What drove the increase in earnings per share in 2003?

Net income rose to $617 million from $583 million, and diluted EPS rose to $2.02 from $1.88. Revenue growth came from new unit development and the full-year effect of the May 2002 YGR acquisition, while the lower effective tax rate of 30.2% also contributed. The filing notes the tax benefit from amended returns is non-recurring.

Why did restaurant margins decline in 2003?

Company restaurant margin fell to 14.8% of Company sales from 16.0%. In the U.S., the decline reflected higher occupancy costs, including additional rent from the amended YGR sale-leaseback agreements, higher utilities, unfavorable discounting and product mix affecting food and paper costs, and higher labor costs driven by wage rates. International margin fell about 50 basis points, largely due to same store sales declines.

What litigation and contingent items could affect future results?

The Wrench litigation resulted in a $42 million charge in 2003 after a jury award of $30 million and a subsequent judgment amendment. The company has appealed to the Sixth Circuit and continues to believe the claims are without merit, with post-judgment interest accruing during the appeal. The company also has lease guarantees with a present value of $326 million, and it indemnifies PepsiCo for certain contingent liabilities.

What are the company's expectations for 2004?

The company estimates 2004 capital spending of about $770 million and refranchising proceeds of about $100 million. Company sales are expected to increase by about $165 million because of the Canada unconsolidated affiliate dissolution, while franchise fees are expected to decrease by about $10 million. Pension expense is expected to rise by about $14 million to $54 million, and avian flu could reduce 2004 diluted EPS by up to $0.02 if China sales fell 20% through March 2004.

How is the company's balance sheet and liquidity position?

Total assets were $5.62 billion and total shareholders' equity was $1.12 billion at December 27, 2003, up from $594 million a year earlier. Total debt was $2.07 billion, and long-term debt was $2.06 billion. The unused Credit Facility totaled $737 million after $263 million of letters of credit, and the company was in compliance with all covenants. A new $300 million share repurchase program was authorized in November 2003, with $294 million remaining at year-end.

YUM 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 2004. Cited figures are marked; the original filing is the authoritative source.

YUM!

Brands, Inc. (filed as YUM! Brands, Inc., formerly TRICON Global Restaurants, Inc.) reported fiscal 2003 (ended December 27, 2003) net income of $617 million^a, or $2.02 diluted earnings per share, versus $583 million and $1.88 in 2002. Total revenues rose to $8.38 billion from $7.76 billion, driven by Company sales of $7.44 billion and franchise and license fees of $939 million.

Operating profit was $1.06 billion^b, including a $42 million Wrench litigation charge. The company operated 33,199 system units worldwide, of which about 24% were Company-operated, and system sales grew 7% (3% excluding currency translation and the YGR acquisition). Company restaurant margin declined to 14.8% of Company sales from 16.0% in 2002, with U.S. margin falling to 14.6%.

Cash flow from operations was $1.05 billion^c, compared with $1.09 billion in 2002, reflecting $130 million of voluntary pension contributions. Capital spending was $663 million, and the company repurchased $278 million of common stock. Total debt was $2.07 billion at year-end, and the $1.0 billion revolving Credit Facility had no borrowings outstanding.

The company did not pay common stock dividends in the past. The 2003 effective tax rate fell to 30.2%^d from 32.1%, aided by a 4.1-point benefit from amended prior-year U.S. returns that management describes as non-recurring.

Management highlighted several 2004 items: an expected increase of about $165 million in Company sales and a decrease of about $10 million in franchise fees from the Canada unconsolidated affiliate dissolution, a pension expense increase of about $14 million to $54 million, and a potential avian flu impact of up to $0.02 of diluted EPS if China sales declined 20% through March 2004. The company also disclosed a Wrench litigation judgment that it has appealed, and it expects capital spending of about $770 million in 2004.

02—Key points

Key Highlights

Diluted EPS of $2.02 in 2003, up from $1.88 in 2002; net income of $617 million versus $583 million.
Total revenues of $8.38 billion, up from $7.76 billion, with Company sales of $7.44 billion and franchise and license fees of $939 million.
Company restaurant margin fell to 14.8% of Company sales from 16.0%, with U.S. margin at 14.6% and International at 15.5%.
Operating profit of $1.06 billion includes a $42 million Wrench litigation charge and $26 million of AmeriServe and other credits.
Worldwide system of 33,199 units; system sales grew 7% in 2003, or 3% excluding currency translation and the YGR acquisition.
Operating cash flow of $1.05 billion funded $663 million of capital spending and $278 million of share repurchases; no borrowings were outstanding under the $1.0 billion Credit Facility at year-end.
Effective tax rate declined to 30.2% from 32.1%, aided by a non-recurring 4.1-point benefit from amended prior-year U.S. tax returns.

03—Questions

Frequently Asked Questions

What drove the increase in earnings per share in 2003?
Net income rose to $617 million from $583 million, and diluted EPS rose to $2.02 from $1.88. Revenue growth came from new unit development and the full-year effect of the May 2002 YGR acquisition, while the lower effective tax rate of 30.2% also contributed. The filing notes the tax benefit from amended returns is non-recurring.
Why did restaurant margins decline in 2003?
Company restaurant margin fell to 14.8% of Company sales from 16.0%. In the U.S., the decline reflected higher occupancy costs, including additional rent from the amended YGR sale-leaseback agreements, higher utilities, unfavorable discounting and product mix affecting food and paper costs, and higher labor costs driven by wage rates. International margin fell about 50 basis points, largely due to same store sales declines.
What litigation and contingent items could affect future results?
The Wrench litigation resulted in a $42 million charge in 2003 after a jury award of $30 million and a subsequent judgment amendment. The company has appealed to the Sixth Circuit and continues to believe the claims are without merit, with post-judgment interest accruing during the appeal. The company also has lease guarantees with a present value of $326 million, and it indemnifies PepsiCo for certain contingent liabilities.
What are the company's expectations for 2004?
The company estimates 2004 capital spending of about $770 million and refranchising proceeds of about $100 million. Company sales are expected to increase by about $165 million because of the Canada unconsolidated affiliate dissolution, while franchise fees are expected to decrease by about $10 million. Pension expense is expected to rise by about $14 million to $54 million, and avian flu could reduce 2004 diluted EPS by up to $0.02 if China sales fell 20% through March 2004.
How is the company's balance sheet and liquidity position?
Total assets were $5.62 billion and total shareholders' equity was $1.12 billion at December 27, 2003, up from $594 million a year earlier. Total debt was $2.07 billion, and long-term debt was $2.06 billion. The unused Credit Facility totaled $737 million after $263 million of letters of credit, and the company was in compliance with all covenants. A new $300 million share repurchase program was authorized in November 2003, with $294 million remaining at year-end.

04—Continue

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