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Items Affecting Comparability of Net Income and Cash Flows | 12 Months Ended
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Dec. 29, 2012
Items Affecting Comparability Of Net Income And Cash Flows Disclosure [Abstract] |
Items Affecting Comparability of Net Income and Cash Flows | Items Affecting Comparability of Net Income and Cash Flows U.S. Business Transformation As part of our plan to transform our U.S. business we took several measures in 2012, 2011 and 2010 ("the U.S. business transformation measures"). These measures included: continuation of our U.S. refranchising; General and Administrative ("G&A") productivity initiatives and realignment of resources (primarily severance and early retirement costs). For information on our U.S. refranchising, see the Refranchising (Gain) Loss section on pages 67 and 68. In connection with our G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs), we recorded pre-tax charges of $5 million, $21 million and $9 million in the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively. The unpaid current liability for the severance portion of these charges was $5 million and $18 million as of December 29, 2012 and December 31, 2011, respectively. Severance payments in the years ended December 29, 2012, December 31, 2011 and December 25, 2010 totaled approximately $14 million, $4 million and $7 million respectively. We are not including the impacts of these U.S. business transformation measures in our U.S. segment for performance reporting purposes as we do not believe they are indicative of our ongoing operations. Additionally, we did not include the depreciation reduction of $3 million, $10 million and $9 million for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively, arising from the impairment of the KFCs offered for sale in the year ended December 25, 2010 within our U.S. segment for performance reporting purposes. Rather, we recorded such reduction as a credit within unallocated Occupancy and other operating expenses resulting in depreciation expense for the impaired restaurants we continued to own being recorded in the U.S. segment at the rate at which it was prior to the impairment charge being recorded. YUM Retirement Plan Settlement Charge During the fourth quarter of 2012, the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan ("the Plan") an opportunity to voluntarily elect an early payout of their pension benefits. We paid out $227 million, all of which was funded from existing pension plan assets. As a result of settlement payments exceeding the sum of service and interest costs within the Plan, pursuant to our policy, we recorded a pre-tax settlement charge of $84 million in General and administrative expenses in the fourth quarter of 2012 which was not allocated for segment reporting purposes. See Note 14 for further discussion of our pension plans. LJS and A&W Divestitures In 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders and strategic investors in separate transactions. We recognized $86 million of pre-tax losses and other costs primarily in Closures and impairment (income) expenses during 2011 as a result of these transactions. Additionally, we recognized $104 million of tax benefits related to tax losses associated with the transactions. We are not including the pre-tax losses and other costs in our U.S. and YRI segments for performance reporting purposes as we do not believe they are indicative of our ongoing operations. In 2012, System sales and Franchise and license fees and income in the U.S. were negatively impacted by 5% and 6%, respectively, due to these divestitures while YRI's system sales and Franchise and license fees and income were both negatively impacted by 1%. While these divestitures negatively impacted both the U.S. and YRI segments' Operating Profit by 1% in 2012, the impact on our consolidated Operating Profit was not significant. Little Sheep Acquisition On February 1, 2012 we acquired an additional 66% interest in Little Sheep Group Limited (“Little Sheep”) for $540 million, net of cash acquired of $44 million, increasing our ownership to 93%. The acquisition was driven by our strategy to build leading brands across China in every significant category. Prior to our acquisition of this additional interest, our 27% interest in Little Sheep was accounted for under the equity method of accounting. As a result of the acquisition we obtained voting control of Little Sheep, and thus we began consolidating Little Sheep upon acquisition. As required by GAAP, we remeasured our previously held 27% ownership in Little Sheep, which had a recorded value of $107 million at the date of acquisition, at fair value based on Little Sheep's traded share price immediately prior to our offer to purchase the business and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Consolidated Statement of Income and was not allocated to any segment for performance reporting purposes. We recorded the following assets acquired and liabilities assumed upon acquisition of Little Sheep as a result of our purchase price allocation:
| Current assets, including cash of $44 | $ | 109 |
| Property, plant and equipment |  | 64 |
| Goodwill |  | 376 |
| Intangible assets, including indefinite-lived trademark of $404 |  | 421 |
| Other assets |  | 35 |
| Total assets acquired |  | 1,005 |
| Deferred taxes |  | 105 |
| Other liabilities |  | 60 |
| Total liabilities assumed |  | 165 |
| Redeemable noncontrolling interest |  | 59 |
| Other noncontrolling interests |  | 16 |
| Net assets acquired | $ | 765 |
The fair values of intangible assets were determined using an income approach based on expected cash flows. The goodwill recorded resulted from the value expected to be generated from applying YUM's processes and knowledge in China, including YUM's development capabilities, to the Little Sheep business. The goodwill is not expected to be deductible for income tax purposes and has been allocated to the China operating segment. As part of the acquisition, YUM granted an option to the shareholder that holds the remaining 7% ownership interest in Little Sheep that would require us to purchase their remaining shares owned upon exercise, which may occur any time after the third anniversary of the acquisition. This noncontrolling interest has been recorded as a Redeemable noncontrolling interest in the Consolidated Balance Sheet. The Redeemable noncontrolling interest is reported at its fair value of $59 million at the date of acquisition, which is based on the Little Sheep traded share price immediately subsequent to our offer to purchase the additional interest. Under the equity method of accounting, we previously reported our 27% share of the net income of Little Sheep as Other (income) expense in the Consolidated Statements of Income. From the date of the acquisition, we have reported the results of operations for the entity in the appropriate line items of our Consolidated Statement of Income. We no longer report Other (income) expense as we did under the equity method of accounting. Net income attributable to our partner's ownership percentage is recorded as Net Income - noncontrolling interest. Little Sheep reports on a one month lag, and as a result, their consolidated results are included in the China Division from the beginning of the quarter ended June 16, 2012. In 2012, the consolidation of Little Sheep increased China Division revenues by 4% and did not have a significant impact on China Division Operating Profit.. The pro forma impact on our results of operations if the acquisition had been completed as of the beginning of 2011 would not have been significant. YRI Acquisitions In 2011, YRI acquired 68 KFC restaurants from an existing franchisee in South Africa for $71 million. In 2010, we completed the exercise of our option with our Russian partner to purchase their interest in the co-branded Rostik’s-KFC restaurants across Russia and the Commonwealth of Independent States. As a result, we acquired company ownership of 50 restaurants and gained full rights and responsibilities as franchisor of 81 restaurants, which our partner previously managed as master franchisee. We paid cash of $60 million, net of settlement of a long-term note receivable of $11 million, and assumed long-term debt of $10 million which was subsequently repaid. Of the remaining balance of the purchase price of $12 million, a payment of $9 million was made in July 2012 and the remainder is expected to be paid in cash during 2013. The impact of consolidating these businesses on all line-items within our Consolidated Statement of Income was insignificant to the comparison of our year-over-year results. Refranchising (Gain) Loss The Refranchising (gain) loss by reportable segment is presented below. We do not allocate such gains and losses to our segments for performance reporting purposes.
|  | Refranchising (gain) loss |  |  |  |  |
|  | 2012 |  | 2011 |  | 2010 |  |  |  |  |
China |  | $ | (17 | ) |  | $ | (14 | ) |  | $ | (8 | ) |  |  |  |  |
YRI (a)(b)(c) |  | 61 |  |  | 69 |  |  | 53 |  |  |  |  |  |
U.S. (d) |  | (122 | ) |  | 17 |  |  | 18 |  |  |  |  |  |
India |  | — |  |  | — |  |  | — |  |  |  |  |  |
Worldwide |  | $ | (78 | ) |  | $ | 72 |  |  | $ | 63 |  |  |  |  |  |
(a) | During the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom. The newly signed franchise agreement for these stores allows the franchisee to pay continuing franchise fees in the initial years of the agreement at a reduced rate. We agreed to allow the franchisee to pay these reduced fees in part as consideration for their assumption of lease liabilities related to underperforming stores that we anticipate they will close that were part of the refranchising. We recognize the estimated value of terms in franchise agreements entered into concurrently with a refranchising transaction that are not consistent with market terms as part of the upfront refranchising gain (loss). Accordingly, upon the closing of this refranchising we recognized a loss of $53 million representing the estimated value of these reduced continuing fees. The associated deferred credit is recorded within Other liabilities and deferred credits in our Consolidated Balance Sheet as of December 29, 2012 and will be amortized into YRI's Franchise and license fees and income over the next 4 years, including $16 million in 2013. This upfront loss largely contributed to a $70 million Refranchising loss we recognized during 2012 as a result of this refranchising. Also included in that loss was the write-off of $14 million in goodwill allocated to the Pizza Hut UK reporting unit. The remaining carrying value of goodwill allocated to our Pizza Hut UK business of $87 million, after the aforementioned write-off, was determined not to be impaired as the fair value of the Pizza Hut UK reporting unit exceeded its carrying amount. An income tax benefit of $9 million was recorded in 2012 as a result of this $70 million refranchising loss.
During 2011, we recorded a $76 million charge in Refranchising gain (loss) as a result of our decision to refranchise or close all of our remaining company-owned Pizza Hut UK dine-in restaurants, primarily to write down these restaurants' long-lived assets to their then estimated fair value. Impairment charges of Pizza Hut UK long-lived assets incurred as a result of this decision, including the charge mentioned in the previous sentence, reduced depreciation expense versus what would have otherwise been recorded by $13 million and $3 million for the years ended December 29, 2012 and December 31, 2011, respectively.
(b) | In the year ended December 25, 2010 we recorded a $52 million loss on the refranchising of our Mexico equity market as we sold all of our Company-owned restaurants, comprised of 222 KFCs and 123 Pizza Huts, to an existing Latin American franchise partner. The buyer is serving as the master franchisee for Mexico which had 102 KFC and 53 Pizza Hut franchise restaurants at the time of the transaction. The write-off of goodwill included in this loss was minimal as our Mexico reporting unit included an insignificant amount of goodwill. This loss did not result in any related income tax benefit.
(c) | During the year ended December 25, 2010 we refranchised all of our remaining company restaurants in Taiwan, which consisted of 124 KFCs. We included in our December 25, 2010 financial statements a write-off of $7 million of goodwill in determining the loss on refranchising of Taiwan. This loss did not result in a related income tax benefit. The remaining carrying value of goodwill related to our Taiwan business of $30 million, after the aforementioned write-off, was determined not to be impaired as the fair value of the Taiwan reporting unit exceeded its carrying amount.
(d) | U.S. Refranchising (gain) loss in the year ended December 29, 2012 is primarily due to gains on sales of Taco Bells. U.S. Refranchising (gain) loss in the years ended December 31, 2011 and December 25, 2010 is primarily due to losses on sales of and offers to refranchise KFCs in the U.S. The non-cash impairment charges that were recorded related to our offers to refranchise these company-operated KFC restaurants in the U.S. decreased depreciation expense versus what would have otherwise been recorded by $3 million, $10 million and $9 million in the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively. These depreciation reductions were not allocated to the U.S. segment resulting in depreciation expense in the U.S. segment results continuing to be recorded at the rate at which it was prior to the impairment charges being recorded for these restaurants.
See Note 2 for our policy for writing off goodwill in a refranchising transaction. Store Closure and Impairment Activity Store closure (income) costs and Store impairment charges by reportable segment are presented below. These tables exclude $80 million of net losses recorded in 2011 related to the LJS and A&W divestitures. This amount was not allocated to any segment for performance reporting purposes:
|  | 2012
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | (4 | ) |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 8 |
Store impairment charges |  | 13 |  |  | 7 |  |  | 9 |  |  | — |  |  | 29 |
Closure and impairment (income) expenses |  | $ | 9 |  |  | $ | 19 |  |  | $ | 9 |  |  | $ | — |  |  | $ | 37 |
|  | 2011
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | (1 | ) |  | $ | 4 |  |  | $ | 4 |  |  | $ | — |  |  | $ | 7 |
Store impairment charges |  | 13 |  |  | 18 |  |  | 17 |  |  | — |  |  | 48 |
Closure and impairment (income) expenses |  | $ | 12 |  |  | $ | 22 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 55 |
|  | 2010
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | — |  |  | $ | 2 |  |  | $ | 3 |  |  | $ | — |  |  | $ | 5 |
Store impairment charges |  | 16 |  |  | 12 |  |  | 14 |  |  | — |  |  | 42 |
Closure and impairment (income) expenses |  | $ | 16 |  |  | $ | 14 |  |  | $ | 17 |  |  | $ | — |  |  | $ | 47 |
(a) | Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company restaurant that was closed, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves and other facility-related expenses from previously closed stores.
The following table summarizes the 2012 and 2011 activity related to reserves for remaining lease obligations for closed stores.
|  | Beginning Balance |  | Amounts Used |  | New Decisions |  | Estimate/Decision Changes |  | CTA/ Other |  | Ending Balance
2012 Activity |  | $ | 34 |  |  | (14 | ) |  | 3 |  |  | 3 |  |  | 1 |  |  | $ | 27 |
2011 Activity |  | $ | 28 |  |  | (12 | ) |  | 17 |  |  | 2 |  |  | (1 | ) |  | $ | 34 |

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