Taco Bell 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
    ... see, we don't have to dream up a dramatic new approach or totally revamp our business model because the strategies we have are working. David C. Novak Chairman & Chief Executive Officer, Yum! Brands, Inc. * ** *** Excluding special items Prior to foreign currency translation Outside the U.S. 1

  • Page 4
    ... goals and commitments as well as showcase our management talent from around the world. The theme of our 2012 meeting was "On the Ground Floor of Global Growth: China and a Whole Lot More." No statement could better describe Yum! Brands. We, of course, highlighted our 11-year track record but, even...

  • Page 5
    ... teams in the world. We are really in tune with 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...

  • Page 6
    ... 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 most successful full-scale restaurant in China with fantastic new-unit...

  • Page 7
    ...top 10 emerging markets, compared to 58 restaurants per million in the U.S. In 2012, Yum! Restaurants International (YRI) which includes all countries outside the U.S., China and India Divisions, grew system sales 5%, before foreign currency translation, and developed a record 949 new units, with 65...

  • 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
    ... Taco Bell will lead even greater 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...

  • 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
    ... lines, as we entered 2013, we agreed on terms to acquire the operations of our franchise partner in Turkey, a highgrowth emerging market that has over 100 KFC and Pizza Hut restaurants. Our success executing our strategies has driven our Return on Invested Capital to 22%, placing us among industry...

  • Page 12
    .... 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 around the world. Yum! to You! David C. Novak Chairman & Chief Executive Officer, Yum! Brands, Inc. 10

  • Page 13
    ... 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 grow each other Truly care about the world...and save lives with the World Food Programme

  • Page 14
    ... Be the Defining Global Company That Feeds the World. our goal Be the Best in the World at Building Great Restaurant Brands! our passion Customer Mania...put a YUM on customers' faces around the world our formula for success People Capability First...satisfied customers and profitability follow...

  • 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
    ... 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 ADDITIONAL INFORMATION APPENDIX A YUM! BRANDS INC. LONG TERM...

  • Page 19
    ... 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 Shareholders of the Company to be held at 9:00 a.m. (Eastern Daylight Saving Time), on...

  • Page 20
    ... 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 will also consider other business that...

  • Page 21
    ... proposal regarding an advisory vote on executive compensation; • FOR the proposal to re-approve the performance measures of the YUM! Brands, Inc. Long Term Incentive Plan for 162(m) purposes; and • AGAINST the shareholder proposal. How do I vote before the Annual Meeting? There are three ways...

  • Page 22
    ... 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 • AGAINST the...

  • 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
    ... The Nominating and Governance Committee reviews the Board's leadership structure annually together with an evaluation of the performance and effectiveness of the Board of Directors. In August 2012, the Board created a new position of lead director, after YUM! BRANDS, INC. - 2013 Proxy Statement 7

  • Page 26
    ... made at any executive session, Approving in advance agendas and schedules for Board meetings and the information that is provided to directors, If requested by major shareholders, being available for consultations and direct communication, (b) (c) 8 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 27
    ... 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 of Directors oversaw the performance of...

  • Page 28
    ..., require that we meet the listing standards of the NYSE. The full text of the Principles can be found on the Company's website (www.yum.com/investors/governance/principles.asp). Pursuant to the Principles, the Board undertook its annual review of director independence. During this review, the Board...

  • Page 29
    ... 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 30
    ... annual compensation for each director who is not an employee of YUM is discussed under "Director Compensation" beginning on page 58. What are the Company's policies and procedures with respect to related person transactions? The Board of Directors has adopted policies and procedures for the review...

  • Page 31
    ... 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 There are no family relationships among any of the directors and executive officers of the Company. See"What are the Company's policies...

  • Page 32
    ... Services business, one of the world's largest cash management providers and a leading global custodian. From 2004 to 2010, Mr. Cavanagh was Chief Financial Officer of JPMorgan Chase & Co. • Expertise in finance, strategic planning and public company executive compensation • Public company...

  • Page 33
    ...of the school of commerce at a large public university • Expertise in corporate governance, succession planning and public company compensation • Public company directorship and committee experience • Financially literate • Independent of Company YUM! BRANDS, INC. - 2013 Proxy Statement 15

  • Page 34
    ..., including as chief executive officer of global pharmacy healthcare business • Expertise in finance, strategic planning and public company executive compensation • Public company directorship and committee experience • Independent of Company 16 YUM! BRANDS, INC. - 2013 Proxy Statement

  • Page 35
    ... the Board of Directors. What vote is required to elect directors? A nominee will be elected as a director if the number of "FOR" votes exceeds the number of "AGAINST" votes. Our policy regarding the election of directors can be found in our Corporate Governance Principles at www.yum.com/investors...

  • Page 36
    ... fees Tax fees(3) All other fees (4) TOTAL FEES $ 7,670,000 $ (1) Audit fees include fees for the audit of the annual consolidated financial statements, reviews of the interim condensed consolidated financial statements included in the Company's quarterly reports, audits of the effectiveness...

  • 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
    ...-term incentive compensation mix for the Company's Chief Executive Officer to 75% stock appreciation rights and 25% performance share plan units (from approximately 90% stock appreciation rights and 10% performance share plan units in 2012); • Eliminating CEO's Accruals under Company's Pension...

  • 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
    ... years for awards granted in the form of restricted shares. These awards are granted as a settlement of earned annual cash incentives and are designed to encourage employee stock ownership. In addition, employees are permitted to defer their salary or annual cash incentive into stock units payable...

  • Page 41
    ... OF YUM! BRANDS, INC. LONG TERM INCENTIVE PLAN PERFORMANCE MEASURES subsidiary, operating unit or division performance 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...

  • Page 42
    ITEM 4 RE-APPROVAL OF YUM! BRANDS, INC. LONG TERM INCENTIVE PLAN PERFORMANCE MEASURES Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in such stock equal to the fair market value of the shares at the time of exercise. • INCENTIVE STOCK ...

  • Page 43
    ...for all food service packaging as feasible and development of recycled content goals for packaging. The board shall prepare a report by September 1, 2013 on the company's efforts to implement this strategy. The report, to be prepared at reasonable cost, may omit confidential information. SUPPORTING...

  • Page 44
    ... allowable by law, would increase the amount of recycled content. In addition, our Brands inside and outside of the U.S. are developing initiatives directed specifically toward sustainable food packaging and including greater recycled content: • Pizza Hut U.S.'s, packaging includes 95% fiber...

  • 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
    ... Plan or our Executive Income Deferral Program. Amounts payable under these plans will be paid in shares of YUM common stock at termination of directorship/employment or within 60 days if so elected. This amount also includes performance share unit awards granted in 2010 by the Management Planning...

  • Page 47
    ... 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 Statement 29

  • Page 48
    ... 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 shareholders benefited from our strong year as our total shareholder return during the 2012 calendar year...

  • Page 49
    ... related increase in our stock price and Total Shareholder Return ("TSR") over the past ten years. EARNINGS PER SHARE* - TEN YEAR GROWTH +534% Total Shareholder Return 17% 15% 14% 13% 13% 13% 15% 14% 13% 14% 13% $66.06 $10.43 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *For...

  • Page 50
    ..., 2012 534% 40% 167% 99% Proxy Statement 9% Yum! 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...

  • Page 51
    ... long-term incentive compensation • Require Named Executive Officers and other executives to personally invest in Company stock Key Elements of Our Executive Compensation Program • Pay for Performance - The majority of Named Executive Officer pay is performance based. We establish annual...

  • Page 52
    ...pledging of Company stock • No inclusion of 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...

  • Page 53
    ... nondurable consumer product companies. The Committee established the current Executive Peer Group for the Chief Executive Officer and other Named Executive Officer compensation at the end of 2011 for pay actions in 2012. The group was chosen because the companies are reï¬,ective of the market in...

  • Page 54
    ... long-term incentives. For the Chief Executive Officer, the Company generally attempts to deliver pay at the 75th percentile of the market if he and the Company have superior performance, specifically, 75th percentile total cash and total direct compensation. For 2012, his total compensation was...

  • Page 55
    ... 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 growth strategies, historical...

  • Page 56
    ... Average Divisions' Team Factors (1) 50% 75 Earnings Per Share Growth 10% 50% 77 (excluding special items) TOTAL WEIGHTED TEAM PERFORMANCE - YUM BRANDS 152 Su Operating Profit Growth (excluding impact of foreign exchange) 12% 9% 48 50% 24 System Sales Growth 15% 20% 200 20% 40 System Gross New...

  • Page 57
    ... 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 Proxy Statement 39

  • 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
    ... 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 Proxy Statement 41

  • 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
    ... review and discussion, recommended that section be incorporated by reference into our 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. - 2013...

  • 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
    ... in column (f) reflect the annual incentive awards earned for the 2012, 2011 and 2010 fiscal year performance periods, which were awarded by our Management Planning and Development Committee in January 2013, January 2012 and January 2011, respectively, under the Yum Leaders' Bonus Program, which...

  • Page 64
    ...maintenance, crew travel, on board catering, landing and license fees, "dead head" costs of flying planes to and from locations for personal use, and contract labor; for Mr. Su: expatriate spendables/housing allowance ($215,745); and for Mr. Carucci: home security service and equipment expenses ($29...

  • Page 65
    ... additional information regarding valuation assumptions 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...

  • Page 66
    ... 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) Number of Number of...

  • Page 67
    ...that vests after five years. (3) The market value of these awards are calculated by multiplying the number of shares covered by the award by $66.40, the closing price of YUM stock on the NYSE on December 31, 2012. (4) The awards reflected in this column are unvested performance-based PSUs with three...

  • Page 68
    EXECUTIVE COMPENSATION Option Exercises and Stock Vested The table below shows the number of shares of YUM common stock acquired during 2012 upon exercise of stock options and vesting of stock awards in the form of RSUs and PSUs, each including accumulated dividends and before payment of applicable...

  • 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
    ... (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! Brands Inc. Pension Equalization Plan...

  • Page 71
    ... annual incentive award, Named Executive Officers are no longer eligible to participate in the Matching Stock Fund. Mr. Grismer deferred his 2012 annual incentive award into the YUM! Matching Stock Fund since he was ineligible for a performance share unit award upon his promotion to Chief Financial...

  • 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
    ... termination of employment as of December 31, 2012. The table on page 52 provides the present value of the lump sum benefit payable to each Named Executive Officer when they attain eligibility for Early Retirement (i.e., age 55 with 10 years of service) under the plans. YUM! BRANDS, INC. - 2013...

  • Page 74
    ...Proxy Statement • a proportionate annual incentive assuming achievement of target performance goals under the bonus plan or, if higher, assuming continued achievement of actual Company performance until date of termination, • a severance payment equal to two times the sum of the executive's base...

  • Page 75
    ... if the executive is employed on the date of the change in control of the Company and is is involuntarily terminated (other than by the Company for cause) on or within two years following the change in control ("double trigger" vesting). Proxy Statement YUM! BRANDS, INC. - 2013 Proxy Statement 57

  • Page 76
    ... 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." (3) At December 31, 2012, the aggregate number of...

  • 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
    ..., restricted 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...

  • Page 79
    ... restated effective November 16, 2012. The charter is reviewed by management at least 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...

  • Page 80
    ..., 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 December 29, 2012 for filing with the SEC. Who prepared this report? This report has been furnished by the...

  • Page 81
    ... 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 service to provide shareholders with added...

  • 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
    ... New York Stock Exchange (or if no sales of stock were made on said exchange on such date, on the next preceding day on which sales were made on such exchange). (c) 2.5 Settlement of Award. Settlement of Options and SARs is subject to subsection 4.7. YUM! BRANDS, INC. - 2013 Proxy Statement A-1

  • Page 84
    ... Company, Subsidiary, operating unit or division performance measures, as selected 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...

  • Page 85
    ... 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 for...

  • Page 86
    ... rules of Code section 409A(a)(2)(B)(i) (regarding the required six-month delay for distributions to specified employees that are related to a separation from service). In the event that any Award shall be deemed not to comply with Code section 409A, then neither the Company, the Board of Directors...

  • Page 87
    ... 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 rights earned or due under any other compensation plans or arrangements of the Company or a Subsidiary, including...

  • Page 88
    ... from among the Eligible Individuals those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of...

  • Page 89
    ...furnish the Committee with such data and information as it determines may be required for it to discharge its duties. The records of the Company and Subsidiaries as to an employee's or Participant's employment (or other provision of services), termination of employment (or cessation of the provision...

  • Page 90
    ...such Awards shall not become vested prior to the date the employee first performs such services. Fair Market Value. For purposes of determining the "Fair Market Value" of a share of Stock as of any date, Fair Market Value shall mean the average between the lowest and highest reported sale prices of...

  • Page 91
    ... 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 Statement A-9

  • Page 92
    ... registrant is a shell company (as defined 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 16, 2012 computed by reference to the closing price of the registrant...

  • Page 93
    ... Market Risk ...35 Financial Statements and Supplementary Data ...36 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ...71 Controls and Procedures ...71 Other Information ...71 PART III ITEM 10 ITEM 11 ITEM 12 ITEM 13 ITEM 14 72 Directors, Executive Officers...

  • Page 94
    ... factors described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form 10-K. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. In making these statements, we are not...

  • Page 95
    ...8300. Our website address is http://www.yum.com. (A) Financial Information about Operating Segments has been restated to be consistent with the current period presentation. In December 2011, the Company sold the Long John Silver's ("LJS") and A&W All-American Food Restaurants ("A&W") brands to key...

  • Page 96
    ... 1 percent of the India units are Company-owned. • Pizza Hut operates in the delivery and casual dining segments around the world. Outside of the U.S., Pizza Hut often uses unique branding to differentiate its delivery and casual dining businesses. • As of year end 2012, Pizza Hut was the leader...

  • Page 97
    ... California (Taco Bell); Louisville, Kentucky (KFC U.S.) and several other locations outside the U.S. The Company expensed $30 million, $34 million and $33 million in 2012, 2011 and 2010, respectively, for R&D activities. From time to time, independent suppliers also conduct research and development...

  • Page 98
    ... 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 compensation that compare favorably with...

  • Page 99
    ... 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 will depend in large part on our ability and the ability of our franchisees to open...

  • Page 100
    ... to continue to reduce the percentage of Company ownership of KFCs, Pizza Huts, and Taco Bells in the U.S. Once executed, the success of the refranchising program will depend on, among other things, buyers effectively operating these restaurants, the impact of contingent liabilities incurred in...

  • Page 101
    ... food industry in which we operate is highly competitive. The retail food 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...

  • Page 102
    ... on a number of issues, including, but not limited to, general performance, compliance with product specifications and terms of procurement and service requirements. Employees At any given time, the Company or its Concepts employ hundreds of thousands of persons, primarily in its restaurants. In...

  • Page 103
    ...ficer of Pizza Hut UK from May 2005 to September 2007. Muktesh Pant, 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...

  • 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
    ... following 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...

  • Page 106
    PART 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 ...

  • 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
    ..., the Company is rapidly adding KFC and Pizza Hut Casual Dining restaurants and testing the additional restaurant concepts of Pizza Hut Home Service (pizza delivery) and East Dawning (Chinese food). Additionally, on February 1, 2012 we acquired an additional 66% interest in Little Sheep Group Ltd...

  • Page 109
    ... YUM Retirement Plan settlement charge in 2012, the gain upon acquisition of Little Sheep in 2012, the losses associated with refranchising equity markets outside the U.S. and the losses, other costs and tax benefits in 2011 relating to our divestiture of the LJS and A&W brands. Other Special Items...

  • Page 110
    ... II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Year 2012 Detail of Special Items U.S. Refranchising gain (loss) YUM Retirement Plan settlement charge Gain upon acquisition of Little Sheep Losses associated with refranchising equity markets outside...

  • Page 111
    ... future cash ï¬,ows from our Pizza Hut UK delivery business, which is part of the Pizza Hut UK reporting unit, and was not impacted by the dine-in refranchising. LJS and A&W Divestitures In 2011, we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders...

  • Page 112
    ... our overall operating performance, while retaining Company ownership of strategic U.S. and international markets in which we choose to continue investing capital. In the U.S., we are targeting Company ownership of KFC, Pizza Hut and Taco Bell restaurants of about 10%, down from its current level of...

  • Page 113
    PART II ITEM 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: 2012 Decreased Company sales Increased Franchise and license fees and income DECREASE IN TOTAL ...

  • 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
    ... of distribution for the second brand added to a restaurant but do not result in an additional unit count. Similarly, a new multibrand restaurant, while increasing sales and points of distribution for two brands, results in just one additional unit count. YUM! BRANDS, INC. - 2012 Form 10-K 23

  • Page 116
    ...ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations System Sales Growth The following tables detail the key drivers of system sales growth for each reportable segment by year. Net unit growth represents the net impact of actual system sales growth due to new...

  • Page 117
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2012, the increase in China Company sales associated with store portfolio actions was primarily driven by new unit development and the acquisition of Little Sheep, partially offset by restaurant...

  • Page 118
    ... franchise same-store sales. U.S. Franchise and license fees and income increased 4% in 2012, excluding the 53rd week in 2011. The increase was driven by refranchising, positive franchise same-store sales and new unit development, partially offset by the LJS and A&W divestitures and franchise store...

  • Page 119
    ... litigation and incentive compensation costs in 2010 and G&A savings from the actions taken as part of our U.S. business transformation measures. The increase in Unallocated G&A expenses for 2012 was driven primarily by higher pension costs, including the YUM Retirement Plan settlement charge of...

  • Page 120
    ... the impact of same-store sales growth and new unit development, partially offset by higher restaurant operating costs, higher G&A expenses, and lapping the effect of our brands' participation in the World Expo in 2010. YRI Division Operating Profit increased 10% in 2012, excluding foreign currency...

  • Page 121
    ... by timing of cash payments for operating expenses and higher income taxes paid. In 2011, net cash provided by operating activities was $2,170 million compared to $1,968 million in 2010. The increase was primarily driven by higher operating profit before Special Items. Net cash used in investing...

  • Page 122
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Condition The changes in our Goodwill, Intangible assets, net, Restricted cash, Other liabilities and deferred credits, Investments in unconsolidated affiliates and ...

  • Page 123
    ... of the Plan and our 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...

  • Page 124
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These ...

  • Page 125
    .... During 2012, the Company's reporting units with the most significant refranchising activity and recorded goodwill were our Taco Bell U.S. and KFC U.S. operating segments and our Pizza Hut United Kingdom ("U.K.") business unit. Within our Taco Bell U.S. operating segment, 181 restaurants were...

  • Page 126
    PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations The assumption we make regarding our expected long-term rates of return on plan assets also impacts our pension expense. Our estimated longterm rate of return on U.S. plan assets represents the ...

  • Page 127
    ... market risk associated with commodity prices. Our ability to recover 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. YUM! BRANDS, INC. - 2012...

  • 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
    PART II ITEM 8 Financial Statements and Supplementary 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, ...

  • Page 130
    ... 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 other operating...

  • 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
    PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Cash Flows YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 29, 2012, DECEMBER 31, 2011 AND DECEMBER 25, 2010 (in millions) 2012 $ 1,608 $ 645 37 (78) (119) 84 (74) 28 (47) 41 (98) 50 (18) 9 (14) 9...

  • Page 133
    PART II ITEM 8 Financial Statements and Supplementary 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 ...

  • 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
    PART II ITEM 8 Financial Statements and Supplementary Data is classified outside permanent equity and recorded in the Consolidated Balance Sheet as the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income (loss) or its redemption value. We ...

  • Page 137
    ...are reported in G&A expenses. Research and development expenses were $30 million, $34 million and $33 million in 2012, 2011 and 2010, respectively. Share-Based Employee Compensation. We recognize all share-based payments to employees, including grants of employee stock options and stock appreciation...

  • Page 138
    ... will be unable to make their required payments. Balances of notes receivable and direct financing leases due within one year are included in Accounts and Notes Receivable while amounts due beyond one year are included in Other assets. Amounts included in Other assets totaled $18 million (net of an...

  • Page 139
    ... be at prevailing market rates. As such, the fair value of the reporting unit retained can include expected cash ï¬,ows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations. As a result, the...

  • Page 140
    ...in a year 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...

  • Page 141
    PART II ITEM 8 Financial Statements and Supplementary Data LJS and A&W Divestitures In 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders and strategic investors in separate transactions. We recognized $86 million of pre-tax losses and other ...

  • Page 142
    ... 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 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
    ... to our KFC U.S. and Taco Bell U.S. reporting units upon the acquisition of LJS and A&W and that has not been previously included in the carrying amounts of restaurants disposed of was not impaired, totals approximately $130 million and remains on our Consolidated Balance Sheet at December 29, 2012...

  • 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
    ...in 2012, 2011 and 2010, respectively. NOTE 11 Leases office space for headquarters and support functions, 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...

  • Page 147
    ... years ended December 29, 2012 and December 31, 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...

  • Page 148
    PART II ITEM 8 Financial Statements and Supplementary Data NOTE 13 Fair Value Disclosures the year ended December 31, 2011 that remained on our Consolidated Balance Sheet as of December 31, 2011. These assets and liabilities include restaurants or groups of restaurants that were impaired either ...

  • Page 149
    ... return on plan assets Employer contributions Participant contributions 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...

  • Page 150
    ... cost for each plan during the year. See Note 4 for discussion of the settlement payments and settlement loss related to the U.S. Plan's deferred vested benefit project. (c) Special termination benefits primarily related to the U.S. business transformation measures taken in 2012, 2011 and 2010...

  • Page 151
    ...net periodic benefit cost for fiscal years: U.S. Pension Plans 2011 5.90% 7.75% 3.75% International Pension Plans 2012 2011 4.75% 5.40% 5.55% 6.64% 3.85% 4.41% Discount rate Long-term rate of return on plan assets Rate of compensation increase 2012 4.90% 7.25% 3.75% 2010 6.30% 7.75% 3.75% 2010...

  • Page 152
    ... in 2010. NOTE 15 Overview 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...

  • Page 153
    ... two homogeneous groups when estimating expected term. These groups consist of grants made primarily to restaurant-level employees under the RGM Plan, which cliff-vest after four years and expire ten years after grant, and grants made to executives under our other stock award plans, which typically...

  • Page 154
    ...Financial Statements and Supplementary 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...

  • Page 155
    ... 2011 and 2010, this benefit was positively impacted by the repatriation of current year foreign earnings as we recognized excess foreign tax credits, resulting from the related effective tax rate being higher than the U.S. federal statutory rate. Adjustments to reserves and prior years. This item...

  • Page 156
    ...equipment Other Gross deferred tax liabilities NET 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...

  • Page 157
    ... prior to our disposal of those businesses in December 2011. Revenues 2011 5,566 $ 3,192 3,786 82 12,626 $ We are principally engaged in developing, operating, franchising and licensing the worldwide KFC, Pizza Hut and Taco Bell concepts. KFC, Pizza Hut and Taco Bell operate in 120, 97, and 27...

  • 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
    ... reductions arising from the impairment of Pizza Hut UK restaurants we decided to sell in 2011 of $13 million and $3 million, respectively. See Note 4. (d) 2012 includes the YUM Retirement Plan settlement charge of $84 million. 2012, 2011 and 2010 include approximately $5 million, $21 million and...

  • 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
    ... for daily overtime after 12 hours worked in a day. The Company has been dismissed from the case without prejudice. Taco Bell filed its answer on September 20, 2010, and the parties commenced class discovery, which is currently on-going. On September 16, 2011, plaintiffs filed their motion for...

  • 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
    ...Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 29, 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...

  • Page 164
    ... proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2012. Form 10-K ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding equity compensation plans and...

  • 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
    PART IV Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant 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/...

  • Page 167
    ... Exhibit 10.26 to YUM's Quarterly Report on Form 10-Q for quarter ended March 24, 2012. YUM Director Deferred Compensation Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.7 to YUM's Annual Report on Form 10-K for the fiscal year ended December 27, 1997...

  • Page 168
    ... 2009. 2010 YUM! Brands Supplemental Long Term Disability Coverage Summary, as effective January 1, 2010, which is incorporated by reference from Exhibit 10.26 to 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...

  • Page 169
    ... a duplicate Form 1099-B • Purchase shares of YUM through the Company's Direct Stock Purchase Plan • Sell shares held by AST Access accounts online at the following URL: https://secure.amstock.com/Shareholder/sh_login.asp. Your account number and Social Security Number are required. If you...

  • 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
    ... Chief Franchise Policy Officer, Yum! Brands, Inc. Richard T. Carucci 55 President, Yum! Brands, Inc. J. David Grissom 74 Chairman, Mayfair Capital, Inc. and Chairman, The Glenview Trust Company Niren Chaudhary 50 President, Yum! Restaurants India Greg Creed 55 Chief Executive Officer, Taco Bell...

  • 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.