Pizza Hut 2013 Annual Report Download

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ON THE GROUND FLOOR OF GLOBAL GROWTH
Yum! Brands 2013 Customer Mania Report
4,800,000,000 transactions
1,900,000,000 dollars in franchise fees
1,500,000 associates
40,000 restaurants
1,952 new international restaurants
128 countries
3 powerful brands
THE POWER OF

Table of contents

  • Page 1
    THE POWER OF 4,800,000,000 transactions 1,900,000,000 dollars in franchise fees 1,500,000 associates 40,000 restaurants 1,952 new international restaurants 128 countries 3 powerful brands ON THE GROUND FLOOR OF GLOBAL GROWTH Yum! Brands 2013 Customer Mania Report

  • Page 2
    Financial Highlights (In millions, except for per share amounts) Year-end 2013 2012 % 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
    ...-digit EPS growth in the years ahead. Let me start with our decision to reorganize the business. As of January 1, 2014, we combined our Yum! Restaurants International and U.S. divisions into three global brand divisions: KFC, Pizza Hut and Taco Bell. China and India will remain separate divisions...

  • Page 4
    2 # KFC 1 FOREIGN BRAND * IN CHINA

  • Page 5
    ... sales deleverage at KFC, the China team deserves a lot of credit for doing an excellent job managing costs. We sharpened our ability in the areas of sales forecasting, labor scheduling and how best to optimize service levels with fewer labor hours. This capability will help us drive profitability...

  • Page 6
    ... products, menu management, marketing calendar, advertising and the digital customer experience. Overall at KFC China, we know we still have work to do but we're confident we are making progress rebuilding trust with consumers and improving same-store sales. PIZZA HUT CASUAL DINING CHINA For Pizza...

  • Page 7
    6:1 LEAD } OVER NEAREST CASUAL DINING COMPETITOR 5

  • Page 8
    ... country with new restaurants. Looking at China's new unit development in total, we strengthened our category-leading positions with 740 new restaurants in 2013, exceeding our target of at least 700 new units for the year. Going forward, we expect another strong year of development in Remember, Yum...

  • Page 9
    ... of the growth curve to best position KFC, Pizza Hut and Taco Bell to expand even more rapidly as the country develops. This year we opened 157 new units, including Yum!'s 40,000th restaurant in Goa, and expect to open an additional 150 new units in 2014. And while our 2013 results haven't been as...

  • Page 10
    Mongolia Ukraine Indonesia Vietnam Russia Malaysia LONG RUNWAY FOR 8 Brazil GROWTH

  • Page 11
    ...business as you can possibly have. We've also made targeted investments in emerging markets to accelerate growth. We acquired about 100 restaurants from a franchisee in Turkey and expect to increase our pace of development in this country going forward. We opened our first company-operated Pizza Hut...

  • Page 12
    10 LIVE MÁS

  • Page 13
    ... in 2013, but we have exciting new product innovations and more compelling value planned to improve our performance in the growing chicken category. We clearly have some catch-up work to do in the U.S. versus the competition for both Pizza Hut and KFC, and intend to make significant progress in 2014...

  • Page 14
    ... of innovative new sales layers, expanded day parts, menu variety, strong value offers and by opening new channels with digital. Harnessing the power of digital technology, we're expanding the use of online and mobile ordering platforms across our Pizza Hut and KFC delivery businesses worldwide. We...

  • Page 15
    ... food and world-class operations Drive aggressive unit expansion everywhere, especially in emerging markets - and by building leading brands in every significant category in China and India Create industry leading returns through franchising and disciplined use of capital - maximizing long-term...

  • Page 16
    ... others. After reading this Annual Report, I hope you recognize the power of Yum! and agree the best is yet to come. I want to thank all our team members, restaurant general managers, franchisees, community partners and restaurant support leaders who are putting our customers front and center in...

  • Page 17
    ..." 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 18
    ... Food and World Class Operations Drive Aggressive Unit Expansion Everywhere, Especially in Emerging Markets Build Leading Brands in Every Significant Category in China and India Create Industry Leading Returns Through Franchising and Disciplined Use of Capital Maximize Long-Term Shareholder Value...

  • Page 19
    ...Chairman of the Board and Chief Executive Officer Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to Be Held on May 1, 2014-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 20

  • Page 21
    ... of record as of the close of business on March 3, 2014. ANNUAL REPORT: A copy of our 2013 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...

  • Page 22
    ...Year-End 48 Option Exercises and Stock Vested 50 Pension Benefits 51 Nonqualified Deferred Compensation 53 Potential Payments Upon Termination or Change in Control 56 DIRECTOR COMPENSATION EQUITY COMPENSATION PLAN INFORMATION AUDIT COMMITTEE REPORT ADDITIONAL INFORMATION APPENDIX A YUM! BRANDS...

  • Page 23
    ... Company to be held at 9:00 a�m� (Eastern Daylight Saving Time), on Thursday, May 1, 2014, in the YUM! Conference Center, at 1900 Colonel Sanders Lane, Louisville, Kentucky� This proxy statement contains information about the matters to be voted on at the Annual Meeting and the voting process...

  • Page 24
    ... on executive compensation; and • The re-approval of the performance measures available under the YUM! Brands, Inc. Executive Incentive Compensation Plan for 162(m) purposes. We will also consider other business that properly comes before the meeting. 2 YUM! BRANDS, INC. - 2014 Proxy Statement

  • Page 25
    ...; • Voting again by telephone or through the Internet prior to 11:59 p.m., Eastern Daylight Saving Time, on April 30, 2014; • Giving written notice to the Secretary of the Company prior to the Annual Meeting; or • Voting again at the Annual Meeting. YUM! BRANDS, INC. - 2014 Proxy Statement 3

  • Page 26
    ... fiscal year 2014 (Item 2); • FOR the proposal regarding an advisory vote on executive compensation (Item 3); and • FOR the proposal to re-approve the performance measures available under the YUM! Brands, Inc. Executive Incentive Compensation Plan for 162(m) purposes (Item 4). Proxy Statement...

  • Page 27
    ...and call for a vote 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. YUM! BRANDS, INC. - 2014...

  • Page 28
    ... Procedures Policy regarding Accounting Matters Compensation • Executive Compensation is Highly Performance Based to Align with Shareholder Interests and Promote Company Business Strategy • At Risk Pay Tied to Performance • Strong Stock Ownership Guidelines • No Employment Agreements...

  • Page 29
    ... are selected based upon contributions they can make to the Board and management. The Committee's assessment of a proposed candidate will include a review of the person's judgment, experience, independence, understanding of the Company's business or other related industries and such other factors as...

  • Page 30
    ...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 31
    ... to Management and Employees. Directors have full and unrestricted access to the management and employees of the Company. Additionally, key members of management attend Board meetings to present information about the results, plans and operations of the business within their areas of responsibility...

  • Page 32
    ... return; emphasize long-term incentives; drive ownership mentality; and require executives to personally invest in Company stock� In 2014, the Management Planning and Development Committee of the Board of Directors ("Committee") oversaw the performance of a risk assessment of our compensation...

  • Page 33
    ... of management and/or the Board of Directors with respect to all concerns it receives. The full text of our Policy on Reporting of Concerns Regarding Accounting and Other Matters is available on our website at www.yum.com/investors/governance/complaint.asp. YUM! BRANDS, INC. - 2014 Proxy Statement...

  • Page 34
    ... the annual audited financial statements and results of the audit with management and the independent auditors • Reviews the Company's accounting and financial reporting principles and practices including any significant changes • Advises the Board with respect to Company policies and procedures...

  • Page 35
    ... 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 believes that the emphasis on the equity component...

  • Page 36
    ... of service to YUM and our Board. Finally, we value their significant experience on other public company boards of directors and board committees. There are no family relationships among any of the directors and executive officers of the Company. See "What are the Company's policies and procedures...

  • Page 37
    ... in branding, marketing, sales and international business development • Public company directorship and committee experience • Independent of Company Proxy Statement David W. Dorman Age 60 Director since 2005 Non-Executive Chairman, CVS Caremark Corporation and Founding Partner, Centerview...

  • Page 38
    ... as 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 Bonnie G. Hill Age 72 Director since 2003 President...

  • Page 39
    ...Operating and management experience, including as president of the Company's China Division • Expertise in marketing and brand development • Expertise in strategic planning and international business development David C. Novak Age 61 Director since 1997 Chairman and Chief Executive Officer, YUM...

  • Page 40
    ...the election of directors can be found in our Corporate Governance Principles at www.yum.com/ investors/governance/principles.asp and at page 9 under "What other significant Board practices does the Company have?-Majority Voting Policy." Proxy Statement 18 YUM! BRANDS, INC. - 2014 Proxy Statement

  • Page 41
    ...internal controls over financial reporting, statutory audits and services rendered in connection with the Company's securities offerings. (2) Audit-related fees include audits of financial statements of certain employee benefit plans, agreed upon procedures and other attestations. Audit-related fees...

  • Page 42
    .... The Compensation Discussion and Analysis section of this proxy statement, beginning on page 28 discusses in detail how our compensation policies and procedures operate and are designed to meet our compensation goals and how we make our compensation decisions. 20 YUM! BRANDS, INC. - 2014 Proxy...

  • Page 43
    ... size of the peer group companies with YUM. • Re-designed 2013-2015 Performance Share Plan Re-designed 2013-2015 Performance Share Plan to measure relative total shareholder return vs. the S&P 500. • Increased Use of Performance Share Units in CEO's Long Term Incentive ("LTI") Program - Changed...

  • Page 44
    ...share, return on operating assets, return on equity, operating profit, net income, revenue growth, Company or system sales, shareholder return, gross margin management, market share improvement, market value added, restaurant development, customer satisfaction, economic value added, operating income...

  • Page 45
    ... of business, a subsidiary of the Company, or other units or may be based on the Company or franchise system generally� Performance-Based Compensation. A federal income tax deduction will generally be unavailable for annual compensation in excess of $1 million paid to the chief executive officer...

  • Page 46
    ... vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting. What is the recommendation of the Board of Directors? The Board of Directors recommends that you vote FOR approval of this proposal. 24 YUM! BRANDS, INC. - 2014 Proxy Statement

  • Page 47
    ... any shares as to which the individual has either sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days through the exercise of any stock option or other right. Proxy Statement YUM! BRANDS, INC. - 2014 Proxy Statement 25

  • Page 48
    ... director incentive compensation plans. For stock options, we report shares equal to the number of options exercisable within 60 days. For SARs we report the shares that would be delivered upon exercise (which is equal to the number of SARs multiplied by the difference between the fair market value...

  • Page 49
    .... To our knowledge, 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 2013, except that the Form 4 filed on May...

  • Page 50
    ...with an increase of 16% in total shareholder return. We maintain a long-term view of our business, making decisions that put us in a position of strength. And in 2013, YUM delivered some major accomplishments through our global portfolio of leading brands including: • Opening 1,952 new restaurants...

  • Page 51
    ...-Term Equity Incentive Based on the Company's 2013 performance, compensation fell considerably versus the prior year, specifically: • Cash compensation (base salary and annual bonus) decreased by 60% for the Chief Executive Officer ("CEO") and 33% for the other NEOs. • Direct compensation (base...

  • Page 52
    ... pay for performance program. We Do Executive Stock Ownership Guidelines Compensation recovery (i.e., "clawback") Limited future severance agreements Double trigger vesting of equity awards upon change in control We Don't Do Employment agreements Re-pricing of SARs or stock options Excise tax gross...

  • Page 53
    ... powerful brands • KFC is #1 brand in China; • Pizza Hut China Casual Dining is #1 western casual dining chain with a 6:1 advantage; • Taco Bell named marketer of the year in the U.S. Drive aggressive expansion • Increased global restaurant counts by 33% to over 40,000(1) in 128 countries...

  • Page 54
    ..., like cash compensation, tracks earnings per share. CEO DIRECT COMPENSATION Direct Compensation in $ 15 000 000 (1) VS. Proxy Statement EPS EPS in $ 4 3 10 000 000 2 5 000 000 1 0 0 2009 Base Salary 2010 2011 2012 2013 Annual Bonus Long-Term Equity Incentive EPS (1) Represents our...

  • Page 55
    ... past two years, members of our management team from compensation, investor relations and legal were directly involved in key engagement efforts that served to reinforce our open door policy, which included: • Outreach calls to our top 100 shareholders • Actively offering meetings to the top 25...

  • Page 56
    ... several factors used in the setting of executive compensation, the Committee applies discretion in determining the nature and extent of its use. For the CEO, the Company generally attempts to target pay at the 75th percentile of the market, specifically, 75th percentile total cash and total direct...

  • Page 57
    ...long-term retirement income and basic health and welfare coverage. Form Cash Cash SAR & PSU Various Details on each program element follow. Proxy Statement Base Salary We provide base salary to compensate our NEOs for their primary roles and responsibilities and to provide a stable level of annual...

  • Page 58
    ... 2013 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 59
    ... 2012 and 2013. (6) Actual operating profit growth target was adjusted for the impact of certain non-recurring costs within our Pizza Hut U.K. market in 2012. NEO Novak, Grismer Earned Award as % Final Team Actual of Target Weighting Performance 89 50% 45 (9)% 0 50% 0 Proxy Statement YUM! BRANDS...

  • Page 60
    ...with a team factor of 91, resulted in him receiving 105% of his target bonus. • System same-store sales were flat or declined in every division except Taco Bell and YRI; • YRI opened a record 1,055 new restaurants last year and China exceeded their development plan; • Grew operating profit by...

  • Page 61
    ...emphasize the Company's focus on long-term growth and they reward employees only if YUM's stock price increases. For each NEO, the breakdown between SARs/stock option award and PSU award values can be found under the Summary Compensation Table, page 44 at columns d and e. Performance Share Plan The...

  • Page 62
    ... Summary Compensation Table at footnote 5, beginning in 2013, Mr. Novak started receiving an allocation to his LRP account equal to 9.5% of his base salary and target bonus and will receive an annual earnings Proxy Statement credit on his account balance equal to 120% of the applicable federal rate...

  • Page 63
    ... (2) Based on YUM closing stock price of $75.61 as of December 31, 2013. (3) Mr. Grismer's ownership guidelines will increase by 10,000 shares each of the next two years until 50,000 shares are reached. Payments Upon Termination of Employment The Company does not have agreements with its executives...

  • Page 64
    ... policy of attracting and retaining highly qualified employees. YUM's Stock Option and SAR Granting Practices Historically, we have awarded non-qualified stock option and SAR grants annually at the Committee's January meeting. This meeting date is set by the Board of Directors more than six months...

  • Page 65
    ... to the Board that the section be incorporated by reference into the Company's Annual Report on Form 10-K and included in this proxy statement. THE MANAGEMENT PLANNING AND DEVELOPMENT COMMITTEE Robert D. Walter, Chair David W. Dorman Massimo Ferragamo Thomas M. Ryan YUM! BRANDS, INC. - 2014 Proxy...

  • Page 66
    ... Muktesh Pant Chief Executive Officer of Yum! Restaurants International(9) Salary Bonus ($) Year ($)(1) (b) (c) 2013 1,450,000 - 2012 1,450,000 - 2011 1,474,038 - 2013 2012 638,462 500,308 Stock Awards ($)(2) (d) 1,568,655 773,022 773,024 Non-Equity Option/ SAR Incentive Plan Awards Compensation...

  • Page 67
    ..., reflects the aggregate increase in actuarial present value of his accrued benefit under the YUM! Brands Retirement Plan ("Retirement Plan") during the 2013 fiscal year (using interest rate and mortality assumptions consistent with those used in the Company's financial statements). As discussed in...

  • Page 68
    ... these benefits and the perquisites and other personal benefits shown in column (b) for each NEO. These other benefits include: home security expense, home leave expenses, club dues, personal use of Company aircraft and tax preparation assistance. Proxy Statement 46 YUM! BRANDS, INC. - 2014 Proxy...

  • Page 69
    ... in its financial statements over the award's vesting schedule. For PSU awards granted prior to 2013, fair value was calculated using the closing price of the Company's common stock on the date of grant. In 2013, the Company granted PSU awards with market-based conditions valued using a Monte Carlo...

  • Page 70
    ... 1/24/2008 2/5/2009 2/5/2010 2/4/2011 2/8/2012 2/6/2013 Grismer Su Market Number Number of Value of Number of of Shares Securities Securities or Units Shares or Option/ Underlying Units of Underlying of Stock SAR Unexercised Unexercised Option/ That Stock That Options/ Options/SARs Exercise SAR...

  • Page 71
    ... after five years. For Mr. Grismer, this amount represents deferrals of his 2011 and 2012 bonuses into the EID Program's Matching Stock Fund. (3) The market value of these awards are calculated by multiplying the number of shares covered by the award by $75.61, the closing price of YUM stock on the...

  • Page 72
    EXECUTIVE COMPENSATION Option Exercises and Stock Vested The table below shows the number of shares of YUM common stock acquired during 2013 upon exercise of stock option and SAR awards and vesting of stock awards in the form of RSUs and PSUs, each including accumulated dividends and before payment...

  • Page 73
    ...Plan"), the YUM! 2013 FISCAL YEAR PENSION BENEFITS TABLE Brands, Inc. Pension Equalization Plan ("PEP"), and the YUM! Brands International Retirement Plan ("YIRP") determined using interest rate and mortality rate assumptions consistent with those used in the Company's financial statements. Number...

  • Page 74
    ... in the form of a lump sum. In the case of a participant whose benefits are 52 YUM! BRANDS, INC. - 2014 Proxy Statement 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...

  • Page 75
    ... provide market rate returns and do not provide for preferential earnings. The S&P 500 index fund, bond market index fund and stable value fund are designed to track the investment return of like-named funds offered under the Company's 401(k) Plan. The YUM! Stock Fund and YUM! Matching Stock Fund...

  • Page 76
    ... the election to re-defer. Investments in the YUM! Stock Fund and YUM! Matching Stock Fund are only distributed in shares of Company stock. LRP LRP Account Returns. The LRP provides an annual earnings credit to each participant's account based on the value of participant's account at the end of each...

  • Page 77
    ... 86,280,385 2,096,682 7,536,875 3,916,822 4,640,205 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. YUM! BRANDS, INC. - 2014 Proxy Statement 55

  • Page 78
    ... existing plans and arrangements if the NEO's employment had terminated on December 31, 2013, given the NEO's compensation and service levels as of such date and, if applicable, based on the Company's closing stock price on that date. These benefits are in addition to benefits available generally to...

  • Page 79
    EXECUTIVE COMPENSATION assuming termination of employment as of December 31, 2013. The table on page 52 provides the present value of the lump sum benefit payable to each NEO when they attain eligibility for Early Retirement (i.e., age 55 with 10 years of service) under the plans. Life Insurance ...

  • Page 80
    ... Severance Payment Annual Incentive Accelerated Vesting of Stock Options and SARs Accelerated Vesting of RSUs Acceleration of PSU Performance/Vesting Outplacement TOTAL $ If a change in control without an involuntary termination had occurred as of December 31, 2013, the following benefits would...

  • Page 81
    ... "Financial Statements and Supplementary Data" of the 2013 Annual Report in Notes to Consolidated Financial Statements at Note 15, "Share-based and Deferred Compensation Plans." (3) At December 31, 2013, the aggregate number of options and SARs awards outstanding for each non-management director was...

  • Page 82
    ...common stock received as compensation for service on the Board until the director has ceased being a member of the Board for one year (sales are permitted to cover income taxes attributable to any stock retainer payment or exercise of a stock option or SAR). Matching Gifts. To further YUM's support...

  • Page 83
    EQUITY COMPENSATION PLAN INFORMATION similar companies and align the interest of employees and directors with those of our shareholders. The 1999 Plan is administered by the Management Planning and Development Committee of the Board of Directors (the "Committee"). The exercise price of a stock ...

  • Page 84
    ... that arise throughout the year. Management is responsible for the Company's financial reporting process, including its system of internal control over financial reporting, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the...

  • Page 85
    ... both management and the Company's independent auditors all annual and quarterly financial statements prior to their issuance. During 2013, management advised the Committee that each set of financial statements reviewed had been prepared in accordance with accounting principles generally accepted...

  • Page 86
    ...? 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 87
    ...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. Proxy Statement YUM! BRANDS, INC. - 2014 Proxy Statement...

  • Page 88

  • Page 89
    ...share, return on operating assets, return on equity, operating profit, net income, revenue growth, Company or system sales, shareholder return, gross margin management, market share improvement, market value added, restaurant development, customer satisfaction, economic value added, operating income...

  • Page 90
    ... legal representative or to such other person or persons as shall be determined by the Committee. The Company shall have the right to deduct from all amounts payable under the Plan any taxes required by law to be withheld with respect thereto; provided, A-2 YUM! BRANDS, INC. - 2014 Proxy Statement

  • Page 91
    ...additional compensation arrangements as it deems desirable for Participants under this Plan, including, without limitation, any thrift, savings, investment, stock purchase, stock option, profit sharing, pension, retirement, insurance or other incentive plan. YUM! BRANDS, INC. - 2014 Proxy Statement...

  • Page 92
    ...below the Partners Council or Executive Officer level is delegated to the Chief Executive Officer and the Chief People Officer of the Company. 5.4. Information to be Furnished to Committee.The Company, the Subsidiaries, and the Affiliates shall furnish the Committee with such data and information as...

  • Page 93
    ... discharged by the employer. (i) "Participant" means an Eligible Employee who is selected by the Committee to receive one or more Awards under the Plan. "Performance-Based Compensation" means amounts satisfying the applicable requirements imposed by section 162(m) of the Internal Revenue Code of...

  • Page 94

  • Page 95
    ...in Rule 12b-2 of the Exchange Act). The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June 15, 2013 computed by reference to the closing price of the registrant's Common Stock on the New York Stock Exchange...

  • Page 96

  • Page 97
    ...Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities ...12 Selected Financial Data ...14 Management's Discussion and Analysis of Financial Condition and Results of Operations...15 Quantitative and Qualitative Disclosures About Market Risk ...35 Financial Statements and...

  • Page 98
    ...-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. - 2013 Form...

  • Page 99
    ...acquired Little Sheep business. YRI, based in Plano, Texas, comprises approximately 15,200 system restaurants, primarily franchised KFCs and Pizza Huts, operating in over 120 countries outside the U.S., China and India. In 2013 YRI recorded revenues of approximately $3.1 billion and Operating Profit...

  • Page 100
    ... Pizza Hut • The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and within a year, the 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 91 countries...

  • Page 101
    ... 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, California (Taco...

  • Page 102
    ... of risks relating to federal, state, local and international regulation of our business. Employees As of year end 2013, the Company and its Concepts employed approximately 539,000 persons, approximately 86 percent of whom were part-time. The Company believes that it provides working conditions and...

  • Page 103
    ... 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 104
    ... Our operating expenses also include employee wages and benefits and insurance costs (including workers' compensation, general liability, property and health) which may increase over time. Any such increase could adversely affect our profit margins. out-of-date information. The inappropriate use of...

  • Page 105
    ... industry in which 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...

  • Page 106
    ..., without limitation, marketing, operational standards, quality, service and cleanliness issues, grants, transfers or terminations of franchise rights, territorial disputes and delinquent payments. Suppliers The Company and its Concepts purchase food, paper, equipment and other restaurant supplies...

  • Page 107
    ... Restaurants China from 1997 to May 2010. Scott O. Bergren, 67, is Chief Executive Officer of Pizza Hut and Chief Innovation Officer of YUM. He has served as Chief Executive Officer of Pizza Hut since January 2014 and as Chief Innovation Officer of YUM since February 2011. Prior to these positions...

  • Page 108
    ...'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. $ 2012 Quarter First Second Third Fourth Form 10...

  • Page 109
    ..., 2013, the last trading day of our 2013 fiscal year. The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 26, 2008 and that all dividends were reinvested. In $ 400 350 300 Form 10-K 250 200 150 100 50 2008 YUM! 2009 S&P 500 2010 2011 2012 2013...

  • Page 110
    ... restaurants Repurchase shares of Common Stock Dividends paid on Common Stock Balance Sheet Total assets Long-term debt Total debt Other Data Number of stores at year end Company Unconsolidated Affiliates Franchisees Licensees System China system sales growth(d) Reported Local currency(e) YRI system...

  • Page 111
    ... the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit development. • Same-store sales is the estimated growth in sales of all restaurants that have been open and in the YUM system one year or more. The impact...

  • Page 112
    ... 90% of the Company's operating profits, excluding Corporate and unallocated income and expenses. In the first quarter of 2014, we will combine our YRI and U.S. businesses and begin reporting segment information for three global divisions: KFC, Pizza Hut and Taco Bell. China and India will remain...

  • Page 113
    ... REVENUES COMPANY RESTAURANT PROFIT % OF COMPANY SALES OPERATING PROFIT Interest expense, net Income tax provision Net Income - including noncontrolling interests Net Income (loss) - noncontrolling interests NET INCOME - YUM! BRANDS, INC. DILUTED EPS(a) DILUTED EPS BEFORE SPECIAL ITEMS(a) REPORTED...

  • Page 114
    ... 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 in 2012...

  • Page 115
    ... sales by 18% and increased Franchise and license fees and income and Operating Profit by 2% and 3%, respectively, for the YRI Division versus 2012. Losses and Other Costs Relating to the LJS and A&W Divestitures In 2011, we sold the Long John Silver's and A&W All American Food Restaurants brands...

  • Page 116
    ... same store sales declines of 15% for the full year. Given the momentum of the KFC business and the continued strength of Pizza Hut Casual Dining, China Division 2014 Operating Profit is expected to return to 2012 levels of more than $1 billion. In light of increased attention on food safety issues...

  • Page 117
    ... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations The following table summarizes the impact of refranchising on Total revenues as described above: 2013 Decreased Company sales Increased Franchise and license fees and income DECREASE IN TOTAL REVENUES $ China...

  • Page 118
    ... and Analysis of Financial Condition and Results of Operations Restaurant Unit Activity Worldwide Balance at end of 2011 New Builds Acquisitions(b) Refranchising Closures Other Balance at end of 2012 New Builds Acquisitions Refranchising Closures Other BALANCE AT END OF 2013 % of Total Franchisees...

  • Page 119
    ... significant or meaningful information at this time. (b) Includes 472 Little Sheep units acquired on February 1, 2012. Multibrand restaurants are included in the totals above. Multibrand conversions increase the sales and points of distribution for the second brand added to a restaurant but do not...

  • Page 120
    ... change in pricing, the number of transactions or sales mix� Form 10-K China 2013 vs. 2012 Store Portfolio Actions Other $ 611 $ (785) $ (190) 303 (129) 62 (211) 127 $ 81 $ (293) $ Income/(Expense) Company sales Cost of sales Cost of labor Occupancy and other RESTAURANT PROFIT Restaurant margin...

  • Page 121
    ... offset by higher restaurant operating costs. In 2012, the increase in YRI Company sales and Restaurant profit associated with store portfolio actions was driven by the acquisition of restaurants in South Africa in the fourth quarter of 2011 and net new unit development, partially offset by...

  • Page 122
    ...week in 2011. The increase was driven by franchise net new unit development and franchise same-store sales growth. U.S. Franchise and license fees and income increased 4% in 2013 driven by refranchising. U.S. Franchise and license fees and income increased 4% in 2012, excluding the 53rd week in 2011...

  • Page 123
    ...-owned Pizza Hut UK dine-in restaurants in the fourth quarter of 2012, lapping certain prior year headquarter restructuring costs and a pension curtailment gain in the first quarter of 2013 related to one of our UK pension plans, partially offset by higher headcount in strategic growth markets. YRI...

  • Page 124
    ...-store sales declines. China Division Operating Profit increased 9% in 2012, excluding the impact of foreign currency, driven by the impact of same-store sales growth and new unit development, partially offset by higher restaurant operating costs and higher G&A expenses. Leap year added an extra day...

  • Page 125
    ... million in 2011. The increase was primarily driven by higher Operating Profit before Special Items, partially offset by timing of cash payments for operating expenses and higher income taxes paid. Net cash used in investing activities was $886 million in 2013 compared to $1,005 million in 2012. The...

  • Page 126
    ... 22, 2013 our Board of Directors approved cash dividends of $0.37 per share of Common Stock that were distributed on February 7, 2014 to shareholders of record at the close of business on January 17, 2014. The Company targets an ongoing annual dividend payout ratio of 35% to 40% of net income...

  • Page 127
    ...the Plan and our UK pension plans, we currently estimate that we will not be required to make any contributions in 2014. 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...

  • Page 128
    ...to the useful lives of the restaurant assets, including a deduction for the anticipated, future royalties we would receive under a franchise agreement with terms substantially at market entered into simultaneously with the refranchising transaction� Form 10-K 32 YUM! BRANDS, INC. - 2013 Form 10...

  • Page 129
    ... 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 flows from Company-owned restaurant operations and franchise royalties� Future cash flow estimates and the discount rate are...

  • Page 130
    ... returns thereon. A one percentage-point change in our expected long-term rate of return on plan assets assumption would impact our 2014 U.S. pension expense by approximately $8 million. A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss...

  • Page 131
    ... income taxes. The estimated reductions are based upon the current level of variable rate debt and assume no changes in the volume or composition of that debt and include no impact from interest income related to cash and cash equivalents. In addition, the fair value of our derivative financial...

  • Page 132
    ... 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. ITEM 8 Financial Statements and Supplementary Data Index to Financial Information Page...

  • Page 133
    ..., 2012, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the fiscal years in the three-year period ended December 28, 2013. We also have audited YUM's internal control over financial reporting as of December 28, 2013, based on...

  • Page 134
    ..., except per share data) 2013 $ 11,184 1,900 13,084 $ 2012 11,833 1,800 13,633 $ 2011 10,893 1,733 12,626 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...

  • Page 135
    ... comprehensive income (loss), net of tax Comprehensive Income - including noncontrolling interests Comprehensive Income (loss) - noncontrolling interests COMPREHENSIVE INCOME - YUM! BRANDS, INC. See accompanying Notes to Consolidated Financial Statements. $ 2013 1,064 $ 2012 1,608 $ 2011 1,335...

  • Page 136
    ... - 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 137
    ... Data Consolidated Balance Sheets YUM! BRANDS, INC. AND SUBSIDIARIES DECEMBER 28, 2013 AND DECEMBER 29, 2012 (in millions) 2013 2012 ASSETS Current Assets Cash and cash equivalents Accounts and notes receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes...

  • Page 138
    ... Compensation-related events (includes tax impact of $11 million) Balance at December 29, 2012 Net Income (loss) Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $2 million) Pension and post-retirement benefit plans (net...

  • Page 139
    ... businesses through the sale date are included in the Company's results for 2011. In the first quarter of 2014, we will combine our YRI and U.S. businesses and begin reporting segment information for three global divisions: KFC, Pizza Hut and Taco Bell. China and India will remain separate reporting...

  • Page 140
    ... for franchise-related intangible assets and certain other 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...

  • Page 141
    ... new cost basis. Fair value is an estimate of the price a franchisee would pay for the restaurant and its related assets and is determined by discounting the estimated future after-tax cash flows of the restaurant, which include a deduction for royalties we would receive under a franchise agreement...

  • Page 142
    ... to temporary differences between the 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...

  • Page 143
    ... 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 flows from Company-owned restaurant operations and franchise royalties� The discount rate is our estimate of the required rate of return...

  • Page 144
    ... other comprehensive income (loss). The net periodic benefit costs associated with the Company's defined benefit pension and post-retirement medical plans are determined using assumptions regarding the projected benefit obligation and, for funded plans, the market-related value of plan assets as of...

  • Page 145
    ... 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 in 2012...

  • Page 146
    ... as the fair value of the Pizza Hut UK reporting unit exceeded its carrying amount. For the year ended December 28, 2013, the refranchising of the Pizza Hut UK dine-in restaurants decreased Company sales by 18% and increased Franchise and license fees and income and Operating Profit by 2% and...

  • Page 147
    ... 8 Financial Statements and Supplementary Data Store Closure and Impairment Activity Store closure (income) costs and Store impairment charges by reportable segment are presented below. These tables exclude $295 million of Little Sheep impairment losses in 2013 and $80 million of net losses related...

  • Page 148
    ... net (gain) loss and other OTHER (INCOME) EXPENSE (a) See Note 4 for further details on the acquisition of Little Sheep. $ NOTE 8 Supplemental Balance Sheet Information $ 2013 89 16 181 286 $ 2012 55 56 161 272 Prepaid Expenses and Other Current Assets Income tax receivable Assets held for sale...

  • Page 149
    ... 8 Financial Statements and Supplementary Data NOTE 9 Goodwill and Intangible Assets The changes in the carrying amount of goodwill are as follows: China Balance as of December 31, 2011 Goodwill, gross Accumulated impairment losses Goodwill, net Acquisitions(a) Disposals and other, net(b) Balance...

  • Page 150
    ...certain other transactions specified in the agreement. Given the Company's strong balance sheet and cash flows, we were able to comply with all debt covenant requirements at December 28, 2013 with a considerable amount of cushion� Additionally, the Credit Facility contains cross-default provisions...

  • Page 151
    ..., as well as certain office and restaurant equipment. We do not consider any of these individual leases material to our operations. Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance. At December 28, 2013 we operated more than 8,100...

  • Page 152
    ... to their carrying value of $2.8 billion. We estimated the fair value of debt using market quotes and calculations based on market rates. Foreign Currency Forwards, net Interest Rate Swaps, net Other Investments TOTAL Level 2 $ 2 1 $ 2012 (5) 24 17 36 56 YUM! BRANDS, INC. - 2013 Form 10-K

  • Page 153
    ... Our other UK plan was previously frozen to future service credits in 2011. The funding rules for our pension plans outside of the U.S. vary from country to country and depend on many factors including discount rates, performance of plan assets, local laws and regulations. We do not plan to make any...

  • Page 154
    ... 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 2013 10 $ (8) (94) (92) $ International Pension Plans 2013 2012 33...

  • Page 155
    ... (89) - 428 $ Accumulated pre-tax losses recognized within Accumulated Other Comprehensive Income: U.S. Pension Plans 2013 119 $ 5 124 $ International Pension Plans 2013 2012 23 $ 14 - - 23 $ 14 Actuarial net loss Prior service cost $ $ 2012 421 7 428 $ $ YUM! BRANDS, INC. - 2013 Form 10-K 59

  • Page 156
    ...and to better correlate asset maturities with obligations. The fair values of all pension plan assets are determined based on closing market prices or net asset values. A mutual fund held as an investment by the Plan includes shares of YUM common stock valued at $0.2 million at December 28, 2013 and...

  • Page 157
    ... Share-based and Deferred Compensation Plans At year end 2013, 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 158
    ...our publicly traded options. The expected dividend yield is based on the annual dividend yield at the time of grant. The fair values of RSU and PSU awards granted prior to 2013 are based on the closing price of our stock on the date of grant. In 2013, the Company granted PSU awards with market-based...

  • Page 159
    ...post-retirement benefit plan losses during 2013 include amortization of net losses of $51 million, settlement charges of $30 million, amortization of prior service cost of $2 million and the related income tax benefit of $30 million. See Note 14 Pension Benefits for further information. YUM! BRANDS...

  • Page 160
    ... the Internal Revenue Service Proposed Adjustments for details� In 2012, this item was favorably impacted by the resolution of uncertain tax positions in certain foreign jurisdictions� Net benefit from LJS and A&W divestitures� This item includes a one-time $117 million tax benefit, including...

  • Page 161
    ... DEFERRED TAX ASSETS (LIABILITIES) Reported in Consolidated Balance Sheets as: Deferred income taxes - current Deferred income taxes - long-term Accounts payable and other current liabilities Other liabilities and deferred credits We have investments in foreign subsidiaries where the carrying values...

  • Page 162
    ...in developing, operating, franchising and licensing the worldwide KFC, Pizza Hut and Taco Bell concepts. KFC, Pizza Hut and Taco Bell operate in 118, 91, and 21 countries and territories, respectively. Our five largest international markets based on Operating Profit in 2013 are China, Asia Franchise...

  • Page 163
    ... Refranchising gain (loss)(a)(g) Operating Profit Interest expense, net(h) INCOME BEFORE INCOME TAXES Operating Profit; Interest Expense, Net; and Income Before Income Taxes 2013 2012 2011 $ 777 $ 1,015 $ 908 760 715 673 684 666 589 (15) (1) - - 16 14 (207) (271) (223) (295) - (80) (6) 76 6 100...

  • Page 164
    ... of Note 4. (i) China includes investments in 4 unconsolidated affiliates totaling $53 million, $72 million and $167 million for 2013, 2012 and 2011, respectively. (j) Primarily includes cash, deferred tax assets and property, plant and equipment, net, related to our office facilities. 2011 includes...

  • Page 165
    ... the Company's business or financial condition and instead alleges that, during the Class Period, defendants purportedly omitted information about the Company's supply chain in China, thereby inflating the prices at which the Company's securities traded� On October 4, 2013, the Company and...

  • Page 166
    ... Financial Statements cannot be made at this time. On May 16, 2013, a putative class action styled Bernardina Rodriguez v. Taco Bell Corp. was filed in California Superior Court. The plaintiff seeks to represent a class of current and former California hourly restaurant employees alleging...

  • Page 167
    ...61 0.335 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 $ 2,344 $ 399...

  • Page 168
    ... Company's internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended December 28, 2013. ITEM 9B Other Information None. 72 YUM! BRANDS, INC. - 2013 Form...

  • Page 169
    ... 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 170
    ...: The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K. The Index to Exhibits specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Form 10-K. (3) Form 10-K 74 YUM! BRANDS, INC. - 2013 Form 10-K

  • Page 171
    ...has duly caused this Form 10-K annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 18, 2014 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 172
    ... 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 173
    ... ended September 4, 2004. Form of YUM 1999 Long Term Incentive Plan Award Agreement (2013) (Stock Options), as incorporated by reference from Exhibit 10.15.1 to YUM's Quarterly Report on Form 10-Q for the quarter ended March 23, 2013. YUM! Brands, Inc. International Retirement Plan, as in effect...

  • Page 174
    PART IV ITEM 15 Exhibit Index Exhibit Number 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101... information has been filed separately with the SEC pursuant to our application for confidential treatment. Indicates a management contract or compensatory plan. Form 10-K 78 YUM! BRANDS, INC. - 2013 Form ...

  • Page 175
    ... a detailed list of holdings represented by certificates and the identifying certificate numbers • Request a certificate for shares held at AST • Replace a lost or stolen certificate • Retrieve a duplicate Form 1099-B • Purchase shares of YUM through the Company's Direct Stock Purchase Plan...

  • Page 176
    ...-0535 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's Annual Report...

  • Page 177
    ... China Michael J. Cavanagh 48 Co-Chief Executive Officer, JP Morgan Chase and Co.'s Corporate and Investment Bank Scott O. Bergren 67 Chief Executive Officer, Pizza Hut and Chief Innovation Officer, Yum! Brands, Inc. Jonathan D. Blum 55 Senior Vice President, Chief Public Affairs and Global...

  • Page 178
    THE POWER OF 58 YUM! RESTAURANTS PER MILLION PEOPLE IN THE U.S. Only 2 YUM! RESTAURANTS PER MILLION PEOPLE IN THE TOP TEN EMERGING MARKETS. ON THE GROUND FLOOR OF GLOBAL GROWTH 20 Yum! Brands, Inc., trades under the symbol YUM and is proud to meet the listing requirements of the NYSE, the world's...