YUM! Brands, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (53 weeks; FY2010 ended December 25, 2010 and had 52 weeks). The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are unaudited. YUM operated KFC, Pizza Hut and Taco Bell through about 37,000 system restaurants in more than 120 countries. In December 2011, it sold Long John Silver’s and A&W.
Key financial results
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Total revenue | $12.626 billion | $11.343 billion | Up 11%; includes $91 million estimated contribution from the 53rd week |
| Operating profit | $1.815 billion | $1.769 billion | Up 3% reported; $2.002 billion before Special Items versus $1.846 billion |
| Net income attributable to YUM | $1.319 billion | $1.158 billion | Up 14% |
| Diluted EPS | $2.74 | $2.38 | Up 15%; before Special Items, $2.87 versus $2.53 |
| Company restaurant profit margin | 16.1% | 17.0% | Down 0.9 percentage points |
| Cash from operations | $2.170 billion | $1.968 billion | Up $202 million |
| Capital spending | $940 million | $796 million | Up $144 million |
| Cash and cash equivalents | $1.198 billion | $1.426 billion | Restricted cash of $300 million was separately reported for the Little Sheep acquisition |
| Total debt | $3.317 billion | $3.588 billion | Includes $320 million short-term borrowings and $2.997 billion long-term debt |
Fourth-quarter FY2011 revenue was $4.111 billion, operating profit $507 million and net income attributable to YUM $356 million. The quarter included the 53rd week and substantial Special Items; the comparable FY2010 figures were $3.562 billion, $440 million and $274 million, respectively.
Operating cash flow less capital spending was approximately $1.230 billion. Current assets were $2.321 billion versus current liabilities of $2.450 billion. The filing reports approximately $1.1 billion of unused capacity under revolving credit facilities, which were due to mature in November 2012 and were being renewed; there were no facility borrowings at year-end.
Performance, changes and unusual items
- China led growth: revenue was $5.566 billion and operating profit $908 million. System sales grew 29% excluding currency effects; same-store sales increased 19%. Operating profit rose 15% excluding currency translation, but the reported operating margin declined to 16.3% from 18.3%, reflecting costs and growth-related spending.
- YRI revenue was $3.274 billion and operating profit $673 million. System sales grew 8% excluding currency effects; same-store sales increased 3%. Operating profit grew 9% excluding currency translation, and operating margin improved to 20.6% from 19.1%.
- U.S. revenue was $3.786 billion and operating profit $589 million. U.S. system sales were flat, same-store sales declined 1%, and operating profit fell 12%; management cited restaurant cost inflation, higher franchise expenses and weaker same-store sales.
- Worldwide system sales grew 7% excluding currency translation. Restaurant margin declined 0.9 points to 16.0%, reflecting commodity and labor inflation, notably in China and the U.S.
- FY2011 included $187 million of pre-tax Special Item expense, including $86 million of losses and other costs from the LJS/A&W divestitures, $74 million non-cash impairment related to planned disposition or closure of Pizza Hut UK dine-in restaurants, and U.S. and international refranchising-related items. The divestitures generated $104 million of net tax benefits, lowering the reported effective tax rate to 19.5% from 26.1%; the rate before Special Items was 24.2%.
- YUM repurchased $752 million of shares and paid $481 million in dividends. The annual dividend declared per share was $1.07; management targeted a 35%–40% annual payout ratio.
- After year-end, on February 1, 2012, YUM paid $584 million for an additional 66% of Little Sheep, raising total ownership to about 93%. Management expected China revenue to rise about 5% in 2012 from consolidation, with a modest initial operating-profit impact due to transaction and transition costs.
Outlook, risks and contingencies
- Management’s multi-year growth model called for China operating-profit growth of 15%, YRI growth of 10% and U.S. growth of 5%. China targets included at least 13% system-sales growth and at least 5% same-store-sales growth; YRI targets included 6% system-sales growth and 2%–3% or better same-store-sales growth. These are expectations, not guarantees. Estimated 2012 capital spending was about $1 billion.
- Key operating risks include food safety and brand damage, commodity and wage inflation, supply interruptions, intense competition, consumer spending weakness, and the success and financial health of franchisees. China’s growing contribution increases exposure to local economic, regulatory, political and currency risks; foreign exchange movements can materially affect reported results.
- The IRS proposed adjustments concerning transferred foreign intangible rights for 2004–2006 that could result in about $700 million of additional tax plus $170 million of interest; similar claims for 2007–2011 could add about $350 million of tax plus $25 million of interest. YUM disputed the proposed adjustment, intended to defend its position, and warned that final payments could exceed reserves and materially affect financial position. Resolution was not expected within 12 months.
- YUM disclosed multiple employment and accessibility lawsuits, including Taco Bell wage-and-hour and ADA matters. Certain potential losses could not be reasonably estimated; management said its overall recorded provisions and other claims were not expected to have a material adverse effect, while noting litigation uncertainty.
- Company-operated U.S. restaurants were being refranchised, with a target to reduce company ownership from about 13% to about 8%. The strategy may reduce reported company sales and restaurant profit, and depends on buyers, financing and successful franchisee operations. YUM also carried about $550 million present value of potential lease-guarantee payments, though the recorded probable liability was not material.
Most important facts for investors to verify
- Reconcile GAAP growth with the 53rd-week contribution, foreign exchange effects and Special Items; distinguish reported EPS of $2.74 from adjusted EPS of $2.87.
- Assess whether China’s strong sales and profit growth can offset margin pressure, inflation and increased dependence on that market.
- Monitor U.S. same-store sales, restaurant margins and operating-profit recovery, alongside progress and economics of refranchising.
- Track resolution of the IRS intangible-transfer dispute and compare any eventual settlement with recorded tax reserves.
- Confirm renewal of the November 2012 revolving facilities, the use of cash and debt following the Little Sheep acquisition, and the effects of lease guarantees and pension underfunding.