Taco Bell 2002 Annual Report Download

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

Table of contents

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

  • Page 2

  • Page 3
    1.

  • Page 4
    ... annual growth rate. $ 898 748 964 $ 865 724 890 $ 833 712 896 $ 837 696 918 $ 817 645 931 3% 3% 1% WORLDWIDE SYSTEM SALES(a) (in billions) 2002 2001 2000 1999 1998 5-year growth(b) United States KFC Pizza Hut Taco Bell Long John Silver's(c) A&W(c) Total U.S. International KFC Pizza Hut Taco...

  • Page 5
    ... international ongoing operating profits 22%. Worldwide restaurant margins also reached an all time high at 16%, up 1.2 points versus last year. Our Return on Invested Capital was 18%, the highest in the quick-service restaurant industry. By any measure, 2002 was an outstanding year for your company...

  • Page 6
    ...ongoing operating profit in 2002, with China, the United Kingdom, Mexico and Korea receiving the majority of our company's capital investment because the returns are terrific. Our franchise and joint venture partners are driving system growth by opening about 65% of our new international restaurants...

  • Page 7
    ... the Chinese customer's favorite brand of any kind...period. The biggest challenge we face today is developing new markets...getting to scale in We're committed to Continental Europe, in Brazil with KFC, and in India with Pizza Hut. Opening up KFCs doubling our number of international restaurants in...

  • Page 8
    ... average sales, dramatically improving our already strong unit economics. We then began testing multibrand combinations of KFC and Taco Bell with Long John Silver's, the country's leading seafood restaurant, and A&W All-American Food, which offers a signature frosty mug Root Beer Float and pure-beef...

  • Page 9
    ... units are being opened by franchisees putting their own hard-earned money in the game. Since franchisees only get behind initiatives that make sense for their customers and long term economics, you can tell from their investment they're as excited about multibranding as we are. The bottom line...

  • Page 10
    ...is driving improvement as we speak. To date, customer complaints are down and compliments are up. We are making improvements in speed at Taco Bell and Pizza Hut. And KFC has improved product quality. The key to great restaurant operations is the capability of our people, and our team member turnover...

  • Page 11
    ... the best restaurant company investment. Given our unique international, multibranding and operational growth opportunities, we intend to continue to grow our earnings per share at least 10% every year. If we can deliver even better results, like we did in 2002, we will. Our challenge going forward...

  • Page 12
    Setting around the the table world.

  • Page 13
    ... that we've been rated the #1 brand in China today - so our true potential may even be bigger. Pete: We also think we're making the right strategic bets on the growth of certain developing and start-up markets that should be very rapidly growing in the next five years - namely, KFC Europe and we're...

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

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

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

  • Page 17
    ...'t as many slow periods in your day. Al: (opened first KFC/Taco Bell) Multibranding gives franchisees the option to leverage new and existing real estate in order to reach a broader customer base. For example, placing two brands under one roof in more expensive city locations helps pay the higher...

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

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

  • Page 20
    ... about making money. That's why we're in the business - we're here to increase profits. Aylwin: How does Customer Mania impact operations? Jackie: We think Customer Mania is a great initiative and very impor tant to our success. We have seen improvements in operations because of Customer Mania. I've...

  • Page 21
    1+1= 19. 3

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

  • Page 23
    ... through our 100% CHAMPS with a Yes! program. We're training people four times a year, making steady progress and having fun doing it. We just need to continue to drive success at the restaurant level and get better, and better and bet ter at satisfying our customers. Rather than me talking about it...

  • Page 24
    ...my customers feel at home." Kelly Holsclaw, Team Member Long John Silver's/A&W Aylwin: What is the toughest part of your job? Alfredo: When we're busy it's great. Everyone is in place; they've been fully cross-trained to step in and take over when someone else on the team needs help. The drive-thru...

  • Page 25
    "CUSTOMER MANIA TRAINING was kind of challenging - and fun. The bottom line is it made me feel empowered - I'm a professional! And I know I can make my customers' experiences the best they can be. And I train my team to do the same, every day." Bruce Taylor, Assistant Manager, KFC/Long John Silver's...

  • Page 26
    Left "Customer Mania is giving 100% of your energy and enthusiasm to making your customers 100% satisfied - every hour, every day." Joe Gootee, Assistant Manager Long John Silver's/A&W Below "I'm proud of my work. I make sure that every piece of chicken I fry and every product I make is delicious. ...

  • Page 27
    ... Dine In 26% • Dinner 50% • Lunch 50% • Dine Out 58% • Dine In 42% Sources of System Sales in International Restaurants* • Dinner 26% • Lunch 47% • Snacks/Breakfast 27% SOURCE: CREST * System sales represents the combined sales of Company, unconsolidated affiliates, franchise and...

  • Page 28
    ..." advertising campaign helped introduce America to some hit products, including delicious Border Bowls, Fajita Grilled Stuft Burritos and 7-Layer Nachos. Our customers took notice, and Taco Bell moved up to third place from fifth in QSR magazine's annual drive-thru survey of the top 25 quick-service...

  • Page 29
    ... FAJITA GRILLED STUFT BURRITO: Sizzling strips of marinated steak, grilled veggies and all the great fajita flavors wrapped up in a grilled tor tilla. HOME-STYLE MEALS: KFC's advantage is that it offers a satisfying, complete meal - perfect for moms who care about the meals they serve their family...

  • Page 30
    ... annual growth rate excludes the impact of transferring 30 units from Taco Bell U.S. to Taco Bell International in 2002. BREAKDOWN OF WORLDWIDE SYSTEM UNITS Unconsolidated Affiliate Year-end 2002 Company Franchised Licensed Total United States KFC Pizza Hut Taco Bell Long John Silver...

  • Page 31
    ... worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver's ("LJS") and A&W AllAmerican Food Restaurants ("A&W") (collectively "the Concepts") and is the world's largest quick service restaurant ("QSR") company based on the number of system units. LJS and A&W were added when YUM acquired...

  • Page 32
    ... factors such as sales growth and margin improvement to those that are supportable based upon our plans for the reporting unit. We impaired $5 million of goodwill during 2002 related to our Pizza Hut France reporting unit. For the remainder of our reporting units with goodwill, the fair value is...

  • Page 33
    ... to improve the restaurants' overall operating performance, while retaining Company ownership of key U.S. and International markets. This portfolio-balancing activity reduces our reported revenues and restaurant profits, which increases the importance of system sales as a key performance measure. We...

  • Page 34
    ... table summarizes Company store closure activities: U.S. 2002 2001 2000 2002 International Worldwide Number of units closed Store closure costs Impairment charges for stores to be closed 224 $ 15 $ 9 270 $ 17 $ 5 208 $ 10 $ 6 Decreased restaurant margin Increased franchise fees Decreased...

  • Page 35
    ... in business trends at Taco Bell has helped alleviate financial problems in the Taco Bell franchise system which were due to past downturns in sales. As described in the U.S. revenues section, Company same-store sales growth at Taco Bell increased 7% in 2002. This follows an 8% increase in Company...

  • Page 36
    ... Concepts' market share and 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. % B(W) vs. 2001 % B(W) vs. 2000 WORLDWIDE REVENUES Company sales increased $753 million or 12% in 2002. The impact...

  • Page 37
    ...was primarily due to support costs related to the financial restructuring of certain Taco Bell franchisees. The increase was partially offset by lower allowances for doubtful franchise and license fee receivables. The changes in U.S. and International ongoing operating profit for 2002 and 2001 are...

  • Page 38
    ... 37.7% (a) Excludes the effects of facility actions net loss (gain) and unusual items (income) expense. See Note 7 for a discussion of these items. Revenues Company sales Franchise and license fees Total revenues Company restaurant margin % of Company sales Ongoing operating profit $ 4,778 569...

  • Page 39
    ...new unit development and same store sales growth. The increase was partially offset by store closures and refranchising. For 2002, blended Company same store sales for KFC, Pizza Hut and Taco Bell were up 2% due to increases in both transactions and average guest check. Same store sales at Taco Bell...

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

  • Page 41
    ...to higher restaurant operating costs and the acquisition of below average margin stores from franchisees. The decrease was partially offset by the favorable impact of same store sales growth. INTERNATIONAL ONGOING OPERATING PROFIT Ongoing operating profit increased $71 million or 22% in 2002, after...

  • Page 42
    ... Rate or the Federal Funds Effective Rate plus 1%. The exact spread over LIBOR or the Alternate Base Rate, as applicable, will depend upon our performance under specified financial criteria. Interest is payable at least quarterly. In the third quarter of 2002, we capitalized debt issuance costs...

  • Page 43
    ...ows from the operations of our company stores and from our franchise operations, which require a limited YUM investment in operating assets. Typically, our cash ï¬,ows include a significant amount of discretionary capital spending. Though a decline in revenues could adversely impact our cash ï¬,ows...

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

  • Page 45
    ...-Pacific, the Americas and Europe. Changes in foreign currency exchange rates would impact the translation of our investments in foreign operations, the fair value of our foreign currency denominated financial instruments and our reported foreign currency denominated earnings and cash flows. For...

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

  • Page 47
    ... non-cash charges and credits, net Changes in operating working capital, excluding effects of acquisitions and dispositions: Accounts and notes receivable Inventories Prepaid expenses and other current assets Accounts payable and other current liabilities Income taxes payable Net change in operating...

  • Page 48
    ... 4,321 Total Current Liabilities Long-term debt Other liabilities and deferred credits Total Liabilities Shareholders' Equity Preferred stock, no par value, 250 shares authorized; no shares issued Common stock, no par value, 750 shares authorized; 294 shares and 293 shares issued in 2002 and 2001...

  • Page 49
    ... STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 Issued Common Stock (in millions) Shares Amount Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Balance...

  • Page 50
    ... Hut, Taco Bell and since May 7, 2002, Long John Silver's ("LJS") and A&W All-American Food Restaurants ("A&W") (collectively the "Concepts"), which were added when we acquired Yorkshire Global Restaurants, Inc. ("YGR"). YUM is the world's largest quick service restaurant company based on the number...

  • Page 51
    .... Based on the best information available, we write down an impaired restaurant to its estimated fair market value, which becomes its new cost basis. We generally measure estimated fair market value by discounting estimated future cash flows. In addition, when we decide to close a restaurant it is...

  • Page 52
    ... will not be acquired or developed, any previously capitalized internal development costs are expensed and included in general and administrative expenses. Goodwill and Intangible Assets The Company has adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the use of...

  • Page 53
    ... cost is reï¬,ected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair...

  • Page 54
    ... of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for the Company for fiscal year 2003. We currently do not anticipate that the adoption of SFAS 143 will have a material impact on our Consolidated Financial Statements. In June 2002, the FASB issued SFAS...

  • Page 55
    ... fair values of YGR's assets acquired and liabilities assumed at the date of acquisition. Current assets Property, plant and equipment Intangible assets Goodwill Other assets Total assets acquired Current liabilities Long-term debt, including current portion Future rent obligations related to sale...

  • Page 56
    ... (income) expense. The results of operations for YGR have been included in our Consolidated Financial Statements since the date of acquisition. If the acquisition had been completed as of the beginning of the years ended December 28, 2002 and December 29, 2001, pro forma Company sales, and franchise...

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

  • Page 58
    payroll and employee benefits and occupancy and other operating expenses. NOTE 2002 2001 2000 8 SUPPLEMENTAL CASH FLOW DATA 2002 2001 2000 Stores held for sale at December 28, 2002: Sales Restaurant profit Stores disposed of in 2002, 2001 and 2000: Sales Restaurant profit $ 228 31 $ 147 20 $ ...

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

  • Page 60
    ... of reported net income to adjusted net income as though SFAS 142 had been effective for the years ended 2001 and 2000: 2001 Amount Basic EPS Diluted EPS NOTE 14 LONG-TERM DEBT SHORT-TERM BORROWINGS AND 2002 2001 Short-term Borrowings Current maturities of long-term debt International lines of...

  • Page 61
    ...issuance costs of approximately $5 million related to the 2012 Notes in the third quarter of 2002. The following table summarizes all Senior Unsecured Notes issued under this shelf registration through December 28, 2002: Issuance Date Maturity Date Principal Amount Interest Rate Stated Effective...

  • Page 62
    ... debt. During the second quarter of 2002, we entered into treasury locks with notional amounts totaling $250 million. These treasury locks were entered into to hedge the risk of changes in future interest payments attributable to changes in the benchmark interest rate prior to issuance of additional...

  • Page 63
    ...the cumulative change in the hedged item. No ineffectiveness was recognized in 2002 or 2001 for those foreign currency forward contracts designated as cash ï¬,ow hedges. Commodities We also utilize on a limited basis commodity futures and options contracts to mitigate our exposure to commodity price...

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

  • Page 65
    ... 420 369 291 The assumptions used to compute the information above are set forth below: Postretirement Medical Benefits 2000 2002 2001 2000 Pension Benefits 2002 2001 Discount rate Long-term rate of return on plan assets Rate of compensation increase 6.85% 8.50% 3.85% 7.60% 10.00% 4.60% 8.03...

  • Page 66
    ... reached, our annual cost per retiree will not increase. Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement health care plans. A one percent increase or decrease in the assumed health care cost trend rates would have increased or decreased...

  • Page 67
    ... Deferral Program (the "RDC Plan" and the "EID Plan," respectively) for eligible employees and non-employee directors. Effective October 1, 2001, participants can no longer defer funds into the RDC Plan. Prior to that date, the RDC Plan allowed participants to defer a portion of their annual salary...

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

  • Page 69
    ...in 2002, 2001 and 2000, respectively, as a result of stock option exercises. In addition, goodwill and other intangibles were reduced by $8 million in 2001 as a result of the settlement of a disputed claim with the Internal Revenue Service relating to the deductibility of reacquired franchise rights...

  • Page 70
    ...which were added when we acquired YGR. KFC, Pizza Hut, Taco Bell, LJS and A&W operate throughout the U.S. and in 88, 85, 12, 5 and 17 countries and territories outside the U.S., respectively. Our five largest international markets based on operating profit in 2002 are China, United Kingdom, Canada...

  • Page 71
    Yum! Brands Inc. Long-Lived Assets(e) 2002 2001 2000 United States International Corporate $ 2,805 1 ,0 2 1 60 $ 3,886 $ 2,195 955 45 $ 3,195 $ 2,1 0 1 828 30 $ 2,959 (a) Includes equity income of unconsolidated affiliates of $31 million, $26 million and $25 million in 2002, 2001 and 2000, ...

  • Page 72
    ...position; however, certain issues were decided in favor of the plaintiffs. In April 2002, a jury trial to determine the damages of 93 of those claimants found that Taco Bell failed to pay for certain meal breaks and/or off-the-clock work for 86 of the 93 claimants. However, the total amount of hours...

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

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

  • Page 75
    ... in the United States of America and include certain amounts based upon our estimates and assumptions, as required. Other financial information presented in the annual report is derived from the financial statements. We maintain a system of internal control over financial reporting, designed to...

  • Page 76
    SELECTED FINANCIAL DATA Fiscal Year (in millions, except per share and unit amounts) 2002 2001 2000 1999 1998 Summary of Operations Revenues Company sales (a) Franchise and license fees Total Facility actions net (loss) gain (b) Unusual items income (expense) (b) (c) Operating profit Interest ...

  • Page 77
    ... Counsel, Secretary and Chief Franchise Policy Officer, Yum! Brands, Inc. Kathy Corsi 42 Senior Vice President, Treasurer, Yum! Brands, Inc. David J. Deno 45 Chief Financial Officer, Yum! Brands, Inc. Peter R. Hearl 51 President and Chief Concept Officer, Pizza Hut, U.S.A. Aylwin B. Lewis 48...

  • Page 78
    ... Option Plan Services P.O. Box 30446 New Brunswick, NJ 08989-0446 Telephone: (800) 637-2432 (U.S., Puerto Rico and Canada) (732) 560-9444 (all other locations) Independent Auditors KPMG LLP 400 West Market Street, Suite 2600 Louisville, KY 40202 Telephone: (502) 587-0535 CAPITAL STOCK INFORMATION...

  • Page 79
    ... Colonel's Kids. Today, we subsidize high quality YMCA daycare for families in need. We're also piloting a program to extend daycare beyond the traditional Monday-Friday, 9AM-5PM timeframe, for the millions of people who work "after hours" or on weekends. Taco Bell's TEENSupreme Through a unique...

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