10-K 1 yum10k12272014.htm 10-K YUM 10K 12.27.2014

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
                        

FORM 10-K

[Ÿ]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934 for the fiscal year ended December 27, 2014
 
 
 
 
 
OR
 
 
 
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934

For the transition period from ____________ to _________________
 
Commission file number 1-13163
                        
YUM! BRANDS, INC.
(Exact name of registrant as specified in its charter)

 
North Carolina
 
13-3951308
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
1441 Gardiner Lane, Louisville, Kentucky
 
40213
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
Registrant’s telephone number, including area code:  (502) 874-8300
Securities registered pursuant to Section 12(b) of the Act
 
 
 
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, no par value
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ü   No     
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes       No ü
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No     
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No     
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):  Large accelerated filer:  [ü] Accelerated filer:  [  ] Non-accelerated filer:  [  ] Smaller reporting company:  [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes       No ü




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 14, 2014 computed by reference to the closing price of the registrant’s Common Stock on the New York Stock Exchange Composite Tape on such date was approximately $34,800,000,000.  All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.  The number of shares outstanding of the registrant’s Common Stock as of February 10, 2015 was 433,115,252 shares.

Documents Incorporated by Reference

Portions of the definitive proxy statement furnished to shareholders of the registrant in connection with the annual meeting of shareholders to be held on May 1, 2015 are incorporated by reference into Part III.




Forward-Looking Statements

In this Form 10-K, as well as in other written reports and oral statements that we make from time to time, we present “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  We intend such forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe harbor provisions.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.  These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan” or other similar terminology.  These forward-looking statements are based on current expectations and assumptions and upon data available at the time of the statements and are neither predictions nor guarantees of future events or circumstances.  The forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected.  Factors that could cause our actual results to differ materially from our expectations and forward-looking statements include (i) the risks and uncertainties described in the Risk Factors included in Part I, Item 1A of this Form 10-K and (ii) the 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 undertaking to address or update any of our forward-looking statements set forth herein in future filings or communications regarding our business results.


2



PART I
Item 1.
Business.

YUM! Brands, Inc. (referred to herein as “YUM”, the “Registrant” or the “Company”), was incorporated under the laws of the state of North Carolina in 1997.  The principal executive offices of YUM are located at 1441 Gardiner Lane, Louisville, Kentucky  40213, and the telephone number at that location is (502) 874-8300. Our website address is http://yum.com.

YUM, together with its subsidiaries, is referred to in this Form 10-K annual report (“Form 10-K”) as the Company.  The terms “we,” “us” and “our” are also used in the Form 10-K to refer to the Company.  Throughout this Form 10-K, the terms “restaurants,” “stores” and “units” are used interchangeably. While YUM! Brands, Inc., referred to as the Company, does not directly own or operate any restaurants, throughout this document we may refer to restaurants as being Company-owned.

Financial Information about Operating Segments

As of December 27, 2014, YUM consists of five operating segments:  

YUM China (“China” or “China Division”) which includes all operations in mainland China
YUM India ("India" or "India Division") which includes all operations in India, Bangladesh, Nepal and Sri Lanka
The KFC Division which includes all operations of the KFC concept outside of China Division and India Division
The Pizza Hut Division which includes all operations of the Pizza Hut concept outside of China Division and India Division
The Taco Bell Division which includes all operations of the Taco Bell concept outside of India Division

Prior to 2014, our reporting segments consisted of Yum Restaurants International ("YRI"), the United States, China and India. In the first quarter of 2014 we changed our management reporting structure to align our global operations outside of China and India by brand. As a result, our YRI and United States reporting segments were combined, and we began reporting this information by three new reporting segments: KFC Division, Pizza Hut Division and Taco Bell Division. China and India remain separate reporting segments. This new structure is designed to drive greater global brand focus, enabling us to more effectively share know-how and accelerate growth. While our consolidated results have not been impacted, we have restated our comparable segment information for consistent presentation.

Operating segment information for the years ended December 27, 2014, December 28, 2013 and December 29, 2012 for the Company is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7 and in the related Consolidated Financial Statements in Part II, Item 8.

Narrative Description of Business

General

YUM has over 41,000 restaurants in more than 125 countries and territories.  Primarily through the three concepts of KFC, Pizza Hut and Taco Bell (the “Concepts”), the Company develops, operates, franchises and licenses a worldwide system of restaurants which prepare, package and sell a menu of competitively priced food items.  Units are operated by a Concept or by independent franchisees or licensees under the terms of franchise or license agreements.  Franchisees can range in size from individuals owning just one restaurant to large publicly traded companies.  

The China Division, based in Shanghai, China, comprises 6,715 units, primarily Company-owned KFCs and Pizza Huts.  In 2014, the China Division recorded revenues of approximately $6.9 billion and Operating Profit of $713 million. On February 1, 2012, we acquired a controlling interest in Little Sheep Group Limited ("Little Sheep"), a casual dining concept headquartered in Inner Mongolia, China. See Note 4 for details. The Company also owns non-controlling interests in Chinese entities who operate in a manner similar to franchisees and a meat processing entity that supplies lamb to the Little Sheep business. The KFC Division comprises 14,197 units, operating in 115 countries outside China and India and recorded revenues of approximately $3.2 billion and Operating Profit of $708 million in 2014. The Pizza Hut Division has 13,602 units, operating in 87 countries outside China and India and recorded revenues of approximately $1.1 billion and Operating Profit of $295 million in 2014. The Taco Bell Division comprises 6,199 units, operating in 20 countries outside of India, and recorded revenues of approximately $1.9 billion and Operating Profit of $480 million in 2014. The India Division, based in Delhi, India comprises 833 units. In 2014, India recorded revenues of $141 million and an Operating Loss of $9 million.     


3



Restaurant Concepts

Most restaurants in each Concept offer consumers the ability to dine in and/or carry out food.  In addition, Taco Bell and KFC offer a drive-thru option in many stores.  Pizza Hut offers a drive-thru option on a much more limited basis.  Pizza Hut and KFC, on a more limited basis primarily in China, offer delivery service.

Each Concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients, as well as unique recipes and special seasonings to provide appealing, tasty, convenient and attractive food at competitive prices.

The franchise programs of the Company are designed to promote consistency and quality, and the Company is selective in granting franchises.  Under standard franchise agreements, franchisees supply capital – initially by paying a franchise fee to YUM, by purchasing or leasing the land, building, equipment, signs, seating, inventories and supplies and, over the longer term, by reinvesting in the business.  Franchisees contribute to the Company’s revenues on an ongoing basis through the payment of royalties based on a percentage of sales.

The Company believes that it is important to maintain strong and open relationships with its franchisees and their representatives.  To this end, the Company invests a significant amount of time working with the franchisee community and their representative organizations on key aspects of the business, including products, equipment, operational improvements and standards and management techniques.

Following is a brief description of each Concept:

KFC

KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early developer of the quick service food business and a pioneer of the restaurant franchise concept.  The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952.

KFC operates in 120 countries and territories throughout the world.  As of year end 2014, KFC had 4,828 units in China, 395 units in India and 14,197 units within the KFC Division.  77 percent of the China units, 51 percent of the India units and 9 percent of the units outside China and India are Company-owned.

KFC restaurants across the world offer fried and non-fried chicken products such as sandwiches, chicken strips, chicken-on-the-bone and other chicken products marketed under a variety of names. KFC restaurants also offer a variety of entrees and side items suited to local preferences and tastes.  Restaurant decor throughout the world is characterized by the image of the Colonel.

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 92 countries and territories throughout the world. As of year end 2014, Pizza Hut had 1,572 units in China, 431 units in India and 13,602 units within the Pizza Hut Division. Nearly 100 percent of the China units, none of the India units and 6 percent of the units outside China and India are Company-owned.

Pizza Hut operates in the delivery, carryout and casual dining segments around the world. Outside of the U.S., Pizza Hut often uses unique branding to differentiate these segments. Additionally, a growing percentage of Pizza Hut's customer orders are being generated digitally.

Pizza Hut features a variety of pizzas which are marketed under varying names.  Each of these pizzas is offered with a variety of different toppings suited to local preferences and tastes.  Many Pizza Huts also offer pasta and chicken wings, including nearly 5,700 stores offering wings under the brand WingStreet, primarily in the U.S. Outside the U.S., Pizza Hut casual dining restaurants offer a variety of core menu products other than pizza, which are typically suited to local preferences and tastes. Pizza Hut units feature a distinctive red roof logo on their signage.


4



Taco Bell

The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey, California, and in 1964, the first Taco Bell franchise was sold.

Taco Bell operates in 21 countries and territories throughout the world. As of year end 2014, there were 6,199 Taco Bell units within the Taco Bell Division, primarily in the U.S., and 7 units in India.  15 percent of the units within the Taco Bell Division and 100 percent of the India units are Company-owned.

Taco Bell specializes in Mexican-style food products, including various types of tacos, burritos, quesadillas, salads, nachos and other related items.  In 2014, Taco Bell rolled out breakfast items in its U.S. stores. Taco Bell units feature a distinctive bell logo on their signage.

Restaurant Operations

Through its Concepts, YUM develops, operates, franchises and licenses a worldwide system of both traditional and non-traditional Quick Service Restaurants ("QSR").  Traditional units feature dine-in, carryout and, in some instances, drive-thru or delivery services.  Non-traditional units, which are typically licensed outlets, include express units and kiosks which have a more limited menu, usually generate lower sales volumes and operate in non-traditional locations like malls, airports, gasoline service stations, train stations, subways, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient.

Restaurant management structure varies by Concept and unit size.  Generally, each Concept-owned restaurant is led by a restaurant general manager (“RGM”), together with one or more assistant managers, depending on the operating complexity and sales volume of the restaurant.  Most of the employees work on a part-time basis.  Each Concept issues detailed manuals, which may then be customized to meet local regulations and customs. These manuals set forth standards and requirements for all aspects of restaurant operations, including food safety and quality, food handling and product preparation procedures, equipment maintenance, facility standards and accounting control procedures.  The restaurant management teams are responsible for the day-to-day operation of each unit and for ensuring compliance with operating standards. CHAMPS – which stands for Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service – is our proprietary systemwide program for training, measuring and rewarding employee performance against key customer measures.  CHAMPS is intended to align the operating processes of our entire system around one core set of standards. RGMs’ efforts, including CHAMPS performance measures, are monitored by Area Coaches.  Area Coaches typically work with approximately six to twelve restaurants.  Various senior operators visit restaurants from time to time to promote adherence to system standards and mentor restaurant team members.

Supply and Distribution

The Company’s Concepts, including Concept units operated by its franchisees, are substantial purchasers of a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include chicken, cheese, beef and pork products, paper and packaging materials. The Company has not experienced any significant continuous shortages of supplies, and alternative sources for most of these products are generally available.  Prices paid for these supplies fluctuate.  When prices increase, the Concepts may attempt to pass on such increases to their customers, although there is no assurance that this can be done practically.

China Division In China, we partner with approximately 600 independent suppliers, mostly China-based, providing a wide range of products. The Company, along with multiple independently owned and operated distributors, utilizes approximately 20 logistic centers to distribute restaurant products to our Company and franchise stores. We also own a seasoning facility and a non-controlling interest in a meat processing facility in Inner Mongolia, both of which supply products to our Little Sheep business, as well as third-party customers.

Other Divisions  In the U.S., the Company, along with the representatives of the Company’s KFC, Pizza Hut and Taco Bell franchisee groups, are members of Restaurant Supply Chain Solutions, LLC (“RSCS"), which is responsible for purchasing certain restaurant products and equipment.  The core mission of RSCS is to provide the lowest possible sustainable store-delivered prices for restaurant products and equipment.  This arrangement combines the purchasing power of the Company-owned and franchisee restaurants which the Company believes leverages the system’s scale to drive cost savings and effectiveness in the purchasing function.  The Company also believes that RSCS fosters closer alignment of interests and a stronger relationship with its franchisee community.


5



Most food products, paper and packaging supplies, and equipment used in restaurant operations are distributed to individual restaurant units by third-party distribution companies.  In the U.S., McLane Company, Inc. (“McLane”) is the exclusive distributor for the majority of items used in Company-owned restaurants and for a substantial number of franchisee and licensee stores.  The Company entered into an agreement with McLane effective January 1, 2011 relating to distribution to Company-owned restaurants.  This agreement extends through December 31, 2016 and generally restricts Company-owned restaurants from using alternative distributors for most products.

Outside the U.S., we and our franchisees use decentralized sourcing and distribution systems involving many different global, regional and local suppliers and distributors. We have approximately 3,000 suppliers, including U.S.-based suppliers that export to many countries.

Trademarks and Patents

The Company and its Concepts own numerous registered trademarks and service marks.  The Company believes that many of these marks, including its Kentucky Fried Chicken®, KFC®, Pizza Hut® and Taco Bell® marks, have significant value and are materially important to its business.  The Company’s policy is to pursue registration of its important marks whenever feasible and to oppose vigorously any infringement of its marks.  

The use of these marks by franchisees and licensees has been authorized in our franchise and license agreements.  Under current law and with proper use, the Company’s rights in its marks can generally last indefinitely.  The Company also has certain patents on restaurant equipment which, while valuable, are not material to its business.

Working Capital

Information about the Company’s working capital is included in MD&A in Part II, Item 7 and the Consolidated Statements of Cash Flows in Part II, Item 8.

Seasonal Operations

The Company does not consider its operations to be seasonal to any material degree.

Competition

The retail food industry, in which our Concepts compete, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including the QSR segment), and is intensely competitive with respect to food quality, price, service, convenience, location and concept.  The industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power.  Each of the Concepts competes with international, national and regional restaurant chains as well as locally-owned restaurants, not only for customers, but also for management and hourly personnel, suitable real estate sites and qualified franchisees.  Given the various types and vast number of competitors, our Concepts do not constitute a significant portion of the retail food industry in terms of number of system units or system sales, either on a worldwide or individual country basis.

Research and Development (“R&D”)

The Company operates R&D facilities in Shanghai, China (China Division); Plano, Texas (KFC and Pizza Hut Divisions); Irvine, California (Taco Bell Division); Louisville, Kentucky (KFC U.S.) and several other locations outside the U.S.  The Company expensed $30 million, $31 million and $30 million in 2014, 2013 and 2012, respectively, for R&D activities.  From time to time, independent suppliers also conduct research and development activities for the benefit of the YUM system.

Environmental Matters

The Company is not aware of any federal, state or local environmental laws or regulations that will materially affect its earnings or competitive position, or result in material capital expenditures.  However, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations.  During 2014, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.


6



Government Regulation

U.S. Operations.  The Company and its U.S. operations are subject to various federal, state and local laws affecting its business, including laws and regulations concerning information security, labor, health, sanitation and safety.  Each of the Concepts’ restaurants in the U.S. must comply with licensing and regulation by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located.  In addition, each Concept must comply with various state and federal laws that regulate the franchisor/franchisee relationship.  To date, the Company has not been materially adversely affected by such licensing and regulation or by any difficulty, delay or failure to obtain required licenses or approvals.

International, China and India Operations.  The Company’s restaurants outside the U.S. are subject to national and local laws and regulations which are similar to those affecting U.S. restaurants.  The restaurants outside the U.S. are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment, as well as anti-bribery and corruption laws.  

See Item 1A "Risk Factors" for a discussion of risks relating to federal, state, local and international regulation of our business.

Employees

As of year end 2014, the Company and its Concepts employed approximately 537,000 persons, approximately 87 percent of whom were part-time.    The Company believes that it provides working conditions and compensation that compare favorably with those of its principal competitors.  The majority of employees are paid on an hourly basis.  Some employees are subject to labor council relationships that vary due to the diverse cultures in which the Company operates.  The Company and its Concepts consider their employee relations to be good.

Financial Information about Geographic Areas

Financial information about our significant geographic areas is incorporated herein by reference from the related Consolidated Financial Statements in Part II, Item 8.

Available Information

The Company makes available through the Investor Relations section of its internet website at http://yum.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission ("SEC") at http://www.sec.gov.  These reports may also be obtained by visiting the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1 (800) SEC-0330.

Our Corporate Governance Principles and our Code of Conduct are also located within the Investor Relations section of the Company's website.  The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.  These documents, as well as our SEC filings, are available in print free of charge to any shareholder who requests a copy from our Investor Relations Department.

Item 1A.
Risk Factors.

You should carefully review the risks described below as they identify important factors that could cause our actual results to differ materially from our forward-looking statements and historical trends.

Food safety and food-borne illness concerns may have an adverse effect on our business.

Food-borne illnesses, such as E. coli, hepatitis A, trichinosis or salmonella, and food safety issues, such as food tampering, contamination or adulteration, have occurred in the past and could occur in the future. Any report or publicity linking us or one of our Concept restaurants, including restaurants operated by our Concepts’ franchisees, to instances of food-borne illness or food safety issues could adversely affect our Concepts’ brands and reputations as well as our revenues and profits and possibly lead to litigation.  If a customer of our Concepts becomes ill from food-borne illnesses or as a result of food safety issues, restaurants in our system may be temporarily closed, which would decrease our revenues.  In addition, instances or allegations of food-borne illness or food safety issues, real or perceived, involving our restaurants, restaurants of competitors, suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our

7



restaurants, could result in negative publicity that could adversely affect our sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our Concepts’ franchisees.

Our significant China operations subject us to risks that could negatively affect our business.

A significant and growing portion of our restaurants are located, and our revenues and profits originate, in China.  As a consequence, our financial results are increasingly dependent on our results in China, and our business is increasingly exposed to risks there.  These risks include changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), consumer preferences, taxation (including income and non-income based tax rates and laws) and the regulatory environment, as well as increased media scrutiny of our business and industry and increased competition.  In addition, our results of operations in China and the value of our Chinese assets are affected by fluctuations in currency exchange rates, which may adversely affect reported earnings.  There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash flows.

In addition, any significant or prolonged deterioration in U.S.-China relations could adversely affect our China business.  Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China.  There are also uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China.  If we were unable to enforce our intellectual property or contract rights in China, our business would be adversely impacted.

Health concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.

Outbreaks of avian flu occur from time to time around the world, including in China where a significant portion of our profits and revenues originate. It is possible that outbreaks in China and elsewhere could reach pandemic levels.  Public concern over avian flu generally may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. This would likely result in lower revenues and profits. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact our profit margins and revenues. Widespread outbreaks could also affect our ability to attract and retain employees.

Furthermore, other viruses such as H1N1 or “swine flu” may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff restaurants.  We could also be adversely affected if jurisdictions in which we have restaurants impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants.  Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may affect our business.

Our foreign operations subject us to risks that could negatively affect our business.

A significant portion of our Concepts’ restaurants are operated in countries and territories outside of the U.S., and we intend to continue expansion of our international operations.  As a result, our business is increasingly exposed to risks inherent in foreign operations.  These risks, which can vary substantially by country, include political instability, corruption, social and ethnic unrest, changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), the regulatory environment, income and non-income based tax rates and laws and consumer preferences as well as changes in the laws and policies that govern foreign investment in countries where our restaurants are operated.

In addition, our results of operations and the value of our foreign assets are affected by fluctuations in currency exchange rates, which may adversely affect reported earnings.  More specifically, an increase in the value of the U.S. Dollar relative to other currencies, such as the Australian Dollar, the British Pound, the Canadian Dollar and the Euro, as well as currencies in certain emerging markets, such as the Russian Ruble, could have an adverse effect on our reported earnings.  There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash flows.

Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us to litigation and damage our reputation.

We receive and maintain certain personal financial and other information about our customers and employees. The use of this information is regulated by evolving and increasingly demanding laws, as well as by certain third-party contracts. If our security and information systems are compromised as a result of data corruption or loss, cyber-attack or a network security incident or our employees, franchisees or vendors fail to comply with these laws and regulations and this information is obtained by unauthorized

8



persons or used inappropriately, it could result in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and result in a loss of customer confidence, which could adversely affect our restaurant operations and results of operations and financial condition. Additionally, we could be subject to litigation and government enforcement actions as a result of any such failure.

Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.

The products sold by our Concepts and their franchisees are sourced from a wide variety of domestic and international suppliers. We are also dependent upon third parties to make frequent deliveries of food products and supplies that meet our specifications at competitive prices.  Shortages or interruptions in the supply of food items and other supplies to our restaurants could adversely affect the availability, quality and cost of items we buy and the operations of our restaurants.  Such shortages or disruptions could be caused by inclement weather, natural disasters such as floods, drought and hurricanes, increased demand, problems in production or distribution, the inability of our vendors to obtain credit, political instability in the countries in which foreign suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements or other conditions beyond our control.  A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales.  In addition, failure by a principal distributor for our Concepts and/or our Concepts’ franchisees to meet its service requirements could lead to a disruption of service or supply until a new distributor is engaged, and any disruption could have an adverse effect on our business.

We may not attain 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 will depend in large part on our ability and the ability of our Concepts’ franchisees to open new restaurants and to operate these restaurants on a profitable basis.  We cannot guarantee that we, or our Concepts’ franchisees, will be able to achieve our expansion goals or that new restaurants will be operated profitably.  Further, there is no assurance that any new restaurant will produce operating results similar to those of our existing restaurants.  Other risks which could impact our ability to increase our net restaurant count include prevailing economic conditions and our, or our Concepts’ franchisees’, ability to obtain suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, obtain required permits and approvals in a timely manner, hire and train qualified personnel and meet construction schedules.

Expansion into target markets could also be affected by our Concepts’ franchisees’ ability to obtain financing to construct and open new restaurants.  If it becomes more difficult or more expensive for our Concepts’ franchisees to obtain financing to develop new restaurants, the expected growth of our system could slow and our future revenues and operating cash flows could be adversely impacted.

In addition, the new restaurants could impact the sales of our existing restaurants nearby.  There can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets.

Changes in commodity and other operating costs could adversely affect our results of operations.

Any increase in certain commodity prices, such as food, supply and energy costs, could adversely affect our operating results.  Because our Concepts and their franchisees provide competitively priced food, our ability to pass along commodity price increases to our customers is limited.  Significant increases in gasoline prices could also result in a decrease of customer traffic at our restaurants or the imposition of fuel surcharges by our distributors, each of which could adversely affect our profit margins.  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.

Our operating results are closely tied to the success of our Concepts’ franchisees.

A significant portion of our restaurants are operated by franchisees from whom we derive a significant portion of our revenues in the form of royalty payments. As a result, the success of our business depends in part upon the operational and financial success of our Concepts’ franchisees.  We have limited control over how our Concepts’ franchisees’ businesses are run, and the inability of our Concepts’ franchisees to operate successfully could adversely affect our operating results through decreased royalty payments.   


9



If franchisees incur too much debt or if economic or sales trends deteriorate such that they are unable to operate profitably or repay existing debt, it could result in financial distress, including insolvency or bankruptcy.  If a significant franchisee or a significant number of our Concepts’ franchisees become financially distressed, our operating results could be impacted through reduced or delayed royalty payments or increased rent obligations for leased properties on which we are contingently liable.

Our success depends substantially on the value and perception of our brands.

Our success depends in large part upon our ability to maintain and enhance the value of our brands and our customers’ connection to our brands.  Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring and whether originating from us, our franchisees or suppliers, can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation.  For example, our brands could be damaged by claims or perceptions about the quality or safety of our products or the quality of our suppliers, regardless of whether such claims or perceptions are true.  Any such incident could cause a decline in consumer confidence in, or the perception of, our Concepts and/or our products and decrease the value of our brands as well as consumer demand for our products, which would likely result in lower revenues and profits.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.

There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction.

Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our Concepts, exposure of personally identifiable information, fraud and out-of-date information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.

We could be party to litigation that could adversely affect us by increasing our expenses or subjecting us to significant monetary damages and other remedies.

From time to time we are involved in a number of legal proceedings, which include consumer, employment, tort, patent, securities, derivative and other litigation (see the discussion of Legal Proceedings in Note 18 to the consolidated financial statements included in Item 8 of this Report). We are currently a defendant in cases containing class action allegations in which the plaintiffs have brought claims under federal and state wage and hour, disability and other laws. We are also currently a defendant in securities and derivative lawsuits alleging inadequate disclosures in violation of federal securities laws. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated.  Regardless of whether any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources away from our operations and negatively impact reported earnings.  With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations.  Any adverse publicity resulting from these allegations may also adversely affect our reputation, which in turn could adversely affect our results.

In addition, the restaurant industry has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to the obesity of some customers.  We may also be subject to this type of claim in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and fast-casual segments of the industry) may harm our reputation and adversely affect our results.

Changes in, or noncompliance with, governmental regulations may adversely affect our business operations, growth prospects or financial condition.

Our Concepts and their franchisees are subject to numerous laws and regulations around the world. These laws change regularly and are increasingly complex. For example, we are subject to:


10



The Americans with Disabilities Act in the U.S. and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.
 
 
The U.S. Fair Labor Standards Act, which governs matters such as minimum wages, overtime and other working conditions, as well as family leave mandates and a variety of similar state laws that govern these and other employment law matters.
 
 
Anti-bribery and corruption laws and regulations, such as the Foreign Corrupt Practices Act, the UK Bribery Act and similar laws, which are the subject of increasing scrutiny and enforcement around the world.
 
 
Laws and regulations in government-mandated health care benefits such as the Patient Protection and Affordable Care Act.
 
 
Laws relating to state and local licensing.
 
 
Laws and regulations relating to health, sanitation, food, workplace safety, child labor, including laws prohibiting the use of certain “hazardous equipment” by employees younger than the age of 18 years of age, and fire safety and prevention.
 
 
Laws and regulations relating to union organizing rights and activities.
 
 
Laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud.
 
 
Environmental regulations.
 
 
Federal and state immigration laws and regulations in the U.S.

Compliance with new or existing laws and regulations could impact our operations. The compliance costs associated with these laws and regulations could be substantial. Any failure or alleged failure to comply with these laws or regulations could adversely affect our reputation, international expansion efforts, growth prospects and financial condition or result in, among other things, litigation, revocation of required licenses, governmental investigations or proceedings, administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could also harm our reputation and adversely affect our revenues.

Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

A significant percentage of our profit is earned outside the U.S. and taxed at lower rates than the U.S. statutory rates.  Historically, the cash we generate outside the U.S. has principally been used to fund our international development. However, if the cash generated by our U.S. business is not sufficient to meet our need for cash in the U.S., we may need to repatriate a greater portion of our international earnings to the U.S. in the future.  We are required to record U.S. income tax expense in our financial statements at the point in time when our management determines that such funds are not permanently invested outside the U.S. This could cause our worldwide effective tax rate to increase materially.
 
We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property, withholding and franchise taxes in both the U.S. and various foreign jurisdictions. We are also subject to regular reviews, examinations and audits by the Internal Revenue Service and other taxing authorities with respect to such income and non-income based taxes inside and outside of the U.S. These reviews could include challenges of our methodologies for transfer pricing. If the IRS or another taxing authority disagrees with our tax positions, we could face additional tax liability, including interest and penalties.  Payment of such additional amounts upon final settlement or adjudication of any disputes could have a material impact on our results of operations and financial position.

In addition, we are directly and indirectly affected by new tax legislation and regulation and the interpretation of tax laws and regulations worldwide. Changes in such legislation, regulation or interpretation could increase our taxes and have an adverse effect on our operating results and financial condition. This includes potential changes in tax laws or the interpretation of tax laws arising out of the Base Erosion Profit Shifting project initiated by the Organization for Economic Co-operation and Development.


11



Our business may be adversely impacted by general economic conditions.
 
Our results of operations are dependent upon discretionary spending by consumers, which may be affected by general economic conditions globally or in one or more of the markets we serve.  Some of the factors that impact discretionary consumer spending include unemployment, disposable income and consumer confidence.  These and other macroeconomic factors could have an adverse effect on our sales, profitability or development plans, which could harm our financial condition and operating results.

The retail 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, and attractiveness and maintenance of properties.  If consumer or dietary preferences change, or our restaurants are unable to compete successfully with other retail food outlets in new and existing markets, our business could be adversely affected.  We also face growing competition as a result of convergence in grocery, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes.  In addition, in the retail food industry, labor is a primary operating cost component.  Competition for qualified employees could also require us to pay higher wages to attract a sufficient number of employees, which could adversely impact our profit margins.



12



Item 1B.
Unresolved Staff Comments.

The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2014 fiscal year and that remain unresolved.

Item 2.
Properties.

As of year end 2014, the Company’s Concepts owned approximately 900 units and leased land, building or both for approximately 7,775 units worldwide.  These units are further detailed as follows:

The China Division leased land, building or both in approximately 5,425 units.
The KFC Division owned approximately 250 units and leased land, building or both in approximately 1,075 units.
The Pizza Hut Division owned approximately 75 units and leased land, building or both in approximately 725 units.
The Taco Bell Division owned approximately 550 units and leased land, building or both in approximately 375 units.
The India Division leased land, building or both in approximately 200 units.

Company-owned restaurants in China are generally leased for initial terms of 10 to 15 years and generally do not have renewal options.  Historically, the Company has either been able to renew its China Division leases or enter into competitive leases at replacement sites without a significant impact on our operations, cash flows or capital resources. Company-owned restaurants in the U.S. with leases are generally leased for initial terms of 15 or 20 years and generally have renewal options; however, Pizza Hut delivery/carryout units in the U.S. generally are leased for significantly shorter initial terms with shorter renewal options.  Company-owned restaurants outside of China and the U.S. with leases have initial lease terms and renewal options that vary by country. The Company currently has land, buildings or both in approximately 875 units, not included in the property counts above, that it leases or subleases to franchisees, principally in the U.S., U.K., China and Mexico.

The China Division leases their corporate headquarters and research facilities in Shanghai, China. The KFC Division and Pizza Hut Division corporate headquarters and a KFC and Pizza Hut research facility in Plano, Texas are owned by Pizza Hut.  Taco Bell leases its corporate headquarters and research facility in Irvine, California. The YUM corporate headquarters and a KFC research facility in Louisville, Kentucky are owned by the Company.  Additional information about the Company’s properties is included in the Consolidated Financial Statements in Part II, Item 8.

The Company believes that its properties are generally in good operating condition and are suitable for the purposes for which they are being used.

Item 3.
Legal Proceedings.

The Company is subject to various lawsuits covering a variety of allegations. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s annual results of operations, financial condition or cash flows. Matters faced by the Company include, but are not limited to, claims from franchisees, suppliers, employees, customers and others related to operational, contractual or employment issues as well as claims that the Company has infringed on third party intellectual property rights. In addition, the Company brings claims from time-to-time relating to infringement of, or challenges to, our intellectual property, including registered marks. Finally, as a publicly-traded company, disputes arise from time to time with our shareholders, including allegations that the Company breached federal securities laws or that officers and/or directors breached fiduciary duties. Descriptions of current specific claims and contingencies appear in Note 18, Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, which Note is incorporated by reference into this item.



13



Item 4.
Mine Safety Disclosures.

Not applicable

Executive Officers of the Registrant

The executive officers of the Company as of February 17, 2015, and their ages and current positions as of that date are as follows:

David C. Novak, 62, is Executive Chairman of the Board of YUM.  He has served in this position since January 2015. Prior to this position, he served as Chairman of the Board and Chief Executive Officer of YUM from January 2001 to December 2014.

Greg Creed, 57, is Chief Executive Officer of YUM. He has served in this position since January 2015.  He served as Chief Executive Officer of Taco Bell Division from January 2014 to December 2014 and as Chief Executive Officer of Taco Bell U.S. from 2011 to December 2013. Prior to this position, Mr. Creed served as President and Chief Concept Officer of Taco Bell U.S., a position he held beginning in December 2006.

Jing-Shyh S. Su, 62, is Vice-Chairman of the Board of YUM and Chairman and Chief Executive Officer of YUM Restaurants China.  He has served in this position since May 2010. He has served as Vice-Chairman of the Board of YUM since March 2008, and he served as President of YUM China from 1997 to May 2010.

Jonathan D. Blum, 56, is Senior Vice President, Chief Public Affairs Officer and Global Nutrition Officer of YUM.  He has served as Senior Vice President and Chief Public Affairs Officer since July 1997. In March of 2012, his title and job responsibilities were expanded to include Global Nutrition Officer.

Anne P. Byerlein, 56, is Chief People Officer of YUM.  She has served in this position since December 2002.

Christian L. Campbell, 64, is Senior Vice President, General Counsel, Secretary and Chief Franchise Policy Officer of YUM.  He has served as Senior Vice President, General Counsel and Secretary since September 1997 and Chief Franchise Policy Officer since January 2003.

Roger Eaton, 54, is President of KFC Division and Chief Operations Officer of YUM.  He has served as President of KFC Division since January 2014 and as Chief Operations Officer of YUM since November 2011.  Prior to these positions, Mr. Eaton served as Chief Executive Officer of KFC U.S. and YUM Operational Excellence Officer from February 2011 to November 2011. He was President and Chief Concept Officer of KFC U.S. from June 2008 to February 2011.

David Gibbs, 51, is Chief Executive Officer of Pizza Hut Division. He has served in this position since January 2015. From January 2014 to December 2014, Mr. Gibbs served as President of Pizza Hut U.S. Prior to this position, Mr. Gibbs served as President and Chief Financial Officer of Yum! Restaurants International, Inc. (“YRI”) from May 2012 through December 2013. Mr. Gibbs served as Chief Financial Officer of YRI from January 2011 to April 2012. He was Chief Financial Officer of Pizza Hut U.S. from September 2005 to December 2010.

Patrick Grismer, 53, is Chief Financial Officer of YUM. He has served in this position since May 2012. Prior to this position, Mr. Grismer served as Chief Planning and Control Officer of YUM, a position he held beginning January 2011. Mr. Grismer served as Chief Financial Officer of YRI from June 2008 to January 2011.

Brian Niccol, 40, is Chief Executive Officer of Taco Bell Division, a position he has held since January 2015.  From January 2014 to December 2014, Mr. Niccol served as President of Taco Bell Division. From May 2013 to December 2013 Mr. Niccol served as President of Taco Bell U.S. Mr. Niccol served as Chief Marketing and Innovation Officer of Taco Bell U.S. from October 2011 to April 2013.  Prior to this position, he served as General Manager of Pizza Hut U.S. from February 2011 to September 2011.  From September 2007 to January 2011 he was Chief Marketing Officer of Pizza Hut U.S. 

Muktesh Pant, 60, is Chief Executive Officer of KFC Division. He has served in this position since January 2014. Prior to this position he served as Chief Executive Officer of YRI from December 2011 to December 2013.  Mr. Pant served as President of YRI from May 2010 to December 2011 and as President of Global Brand Building for YUM from February 2009 to December 2011.  He served as Chief Marketing Officer of YRI from July 2005 to May 2010.


14



David E. Russell, 45, is Vice President, Finance and Corporate Controller of YUM. He has served in this position since December 2012. He has been Vice President and Corporate Controller since February 2011. Effective December 2012, his duties and title were expanded to include Vice President, Finance. From November 2010 to February 2011, Mr. Russell served as Vice President, Controller-Designate.  From January 2008 to November 2010, he served as Vice President and Assistant Controller.

Executive officers are elected by and serve at the discretion of the Board of Directors.





15



PART II

Item 5.
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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.

2014
Quarter
 
High
 
Low
 
Dividends
Declared
First
 
$
77.40

 
$
66.16

 
$
0.37

Second
 
79.99

 
73.20

 
0.37

Third
 
83.29

 
69.40

 

Fourth
 
78.36

 
67.23

 
0.82


2013
Quarter
 
High
 
Low
 
Dividends
Declared
First
 
$
70.20

 
$
62.08

 
$
0.335

Second
 
73.52

 
64.15

 
0.335

Third
 
74.82

 
68.10

 

Fourth
 
78.30

 
65.17

 
0.74


In 2014, the Company declared two cash dividends of $0.37 per share and two cash dividends of $0.41 per share of Common Stock, one of which had a distribution date of February 6, 2015.  In 2013, the Company declared two cash dividends of $0.335 per share and two cash dividends of $0.37 per share of Common Stock, one of which had a distribution date of February 7, 2014.  The Company targets an annual dividend payout ratio of 40% to 45% of net income.

As of February 10, 2015, there were 58,368 registered holders of record of the Company’s Common Stock.


16




Issuer Purchases of Equity Securities

The following table provides information as of December 27, 2014 with respect to shares of Common Stock repurchased by the Company during the quarter then ended:

 
 
 
 
Fiscal Periods
 
 
 
Total number
of shares
purchased
(thousands)
 
 
 
 
Average price
paid per share
 
 
 
 
Total number of shares
purchased as part of
publicly announced plans
or programs
(thousands)
 
Approximate dollar value
of shares that may yet be
purchased under the plans
or programs
(millions)
Period 10
 
 
$

 
 
$
443

9/7/14 - 10/4/14
 
 
 
 
 
 
 
 
Period 11
 
1,836
 
$
68.53

 
1,836
 
$
317

10/5/14 - 11/1/14
 
 
 
 
 
 
 
 
Period 12
 
871
 
$
73.73

 
871
 
$
1,253

11/2/14 - 11/29/14
 
 
 
 
 
 
 
 
Period 13
 
1,689
 
$
71.02

 
1,689
 
$
1,133

11/30/14 - 12/27/14
 
 
 
 
 
 
 
 
Total
 
4,396
 
$
70.52

 
4,396
 
$
1,133


On November 22, 2013, our Board of Directors authorized share repurchases through May 2015 of up to $750 million (excluding applicable transaction fees) of our outstanding Common Stock. On November 20, 2014, our Board of Directors authorized additional share repurchases through May 2016 of up to $1 billion (excluding applicable transaction fees) of our outstanding Common Stock. As of December 27, 2014, we have remaining capacity to repurchase up to $1.1 billion of Common Stock under these authorizations.


17




Stock Performance Graph

This graph compares the cumulative total return of our Common Stock to the cumulative total return of the S&P 500 Stock Index and the S&P 500 Consumer Discretionary Sector, a peer group that includes YUM, for the period from December 24, 2009 to December 26, 2014, the last trading day of our 2014 fiscal year.  The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 24, 2009 and that all dividends were reinvested.

 
 
 
12/24/2009
 
12/23/2010
 
12/30/2011
 
12/28/2012
 
12/27/2013
 
12/26/2014
 
YUM!
 
$
100

 
$
143

 
$
174

 
$
194

 
$
226

 
$
228

 
S&P 500
 
$
100

 
$
114

 
$
116

 
$
133

 
$
178

 
$
206

 
S&P Consumer Discretionary
 
$
100

 
$
127

 
$
134

 
$
163

 
$
235

 
$
260



18




Item 6.
Selected Financial Data.
Selected Financial Data
YUM! Brands, Inc. and Subsidiaries
(in millions, except per share and unit amounts)
 
Fiscal Year
 
2014
 
2013
 
2012
 
2011(h)
 
2010
Income Statement Data
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Company sales
$
11,324

 
$
11,184

 
$
11,833


$
10,893


$
9,783

Franchise and license fees and income
1,955

 
1,900

 
1,800


1,733


1,560

Total
13,279

 
13,084

 
13,633


12,626


11,343

Closures and impairment income (expenses)(a)
(535
)
 
(331
)
 
(37
)

(135
)

(47
)
Refranchising gain (loss)(b)
33

 
100

 
78


(72
)

(63
)
Operating Profit(c)
1,557

 
1,798

 
2,294


1,815


1,769

Interest expense, net(c)
130

 
247

 
149


156


175

Income before income taxes
1,427

 
1,551

 
2,145


1,659


1,594

Net Income – including noncontrolling interest
1,021

 
1,064

 
1,608


1,335


1,178

Net Income – YUM! Brands, Inc.
1,051

 
1,091

 
1,597


1,319


1,158

Basic earnings per common share
2.37

 
2.41

 
3.46


2.81


2.44

Diluted earnings per common share
2.32

 
2.36

 
3.38


2.74


2.38

Diluted earnings per common share before Special Items(c)
3.09

 
2.97

 
3.25


2.87


2.53

Cash Flow Data
 
 
 
 
 
 
 
 
 
Provided by operating activities
$
2,049

 
$
2,139

 
$
2,294


$
2,170


$
1,968

Capital spending, excluding acquisitions and investments
1,033

 
1,049

 
1,099


940


796

Proceeds from refranchising of restaurants
114

 
260

 
364


246


265

Repurchase shares of Common Stock
820

 
770

 
965


752


371

Dividends paid on Common Stock
669

 
615

 
544


481


412

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
8,345

 
$
8,695

 
$
9,013


$
8,834


$
8,316

Long-term debt
3,077

 
2,918

 
2,932


2,997


2,915

Total debt
3,344

 
2,989

 
2,942

 
3,317

 
3,588

Other Data
 
 
 
 
 
 
 
 
 
Number of stores at year end
 
 
 
 
 
 
 
 
 
 Company
8,664

 
8,097

 
7,544


7,403


7,238

 Unconsolidated Affiliates
757

 
716

 
660


587


525

 Franchisees & licensees
32,125

 
31,420

 
30,733


29,056


29,998

 System
41,546

 
40,233

 
38,937

 
37,046

 
37,761

China system sales growth(d)
 
 
 
 
 
 
 
 
 
Reported
1
 %
 
(1
)%
 
23
%

35
 %

18
%
Local currency(e)
1
 %
 
(4
)%
 
20
%

29
 %

17
%
KFC Division system sales growth(d)(f)
 
 
 
 
 
 
 
 
 
Reported
2
 %
 
 %
 
2
%

9
 %

N/A

Local currency(e)
6
 %
 
3
 %
 
6
%

4
 %

N/A

Pizza Hut Division system sales growth(d)(f)
 
 
 
 
 
 
 
 
 
Reported
 %
 
 %
 
2
%
 
5
 %
 
N/A

Local currency(e)
1
 %
 
1
 %
 
5
%
 
2
 %
 
N/A

Taco Bell Division system sales growth(d)(f)
 
 
 
 
 
 
 
 
 
Reported
4
 %
 
4
 %
 
7
%
 
1
 %
 
N/A

Local currency(e)
4
 %
 
4
 %
 
9
%
 
(1
)%
 
N/A

India system sales growth(d)(g)
 
 
 
 
 
 
 
 
 
Reported
(1
)%
 
11
 %
 
13
%

36
 %

43
%
Local currency(e)
3
 %
 
20
 %
 
29
%

35
 %

36
%
Shares outstanding at year end
434

 
443

 
451

 
460

 
469

Cash dividends declared per Common Share
$
1.56

 
$
1.41

 
$
1.24


$
1.07


$
0.92

Market price per share at year end
$
73.14

 
$
73.87

 
$
64.72

 
$
59.01

 
$
49.66



19



(a)
Closures and impairment income (expense) includes $463 million and $295 million of Little Sheep impairment losses in 2014 and 2013 respectively, (See Note 4). Additionally, 2011 included $80 million of net losses related to the divestitures of the Long John Silver's and A&W All American Food Restaurants brands.

(b)
See Note 4 for discussion of Refranchising gain (loss) for fiscal years 2014, 2013 and 2012. Fiscal year 2011 included a charge of $76 million as a result of our decision to refranchise or close all of our remaining Company-owned Pizza Hut UK dine-in restaurants. Fiscal year 2010 included a $52 million loss on the refranchising of our Mexico equity market.

(c)
In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this document, the Company has provided non-GAAP measurements which present operating results on a basis before Special Items.  

The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results.  This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of earnings before Special Items provides additional information to investors to facilitate the comparison of past and present results, excluding items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.  

2014, 2013 and 2012 Special Items are described in further detail within our Management's Discussion and Analysis of Financial Condition and Results of Operations. Special Items in 2011 negatively impacted Operating Profit by $187 million, primarily due to $86 million in losses and other costs relating to the Long John Silvers and A&W All American Food divestitures and $76 million in losses as a result of our decision to refranchise or close all of our remaining Company-owned Pizza Hut UK dine-in restaurants. Special Items in 2010 negatively impacted Operating Profit by $77 million, primarily due to $59 million in refranchising losses for equity markets outside the U.S. and U.S. refranchising net losses of $18 million. Special items above resulted in cumulative net tax benefits of $123 million and $7 million in 2011 and 2010, respectively.

(d)
System sales growth includes the results of all restaurants regardless of ownership, including company-owned, franchise, unconsolidated affiliate and license restaurants that operate our Concepts, except for non-company-owned restaurants for which we do not receive a sales-based royalty.  Sales of franchise, unconsolidated affiliate and license restaurants typically generate ongoing franchise and license fees for the Company (typically at a rate of 4% to 6% of sales).  Franchise, unconsolidated affiliate and license restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues.  We believe system sales growth is useful to investors as a significant indicator of 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 growth.  

(e)
Local currency represents the percentage change excluding the impact of foreign currency translation.  These amounts are derived by translating current year results at prior year average exchange rates.  We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

(f)
In the first quarter of 2014, we changed our management reporting structure to align our global operations outside of China and India. We have restated our comparable segment information back to 2010. Since 2009 was not restated, system sales growth in 2010 is not readily available.

(g)
Effective the beginning of 2014, results from our 28 Mauritius stores are included in KFC and Pizza Hut Divisions as applicable. While there was no impact to our consolidated results, this change negatively impacted India's 2014 reported and local currency system sales growth by 10% and 11%, respectively.

20




(h)
Fiscal years 2014, 2013, 2012 and 2010 include 52 weeks and fiscal year 2011 includes 53 weeks. Our fiscal calendar results in a 53rd week every five or six years. This impacts all of our U.S. businesses and certain of our international businesses that report on a period, as opposed to a monthly, basis within our global brand divisions. Our China and India Divisions report on a monthly basis and thus did not have a 53rd week in 2011.

The estimated impacts of the 53rd week on Company sales, Franchise and license fees and income and Operating Profit in 2011 were increases of $72 million, $19 million and $25 million, respectively. The $25 million Operating Profit benefit was offset throughout 2011 by investments, including franchise development incentives, as well as higher-than-normal spending, such as restaurant closures within our global brand divisions.

The selected financial data should be read in conjunction with the Consolidated Financial Statements.




21



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction and Overview

The following Management’s Discussion and Analysis (“MD&A”), should be read in conjunction with the Consolidated Financial Statements (“Financial Statements”) and the Forward-Looking Statements and the Risk Factors set forth in Item 1A.  

YUM! Brands, Inc. (“YUM” or the “Company”) operates, franchises or licenses a worldwide system of over 41,000 restaurants in more than 125 countries and territories operating primarily under the KFC, Pizza Hut or Taco Bell (collectively the "Concepts") brands. These three Concepts are the global leaders in the chicken, pizza and Mexican-style food categories, respectively.  Of the over 41,000 restaurants, 21% are operated by the Company and 79% are operated by franchisees, licensees or unconsolidated affiliates.

The Company is focused on the following key growth strategies:

Building Powerful Brands Through Superior Marketing, Breakthrough Innovation and Compelling Value with a Foundation Built on Winning Food and World Class Operations

Driving Aggressive Unit Expansion Everywhere, Especially in Emerging Markets, and Building Leading Brands in Every Significant Category in China and India

Creating Industry Leading Returns Through Franchising and Disciplined Use of Capital, Maximizing Long-term Shareholder Value

As of December 27, 2014, YUM consists of five operating segments:

YUM China (“China” or “China Division”) which includes all operations in mainland China
YUM India ("India" or "India Division") which includes all operations in India, Bangladesh, Nepal and Sri Lanka
The KFC Division which includes all operations of the KFC concept outside of China Division and India Division
The Pizza Hut Division which includes all operations of the Pizza Hut concept outside of China Division and India Division
The Taco Bell Division which includes all operations of the Taco Bell concept outside of India Division

Prior to 2014, our reporting segments consisted of Yum Restaurants International ("YRI"), the United States, China and India. In the first quarter of 2014 we changed our management reporting structure to align our global operations outside of China and India by brand. As a result, our YRI and United States reporting segments were combined, and we began reporting this information by three new reporting segments: KFC Division, Pizza Hut Division and Taco Bell Division. China and India remain separate reporting segments. This new structure is designed to drive greater global brand focus, enabling us to more effectively share know-how and accelerate growth. While our consolidated results have not been impacted, we have restated our comparable segment information for consistent presentation.

Our ongoing earnings growth model targets a 10% earnings per share ("EPS") growth rate, which is based on our ongoing Operating Profit growth targets of 15% in China, 10% for our KFC Division, 8% for our Pizza Hut Division and 6% for our Taco Bell Division. While we believe India is a significant long-term growth driver, our ongoing earnings growth model currently assumes no impact from India growth. See the Division discussions within the Results of Operations of this MD&A for further details of our Divisional growth models.

2015 EPS, prior to Special Items, is expected to grow at least 10%, consistent with our ongoing targeted growth rate. This includes an expected negative impact of approximately $75 million from foreign currency translation.

We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. Throughout this MD&A, we commonly discuss the following performance metrics:

The Company provides certain percentage changes excluding the impact of foreign currency translation (“FX” or “Forex”).  These amounts are derived by translating current year results at prior year average exchange rates.  We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.


22



System sales growth includes the results of all restaurants regardless of ownership, including company-owned, franchise, unconsolidated affiliate and license restaurants that operate our Concepts, except for non-company-owned restaurants for which we do not receive a sales-based royalty.  Sales of franchise, unconsolidated affiliate and license restaurants typically generate ongoing franchise and license fees for the Company (typically at a rate of 4% to 6% of sales).  Franchise, unconsolidated affiliate and license restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues.  We believe system sales growth is useful to investors as a significant indicator of 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 growth.

Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the YUM system one year or more. The impact of same-store sales growth on both our Company-owned store results and Franchise and license fees and income is described elsewhere in this MD&A.

Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales.  Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales. Within the Company Sales and Restaurant Profit analysis, Store Portfolio Actions represent the net impact of new unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in costs such as inflation/deflation.

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") throughout this MD&A, the Company provides non-GAAP measurements which present operating results on a basis before items that we have deemed Special. The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results.  This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of earnings before Special Items provides additional information to investors to facilitate the comparison of past and present operations, excluding those items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

All Note references herein refer to the Notes to the Financial Statements.  Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding.

Results of Operations

Summary

All comparisons within this summary are versus the same period a year ago and exclude the impact of Special Items.  All system sales growth and Operating Profit comparisons exclude the impact of foreign currency.

2014 diluted EPS increased by 4% to $3.09 per share as our China Division, which is our largest profit contributor, had its sales and profits significantly impacted by adverse publicity in July surrounding improper food handling practices by a former supplier.

Specifically, on July 20, 2014, an undercover report was televised in China depicting improper food handling practices by supplier Shanghai Husi, a division of OSI, which is a large, global supplier to many in the restaurant industry. This triggered extensive news coverage in China that shook consumer confidence and impacted brand usage. Subsequently, the Shanghai FDA (SFDA) launched an investigation into this matter, alleging illegal activity by OSI. Upon learning of these events we terminated our relationship with OSI globally with minimal disruption to our menu offerings in China. Even though OSI was a minor supplier, sales at KFC and Pizza Hut were disproportionately impacted given our category-leading positions. Since July 21st, China Division has experienced a significant, negative impact to sales and profits at both KFC and Pizza Hut.

Prior to that incident, YUM experienced a strong first half of the year with China Division Operating Profit increasing 113% and EPS increasing 27% through the first two quarters of 2014. At that point the Company believed it was well on its way to recovering from a 9% EPS decline in 2013, which was driven by declines in KFC China sales and profits due to intense media surrounding an investigation by the SFDA into our poultry supply management that began in December 2012, coupled with additional intense media in April 2013 surrounding Avian Flu in China.

As a result of two supplier incidents impacting KFC China sales in a relatively short period of time, the recovery at KFC China has been slower than expected with same-store sales declining 18% in the fourth quarter of 2014. Our Pizza Hut business in China, which was only impacted by the 2014 supplier incident, is recovering more quickly. China Division same-store sales and Operating Profit declined 5% and 8%, respectively, for the full year 2014.

23




Also during 2014:

KFC Division system sales and Operating Profit increased by 6% and 13%, respectively. Same store sales grew 3% and the Division opened 666 new international units.

Pizza Hut Division grew system sales by 1% and Operating Profit declined 13%. Same-store sales declined 1% and the Division opened 465 new international units.

Taco Bell Division system sales and Operating Profit increased by 4% and 5%, respectively. Same-store sales increased 3% and the Division opened 236 new units.

Foreign currency translation negatively impacted Operating Profit by $27 million.

Our effective tax rate decreased from 28.0% in 2013 to 25.5% in 2014.


24




Worldwide

The Consolidated Results of Operations for the years to date ended December 27, 2014, December 28, 2013 and December 29, 2012 are presented below:

 
Amount
 
% B/(W)
 
2014
 
2013
 
2012
 
2014
 
2013
Company sales
$
11,324

 
$
11,184

 
$
11,833


1

 
 
 
(5
)
 
 
Franchise and license fees and income
1,955

 
1,900

 
1,800


3

 
 
 
6

 
 
Total revenues
$
13,279

 
$
13,084

 
$
13,633


1

 
 
 
(4
)
 
 
Restaurant profit
$
1,642

 
$
1,683

 
$
1,981


(2
)
 
 
 
(15
)
 
 
Restaurant Margin %
14.5
%
 
15.0
%
 
16.7
%
 
(0.5
)
 
ppts.
 
(1.7
)
 
ppts.
Operating Profit
$
1,557

 
$
1,798

 
$
2,294


(13
)
 
 
 
(22
)
 
 
Interest expense, net
130

 
247

 
149


47

 
 
 
(66
)
 
 
Income tax provision
406

 
487

 
537


17

 
 
 
9

 
 
Net Income – including noncontrolling interests
1,021

 
1,064

 
1,608


(4
)
 
 
 
(34
)
 
 
Net Income (loss) – noncontrolling interests
(30
)
 
(27
)
 
11


(12
)
 
 
 
NM

 
 
Net Income – YUM! Brands, Inc.
$
1,051

 
$
1,091

 
$
1,597


(4
)
 
 
 
(32
)
 
 
Diluted EPS(a)
$
2.32

 
$
2.36

 
$
3.38


(2
)
 
 
 
(30
)
 
 
Diluted EPS before Special Items(a)
$
3.09

 
$
2.97

 
$
3.25


4

 
 
 
(9
)
 
 
Reported Effective tax rate
28.5%
 
31.4%
 
25.0%

 
 
 
 
 
 
 
Effective tax rate before Special Items
25.5%
 
28.0%
 
25.8%

 
 
 
 
 
 
 

(a)
See Note 3 for the number of shares used in these calculations.

 
2014
 
2013
 
 
 
 
 
 
System Sales Growth, reported
2
%
 
1
%
 
 
 
 
 
 
System Sales Growth, excluding FX
3
%
 
2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% Increase (Decrease)
Unit Count
2014
 
2013
 
2012
 
2014
 
2013
Franchise & License
32,125

 
31,420

 
30,733

 
2

 
2

Company-owned
8,664

 
8,097

 
7,544

 
7

 
7

Unconsolidated Affiliates
757

 
716

 
660

 
6

 
8

 
41,546

 
40,233

 
38,937

 
3

 
3




25



Special Items

Special Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
 
 
Year
 
Detail of Special Items
 
2014
 
2013
 
2012
Little Sheep impairment (See Note 4)
 
$
(463
)
 
$
(295
)
 
$

Gain upon acquisition of Little Sheep (See Note 4)
 

 

 
74

U.S. Refranchising gain (loss) (See Note 17)
 
6

 
91

 
$
122

Pension settlement charges (See Note 4)
 

 
(10
)
 
(84
)
Losses associated with the refranchising of the Pizza Hut UK dine-in business (See Note 4)
 

 
(1
)
 
(70
)
Other Special Items Income (Expense)(a)
 
10

 
(7
)
 
16

Special Items Income (Expense) - Operating Profit
 
(447
)
 
(222
)
 
58

Losses related to the extinguishment of debt - Interest Expense, net (See Note 4)
 

 
(118
)
 

Special Items Income (Expense) before income taxes
 
(447
)
 
(340
)
 
58

Tax Benefit (Expense) on Special Items(b)
 
72

 
41

 
1

Special Items Income (Expense), net of tax - including noncontrolling interests
 
(375
)
 
(299
)
 
59

Special Items Income (Expense), net of tax - noncontrolling interests
 
26

 
19

 

Special Items Income (Expense), net of tax - YUM! Brands, Inc.
 
$
(349
)
 
$
(280
)
 
$
59

Average diluted shares outstanding
 
453

 
461

 
473

Special Items diluted EPS
 
$
(0.77
)
 
$
(0.61
)
 
$
0.13

 
 
 
 
 
 
 
Reconciliation of Operating Profit Before Special Items to Reported Operating Profit
 
 
 
 
 
 
Operating Profit before Special Items
 
$
2,004

 
$
2,020

 
$
2,236

Special Items Income (Expense) - Operating Profit
 
(447
)
 
(222
)
 
58

Reported Operating Profit
 
$
1,557

 
$
1,798


$
2,294

 
 
 
 
 
 
 
Reconciliation of EPS Before Special Items to Reported EPS
 
 
 
 
 
 
Diluted EPS before Special Items
 
$
3.09

 
$
2.97


$
3.25

Special Items EPS
 
(0.77
)
 
(0.61
)
 
0.13

Reported EPS
 
$
2.32

 
$
2.36


$
3.38

 
 
 
 
 
 
 
Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate
 
 
 
 
 
 
Effective Tax Rate before Special Items
 
25.5
%
 
28.0
%
 
25.8
 %
Impact on Tax Rate as a result of Special Items(b)
 
3.0
%
 
3.4
%
 
(0.8
)%
Reported Effective Tax Rate
 
28.5
%
 
31.4
%

25.0
 %

(a)
Other Special Items Income (Expense) in 2014 primarily includes gains of $7 million from real estate sales related to our previously refranchised Mexico business. In connection with the refranchising of stores in the U.S., we have taken several measures to transform our U.S. business, including G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs). Other Special Items Income (Expense) in 2013 primarily includes charges relating to these U.S. G&A productivity initiatives and realignment of resources of $5 million as well as $2 million of costs recorded in G&A that were part of the $120 million charge related to the extinguishment of debt. Other Special Items Income (Expense) in 2012 primarily includes the depreciation reduction from the Pizza Hut UK and KFC U.S. restaurants impaired upon our decision or offer to refranchise that remained Company stores for some or all of the period presented of $13 million and $3 million, respectively, gains from real estate sales related to our previously refranchised Mexico business of $3 million and charges relating to U.S. G&A productivity initiatives and realignment of resources of $5 million.

26




(b)
The tax benefit (expense) was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.


China Division

The China Division has 6,715 units, predominately KFC and Pizza Hut Casual Dining restaurants which are the leading quick service and casual dining restaurant brands, respectively, in mainland China. Given our strong competitive position, a growing economy and a population of approximately 1.4 billion in mainland China, the Company is focused on rapidly adding KFC and Pizza Hut Casual Dining restaurants and accelerating the development of Pizza Hut Home Service (home delivery). Our ongoing earnings growth model in China includes low double-digit percentage unit growth, mid-single digit same-store sales growth and moderate margin improvement, which we expect to drive annual Operating Profit growth of 15%.

See the Results of Operations Summary above for discussion of items impacting China's 2014 performance.

 
 
 
 
 
 
 
 
% B/(W)
 
% B/(W)
 
 
 
 
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
2012
 
Reported
 
Ex FX
 
Reported
 
Ex FX
Company sales
 
$
6,821

 
$
6,800

 
$
6,797

 

 
 
1

 
 

 
 
(3
)
 
Franchise and license fees and income
 
113

 
105

 
101

 
7

 
 
7

 
 
4

 
 
2

 
Total revenues
 
$
6,934

 
$
6,905

 
$
6,898

 

 
 
1

 
 

 
 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
1,009

 
$
1,050

 
$
1,233

 
(4
)
 
 
(4
)
 
 
(15
)
 
 
(17
)
 
Restaurant margin %
 
14.8
%
 
15.4
%
 
18.1
%
 
(0.6
)
ppts.
 
(0.6
)
ppts.
 
(2.7
)
ppts.
 
(2.7
)
ppts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
391

 
$
357

 
$
334

 
(9
)
 
 
(9
)
 
 
(7
)
 
 
(5
)
 
Operating Profit
 
$
713

 
$
777

 
$
1,015

 
(8
)
 
 
(8
)
 
 
(23
)
 
 
(26
)
 
 
 
 
 
 
 
2014
 
2013
System Sales Growth, reported
 
 
 
 
 
1
 %
 
(1
)%
System Sales Growth, excluding FX
 
 
 
 
 
1
 %
 
(4
)%
Same-Store Sales Growth (Decline) %
 
 
 
 
 
(5
)%
 
(13
)%

 
 
 
 
 
 
 
 
% Increase (Decrease)
Unit Count
 
2014
 
2013
 
2012
 
2014
 
2013
Company-owned
 
5,417

 
5,026

 
4,547

 
8
 
 
11

Unconsolidated Affiliates
 
757

 
716

 
660

 
6
 
 
8

Franchise & License
 
541

 
501

 
519

 
8
 
 
(3
)
 
 
6,715

 
6,243

 
5,726

 
8
 
 
9


 
 
2013
 
New Builds
 
Closures
 
Refranchised
 
Acquired
 
2014
Company-owned
 
5,026

 
664

 
(195
)
 
(79
)
 
1

 
5,417

Unconsolidated Affiliates
 
716

 
56

 
(14
)
 
(1
)
 

 
757

Franchise & License
 
501

 
17

 
(56
)
 
80

 
(1
)
 
541

Total
 
6,243

 
737

 
(265
)
 

 

 
6,715



27



 
 
2012
 
New Builds
 
Closures
 
Refranchised
 
Acquired
 
2013
Company-owned
 
4,547

 
664

 
(158
)
 
(28
)
 
1

 
5,026

Unconsolidated Affiliates
 
660

 
66

 
(10
)
 

 

 
716

Franchise & License
 
519

 
10

 
(55
)
 
28

 
(1
)
 
501

Total
 
5,726

 
740

 
(223
)
 

 

 
6,243


Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
2014 vs. 2013
Income / (Expense)
2013
 
Store Portfolio Actions
 
Other
 
FX
 
2014
Company sales
$
6,800

 
$
358

 
$
(322
)
 
$
(15
)
 
$
6,821

Cost of sales
(2,258
)
 
(104
)
 
151

 
4

 
(2,207
)
Cost of labor
(1,360
)
 
(75
)
 
26

 
2

 
(1,407
)
Occupancy and other
(2,132
)
 
(124
)
 
52

 
6

 
(2,198
)
Restaurant profit
$
1,050

 
$
55

 
$
(93
)
 
$
(3
)
 
$
1,009

 
15.4
%
 
 
 
 
 
 
 
14.8
%
 
 
 
 
 
 
 
 
 
 
 
2013 vs. 2012
Income / (Expense)
2012
 
Store Portfolio Actions
 
Other
 
FX
 
2013
Company sales
$
6,797

 
$
611

 
$
(785
)
 
$
177

 
$
6,800

Cost of sales
(2,312
)
 
(190
)
 
303

 
(59
)
 
(2,258
)
Cost of labor
(1,259
)
 
(129
)
 
62

 
(34
)
 
(1,360
)
Occupancy and other
(1,993
)
 
(211
)
 
127

 
(55
)
 
(2,132
)
Restaurant profit
$
1,233

 
$
81

 
$
(293
)
 
$
29

 
$
1,050

 
18.1
%
 
 
 
 
 
 
 
15.4
%

In 2014, the increase in Company sales and Restaurant profit associated with store portfolio actions was driven by net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were wage rate inflation of 9% and same-store sales declines of 5% which led to inefficiencies in Cost of sales, partially offset by labor efficiencies and lower advertising expense. See the Summary at the beginning of this section for discussion of China sales.

In 2013, the increase in Company sales and Restaurant profit associated with store portfolio actions was driven by net new unit growth and the 2012 acquisition of Little Sheep. Significant other factors impacting Company sales and/or Restaurant profit were Company same-store sales declines of 12% and the impact of wage rate inflation of 7%, partially offset by restaurant operating efficiencies. See the Summary at the beginning of this section for discussion of China sales.

Franchise and License Fees and Income

In 2014, the increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by the impact of refranchising, partially offset by franchise same-store sales declines.

In 2013, the increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by refranchising and franchise net new unit development, partially offset by franchise same-store sales declines.

G&A Expenses

In 2014, the increase in G&A expenses, excluding the impact of foreign currency translation, was driven by compensation costs due to higher headcount and wage inflation.

28




In 2013, the increase in G&A expenses, excluding the impact of foreign currency translation, was driven by increased compensation costs due to higher headcount and wage inflation and additional G&A as a result of consolidating Little Sheep beginning in the second quarter of 2012, partially offset by lower incentive compensation costs.

Operating Profit

In 2014, the decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales declines, higher restaurant operating costs and higher G&A expenses, partially offset by net new unit growth and increased Other income due to an insurance recovery related to the 2012 poultry supply incident. See the Summary at the beginning of this section for discussion of China sales.

In 2013, the decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales declines at KFC, partially offset by the impact of net new unit growth and restaurant operating efficiencies. See the Summary at the beginning of this section for discussion of China sales.

KFC Division

The KFC Division has 14,197 units, approximately 70% of which are located outside the U.S. The KFC Division has experienced significant unit growth in emerging markets, which comprised approximately 40% of both the Division’s units and profits, respectively, as of the end of 2014. Additionally, 91% of the KFC Division units were operated by franchisees and licensees as of the end of 2014. Our ongoing earnings growth model for the KFC Division includes low-single-digit percentage net unit and same store sales growth. This combined with restaurant margin improvement and leverage of our G&A structure is expected to drive annual Operating Profit growth of 10%.

 
 
 
 
 
 
 
 
% B/(W)
 
% B/(W)
 
 
 
 
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
2012
 
Reported
 
Ex FX
 
Reported
 
Ex FX
Company sales
 
$
2,320

 
$
2,192

 
$
2,212

 
6

 
 
9

 
 
(1
)
 
 
1

 
Franchise and license fees and income
 
873

 
844

 
802

 
4

 
 
7

 
 
5

 
 
8

 
Total revenues
 
$
3,193

 
$
3,036

 
$
3,014

 
5

 
 
8

 
 
1

 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
308

 
$
277

 
$
298

 
12

 
 
14

 
 
(7
)
 
 
(5
)
 
Restaurant margin %
 
13.3
%
 
12.6
%
 
13.5
%
 
0.7

ppts.
 
0.7

ppts.
 
(0.9
)
ppts.
 
(0.9
)
ppts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
383

 
$
391

 
$
400

 
2

 
 

 
 
2

 
 
1

 
Operating Profit
 
$
708

 
$
649

 
$
626

 
9

 
 
13

 
 
4

 
 
7

 
 
 
 
 
 
 
2014
 
2013
System Sales Growth, reported
 
 
 
 
 
2
%
 
%
System Sales Growth, excluding FX
 
 
 
 
 
6
%
 
3
%
Same-Store Sales Growth %
 
 
 
 
 
3
%
 
1
%

 
 
 
 
 
 
 
 
% Increase (Decrease)
Unit Count
 
2014
 
2013
 
2012
 
2014
 
2013
Franchise & License
 
12,874

 
12,647

 
12,446

 
2
 
 
2

Company-owned
 
1,323

 
1,257

 
1,166

 
5
 
 
8

 
 
14,197

 
13,904

 
13,612

 
2
 
 
2



29



 
 
2013
 
New Builds
 
Closures
 
Refranchised
 
Acquired
 
Other
 
2014
Franchise & License
 
12,647

 
553

 
(356
)
 
39

 
(4
)
 
(5
)
 
12,874

Company-owned
 
1,257

 
123

 
(22
)
 
(39
)
 
4

 

 
1,323

Total
 
13,904

 
676

 
(378
)
 

 

 
(5
)
 
14,197


 
 
2012
 
New Builds
 
Closures
 
Refranchised
 
Acquired
 
Other
 
2013
Franchise & License
 
12,446

 
558

 
(353
)
 
58

 
(71
)
 
9

 
12,647

Company-owned
 
1,166

 
101

 
(23
)
 
(58
)
 
71

 

 
1,257

Total
 
13,612

 
659

 
(376
)
 

 

 
9

 
13,904


Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
2014 vs. 2013
Income / (Expense)
2013
 
Store Portfolio Actions
 
Other
 
FX
 
2014
Company sales
$
2,192

 
$
110

 
$
79

 
$
(61
)
 
$
2,320

Cost of sales
(766
)
 
(43
)
 
(26
)
 
26

 
(809
)
Cost of labor
(521
)
 
(25
)
 
(16
)
 
10

 
(552
)
Occupancy and other
(628
)
 
(38
)
 
(3
)
 
18

 
(651
)
Restaurant profit
$
277

 
$
4

 
$
34

 
$
(7
)
 
$
308

 
12.6
%
 
 
 
 
 
 
 
13.3
%
 
 
 
 
 
 
 
 
 
 
 
2013 vs. 2012
Income / (Expense)
2012
 
Store Portfolio Actions
 
Other
 
FX
 
2013
Company sales
$
2,212

 
$
(19
)
 
$
35

 
$
(36
)
 
$
2,192

Cost of sales
(766
)
 

 
(15
)
 
15

 
(766
)
Cost of labor
(541
)
 
14

 
(1
)
 
7

 
(521
)
Occupancy and other
(607
)
 
(9
)
 
(21
)
 
9

 
(628
)
Restaurant profit
$
298

 
$
(14
)
 
$
(2
)
 
$
(5
)
 
$
277

 
13.5
%
 
 
 
 
 
 
 
12.6
%

In 2014, the increase in Company sales associated with store portfolio actions was driven by international net new unit growth and the impact of the acquisition of restaurants in Turkey from an existing franchisee in April 2013, partially offset by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were Company same-store sales growth of 4%, which was partially offset by higher restaurant operating costs in international markets.

In 2013, the decrease in Company sales and Restaurant Profit associated with store portfolio actions was driven by refranchising in the U.S., partially offset by international net new unit growth and the impact of the acquisition of restaurants in Turkey from an existing franchisee in April 2013. Significant other factors impacting Company sales and/or Restaurant profit were higher restaurant operating costs in international markets and higher commodity costs, which was offset by Company same-store sales growth of 2%.

Franchise and License Fees and Income

In 2014, the increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by international growth in net new units and same-store sales growth.


30



In 2013, the increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by international growth in net new units and same-store sales growth as well as U.S. refranchising initiatives.

G&A Expenses

In 2014, G&A expenses, excluding the impact of foreign currency translation, were even with prior year as the impact of higher headcount in strategic international markets, higher incentive compensation costs and the impact of the acquisition of restaurants in Turkey from an existing franchisee in April 2013 was offset by lower pension costs in 2014 including the favorable resolution of a pension issue in the UK.

In 2013, the decrease in G&A expenses, excluding the impact of foreign currency translation, was driven by lower incentive compensation costs, lapping higher U.S. litigation costs, and our U.S. refranchising initiatives, partially offset by higher headcount in international strategic growth markets.

Operating Profit

In 2014, the increase in Operating Profit, excluding the impact of foreign currency translation, was driven by growth in same-store sales and net new units, partially offset by higher restaurant operating costs in international markets.

In 2013, the increase in Operating Profit, excluding the impact of foreign currency translation, was driven by growth in same-store sales and net new units, partially offset by higher restaurant operating costs in international markets.

Pizza Hut Division

The Pizza Hut Division has 13,602 units, approximately 60% of which are located in the U.S. The Pizza Hut Division operates as one brand that uses multiple distribution channels including delivery, dine-in and express (e.g. airports). Emerging markets comprised approximately 20% of both units and profits for the Division as of the end of 2014. Additionally, 94% of the Pizza Hut Division units were operated by franchisees and licensees as of the end of 2014. Our ongoing earnings growth model for the Pizza Hut Division includes 3 - 4 percentage points of net unit growth and low-single-digit same-store sales growth. This combined with restaurant margin improvement and leverage of our G&A structure is expected to drive annual Operating Profit growth of 8%.

 
 
 
 
 
 
 
 
% B/(W)
 
% B/(W)
 
 
 
 
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
2012
 
Reported
 
Ex FX
 
Reported
 
Ex FX
Company sales
 
$
607

 
$
609

 
$
993

 

 
 
(1
)
 
 
(39
)
 
 
(39
)
 
Franchise and license fees and income
 
541

 
538

 
517

 
1

 
 
2

 
 
4

 
 
5

 
Total revenues
 
$
1,148

 
$
1,147

 
$
1,510

 

 
 
1

 
 
(24
)
 
 
(24
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
50

 
$
71

 
$
110

 
(30
)
 
 
(32
)
 
 
(36
)
 
 
(36
)
 
Restaurant margin %
 
8.2
%
 
11.7
%
 
11.2
%
 
(3.5
)
ppts.
 
(3.7
)
ppts.
 
0.5

ppts.
 
0.4

ppts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
246

 
$
224

 
$
258

 
(10
)
 
 
(11
)
 
 
13

 
 
13

 
Operating Profit
 
$
295

 
$
339

 
$
320

 
(13
)
 
 
(13
)
 
 
6

 
 
7

 
 
 
 
 
 
 
2014
 
2013
System Sales Growth, reported
 
 
 
 
 
 %
 
 %
System Sales Growth, excluding FX
 
 
 
 
 
1
 %
 
1
 %
Same-Store Sales Growth (Decline) %
 
 
 
 
 
(1
)%
 
(1
)%


31