YUM! Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and 24-week year-to-date periods ended June 15, 2013; comparisons are with periods ended June 16, 2012. Amounts are U.S. dollars unless stated otherwise. YUM operates KFC, Pizza Hut and Taco Bell through China, International (YRI), U.S. and India divisions.
Financial performance
| Metric | Quarter 2013 | Quarter 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Revenue | $2.904B | $3.168B | $5.439B | $5.911B |
| Operating profit | $390M | $473M | $877M | $1.118B |
| Net income attributable to YUM | $281M | $331M | $618M | $789M |
| Diluted EPS | $0.61 | $0.69 | $1.33 | $1.65 |
| Operating margin | 13.4% | 14.9% | 16.1% | 18.9% |
- Revenue declined 8% in both the quarter and YTD. Company sales fell 10%, partly reflecting refranchising; franchise and license fees rose 6% in the quarter and 8% YTD.
- GAAP diluted EPS fell 13% for the quarter and 19% YTD. Before special items, diluted EPS was $0.56 versus $0.67 for the quarter and $1.26 versus $1.43 YTD, declines of 16% and 12%.
- Company restaurant profit was $310M for the quarter, down 27%; restaurant margin fell 2.8 percentage points to 12.5%. YTD restaurant profit declined 26% to $643M, and margin fell 2.9 points to 14.0%.
- Quarter system sales grew 1% excluding foreign exchange, but China system sales declined 12%; same-store sales were down 20% in China and up 1% each at YRI and in the U.S. Worldwide restaurant margin fell 2.7 points to 12.5%.
- China operating profit declined 63% for the quarter and 49% YTD; YRI operating profit increased 8% and 14%, respectively, and U.S. operating profit increased 4% in both periods.
- Operating cash flow was $729M, down from $924M. Capital spending was $472M; cash ended the period at $500M, down from $776M at fiscal year-end. Investing activities used $410M and financing activities used $587M.
- At June 15, cash and current assets were $500M and $1.605B; current liabilities were $1.990B. Short-term borrowings were $68M and long-term debt $2.918B. The company reported $1.2B of unused revolving credit capacity and compliance with debt covenants.
- YTD share repurchases were $324M and dividends paid were $301M. The declared quarterly dividend was $0.335 per share.
Changes, outlook and management commentary
- Management attributed the China downturn to adverse publicity around a December 2012 poultry-supply incident and subsequent avian-flu coverage. KFC China same-store sales declined 26% in the second quarter; in June, the decline improved to 13%.
- Management continued to estimate positive China Division same-store sales in the fourth quarter and maintained its full-year 2013 outlook for a mid-single-digit percentage decline in EPS before special items. Recovery timing and extent remained uncertain.
- International growth and U.S. performance partly offset China weakness. The U.S. and YRI benefited from same-store sales, unit development and, in some comparisons, refranchising effects. Worldwide international development totaled 315 new restaurants in the quarter, 76% in emerging markets.
- Prior-year YTD results included a non-cash $74M Little Sheep acquisition gain with no related tax expense. Its absence contributed to the higher 2013 YTD effective tax rate. The reported effective tax rate was 22.7% for the quarter and 24.8% YTD; the quarter rate benefited from resolution of uncertain tax positions.
- Little Sheep sales and development have been below acquisition expectations, and negative publicity affecting other hot-pot concepts has weighed on its sales. YUM warned that continued weakness could result in a non-cash impairment of its approximately $400M trademark, $375M goodwill, or both.
- YUM acquired 65 KFC and 41 Pizza Hut restaurants in Turkey for $86M, with a potential additional payment of up to $19M in 2016.
Risks, contingencies and other notable items
- The IRS has proposed additional taxes relating to transferred foreign intangible rights: approximately $700M plus $235M interest for 2004–2006, $270M plus $35M interest for 2007–2008, and estimated potential claims of $130M plus $5M interest for 2009–2012. YUM disputes the proposals; the company says resolution is not expected within 12 months and that any payment above its reserve could materially affect its financial position.
- YUM disclosed securities class actions and shareholder derivative suits relating to alleged investor disclosures and controls over poultry purchasing in China. The company denies liability; possible loss estimates were not available.
- Potential undiscounted lease-guarantee payments were approximately $750M (present value approximately $675M); the recorded liability for probable exposure was not material. Other franchise-loan and financing guarantees totaled $89M.
- The filing also describes employment and accessibility litigation. Certain matters were settled with costs described as not material; potential losses in other cases could not be reasonably estimated.
- YUM reported effective disclosure controls and no significant changes in internal control over financial reporting. The interim financial statements were reviewed by KPMG, not audited.
Investor verification points
- Track China same-store sales, restaurant margins and the pace of recovery against management’s fourth-quarter positive-sales expectation.
- Reconcile reported EPS with EPS before special items, especially refranchising gains and the absence of the prior-year Little Sheep gain.
- Monitor Little Sheep performance and any impairment assessment of its trademark and goodwill.
- Review developments in the IRS dispute, including reserve adequacy, interest and potential exposure for later tax years.
- Assess liquidity and cash generation alongside capital spending, dividends and repurchases; current liabilities exceeded current assets at period-end.
- Follow developments and potential financial effects of the China-related securities and derivative litigation, as well as other disclosed contingencies.