Yum! Brands, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars unless stated otherwise. Yum operated more than 51,000 restaurants in over 150 countries and territories; 98% were franchisee-operated.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1.602B | $1.198B | $3.088B | $2.461B |
| Operating profit | $567M | $300M | $1.110B | $550M |
| Net income | $391M | $206M | $717M | $289M |
| Diluted EPS | $1.29 | $0.67 | $2.35 | $0.94 |
| Diluted EPS excluding special items | $1.16 | $0.82 | $2.22 | $1.46 |
| Operating cash flow | — | $773M | $362M |
- Sales and operating trends: Q2 worldwide system sales grew 32% reported and 26% excluding foreign exchange; same-store sales rose 23%, following a 15% decline in Q2 2020. Six-month system sales grew 23% reported and 18% excluding foreign exchange; same-store sales rose 16%, versus a 11% decline a year earlier. The company cautions that pandemic comparisons affect these growth rates.
- Margins: Company restaurant margin was 19.8% in Q2, up from 13.4%; for the first half it was 18.7%, up from 14.7%. These margins apply to company-operated restaurants, not the full franchise system.
- Segments: Q2 operating profit was $318M at KFC, $103M at Pizza Hut, $198M at Taco Bell and $5M at Habit Burger Grill. Year-to-date operating profit was $618M, $205M, $376M and $5M, respectively. Worldwide core operating profit, excluding special items and foreign exchange, grew 53% in Q2 and 42% year to date.
- Cash and liquidity: Cash and cash equivalents were $552M at June 30, down from $730M at year-end; cash including restricted cash was $834M. Current assets were $1.514B versus current liabilities of $1.558B. The $1.25B revolving credit facility was undrawn. Management said available cash, operating cash flow and the facility should cover operations, expected capital spending and debt repayments for the next 12 months.
- Debt and returns: Long-term debt was $10.258B and short-term borrowings were $400M. Total debt excluding finance leases was approximately $10.7B; management reported approximately 93% fixed-rate debt, including swaps, at an effective overall rate of about 4.6%. First-half dividends paid were $299M and share repurchases were $530M. A new authorization permits up to $2B of repurchases through December 2022.
Material changes and unusual items
- Q2 GAAP operating profit rose 89% and net income rose 89%; first-half operating profit rose 102% and net income rose 148%. The prior-year comparison included a $139M Habit Burger Grill goodwill impairment and a $50M charitable contribution, while Q2 2020 also included $91M of investment income, primarily from Grubhub fair-value changes. Yum sold its Grubhub investment in 2020.
- The 2021 effective tax rate was 4.0% for Q2 and 12.1% year to date, versus 19.8% and 17.8%. A $64M deferred tax benefit from the UK tax-rate increase lowered the reported rates. Excluding special items, the rates were 20.0% and 20.1%, respectively.
- Q2 interest expense included a $28M redemption premium and $6M write-off of debt issuance costs for redeemed 2026 notes. Yum issued $1.1B of 4.625% notes due 2032 and refinanced its credit facilities in March. It also redeemed $350M of notes due 2021 on August 2, 2021.
- Operating cash flow increased to $773M, driven partly by stronger operating profit and lower incentive-compensation and interest payments. Investing cash use was $8M versus $472M in 2020, which included the Habit acquisition. Financing used $966M, largely reflecting debt repayments, share repurchases and dividends.
Outlook, commentary and risks
- No numerical full-year earnings or sales guidance is provided in the filing. Management said the COVID-19 recovery remains difficult to forecast and expected continued adverse effects in some regions. About 700 restaurants remained temporarily closed at quarter-end, mainly KFC and Pizza Hut locations in parts of Latin America and Asia. Management also cautioned that sales benefits from off-premise channels could lessen as restrictions ease.
- Management attributed the sales recovery to off-premise and digital channels, improving markets and strong new-unit development. Yum added 603 net new units in Q2 and 1,038 year to date. The filing expects second-half operating-profit growth to face comparisons against franchise bad-debt recoveries recorded in the second half of 2020. Taco Bell cited labor, commodity inflation and other restaurant costs as partial offsets to sales-driven margin improvements.
- After quarter-end, a KFC Europe reorganization and related intellectual-property transfers are expected to produce a one-time deferred tax benefit exceeding $100M, net of other tax costs, in Q3 2021, subject to tax-basis amortization.
- Tax contingency: The IRS draft adjustment concerning 2014 reorganizations asserts taxable distributions of approximately $5.9B. The proposed additional tax is not yet quantifiable but is likely to be material. Yum disputes the position, intends to contest it, and has recorded no reserve, believing its position is more likely than not to be sustained.
- Other contingencies: An Indian regulatory penalty of approximately $150M is under an interim court stay; Yum disputes liability and does not consider significant loss probable. Lease guarantees had approximately $400M of undiscounted potential payments, with no material expected-loss liability recorded. A proposed A$93.5M cash acquisition of Dragontail Systems remained conditional, with completion expected by the end of Q3 2021.
- Management reported effective disclosure controls and no material change in internal control. The independent accountant’s interim review found no material modifications necessary for GAAP conformity; it was a review, not an audit.
Most important facts for investors to verify
- How much of the sharp year-over-year sales and profit growth reflects recovery from pandemic-affected 2020 comparisons, and how trends develop after reopening effects normalize.
- The durability of same-store sales, digital/off-premise demand, franchisee health and planned unit growth, particularly amid ongoing closures and cost inflation.
- The eventual tax and financial exposure from the IRS matter, and whether the anticipated Q3 Swiss reorganization tax benefit is realized as estimated.
- Debt maturities, refinancing costs, leverage and capital returns alongside liquidity; confirm the new repurchase authorization and the status of the Dragontail transaction.