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Yum! Brands Inc. Raises Full Year 2010 EPS Growth Forecast to 14% from 12%; Reports Third Quarter 2010 EPS of $0.73, Excluding Special Items; Operating Profit Increased 14% Led by Strong Growth in China

LOUISVILLE, Ky., Oct 05, 2010 (BUSINESS WIRE) -- Yum! Brands Inc. (NYSE: YUM) today reported results for the third quarter ended September 4, 2010, including EPS growth of 5%, prior to special items.

THIRD-QUARTER HIGHLIGHTS

  • Worldwide operating profit grew 14% prior to foreign currency translation, including +23% in China, +16% in Yum Restaurants International ("YRI"), and a decline of 2% in the U.S.
  • Worldwide system sales growth prior to foreign currency translation of 5%, including +18% in China, +5% in YRI, and +1% in the U.S.
  • Same-store-sales growth in each division including +6% in China, +1% in YRI, and +1% in the U.S.
  • Worldwide restaurant margin improvement of 1.6 percentage points including increases in China, YRI, and the U.S.
  • Significantly higher tax rate of 27.4% versus 19.9% in the third quarter of 2009.
  • Announced a 19% increase in the Company's quarterly dividend. The quarterly cash dividend will increase from $0.21 to $0.25 per share.
  • Issued a 10-year, $350 million bond at 3.875%, which is the lowest coupon ever for a BBB- corporate name.

Third Quarter

Year-to-Date

2010 2009 % Change 2010 2009 % Change
EPS Excluding Special Items $0.73 $0.70 5% $1.90 $1.67 14%
Special Items Gain/(Loss)1 $0.01 ($0.01) NM ($0.08) $0.10 NM
EPS $0.74 $0.69 7% $1.82 $1.77 3%

1 See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of the Special Items.

Note: All comparisons are versus the same period a year ago and exclude Special Items unless noted.

FULL YEAR OUTLOOK

The Company raised its full-year 2010 EPS forecast from $2.43 to $2.48 per share, or from 12% to 14% growth prior to special items, based on strong year-to-date operating profit performance.

David C. Novak, Chairman and CEO said, "I'm pleased to report we are raising our full year EPS growth forecast to 14%, which will make 2010 the 9th consecutive year we meet or exceed our annual target of at least 10%. We take satisfaction that our year-to-date operating profit has increased 15%, excluding special items and the impact of foreign currency translation, and is driving our strong EPS growth this year. A key driver of our overall growth continues to be new unit development in China and Yum! Restaurants International. We expect to open about 1,400 international new units this year. This new unit growth positions us well for another successful year in 2011.

"We continue to make progress at all three divisions and are especially pleased with the continued strong results from our China business. The combination of high return new unit development, same-store-sales growth, and increasing margins drove operating profit growth of 23% in China for the quarter, excluding the impact of foreign currency translation. At Yum! Restaurants International, we increased system sales by 5% and grew operating profit 16%, prior to foreign currency translation benefit. Our U.S. business modestly improved same-store-sales growth and margin but operating profit declined slightly. We expect sales momentum to continue in the fourth quarter.

"Overall, we are encouraged with our strong performance. We continue to drive aggressive, international expansion while maintaining our industry-leading return on invested capital. Our intent is to continue to build shareholder value and return cash to shareholders through dividends and share repurchases."

CHINA DIVISION

Third Quarter

Year-to-Date

% Change % Change
2010 2009 Reported Ex F/X 2010 2009 Reported Ex F/X
System Sales Growth +19 +18 +16 +16
Same-Store-Sales Growth +6 Even NM NM +5 (1) NM NM
Restaurant Margin (%) 25.2 24.3 0.9 0.9 24.0 22.4 1.6 1.6
Operating Profit ($MM) 267 216 +24 +23 582 449 +30 +29

  • China Division system sales growth of 18%, prior to the benefit of foreign currency translation, was driven by new unit development of 12% and same-store-sales growth of 6%.
    • China opened 90 new restaurants in the third quarter and 245 year-to-date, further strengthening the company's leadership position.
China Units Q3 2010 % Change
Traditional Restaurants 3,664 +12
KFC 3,054 +12
Pizza Hut Casual Dining 479 +8
Pizza Hut Home Service 106 +22

  • Restaurant margin increased 0.9 percentage points driven primarily by strong same-store-sales growth and commodity deflation, offsetting labor inflation. While we continue to expect full year margin improvement, labor and commodity inflation will negatively impact margins in the fourth quarter.
  • Operating profit benefited about $10 million in the quarter from our brands' participation in the World Expo in Shanghai. This benefit will not occur in 2011.
  • China Division includes solely the results of our operations in mainland China.

YUM! RESTAURANTS INTERNATIONAL (YRI) DIVISION

Third Quarter

Year-to-Date

% Change % Change
2010 2009 Reported Ex F/X 2010 2009 Reported Ex F/X
Traditional Restaurants 14,001 13,486 +4 NA 14,001 13,486 +4 NA
System Sales Growth +7 +5 +10 +3
Franchise & License Fees 171 157 +8 +6 499 445 +12 +4
Operating Profit ($MM) 142 120 +18 +16 405 346 +17 +8
Operating Margin (%) 20.1 16.4 3.7 2.9 19.3 17.2 2.1 1.7

  • YRI system sales grew 5% prior to the benefit of foreign currency, driven primarily by new unit development and same-store-sales growth of 1%. Our emerging markets led the way with 9% system sales growth while developed markets grew 3%.
  • We opened 194 new units, with the majority across 34 emerging markets.
  • Restaurant margins increased 1.6 percentage points to 12.5% driven primarily by the impact of refranchising.
  • Operating profit grew 16% prior to foreign currency translation, primarily driven by new unit development. Additionally, general & administrative and franchise & license expenses were lower than last year.
  • Foreign currency translation positively impacted operating profit by $3 million in the third quarter and $31 million year-to-date.
Key YRI Markets System-Sales Growth
Ex F/X (%)
Third Quarter Year-to-Date
Franchise Only Markets
Asia (ex Mainland China) +8 +4
Continental Europe1 +3 (3)
Middle East +9 +9
Latin America +8 +7
Company/Franchise Markets
Australia +2 Even
UK Even +2

New Growth Markets
(France, Russia, and India)

+21 +16

1 Continental Europe year-to-date system sales growth was negatively impacted by a 99 unit franchisee in Spain exiting the Pizza Hut system in the third quarter of 2009 (equivalent to 7 percentage points based on units).

U.S. DIVISION

Third Quarter

Year-to-Date

2010 2009 % Change 2010 2009 % Change
Same-Store-Sales Growth (%) +1 (6) NM Even (3) NM
Restaurant Margin (%) 14.4 14.1 +0.3 14.3 14.0 +0.3
Operating Profit ($MM) 168 171 (2) 495 497 -
Operating Margin (%) 17.4 16.2 +1.2 17.1 15.5 +1.6

  • Same-store-sales increased 1% driven by growth of 8% at Pizza Hut and 3% at Taco Bell, offset by a decline of 8% at KFC.
  • Restaurant margin increased 0.3 percentage points primarily due to refranchising.
  • Operating profit decreased $3 million primarily due to the timing of employee costs and legal expenses.

REFRANCHISING UPDATE

U.S. DIVISION

  • We continue to pursue the refranchising of a substantial portion of our U.S. businesses, principally Pizza Hut and KFC. Year-to-date we have sold 98 restaurants. Since the inception of our refranchising program in late 2007, we have sold over 1,300 units across all the brands. We continue to expect to complete our U.S. refranchising efforts during 2011.

YRI DIVISION

  • Subsequent to the end of our third quarter we agreed to refranchise all of our company owned restaurants in Mexico, which includes 224 KFCs and 123 Pizza Huts. The buyer is an existing Latin American franchise partner, who will also serve as the master franchisor for the Mexico market. We expect the transaction to close by the end of October. In the fourth quarter we anticipate recording a pre-tax refranchising loss of approximately $50 million in special items as a result of this transaction.

REMINDER - DIVISION REPORTING REALIGNMENT

Beginning in the first quarter of 2010, Thailand and KFC Taiwan, previously part of China Division, are being reported as part of YRI. The China Division includes solely the results of our mainland China business. While our consolidated results are not impacted, our historical segment financial information for YRI and China Division has been restated for 2009 for consistent presentation.

CONFERENCE CALL

Yum! Brands Inc. will host a conference call to review the company's financial performance and strategies at 9:15 a.m. ET Wednesday, October 6, 2010. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers.

The call will be available for playback beginning at noon Eastern Time Wednesday, October 6, through midnight Wednesday, October 20, 2010. To access the playback, dial 800/642-1687 in the United States and 706/645-9291 internationally. The playback pass code is 14416434.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands' Web site, www.yum.com/investors and selecting "Q3 2010 Earnings Conference Call" under "Investors: Presentations." A podcast will be available within 24 hours.

ADDITIONAL INFORMATION ONLINE

Third quarter end dates for each division, restaurant-count details, and definitions of terms including Key Markets are available online at http://www.yum.com under "Investors".

This announcement, any related announcements and the related webcast may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected. Factors that can cause our actual results to differ materially include, but are not limited to: food borne-illness or food safety issues; economic and political conditions in the countries where we operate; currency exchange and interest rates; commodity, labor and other operating costs; our ability to secure and maintain distribution and adequate supply to our restaurants; the effectiveness of our operating initiatives and marketing; the success of our strategies for refranchising and international development; the continued viability and success of our franchise and license operators; publicity that may impact our business and/or industry; pending or future legal claims; the impact of any widespread illness; our effective tax rates; our actuarially determined casualty loss estimates; government regulations; accounting policies and practices; and competition, consumer preferences or perceptions. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We are not undertaking to update any of these statements.

Yum! Brands, Inc., based in Louisville, Kentucky, is the world's largest restaurant company in terms of system restaurants, with more than 37,000 restaurants in over 110 countries and territories. The company is ranked #216 on the Fortune 500 List, with revenues of nearly $11 billion in 2009. Four of the company's restaurant brands - KFC, Pizza Hut, Taco Bell and Long John Silver's - are the global leaders of the chicken, pizza, Mexican-style food and quick-service seafood categories, respectively. Outside the United States in 2009, the Yum! Brands system opened more than four new restaurants each day of the year, making it a leader in international retail development.

YUM! Brands, Inc.

Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

Quarter % Change Year to Date % Change
9/4/10 9/5/09 B/(W) 9/4/10 9/5/09 B/(W)
Company sales $ 2,496 $ 2,432 3 $ 6,712 $ 6,502 3
Franchise and license fees and income 366 346 5 1,069 969 10
Total revenues 2,862 2,778 3 7,781 7,471 4
Company restaurants
Food and paper 788 777 (2) 2,112 2,081 (1)
Payroll and employee benefits 516 523 1 1,480 1,485 --
Occupancy and other operating expenses 713 707 (1) 1,935 1,879 (3)
Company restaurant expenses 2,017 2,007 (1) 5,527 5,445 (2)
General and administrative expenses 285 276 (3) 813 812 --
Franchise and license expenses 24 29 18 71 74 4
Closures and impairment (income) expenses 5 5 (12) 21 31 32
Refranchising (gain) loss (2 ) 4 NM 51 (9 ) NM
Other (income) expense (11 ) (13 ) (12) (31 ) (97 ) (68)
Total costs and expenses, net 2,318 2,308 -- 6,452 6,256

(3)

Operating Profit 544 470 16 1,329 1,215 9
Interest expense, net 38 42 10 121 138 12
Income before income taxes 506 428 18 1,208 1,077 12
Income tax provision 139 88 (57) 307 212 (45)
Net Income - including noncontrolling interest 367 340 8 901 865 4
Net Income - noncontrolling interest 10 6 (57) 17 10 (65)
Net Income - YUM! Brands, Inc. $ 357 $ 334 7 $ 884 $ 855 3

Effective tax rate

27.5 % 20.6 % (6.9) ppts 25.4 % 19.7 % (5.7) ppts

Effective tax rate before special items

27.4 % 19.9 % (7.5) ppts 25.8 % 21.1 % (4.7) ppts

Basic EPS Data

EPS $ 0.76 $ 0.71 7 $ 1.87 $ 1.82 3
Average shares outstanding 473 472 -- 473 469 (1)

Diluted EPS Data

EPS $ 0.74 $ 0.69 7 $ 1.82 $ 1.77 3
Average shares outstanding 484 485 -- 485 482 (1)
Dividends declared per common share $ -- $ -- $ 0.42 $ 0.38

See accompanying notes.

YUM! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter % Change Year to Date % Change
9/4/10 9/5/09 B/(W) 9/4/10 9/5/09 B/(W)
Company sales $ 1,172 $ 980 20 $ 2,745 $ 2,251 22
Franchise and license fees and income 16 14 18 38 40 (4)
Total revenues 1,188 994 20 2,783 2,291 21
Company restaurant expenses, net
Food and paper 390 341 (14) 909 796 (14)
Payroll and employee benefits 151 116 (31) 372 286 (31)
Occupancy and other operating expenses 335 286 (17) 806 666 (21)
876 743 (18) 2,087 1,748 (19)
General and administrative expenses 55 45 (24) 136 117 (17)
Franchise and license expenses 1 -- NM 1 -- NM
Closures and impairment (income) expenses -- 2 67 5 6 15
Other (income) expense (11 ) (12 ) 4 (28 ) (29 ) (1)
921 778 (18) 2,201 1,842 (20)
Operating Profit $ 267 $ 216 24 $ 582 $ 449 30
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 33.3 34.8 1.5 ppts 33.1 35.3 2.2 ppts
Payroll and employee benefits 12.9 11.7 (1.2) ppts 13.6 12.7 (0.9) ppts
Occupancy and other operating expenses 28.6 29.2 0.6 ppts 29.3 29.6 0.3 ppts
Restaurant margin 25.2 % 24.3 % 0.9 ppts 24.0 % 22.4 % 1.6 ppts

See accompanying notes.

As discussed in (d) in the accompanying notes, we began consolidating the operating entity that owns the KFC business in Shanghai, China, with 236 units, during the second quarter of 2009. This entity was previously accounted for as an unconsolidated affiliate.

As discussed in (g) in the accompanying notes, beginning in 2010 the China Division only consists of operations in mainland China and the International Division includes the remainder of our international operations. We have restated the segment information for 2009 to be consistent with 2010.

YUM! Brands, Inc.

YUM! RESTAURANTS INTERNATIONAL DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter % Change Year to Date % Change
9/4/10 9/5/09 B/(W) 9/4/10 9/5/09 B/(W)
Company sales $ 533 $ 573 (7) $ 1,602 $ 1,567 2
Franchise and license fees and income 171 157 8 499 445 12
Total revenues 704 730 (4) 2,101 2,012 4
Company restaurant expenses, net
Food and paper 170 188 9 516 513 (1)
Payroll and employee benefits 133 144 9 404 393 (2)
Occupancy and other operating expenses 163 177 8 498 483 (3)
466 509 8 1,418 1,389 (2)
General and administrative expenses 84 89 5 248 243 (2)
Franchise and license expenses 9 13 31 24 29 17
Closures and impairment (income) expenses 3 (1 ) NM 6 5 (6)
Other (income) expense -- -- -- -- -- --
562 610 8 1,696 1,666 (2)
Operating Profit $ 142 $ 120 18 $ 405 $ 346 17
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 31.9 32.6 0.7 ppts 32.2 32.7 0.5 ppts
Payroll and employee benefits 24.9 25.5 0.6 ppts 25.2 25.2 -- ppts
Occupancy and other operating expenses 30.7 31.0 0.3 ppts 31.1 30.8 (0.3) ppts
Restaurant margin 12.5 % 10.9 % 1.6 ppts 11.5 % 11.3 % 0.2 ppts
Operating margin 20.1 % 16.4 % 3.7 ppts 19.3 % 17.2 % 2.1 ppts

See accompanying notes.

As discussed in (g) in the accompanying notes, beginning in 2010 the China Division only consists of operations in mainland China and the International Division includes the remainder of our international operations. We have restated the segment information for 2009 to be consistent with 2010.

YUM! Brands, Inc.

UNITED STATES Operating Results

(amounts in millions)

(unaudited)

Quarter % Change Year to Date % Change
9/4/10 9/5/09 B/(W) 9/4/10 9/5/09 B/(W)
Company sales $ 791 $ 879 (10) $ 2,365 $ 2,684 (12)
Franchise and license fees and income 179 176 2 532 516 3
Total revenues 970 1,055 (8) 2,897 3,200 (9)
Company restaurant expenses, net
Food and paper 228 248 8 687 772 11
Payroll and employee benefits 232 263 12 704 806 13
Occupancy and other operating expenses 217 244 11 636 730 13
677 755 10 2,027 2,308 12
General and administrative expenses 110 109 -- 323 330 2
Franchise and license expenses 14 16 10 46 45 (2)
Closures and impairment (income) expenses 2 4 39 10 20 49
Other (income) expense (1 ) -- NM (4 ) -- NM
802 884 9 2,402 2,703 11
Operating Profit $ 168 $ 171 (2) $ 495 $ 497 --
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 28.9 28.3 (0.6) ppts 29.1 28.8 (0.3) ppts
Payroll and employee benefits 29.2 29.9 0.7 ppts 29.7 30.0 0.3 ppts
Occupancy and other operating expenses 27.5 27.7 0.2 ppts 26.9 27.2 0.3 ppts
Restaurant margin 14.4 % 14.1 % 0.3 ppts 14.3 % 14.0 % 0.3 ppts
Operating margin 17.4 % 16.2 % 1.2 ppts 17.1 % 15.5 % 1.6 ppts

See accompanying notes.

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

(unaudited)
9/4/10 12/26/09
ASSETS
Current Assets
Cash and cash equivalents $ 1,274 $ 353
Accounts and notes receivable, less allowance: $34 in 2010 and $35 in 2009 249 239
Inventories 149 122
Prepaid expenses and other current assets 313 314
Deferred income taxes 81 81
Advertising cooperative assets, restricted 109 99
Total Current Assets 2,175 1,208
Property, plant and equipment, net of accumulated depreciation and amortization of $3,460 in 2010 and $3,348 in 2009 3,770 3,899
Goodwill 700 640
Intangible assets, net 440 462
Investments in unconsolidated affiliates 145 144
Other assets 529 544
Deferred income taxes 329 251
Total Assets $ 8,088 $ 7,148

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable and other current liabilities $ 1,374 $ 1,413
Income taxes payable 94 82
Short-term borrowings 724 59
Advertising cooperative liabilities 109 99
Total Current Liabilities 2,301 1,653

Long-term debt

2,905 3,207
Other liabilities and deferred credits 1,239 1,174
Total Liabilities 6,445 6,034
Shareholders' Equity
Common stock, no par value, 750 shares authorized; 468 shares and 469 shares issued in 2010 and 2009, respectively 112 253
Retained earnings 1,681 996
Accumulated other comprehensive income (loss) (237 ) (224 )
Total Shareholders' Equity - YUM! Brands, Inc. 1,556 1,025
Noncontrolling interest 87 89
Total Shareholders' Equity 1,643 1,114
Total Liabilities and Shareholders' Equity $ 8,088 $ 7,148

See accompanying notes.

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

Year to Date
9/4/10 9/5/09
Cash Flows - Operating Activities
Net Income - including noncontrolling interest $ 901 $ 865
Depreciation and amortization 383 385
Closures and impairment (income) expenses 21 31
Refranchising (gain) loss 51 (9 )
Contributions to defined benefit pension plans (22 ) (96 )
Gain upon consolidation of a former unconsolidated affiliate in China -- (68 )
Deferred income taxes (130 ) 59
Equity income from investments in unconsolidated affiliates (34 ) (29 )
Distributions of income received from unconsolidated affiliates 34 29
Excess tax benefits from share-based compensation (46 ) (48 )
Share-based compensation expense

37

39
Changes in accounts and notes receivable (6 ) 11
Changes in inventories (30 ) 34
Changes in prepaid expenses and other current assets

15

(26 )
Changes in accounts payable and other current liabilities 94 2
Changes in income taxes payable 118 (87 )
Other, net

111

43
Net Cash Provided by Operating Activities

1,497

1,135
Cash Flows - Investing Activities
Capital spending (490 ) (505 )
Proceeds from refranchising of restaurants 106 91
Acquisitions & investments

(62

)

(99

)
Sales of property, plant and equipment 21 16
Other, net

(10

) (8 )
Net Cash Used in Investing Activities

(435

) (505 )
Cash Flows - Financing Activities
Proceeds from long-term debt 350 499
Repayments of long-term debt (20 ) (522 )
Revolving credit facilities, three months or less, net 12 (289 )
Short-term borrowings by original maturity
More than three months - proceeds -- --
More than three months - payments -- --
Three months or less, net 5 5
Repurchase shares of Common Stock (283 ) --
Excess tax benefits from share-based compensation 46 48
Employee stock option proceeds 64 91
Dividends paid on Common Stock (295 ) (263 )
Other, net (30 ) (8 )
Net Cash Used in Financing Activities (151 ) (439 )
Effect of Exchange Rates on Cash and Cash Equivalents 10 --
Net Increase in Cash and Cash Equivalents 921 191
Change in Cash and Cash Equivalents due to Consolidation of an Entity in China -- 17
Cash and Cash Equivalents - Beginning of Period $ 353 $ 216
Cash and Cash Equivalents - End of Period $ 1,274 $ 424

See accompanying notes.

Reconciliation of Non-GAAP Measurements to GAAP Results

(amounts in millions, except per share amounts)

(unaudited)

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 in 2010 and 2009 on a basis before Special Items. Included in Special Items are the U.S. refranchising gain (loss), the depreciation benefit from the KFC restaurants impaired in the first quarter of 2010, charges relating to U.S. General and Administrative ("G&A") productivity initiatives and realignment of resources, investments in our U.S. Brands, the loss recognized upon refranchising of an equity market outside the U.S. and the 2009 gain upon our acquisition of additional ownership in, and consolidation of, the operating entity that owns the KFCs in Shanghai, China. These amounts are described in (d), (e) and (f) in the accompanying notes.

The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally. 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 items in 2010 and 2009 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

Quarter Year to Date
9/4/10 9/5/09 9/4/10

9/5/09

Detail of Special Items
Gain upon consolidation of a former unconsolidated affiliate in China $ -- $ -- $ -- $ 68
Loss upon refranchising of an equity market outside the U.S. -- (10 ) (7 ) (10 )
U.S. Refranchising gain (loss) -- 8 (51 ) 23
Depreciation benefit from KFC restaurants impaired upon offer to sell 2 -- 5 --
Charges relating to U.S. G&A productivity initiatives and realignment of resources -- -- (5 ) (9 )
Investments in our U.S. Brands -- (1 ) -- (32 )
Total Special Items Income (Expense) 2 (3 ) (58 ) 40
Tax Benefit (Expense) on Special Items (1 ) (3 ) 19 6
Special Items Income (Expense), net of tax $ 1 $ (6 ) $ (39 ) $ 46
Average diluted shares outstanding 484 485 485 482
Special Items diluted EPS $ 0.01 $ (0.01 ) $ (0.08 ) $ 0.10
Reconciliation of Operating Profit Before Special Items to Reported Operating Profit
Operating Profit before Special Items $ 542 $ 473 $ 1,387 $ 1,175
Special Items Income (Expense) 2 (3 ) (58 ) 40
Reported Operating Profit $ 544 $ 470 $ 1,329 $ 1,215
Reconciliation of EPS Before Special Items to Reported EPS
Diluted EPS before Special Items $ 0.73 $ 0.70 $ 1.90 $ 1.67
Special Items EPS 0.01 (0.01 ) (0.08 ) 0.10
Reported EPS $ 0.74 $ 0.69 $ 1.82 $ 1.77
Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate
Effective Tax Rate before Special Items 27.4 % 19.9 % 25.8 % 21.1 %
Impact on Tax Rate as a result of Special Items 0.1 % 0.7 % (0.4 )% (1.4 )%
Reported Effective Tax Rate 27.5 % 20.6 % 25.4 % 19.7 %

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Quarter Ended 9/4/10

China

Division

YRI

United

States

Corporate and

Unallocated

Consolidated
Total revenues $ 1,188 $ 704 $ 970 $ -- $ 2,862
Company restaurant expenses 876 466 677 (2 ) 2,017
General and administrative expenses 55 84 110 36 285
Franchise and license expenses 1 9 14 -- 24
Closures and impairment (income) expenses -- 3 2 -- 5
Refranchising (gain) loss -- -- -- (2 ) (2 )
Other (income) expense (11 ) -- (1 ) 1 (11 )
921 562 802 33 2,318
Operating Profit (loss) $ 267 $ 142 $ 168 $ (33 ) $ 544
Quarter Ended 9/5/09

China

Division

YRI

United

States

Corporate and

Unallocated

Consolidated
Total revenues $ 994 $ 730 $ 1,055 $ (1 ) $ 2,778
Company restaurant expenses 743 509 755 -- 2,007
General and administrative expenses 45 89 109 33 276
Franchise and license expenses -- 13 16 -- 29
Closures and impairment (income) expenses 2 (1 ) 4 -- 5
Refranchising (gain) loss -- -- -- 4 4
Other (income) expense (12 ) -- -- (1 ) (13 )
778 610 884 36 2,308
Operating Profit (loss) $ 216 $ 120 $ 171 $ (37 ) $ 470

The above table reconciles segment information, which is based on management responsibility, with our Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Year to Date Ended 9/4/10

China

Division

YRI

United

States

Corporate and

Unallocated

Consolidated
Total revenues $ 2,783 $ 2,101 $ 2,897 $ -- $ 7,781
Company restaurant expenses 2,087 1,418 2,027 (5 ) 5,527
General and administrative expenses 136 248 323 106 813
Franchise and license expenses 1 24 46 -- 71
Closures and impairment (income) expenses 5 6 10 -- 21
Refranchising (gain) loss -- -- -- 51 51
Other (income) expense (28 ) -- (4 ) 1 (31 )
2,201 1,696 2,402 153 6,452
Operating Profit (loss) $ 582 $ 405 $ 495 $ (153 ) $ 1,329
Year to Date Ended 9/5/09

China

Division

YRI

United

States

Corporate and

Unallocated

Consolidated
Total revenues $ 2,291 $ 2,012 $ 3,200 $ (32 ) $ 7,471
Company restaurant expenses 1,748 1,389 2,308 -- 5,445
General and administrative expenses 117 243 330 122 812
Franchise and license expenses -- 29 45 -- 74
Closures and impairment (income) expenses 6 5 20 -- 31
Refranchising (gain) loss -- -- -- (9 ) (9 )
Other (income) expense (29 ) -- -- (68 ) (97 )
1,842 1,666 2,703 45 6,256
Operating Profit (loss) $ 449 $ 346 $ 497 $ (77 ) $ 1,215

The above table reconciles segment information, which is based on management responsibility, with our Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

Notes to the Consolidated Summary of Results, Condensed Consolidated Balance Sheets

and Condensed Consolidated Statements of Cash Flows

(amounts in millions, except per share amounts)

(unaudited)

(a)

Percentages may not recompute due to rounding.

(b)

Amounts presented as of and for the quarter and year to date ended September 4, 2010 are preliminary.

(c)

China Division Other (income) expense includes equity income from our investments in unconsolidated affiliates. In the year to date ended September 5, 2009, Unallocated Other (income) expense includes the gain upon our acquisition of additional ownership in, and consolidation of, the operating entity that owns the KFCs in Shanghai, China (see Note d).

(d)

On May 4, 2009 we acquired an additional 7% ownership in the entity that operates the KFCs in Shanghai, China for $12 million, increasing our ownership to 58%. Prior to our acquisition of this additional interest, this entity was accounted for as an unconsolidated affiliate. As part of the acquisition we received additional rights in the governance of the entity such that we began consolidating the entity upon acquisition. We remeasured our previously held 51% ownership in the entity at fair value and recognized a gain of $68 million accordingly. The gain, which resulted in no related income tax expense, was recorded as unallocated other income during the quarter ended June 13, 2009 and has been reflected as a Special Item for certain performance measures (see accompanying reconciliation to reported results). For the year to date ended September 4, 2010 the consolidation of the existing restaurants upon acquisition increased Company sales by $98 million and decreased Franchise and license fees and income by $6 million. The consolidation of the existing restaurants upon acquisition increased Operating Profit by $3 million for the year to date ended September 4, 2010.

(e)

As part of our plan to transform our U.S. business we took several measures ("the U.S. business transformation measures") in 2010 and 2009 including: expansion of our U.S. refranchising, potentially reducing our Company ownership in the U.S. to below 10%; a reduced emphasis on multi-branding as a long-term growth strategy; G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs); and investments in our U.S. Brands made on behalf of our franchisees such as equipment purchases. We have traditionally not allocated refranchising (gains) losses for segment reporting purposes and will not allocate the costs associated with the productivity initiatives, realignment of resources and investments in our U.S. Brands to the U.S. segment. Additionally, these items have been reflected as Special Items for certain performance measures (see accompanying reconciliation to reported results). U.S. refranchising loss recorded in the year to date ended September 4, 2010 is the net result of gains from 98 restaurants sold and non-cash impairment charges in the first quarter related to our offers to refranchise restaurants in the U.S., principally a substantial portion of our Company operated KFCs. We have recorded the depreciation benefit for the quarter and year to date ended September 4, 2010 resulting from the non-cash impairment charge related to these KFCs as a Special Item, 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 charge being recorded. Investments in our U.S. Brands recorded in 2009 reflect our reimbursements to KFC franchisees for installation costs of ovens for the national launch of Kentucky Grilled Chicken and have been recorded as a reduction of Franchise and license fees and income.

(f)

During the quarter ended September 5, 2009 we recognized a $10 million refranchising loss as a result of our decision to offer to refranchise our KFC Taiwan equity market. During the quarter ended March 20, 2010 we refranchised all of our remaining company restaurants in Taiwan, which consisted of 124 KFCs. We included in our March 20, 2010 financial statements a non-cash write off of $7 million of goodwill in determining the loss on refranchising of Taiwan. Neither of these losses resulted in a related income tax benefit, and neither loss was allocated to any segment for performance reporting purposes.

(g)

In 2010 we began reporting information for our Thailand and KFC Taiwan businesses within our International Division as a result of changes to our management reporting structure. These businesses now report to the President of our YRI Division whereas previously they reported to the President of our China Division. Beginning in 2010, the China Division only consists of operations in mainland China and the International Division includes the remainder of our international operations. While this reporting change did not impact our Consolidated results, segment information for previous periods has been restated to be consistent with the current period presentation.

The following table summarizes the 2009 quarterly increases to selected line items within the YRI segment as a result of these segment reporting changes (with equal and offsetting decreases impacting the China Division segment):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Company sales $ 47 $ 64 $ 68 $ 91 $ 270
Company restaurant expenses 42 57 62 83 244
Operating Profit 3 -- 1 2 6

(h)

On July 1, 2010, we completed the exercise of our option with our Russian partner to purchase their interest in the co-branded KFC-Rostik's restaurants across Russia and the Commonwealth of Independent States ("CIS"). 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 franchisor. Upon exercise of our option, we paid cash of $56 million, forgave a long-term note receivable of $11 million and assumed long-term debt of $10 million. The remaining balance of the purchase price, anticipated to be $11 million, will be paid in cash in July 2012 . The impact of consolidating this business on all line items within our Condensed Consolidated Income Statement was insignificant for the quarter ended September 4, 2010 for our International Division. While we have not yet completed our allocation of the purchase price, our Condensed Consolidated Balance Sheet at September 4, 2010 reflects the consolidation of this entity using preliminary amounts including $74 million of goodwill.

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SOURCE: Yum! Brands Inc.

Yum! Brands Inc.
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or
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