YUM! BRANDS Washington, D. C. 20549
OR
(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
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Exchange Act. 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 number of shares outstanding of the Registrant's Common Stock as of October 13, 2015 was 431,241,627 shares.
Part I. Financial Information
Item 1 - Financial Statements
Page No.
Condensed Consolidated Statements of Income - Quarters and Years to date ended
September 5, 2015 and September 6, 2014 3
Condensed Consolidated Statements of Comprehensive Income - Quarters and Years to date
ended September 5, 2015 and September 6, 2014 4
Condensed Consolidated Statements of Cash Flows - Years to date ended
September 5, 2015 and September 6, 2014 5
Condensed Consolidated Balance Sheets - September 5, 2015 and December 27, 2014 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 33
Item 4 - Controls and Procedures 33
Report of Independent Registered Public Accounting Firm 35
Part II. Other Information and Signatures
Item 1 - Legal Proceedings 36
Item 1A - Risk Factors 36
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 6 - Exhibits 37
Signatures 38
PART I - FINANCIAL INFORMATIONYUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
Quarter ended Year to date
Revenues | 9/5/2015 | 9/6/2014 | 9/5/2015 | 9/6/2014 |
Company sales | $ 2,968 | $ 2,891 | $ 7,806 | $ 7,941 |
Franchise and license fees and income | 459 | 463 | 1,348 | 1,341 |
Total revenues | 3,427 | 3,354 | 9,154 | 9,282 |
Costs and Expenses, Net Company restaurant expenses Food and paper | 933 | 951 | 2,462 | 2,562 |
Payroll and employee benefits | 625 | 642 | 1,720 | 1,755 |
Occupancy and other operating expenses | 871 | 869 | 2,292 | 2,326 |
Company restaurant expenses | 2,429 | 2,462 | 6,474 | 6,643 |
General and administrative expenses | 328 | 323 | 976 | 946 |
Franchise and license expenses | 65 | 42 | 146 | 109 |
Closures and impairment (income) expenses | 3 | 6 | 30 | 30 |
Refranchising (gain) loss | 2 | (20) | 60 | (27) |
Other (income) expense | (3) | (9) | (12) | (19) |
Total costs and expenses, net | 2,824 | 2,804 | 7,674 | 7,682 |
Operating Profit | 603 | 550 | 1,480 | 1,600 |
Interest expense, net | 32 | 28 | 99 | 90 |
Income Before Income Taxes | 571 | 522 | 1,381 | 1,510 |
Income tax provision | 145 | 119 | 358 | 370 |
Net income - including noncontrolling interests | 426 | 403 | 1,023 | 1,140 |
Net income (loss) - noncontrolling interests | 5 | (1) | 5 | 3 |
Net Income - YUM! Brands, Inc. | $ 421 | $ 404 | $ 1,018 | $ 1,137 |
Basic Earnings Per Common Share | $ 0.97 | $ 0.91 | $ 2.33 | $ 2.55 |
Diluted Earnings Per Common Share | $ 0.95 | $ 0.89 | $ 2.29 | $ 2.50 |
Dividends Declared Per Common Share | $ - | $ - | $ 0.82 | $ 0.74 |
See accompanying Notes to Condensed Consolidated Financial Statements.
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
Quarter ended Year to date 9/5/2015 9/6/2014 9/5/2015 9/6/2014
Net Income - including noncontrolling interests $ 426 $ 403 $ 1,023 $ 1,140 Other comprehensive income (loss), net of tax
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature
Adjustments and gains (losses) arising during the period Reclassification of adjustments and (gains) losses into Net | (122) | 33 | (174) | (29) |
Income | 12 | - | 80 | 2 |
(110) | 33 | (94) | (27) | |
Tax (expense) benefit | 1 | 1 | 1 | (2) |
(109) | 34 | (93) | (29) |
Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the period | (3) | (9) | (1) | (20) |
Reclassification of (gains) losses into Net Income | 11 | 6 | 34 | 20 |
8 | (3) | 33 | - | |
Tax (expense) benefit | (3) | 1 | (12) | |
5 | (2) | 21 | - |
Changes in derivative instruments
Unrealized gains (losses) arising during the period | 8 | - 20 | - |
Reclassification of (gains) losses into Net Income | (10) | - (22) | (1) |
Tax (expense) benefit | (2) - | - (2) - - | (1) - |
(2) | - (2) | (1) | |
Other comprehensive income (loss), net of tax | (106) | 32 (74) | (30) |
Comprehensive Income - including noncontrolling interests | 320 | 435 949 | 1,110 |
Comprehensive Income (loss) - noncontrolling interests | 4 | 1 3 | 1 |
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
Year to date
9/5/2015 9/6/2014
Net Income - including noncontrolling interests $ 1,023 $ 1,140 Depreciation and amortization 505 501
Closures and impairment (income) expenses 30 30
Refranchising (gain) loss 60 (27)
Contributions to defined benefit pension plans (83) (17)
Deferred income taxes (42) (94)
Equity income from investments in unconsolidated affiliates (31) (31)
Distributions of income received from unconsolidated affiliates 9 12
Excess tax benefits from share-based compensation (46) (29)
Share-based compensation expense 40 36
Changes in accounts and notes receivable (15) (25)
Changes in inventories 62 24
Changes in prepaid expenses and other current assets (27) (3)
Changes in accounts payable and other current liabilities 197 59
Changes in income taxes payable 111 (24)
Other, net 24 60
Capital spending (642) (655)
Changes in short-term investments, net (2) (315)
Proceeds from refranchising of restaurants 72 66
Other, net 50 (16)
Repayments of long-term debt (10) (7)
Short-term borrowings by original maturity
More than three months - proceeds - 2
More than three months - payments - -
Three months or less, net - -
Revolving credit facilities, three months or less, net (116) 397
Repurchase shares of Common Stock (370) (510)
Excess tax benefits from share-based compensation 46 29
Employee stock option proceeds 12 21
Dividends paid on Common Stock (532) (490)
Other, net (49) (28)
See accompanying Notes to Condensed Consolidated Financial Statements.
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
(Unaudited)
9/5/2015 12/27/2014
Cash and cash equivalents $ 861 $ 578
Accounts and notes receivable, net 355 325
Inventories 230 301
Prepaid expenses and other current assets 248 254
Deferred income taxes 113 93
Advertising cooperative assets, restricted 112 95
Total Current Assets 1,919 1,646Property, plant and equipment, net 4,263 4,498
Goodwill 674 700
Intangible assets, net 287 318
Investments in unconsolidated affiliates 53 52
Other assets 547 560
Deferred income taxes 563 571
Accounts payable and other current liabilities $ 1,811 $ 1,972 Income taxes payable 153 77
Short-term borrowings 566 267
Advertising cooperative liabilities 112 95
Long-term debt 2,651 3,077
Other liabilities and deferred credits 1,120 1,244
Common Stock, no par value, 750 shares authorized; 431 and 434 shares issued in 2015 and
2014, respectively 8 -
Retained earnings 2,079 1,737
Accumulated other comprehensive income (loss) (262) (190)
(Tabular amounts in millions, except per share data)
YUM! Brands, Inc. and Subsidiaries (collectively referred to herein as 'YUM' or the 'Company') comprise primarily the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the 'Concepts'). References to YUM throughout these Notes to our Financial Statements are made using the first person notations of 'we,' 'us' or 'our.'
YUM consists of five reporting 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
YUM's fiscal year ends on the last Saturday in December. The first three quarters of each fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks. Our subsidiaries operate on similar fiscal calendars except that China, India and certain other international subsidiaries operate on a monthly calendar with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter. International businesses within our KFC, Pizza Hut and Taco Bell divisions close approximately one month earlier to facilitate consolidated reporting.
Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2014 Form 10-K, our financial position as of September 5, 2015, and the results of our operations and comprehensive income for the quarters and years to date ended September 5, 2015 and September 6, 2014 and cash flows for the years to date ended September 5, 2015 and September 6, 2014. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year.
Our significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.
We have reclassified certain items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 5, 2015. These reclassifications had no effect on previously reported Net Income - YUM! Brands, Inc.
Note 2 - Earnings Per Common Share (' EPS' )Net Income - YUM! Brands, Inc. | $ 421 | $ 404 | $ 1,018 | $ 1,137 |
Weighted-average common shares outstanding (for basic calculation) | 436 | 443 | 437 | 445 |
Effect of dilutive share-based employee compensation | 8 | 9 | 8 | 10 |
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) | 444 | 452 | 445 | 455 |
Basic EPS | $ 0.97 | $ 0.91 | $ 2.33 | $ 2.55 |
Diluted EPS | $ 0.95 | $ 0.89 | $ 2.29 | $ 2.50 |
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a) | 4.2 | 5.2 | 4.3 | 5.4 |
Quarter ended Year to date 2015 2014 2015 2014
(a) These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.
Shares Repurchased (thousands)
Dollar Value of Shares Repurchased
Remaining Dollar Value of Shares that may be Repurchased
Authorization Date | 2015 | 2014 | 2015 | 2014 | 2015 |
November 2012 | - | 2,737 | $ - | $ 203 | $ - |
November 2013 | 1,779 | 4,093 | 133 | 307 | - |
November 2014 | 2,737 | - | 237 | - | 763 |
Total | 4,516 | 6,830 | $ 370 | $ 510 | $ 763 |
Changes in accumulated other comprehensive income (loss) ('OCI') are presented below.
Translation Adjustments and Gains (Losses) From
Balance at December 27, 2014,
Intra-Entity Transactions of a Long-Term Nature
Pension and Post- Retirement Benefits
Derivative
Instruments Total
net of tax $ 29 $ (210) $ (9) $ (190)
Gains (losses) arising during the year classified into
accumulated OCI, net of tax (171) - 16(155)
(Gains) losses reclassified from accumulated OCI, net of tax | 80 | 21 | (18) | 83 |
OCI, net of tax | (91) | 21 | (2) | (72) |
Balance at September 5, 2015, net of tax | $ (62) | $ (189) | $ (11) | $ (262) |
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.
Quarter ended Year to date
2015 | 2014 | 2015 | 2014 | |||||
China | $ | (3) | $ | (6) | $ | (7) | $ | (12) |
KFC Division(a) | 4 | (10) | 36 | (10) | ||||
Pizza Hut Division(a) | 15 | (3) | 52 | (4) | ||||
Taco Bell Division | (14) | - | (21) | (1) | ||||
India | - | (1) | - | - | ||||
Worldwide | $ | 2 | $ | (20) | $ | 60 | $ | (27) |
(a) In 2010 we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing it to the franchisee. During the quarter ended June 13, 2015 we initiated plans to sell this real estate and determined it was held for sale in accordance with GAAP. On September 28, 2015, subsequent to our quarter ended September 5, 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represents a substantial liquidation of our Mexican operations under GAAP. Accordingly, we were required to include accumulated translation losses associated with our Mexican business within our carrying value when performing impairment evaluations subsequent to determining that the restaurants were held for sale. As such, we recorded charges of $12 million and $80 million in the quarter and year to date ended September 5, 2015, respectively, representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the then-expected sales price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising Loss. Refranchising Losses of $4 million and $40 million were associated with the KFC Division for the quarter and year to date ended September 5, 2015, respectively. Refranchising Losses of $8 million and $40 million were associated with the Pizza Hut Division for the quarter and year to date ended September 5, 2015, respectively. The proceeds ultimately received for the real estate approximated our carrying value including the remaining unrecognized accumulated translation losses as of September 5, 2015.
Our KFC and Pizza Hut Divisions earned approximately $3 million and $1 million, respectively, of rental income in 2014 related to this real estate that will transfer to the buyer subsequent to the sale of the real estate. We will continue to earn
U.S. dollar-denominated franchise fees, most of which are sales-based royalties, under our existing franchise contracts.
Additionally, during the quarter and year to date ended September 5, 2015 we recognized charges of $8 million and $13 million, respectively, within Refranchising Loss associated with the planned refranchising of our company-owned Pizza Hut restaurants in Korea. The remaining carrying value of these restaurants is not significant. While additional gains or losses may occur as the refranchising plans move forward, such amounts are not expected to be material at this time.
KFC U.S. Acceleration Agreement
During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we anticipate investing approximately $125 million over the next three years primarily to fund new back-of- house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We have recorded charges of
$21 million and $31 million for the quarter and year to date ended September 5, 2015, respectively, for these investments. We currently expect a total charge of approximately $80 million in 2015 for these investments, with the remaining charge split between 2016 and 2017. These charges are not being allocated to the KFC Division segment operating results.
In addition to the investments above we have agreed to fund incremental system advertising dollars of $60 million. We currently expect to fund approximately $10 million of such advertising in 2015 with the remaining funding split between 2016 and 2017. These amounts are being recorded in the KFC Division segment operating results. During the quarter and year to date ended September 5, 2015, we expensed $3 million and $6 million, respectively, in incremental system advertising expense.
Note 5 - Other (Income) ExpenseQuarter ended Year to date 2015 2014 2015 2014
Other (income) expense $ (3) $ (9) $ (12) $ (19)
Accounts and Notes Receivable, net
9/5/2015 | 12/27/2014 | |
Accounts and notes receivable, gross | $ 375 | $ 337 |
Allowance for doubtful accounts | (20) | (12) |
Accounts and notes receivable, net | $ 355 | $ 325 |
Property, Plant and Equipment, net | ||
9/5/2015 | 12/27/2014 | |
Property, plant and equipment, gross | $ 7,960 | $ 8,082 |
Accumulated depreciation and amortization | (3,697) | (3,584) |
Property, plant and equipment, net | $ 4,263 | $ 4,498 |
Assets held for sale, which are classified within Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets, total $34 million at September 5, 2015, including $22 million related to our Mexico business. Assets held for sale at December 27, 2014 totaled $14 million.
Noncontrolling Interests
Noncontrolling interests include the ownership interests of minority shareholders of the entities that operate KFC restaurants in Beijing and Shanghai, China. The redeemable noncontrolling interest comprises the 7% ownership interest in Little Sheep that continues to be held by the Little Sheep founding shareholders, and is classified outside of permanent equity on our Condensed Consolidated Balance Sheets due to redemption rights held by the founding Little Sheep shareholders. A reconciliation of the beginning and ending carrying amount of the equity attributable to noncontrolling interests is as follows:
Noncontrolling Interests
Redeemable Noncontrolling Interest
Balance at December 27, 2014 $ 57 $ 9
Net Income (loss) - noncontrolling interests 6 (1)
Currency translation adjustments and other (3) - Balance at September 5, 2015 $ 60 $ 8
Note 7 - Income TaxesQuarter ended Year to date 2015 2014 20152014
Income tax provision $ 145 $ 119 $ 358 $370
Effective tax rate 25.3% 22.7% 25.9% 24.5%
Our effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the majority of our income being earned outside the U.S. where tax rates are generally lower than the U.S. rate.
Our third quarter and year to date effective tax rates were higher than the prior year primarily due to the refranchising loss (See Note 4 for details of refranchising loss) with no associated tax benefit related to the decision to dispose of our real estate in Mexico and the unfavorable impact associated with a valuation allowance charge resulting from a change in judgment regarding the future use of certain deferred tax assets in a foreign market, partially offset by a reduction in the year-over-year expected cost of repatriating foreign earnings.
Quarter ended Year to date
Revenues | 2015 | 2014 | 2015 | 2014 |
China | $ 1,969 | $ 1,840 | $ 4,861 | $ 4,928 |
KFC Division | 694 | 771 | 2,030 | 2,189 |
Pizza Hut Division | 262 | 264 | 797 | 796 |
Taco Bell Division | 473 | 443 | 1,380 | 1,273 |
India | 29 | 36 | 86 | 96 |
$ 3,427 | $ 3,354 | $ 9,154 | $ 9,282 | |
Quarter ended | Year to date | |||
Operating Profit (loss) | 2015 2014 | 2015 2014 | ||
China(a) | $ 327 | $ 202 | $ 661 | $ 681 |
KFC Division | 150 | 169 | 471 | 487 |
Pizza Hut Division | 67 | 68 | 208 | 215 |
Taco Bell Division | 132 | 124 | 387 | 317 |
India | (8) | (3) | (15) | (7) |
Unallocated and General and administrative expenses(b) | (53) | (33) | (153) | (116) |
Unallocated Other income (expense) | (10) | 3 | (19) | (4) |
Unallocated Refranchising gain (loss)(c) | (2) | 20 | (60) | 27 |
Operating Profit | $ 603 | $ 550 | $ 1,480 | $ 1,600 |
Interest expense, net | (32) | (28) | (99) | (90) |
Income Before Income Taxes | $ 571 | $ 522 | $ 1,381 | $ 1,510 |
Includes equity income from investments in unconsolidated affiliates of $15 million and $9 million for the quarters ended September 5, 2015 and September 6, 2014, respectively. Includes equity income from investments in unconsolidated affiliates of $31 million for both of the years to date ended September 5, 2015 and September 6, 2014.
Primarily Corporate general and administrative ('G&A') expenses. Also included are costs associated with the KFC
U.S. Acceleration Agreement of $21 million and $31 million for the quarter and year to date ended September 5, 2015, respectively. See Note 4.
See the Refranchising (Gain) Loss section of Note 4.
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