YUM! Brands, Inc. — Q2 2015 Form 10-Q
Business context and period: The filing covers the 12-week quarter and year-to-date 24-week period ended June 13, 2015, compared with periods ended June 14, 2014. YUM operates, franchises, or licenses KFC, Pizza Hut, and Taco Bell. It reported 41,748 restaurants across more than 125 countries and territories; 79% were franchise-, license-, or affiliate-operated.
Key financial results
| Metric | Quarter | Year to date |
|---|---|---|
| Total revenue | $3.105 billion, down 3% | $5.727 billion, down 3% |
| Operating profit | $371 million, down 22% | $877 million, down 16% |
| Net income attributable to YUM | $235 million, down 30% | $597 million, down 19% |
| Diluted EPS, reported | $0.53, versus $0.73 | $1.34, versus $1.61 |
| Diluted EPS, before Special Items | $0.69, down 5% | $1.50, down 7% |
| Restaurant margin | 15.5%, unchanged | 16.4%, versus 17.2% |
| Operating cash flow | Not separately reported | $947 million, versus $1.084 billion |
Dollar amounts are in U.S. dollars. Revenue and profit comparisons are versus the corresponding 2014 period. The filing’s adjusted EPS is a non-GAAP measure; reported GAAP diluted EPS was lower, principally reflecting Special Items.
Segments and material changes
- China: Largest profit contributor. Quarterly system sales fell 4% excluding foreign exchange (FX), same-store sales fell 10%, and operating profit fell 25% excluding FX. Year-to-date same-store sales were down 11%. Management attributed weakness to residual effects of 2014 adverse publicity involving a former food supplier.
- KFC Division: Quarterly system sales rose 6% excluding FX, same-store sales rose 3%, and operating profit rose 10% excluding FX.
- Pizza Hut Division: Quarterly system sales rose 1% excluding FX; same-store sales were flat; operating profit fell 1% excluding FX.
- Taco Bell Division: Quarterly system sales rose 9%, same-store sales rose 6%, and operating profit rose 29%.
- India Division: Quarterly same-store sales fell 11%; the division recorded a $3 million operating loss.
- Worldwide system sales grew 3% excluding FX in the quarter. Foreign currency translation reduced quarterly operating profit by $22 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $636 million at June 13, up from $578 million at fiscal year-end. Current liabilities were $2.689 billion.
- Short-term borrowings were $568 million and long-term debt was $2.831 billion. The filing estimated debt fair value at $3.4 billion, versus carrying value of $3.2 billion.
- Year-to-date operating cash flow was $947 million; capital spending was $404 million; investing cash outflow was $352 million; financing cash outflow was $576 million. Cash dividends paid were $355 million and share repurchases totaled $295 million.
- The $1.3 billion revolving credit facility had $814 million unused, net of letters of credit and outstanding facility borrowings. YUM reported compliance with debt covenants and substantial cushion.
Outlook, unusual items, and risks
- Management maintained its expectation for at least 10% full-year 2015 EPS growth before Special Items, despite a 7% year-to-date decline, anticipating substantial China same-store sales and operating-profit growth in the second half as the prior-year supplier issue is lapped. This is an expectation, not a guarantee.
- YUM recorded a $68 million non-cash refranchising loss related to the planned sale of Mexico real estate, including accumulated currency translation losses. The sale was expected to close late in 2015 with limited additional pre-tax gain or loss; a taxable gain was expected when the sale closes.
- Under the KFC U.S. franchisee agreement, YUM expects approximately $125 million of investment over three years, including about $90 million of charges in 2015, with remaining charges in 2016–2017. It also plans $60 million of incremental system advertising over the period.
- Reported quarterly effective tax rate was 30.4%, versus 24.9%; the filing cites the Mexico refranchising loss without a related tax benefit and tax-position items. Before Special Items, the quarterly rate was 25.6%.
- Risks include continued weakness or slower recovery in China, currency movements, food and operating-cost pressures, and litigation. Lease guarantees had approximately $600 million of potential undiscounted payments, but the recorded liability for probable exposure was not material. The company reported no material changes to previously disclosed risk factors.
- Pending matters include an appeal of the dismissal of a securities class action, related derivative actions on stay, and Taco Bell wage-and-hour cases. YUM states it intends to defend the claims; some possible loss ranges cannot be estimated.
Important facts for investors to verify
- Whether China sales, same-store sales, and operating profit recover as management expects in the second half.
- The basis and reconciliation for adjusted EPS and the timing and total cost of Special Items, including Mexico real estate and the KFC U.S. agreement.
- Cash generation, debt levels, and availability under the revolving credit facility as dividends, repurchases, and investment continue.
- Developments in the Mexico property sale, litigation, and any resulting cash, tax, or earnings impacts.