Pizza Hut 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
    Financial Highlights (In millions, 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 ...

  • Page 3
    ...simply going to STAY THE COURSE with our strategies to build the defining global company that feeds the world. 13% EPS Growth* +5% System Sales Growth** $1.6 billion Net Income +18% Increased Dividend $1.34 Annual Dividend Per Share Rate +1,976 Units*** Yet when I step back and think about it...

  • Page 4
    ... the future growth prospects of our company. We have a portfolio of brands with leadership positions in China and other emerging markets, with a long runway for growth. We have an asset base of over 39,000 restaurants and we continue to make progress leveraging these assets further by building sales...

  • Page 5
    ... 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 Casual Dining Restaurant, and opened 889 restaurants (that's right, 889...

  • Page 6
    ...this tailwind, new unit development across China should continue at a high rate, and same-store sales should continue 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...

  • Page 7
    ...potential of the country as well as our strong local capability. The team is successfully adapting the China business model for India to leverage iconic brands with broad appeal. In its first year as a standalone division, India was a powerhouse developer of 138 new units, including 80 KFCs. This is...

  • Page 8
    innovative experiences with KFC, Pizza Hut Casual Dining, Pizza Hut Home Service and Taco Bell. We will invest behind building each of these brands in India and expect all of them to drive tremendous future growth. We are on our way to making this business the next big growth engine for Yum!. And ...

  • Page 9
    ... 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 media history...

  • Page 10
    ...the U.S., KFC successfully reversed the past 4 years of negative same-store sales growth with product innovation and improved franchise relations. Overall in the U.S., we made very good progress with our development and were net-unit positive for the year. We added 150 net new units at Pizza Hut and...

  • Page 11
    ...franchisee value. penetrated markets like Pizza Hut UK and increasing our exposure in emerging and under-penetrated markets. We also build company units or increase our ownership in international markets where we can achieve scale, realize high growth and yield high returns. Our investments in India...

  • Page 12
    ... this Annual Report, I hope you'll agree our plan to STAY THE COURSE is great news for 2013 and beyond. 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...

  • Page 13
    ..." dynamhc, vhbrant brands everywxere whtx one system operathonal excellence 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...

  • Page 14
    ...) Step Change Thinkers Know How Builders Action Drivers People Growers 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...

  • 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
    ...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/annualreport and www.yum.com/investors...

  • Page 18
    ... Equity Awards at Fiscal Year-End ...48 Option Exercises and Stock Vested...50 Pension Benefits ...51 Nonqualified Deferred Compensation ...53 Potential Payments Upon Termination or Change in Control ...55 DIRECTOR COMPENSATION EQUITY COMPENSATION PLAN INFORMATION AUDIT COMMITTEE REPORT...

  • Page 19
    ..., 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 for use at the Annual Meeting of...

  • Page 20
    ... LLP as our independent auditors for the fiscal year ending December 28, 2013; • An advisory vote on 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...

  • Page 21
    ... proxy card in the postage-paid envelope provided. If you are a participant in the Direct Stock Purchase Plan, the administrator of this program, as the shareholder of record, may only vote the shares for which it has received directions to vote from you. If you are a participant in the YUM! Brands...

  • Page 22
    ... independent auditors for the fiscal 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...

  • Page 23
    ... 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 Proxy Statement 5

  • 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
    ... positioned to use his in-depth knowledge of our industry, our global business and its challenges as well as our key constituents including employees, franchisees and business partners to provide the Board with the leadership needed to set Board agendas, strategic focus and direction for the Company...

  • Page 26
    ...of the Company and its management. The lead director position has no term limit and is subject only to annual approval by the independent members of the Board. Based upon the recommendation of the Nominating and Governance Committee, the Board has determined that the lead director is responsible for...

  • Page 27
    ...designing pay programs at all levels that align team performance, individual performance, customer satisfaction 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...

  • Page 28
    ... she deems appropriate. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence. Written correspondence from shareholders relating to accounting, internal controls or auditing matters...

  • Page 29
    ... of corporate goals set by the Committee • Reviews and approves the compensation of the chief executive officer and other senior executive officers • Reviews management succession planning The Board has determined that all of the members of the Management Planning and Development Committee are...

  • Page 30
    ... number of shares of Company common stock and expects non-management directors to retain shares acquired as compensation as a director until at least 12 months following their departure from the Board. YUM directors receive a significant portion of their annual compensation in stock. The Company...

  • Page 31
    ...to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to YUM and our Board. Finally, we value their significant experience on other public company boards of directors and board committees. Proxy Statement...

  • Page 32
    ... of international sales and distribution business • Expertise in branding, marketing, sales and international business development • Public company directorship and committee experience • Independent of Company Proxy Statement David W. Dorman Age 59 Director since 2005 Non-Executive Chairman...

  • 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
    ...the Company's China Division • Expertise in marketing and brand development • Expertise in strategic planning and international business development Specific qualifications, experience, skills and expertise: • Operating and management experience, including as chairman and chief executive of...

  • 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
    ... 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's expansion in an international market. 18 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 37
    ...our annual target of 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...

  • Page 38
    ... Performance Share Plan, beginning with the 2013-2015 performance period; • Changing CEO's Long-Term Incentive Compensation Mix - changing the long-term incentive compensation mix for the Company's Chief Executive Officer to 75% stock appreciation rights and 25% performance share plan units (from...

  • 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
    ...cash, in stock (valued at closing price as of the day of exercise), or in any combination thereof. The Committee may impose such conditions, restrictions, and contingencies on stock acquired pursuant to the exercise of an option as the Committee determines 22 YUM! BRANDS, INC. - 2013 Proxy Statement...

  • Page 41
    ... 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 price; total shareholder return; customer satisfaction metrics; or restaurant unit development. Each goal may be...

  • Page 42
    ... unit award will not realize taxable income at the time of grant. The Participant will have compensation income at the time of distribution equal to the amount of cash received and the then fair market value of the distributed shares. The Company will be entitled to a corresponding tax deduction...

  • Page 43
    ... Statement YUM! Brands 2010 corporate social responsibility report states that understanding and addressing the impact of packaging on the environment is a long-term imperative for the sustainability of its business, yet the company has no comprehensive packaging recycling strategy or stated goals...

  • Page 44
    ... to be worked on collectively. As a founding member of Paper Recovery Alliance, YUM is helping shape that conversation. We oppose this proposal because as described above YUM already is developing goals and implementing initiatives related to recycling as part of its long-term strategy. Adoption of...

  • Page 45
    ...Named Executive Officers call for them to own 50,000 shares of YUM common stock or stock equivalents within five years following their appointment to their current position. The table shows the number of shares of common stock and common stock equivalents beneficially owned as of December 31, 2012...

  • Page 46
    .... All executive officers as a group received distributions in total of 108,406 awards. (4) Amounts include units denominated as common stock equivalents held in deferred compensation accounts which become payable in shares of YUM common stock at a time (a) other than at termination of employment or...

  • Page 47
    ..., based solely 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...

  • Page 48
    ... improve U.S. brand positions, consistency and returns • Drive industry-leading long-term shareholder and franchisee value Our compensation program is designed to support these growth strategies which drive Company profitability and shareholder value. 30 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 49
    ...the Company's annual earnings releases. EPS growth is calculated based on YUM's fiscal year end which ends the last Saturday of each calendar year. The total shareholder return reï¬,ects a calendar year end of December 31, 2012. Proxy Statement In addition to EPS growth, our strategy's success is...

  • Page 50
    ...! 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 relatively ï¬,at from 2009-2012...

  • Page 51
    ...of the Company for equity awards made in 2013 and beyond The changes described above reinforce our longstanding commitment to an executive compensation philosophy that emphasizes performance while at the same time is a direct response to the feedback we received. Proxy Statement YUM's Compensation...

  • Page 52
    ...the value of equity awards in pension calculations • No tax gross-ups • Independent compensation consultant to advise Management Planning and Development Committee 2012 Executive Compensation Program and Decisions Our annual compensation program has three primary pay components: • Base salary...

  • Page 53
    ... any member of the Management Planning and Development Committee or management • Meridian's partners and employees who provide services to the Committee are prohibited from owning YUM stock per Meridian's firm policy Use of Comparator Compensation Peer Group Companies Included in the Executive...

  • Page 54
    ...salary increases take into account these factors. In addition, salary increases may be warranted based on a promotion or change in the responsibilities of the Named Executive Officer. The Committee reviews the Named Executive Officers' salary and performance annually. 36 YUM! BRANDS, INC. - 2013...

  • Page 55
    ... 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 growth strategies, historical performance, and the future operating...

  • Page 56
    ... costs within our Pizza Hut U.K. market. (3) Actual system sales growth was adjusted for the impact of the 53rd week and the divestiture of LJS/A&W in 2011. Note: Mr. Carucci's team factor is based on his role as CFO, as well as responsibility for KFC in the U.S. for 4 months at a blend of 90% YUM...

  • Page 57
    ...-term growth and they 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...

  • 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
    ... RSUs acquired under 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...

  • Page 60
    ...payments would exceed 2.99 times the sum of (a) the Named Executive Officer's annual base salary as in effect immediately prior to termination of employment; and (b) the highest annual bonus awarded to the Named Executive Officer by the Company in any of 42 YUM! BRANDS, INC. - 2013 Proxy Statement...

  • Page 61
    ... transactions related to YUM's stock. Pledging of Company stock is also prohibited. Deductibility of Executive Compensation The provisions of Section 162(m) of the Internal Revenue Code limit the tax deduction for compensation in excess of one million dollars paid to certain Named Executive Of...

  • Page 62
    ... and Chief Executive Officer, YUM's China Division Richard T. Carucci President, YUM! Brands Salary Bonus Year ($)(1) ($) (b) (c) 2012 1,450,000 - 2011 1,474,038 - 2010 1,400,000 - 2012 500,308 Stock Awards ($)(2) (d) 773,022 773,024 740,005 Non-Equity Option Incentive Plan Awards Compensation...

  • Page 63
    ... 2010, respectively. For a discussion of the assumptions and methodologies 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...

  • 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
    ... of SARs/stock options, 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-based and Deferred Compensation Plans." There can...

  • Page 66
    EXECUTIVE COMPENSATION 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) ...

  • Page 67
    ...2009 2/5/2010 2/4/2011 11/18/2011 2/8/2012 Stock Awards Equity incentive Equity incentive Market plan awards: plan awards: Number Value of market or Number of of Shares payout value unearned or Units Shares or Units of of unearned shares, units of Stock That Stock That or other rights shares, units...

  • Page 68
    ...closing price of $66.40 for YUM common stock on December 31, 2012 (December 29, 2012 was a Saturday). The value realized for Mr. Novak's RSU award was calculated based on a closing price of $62.27 for YUM common stock on January 24, 2012. Proxy Statement 50 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 69
    ...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 Service Accumulated Benefit(4) Last Fiscal Year ($) ($) Name Plan...

  • Page 70
    ... Internal Revenue Code Section 417(e)(3) (currently this is the annual 30-year Treasury rate for the 2nd month preceding the date of distribution and the gender blended 1994 Group Annuity Reserving Table as set forth in Revenue Ruling 2001-62). (2) YUM! Brands Inc. Pension Equalization Plan The YUM...

  • Page 71
    ... 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 earlier...

  • Page 72
    ...Pant 51,240,041 954,858 6,981,892 9,118,919 4,324,564 The difference between these amounts and the amount of the year-end balance for each executive represents the total aggregate earnings accumulated under the program with respect to that compensation. 54 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 73
    ... Compensation Table, Mr. Grismer did not receive a performance share unit award for 2012. Pension Benefits. The Pension Benefits Table on page 51 describes the general terms of each pension plan in which the Named Executive Officers participate, the years of credited service and the present value...

  • Page 74
    ...of termination, • a severance payment equal to two times the sum of the executive's base salary and the target bonus or, if higher, the actual bonus for the year preceding the change in control of the Company, • outplacement services for up to one year following termination, and • a "tax gross...

  • Page 75
    ... a best net after-tax method. See the Company's Compensation Discussion and Analysis on page 30 for more detail. In addition, effective for equity awards made in 2013 and beyond, outstanding awards will fully and immediately vest if the executive is employed on the date of the change in control...

  • Page 76
    ... the assumptions used to value the awards, 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-based and Deferred Compensation Plans...

  • 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
    ... stock and restricted stock units. Employees, other than executive officers, are eligible to receive awards under the SharePower Plan. The SharePower Plan is administered by the Management Planning and Development Committee of the Board of Directors. The exercise price of a stock option or...

  • Page 79
    ... annually, and any recommended changes are presented to the Audit Committee for review and approval. The charter is available on our website at www.yum.com/investors/governance/ charters.asp. Proxy Statement What are the responsibilities of the Audit Committee? The Audit Committee assists the Board...

  • Page 80
    ...the limitations on the Committee's role and responsibilities referred to above and in the Audit Committee Charter, 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...

  • Page 81
    ...? YUM shareholders with shares registered directly in their name who received shareholder materials in the mail may elect to receive future annual reports and proxy statements from us and to vote their shares through the Internet instead of receiving copies through the mail. We are offering this...

  • Page 82
    ... foregoing procedures. Bylaw Provisions. You may contact YUM's Corporate Secretary at the address mentioned above for a copy of the relevant bylaw provisions regarding the requirements for making shareholder proposals and nominating director candidates. 64 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 83
    ... the Committee at the time the Option or SAR is granted; except that the Exercise Price shall not be less than the closing price of a share of Stock on the date of grant as reported on the composite tape for securities listed on the New York Stock Exchange (or if no sales of stock were made on said...

  • Page 84
    ...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 return; customer satisfaction metrics; or restaurant unit development. Each goal may be...

  • Page 85
    ... (relating to Other Stock Awards) 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...

  • Page 86
    APPENDIX (ii) (iii) the number and type of Shares (or other property) subject to outstanding Awards; the grant or Exercise Price with respect to outstanding Awards; and Awards and/or Award agreements; (ii) (iv) the terms, conditions or restrictions of outstanding provided, however, that all ...

  • Page 87
    ... of a business or entity, all or a portion of which is acquired by the Company or a Subsidiary). Subject to the overall limitation on the number of shares of Stock that may be delivered under the Plan, the Committee may use available shares of Stock as the form of payment for compensation, grants or...

  • Page 88
    ...4.2(f) (relating to the adjustment of shares), and except as otherwise provided in the Plan or the Award Agreement reï¬,ecting the applicable Award, the Committee may provide under the terms of any Award that upon the occurrence of a Change in Control: (a) (b) (c) All outstanding Options (regardless...

  • Page 89
    ...ficiary under any Award granted under the Plan prior to the date such amendment is adopted by the Board; (ii) no amendments may increase the limitations on the number of shares set forth in subsections 4.2(b) and 4.2(e) or decrease the minimum Option or SAR Exercise Price set forth in subsection...

  • 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
    ... 409A, options 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...

  • Page 92
    ... of shares of Common Stock) held by non-affiliates of the registrant as of June 16, 2012 computed by reference to the closing price of the registrant's Common Stock on the New York Stock Exchange Composite Tape on such date was approximately $29,700,000,000. All executive officers and directors of...

  • Page 93
    ...Properties...10 Legal Proceedings ...10 Mine Safety Disclosures ...11 PART II ITEM 5 ITEM 6 ITEM 7 ITEM 7A ITEM 8 ITEM 9 ITEM 9A ITEM 9B 12 Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities ...12 Selected Financial Data ...14 Management...

  • Page 94
    ...looking statements, which speak only as of the date hereof. In making these statements, we are not undertaking to address or update any of our forward-looking statements set forth herein in future filings or communications regarding our business results. Form 10-K 2 YUM! BRANDS, INC. - 2012 Form...

  • Page 95
    ... In 2012, India recorded revenues of approximately $100 million. General YUM is the world's largest quick service restaurant ("QSR") company based on number of system units, with over 39,000 units in more than 125 countries and territories. Primarily through the three concepts of KFC, Pizza Hut and...

  • 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
    ...ficant portion of the retail food industry in 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...

  • Page 98
    ... of risks relating 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...

  • Page 99
    ... our target development goals, and aggressive development could cannibalize existing sales. Our growth strategy depends in large part on our ability to increase our net restaurant count in markets outside the U.S., especially China and other emerging markets. The successful development of new units...

  • Page 100
    ... labeling, product safety and menu labeling. • New or changing laws relating to state and local licensing. • New or changing laws and regulations relating to health, sanitation, food, workplace safety and fire safety and prevention. • New or changing laws and regulations relating to union...

  • Page 101
    ...we operate is highly competitive with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. If consumer or dietary preferences change...

  • Page 102
    ... sites without a significant impact on our operations, cash ï¬,ows or capital resources. Company restaurants in the U.S. with leases are generally leased for initial terms of 15 or 20 years and generally have renewal options; however, Pizza Hut delivery/ ITEM 3 Legal Proceedings condition or cash...

  • Page 103
    ..., 58, is Chief Executive Officer of YRI. He has served in this position since December 2011. Prior to this position he served as President of YRI from May 2010 to December 2011 and as President of Global Brand Building for YUM from February 2009 to December 2011. He served as the Chief Marketing Of...

  • Page 104
    ... 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 Quarter First Second...

  • Page 105
    ... table provides information as of December 29, 2012 with respect to shares of Common Stock repurchased by the Company during the quarter then ended: Total number of shares purchased (thousands) 436 1,204 - 2,478 4,118 $ $ Total number of shares purchased as part of publicly announced plans or...

  • Page 106
    ... 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 impairment...

  • Page 107
    .... Form 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...

  • Page 108
    ...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. The Company expects to continue to experience strong growth...

  • Page 109
    ..., 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 U.S. restaurants impaired upon our decision or offer to refranchise that remained Company stores for some...

  • Page 110
    ..., at fair value based on Little Sheep's traded share price immediately prior to our offer and recognized a non-cash gain of $74 million, which resulted in no related income tax expense. Under the equity method of accounting, we previously reported our 27% share of the net income of Little Sheep...

  • Page 111
    ... the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom. The newly signed franchise agreement for these stores allows the franchisee to pay continuing franchise fees in the initial years of the agreement at a reduced rate. We...

  • Page 112
    ... Additionally, in December 2012 we refranchised 331 remaining Company-owned dine-in restaurants in the Pizza Hut UK business and during 2010, we refranchised all Companyowned KFCs and Pizza Huts in Mexico (345 restaurants) and KFCs in Taiwan (124 restaurants). 20 YUM! BRANDS, INC. - 2012 Form 10-K

  • Page 113
    ... On June 23, 2010, the 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...

  • 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
    ... or meaningful information at this time. (b) The reductions to Worldwide, YRI, U.S. and India totals of 1,633, 346,1,286 and 1, respectively during 2011 represent the number of LJS and A&W units as of the beginning of 2011. Therefore, 2011 New Builds and Closures exclude any activity related to LJS...

  • Page 116
    ... vs. 2010 U.S. (1)% (1) N/A 2 -% (2)% Same store sales growth (decline) Net unit growth and other(a) Foreign currency translation 53rd week in 2011 % CHANGE % CHANGE, EXCLUDING FOREX AND 53RD WEEK IN 2011 China 4% 16 3 N/A 23% 20% YRI 3% 3 (3) (1) 2% 6% India 5% 24 (16) N/A 13% 29% Worldwide...

  • Page 117
    ... offset by new unit development. Significant other factors impacting Company sales and/or Restaurant profit were Company same-store sales growth of 3% offset by commodity inï¬,ation and higher labor costs. Form 10-K U.S. 2012 vs. 2011 Store Portfolio 53rd Week in Actions Other 2011 $ (535) $ 128...

  • Page 118
    ... ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Income/(Expense) Company sales Cost of sales Cost of labor Occupancy and other RESTAURANT PROFIT Restaurant margin $ $ 2010 3,355 (976) (994) (908) 477 14.2% 2011 vs. 2010 Store Portfolio 53rd Week in...

  • Page 119
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations The increase in YRI G&A expenses for 2011 was driven by increased investment in strategic growth markets, including the acquisition of our Russia business in 2010, partially offset by G&A savings ...

  • Page 120
    ... offset by deal costs related to the acquisition of Little Sheep. China Division Operating Profit increased 15% in 2011, excluding foreign currency, driven by the impact of same-store sales growth and new unit development, partially offset by higher restaurant operating costs, higher G&A expenses...

  • Page 121
    ...change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year. Other. This item primarily includes the impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions. In 2012, this item was positively...

  • Page 122
    ... 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 February 1, 2012, we acquired a controlling interest in Little Sheep Group Limited ("Little Sheep"), a casual dining concept headquartered in Inner Mongolia, China...

  • Page 123
    ... UK pension plans, we currently estimate that we will not be required to make any contributions in 2013. Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumption. Future changes in investment...

  • 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
    ... income. A 50 basis-point change in our discount rate assumption at our measurement date would impact our 2013 U.S. pension expense by approximately $13 million. Allowances for Franchise and License Receivables/Guarantees Franchise and license receivable balances include continuing fees, initial...

  • Page 126
    ...our plan assets and historical market returns thereon. A one percentage-point change in our expected long-term rate of return on plan assets assumption would impact our 2013 U.S. pension expense by approximately $8 million. A decrease in discount rates over time along with actual asset returns below...

  • Page 127
    ... increase in short-term interest rates would result, over the following twelve-month period, in a reduction of approximately $3 million and $5 million, respectively, in income before income taxes. The estimated reductions are based upon the current level of variable rate debt and assume no changes...

  • Page 128
    PART 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 ...

  • Page 129
    ... 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 and December 31, 2011, and the related...

  • Page 130
    ...(in millions, except 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...

  • Page 131
    PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Comprehensive Income YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 29, 2012, DECEMBER 31, 2011 AND DECEMBER 25, 2010 2012 1,608 Year Ended 2011 $ 1,335 2010 1,178 (in millions) Net income - ...

  • Page 132
    ... - payments Three months or less, net Repurchase shares of Common Stock Excess tax benefit from share-based compensation Employee stock option proceeds Dividends paid on Common Stock Other, net NET CASH USED IN FINANCING ACTIVITIES EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS NET INCREASE...

  • Page 133
    ... 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 expenses and other current assets Deferred income taxes...

  • Page 134
    PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Shareholders' Equity (Deficit) YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 29, 2012, DECEMBER 31, 2011 AND DECEMBER 25, 2010 Yum! Brands, Inc. Issued Common Accumulated Stock Other Retained ...

  • Page 135
    ... 2011 and 2010. YUM! Brands, Inc. and Subsidiaries (collectively referred to herein as "YUM" or the "Company") comprises primarily the worldwide 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...

  • Page 136
    ... direct incremental franchise and license support costs. Revenue Recognition. Revenues from Company-owned restaurants are recognized when payment is tendered at the time of sale. The Company presents sales net of sales-related taxes. Income from our franchisees and licensees includes initial fees...

  • Page 137
    ... a franchise agreement with terms substantially at market. The after-tax cash ï¬,ows incorporate reasonable assumptions we believe a franchisee would make such as sales growth and margin improvement. The discount rate used in the fair value calculation is our estimate of the required rate of return...

  • 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
    ... 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 is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business...

  • Page 140
    ... exceeds the sum of the service and interest costs within an individual plan. NOTE 3 Earnings Per Common Share ("EPS") $ 2012 1,597 $ 461 12 473 3.46 $ 3.38 $ 3.1 2011 1,319 $ 469 12 481 2.81 $ 2.74 $ 4.2 2010 1,158 474 12 486 2.44 2.38 2.2 NET INCOME - YUM! BRANDS, INC. Weighted-average common...

  • Page 141
    ... fair value based on Little Sheep's traded share price immediately prior to our offer to purchase the business and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Consolidated Statement of Income and...

  • Page 142
    ... 72 $ China YRI(a)(b)(c) U.S.(d) India WORLDWIDE (a) $ $ 2010 (8) 53 18 - 63 During the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom. The newly signed franchise agreement for these stores allows the franchisee to pay...

  • Page 143
    ... 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 assets (a) Primarily reflects restaurants we have offered for sale to franchisees. $ YUM! BRANDS...

  • Page 144
    ... Accrued taxes, other than income taxes Other current liabilities 2012 684 $ 264 487 151 103 256 1,945 $ 2011 712 229 440 131 112 250 1,874 $ $ NOTE 9 Goodwill and Intangible Assets The changes in the carrying amount of goodwill are as follows: China Balance as of December 25, 2010 Goodwill...

  • Page 145
    PART II ITEM 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 ...

  • Page 146
    ...income associated with direct financing lease receivables was $12 million. The details of rental expense and income are set forth below: 2012 RENTAL EXPENSE Minimum Contingent RENTAL INCOME $ $ $ 721 $ 290 1,011 $ 77 $ 2011 625 $ 233 858 $ 66 $ 2010 565 158 723 44 54 YUM! BRANDS, INC. - 2012 Form...

  • Page 147
    ..., 2011 were: Fair Value 2012 - $ 24 - (5) 19 $ Interest Rate Swaps - Asset Interest Rate Swaps - Asset Foreign Currency Forwards - Asset Foreign Currency Forwards - Liability TOTAL $ $ 2011 10 22 3 (1) 34 Consolidated Balance Sheet Location Prepaid expenses and other current assets Other assets...

  • Page 148
    ... liabilities that employees have chosen to invest in phantom shares of a Stock Index Fund or Bond Index Fund. The other investments are classified as trading securities in Other assets in our Consolidated Balance Sheets and their fair value is determined based on the closing market prices of the...

  • Page 149
    ... Settlement payments(a) Benefits paid Exchange rate changes Administrative expenses Fair value of plan assets at end of year FUNDED STATUS AT END OF YEAR Amounts recognized in the Consolidated Balance Sheet: U.S. Pension Plans 2012 - $ (19) (326) (345) $ International Pension Plans 2012 2011 33...

  • Page 150
    ...(c) Special termination benefits primarily related to the U.S. business transformation measures taken in 2012, 2011 and 2010. Pension (gains) losses in Accumulated other comprehensive income (loss): U.S. Pension Plans 2012 543 $ 117 (10) (63) (1) 5 (74) (89) - 428 $ International Pension Plans 2012...

  • Page 151
    ... of total pension plan assets at the 2012 measurement date, are to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future payment requirements. To achieve these objectives, we are using a combination of active and passive investment strategies. Our equity...

  • Page 152
    ... Share-based and Deferred Compensation Plans At year end 2012, we had four stock award plans in effect: the YUM! Brands, Inc. Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan (collectively the "LTIPs"), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan ("RGM Plan...

  • Page 153
    PART II ITEM 8 Financial Statements and Supplementary Data participants to defer incentive compensation to purchase phantom shares of our Common Stock and receive a 33% Company match on the amount deferred. Deferrals receiving a match are similar to a RSU award in that participants will generally ...

  • Page 154
    ... 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 Performance Share Units TOTAL SHARE-BASED...

  • Page 155
    ... regarding the future use of U.S. state deferred tax assets that existed at the beginning of the year. Other. This item primarily includes the impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions. In 2012, this item was positively impacted by...

  • Page 156
    ...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 other Gross deferred tax assets Deferred tax asset valuation allowances Net...

  • Page 157
    ... the worldwide KFC, Pizza Hut 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...

  • Page 158
    ...070 68 52 684 1,338 9,011 $ 8,834 $ China YRI U.S. India Corporate(c) $ $ 2010 225 156 201 3 4 589 China YRI U.S. India Corporate $ $ 2010 272 249 241 10 24 796 China(h) YRI U.S. India Corporate(i) $ $ 2010 2,289 2,606 2,398 43 980 8,316 Form 10-K 66 YUM! BRANDS, INC. - 2012 Form 10-K

  • Page 159
    ... (h) China includes investments in 3 unconsolidated affiliates totaling $72 million for 2012 and 4 unconsolidated affiliates totaling $167 million and $154 million, for 2011 and 2010, respectively. (i) Primarily includes cash, deferred tax assets and property, plant and equipment, net, related to...

  • Page 160
    PART II ITEM 8 Financial Statements and Supplementary Data The following table summarizes the 2012 and 2011 activity related to our self-insured property and casualty reserves as of December 29, 2012. Beginning Balance $ 140 $ 150 Expense 58 55 Payments (56) (65) Ending Balance $ 142 $ 140 2012 ...

  • Page 161
    ...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 not receive overtime pay after 40 hours worked...

  • 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
    ..., 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 effectiveness of our internal control over financial reporting and has issued their report, included herein. Form 10-K Changes...

  • Page 164
    ... and Management and Related Stockholder Matters Information regarding equity compensation plans and security ownership of certain beneficial owners and management appearing under the captions "Executive Compensation" and "Stock Ownership Information" is incorporated by reference from the Company...

  • 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
    ...has duly caused this Form 10-K annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 19, 2013 YUM! BRANDS, INC. By: /s/DAVID C. NOVAK Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the...

  • 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
    ... 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 Jing-Shyh S. Su, dated as of May 20, 2010, which is incorporated by reference from Exhibit 10.27 to YUM's Annual Report...

  • Page 169
    ... who hold YUM shares in the name of a bank or broker) should direct communications about all administrative matters related to their accounts to their stockbroker. LONG TERM INCENTIVE PLAN (LTIP) AND YUMBUCKS PARTICIPANTS (employees with rights to LTIP and YUMBUCKS options and stock appreciation...

  • Page 170
    ...STOCK TRADING SYMBOL-YUM The New York Stock Exchange is the principal 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...

  • Page 171
    ..., Yum! Brands, Inc. Chairman and Chief Executive Officer, Yum! Restaurants China Scott O. Bergren 66 Chief Executive Officer, Pizza Hut U.S. and Chief Innovation Officer, Yum! Brands, Inc. Jonathan D. Blum 54 Senior Vice President, Chief Public Affairs and Global Nutrition Officer, Yum! Brands...

  • 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.