ Net฀ Diluted฀ Net฀ Diluted฀ Net฀ Diluted฀
฀ Income฀ EPS฀ Income฀ EPS฀ Income฀ EPS
Reported฀results฀฀
฀ prior฀to฀SFAS฀123R฀฀
฀ adoption฀ $฀161฀ $฀0.53฀ $฀187฀ $฀0.62฀ $฀214฀ $฀0.72
Impact฀of฀SFAS฀123R฀฀
฀ adoption฀ ฀ (8)฀ ฀(0.03)฀ ฀ (9)฀ ฀(0.03)฀ ฀ (9)฀ ฀(0.03)
Results฀subsequent฀฀
฀ to฀SFAS฀123R฀฀
฀ adoption฀ $฀153฀ $฀0.50฀ $฀178฀ $฀0.59฀ $฀205฀ $฀0.69
We฀ also฀ have฀ included฀ the฀ following฀ tables฀ detailing฀ the฀
additional฀expense฀by฀quarter,฀by฀segment฀and฀by฀financial฀
statement฀line฀item฀of฀the฀impact฀of฀adoption฀of฀SFAS฀123R฀
as฀well฀as฀the฀related฀decrease฀in฀operating฀profit,฀income฀
tax฀benefit฀and฀decrease฀ in฀net฀income.฀The฀ numbers฀ as฀
presented฀have฀been฀rounded฀to฀accommodate฀our฀financial฀
statement฀presentation฀conventions.฀However,฀unrounded฀
expense฀by฀segment฀is฀relatively฀consistent฀throughout฀all฀
quarters฀relative฀to฀actual฀number฀of฀days฀in฀the฀quarter.
฀ Quarter฀ended฀March฀19,฀2005
฀ ฀ Inter-฀ ฀ Unallo-฀
฀ U.S.฀ national฀ China฀ cated฀ Total
Payroll฀and฀฀
฀ employee฀benefits฀ $฀2฀ $฀1฀ $฀—฀ $฀—฀ $฀ 3
General฀and฀฀
฀ administrative฀ ฀3฀ ฀2฀ ฀ 1฀ ฀ 4฀ ฀10
Operating฀profit฀ $฀5฀ $฀3฀ $฀ 1฀ $฀ 4฀ ฀13
Income฀tax฀benefit฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ (5)
Net฀income฀impact฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $฀ 8
฀ Quarter฀ended฀June฀11,฀2005
฀ ฀ Inter-฀ ฀ Unallo-฀
฀ U.S.฀ national฀ China฀ cated฀ Total
Payroll฀and฀฀
฀ employee฀benefits฀ $฀2฀ $฀—฀ $฀—฀ $฀—฀ $฀ 2
General฀and฀฀
฀ administrative฀ ฀3฀ ฀ 2฀ ฀ 1฀ ฀ 5฀ ฀11
Operating฀profit฀ $฀5฀ $฀ 2฀ $฀ 1฀ $฀ 5฀ ฀13
Income฀tax฀benefit฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ (4)
Net฀income฀impact฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $฀ 9
34.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.