Yum! Brands, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the same period in 2021. Yum! Brands franchises or operates more than 54,000 restaurants in over 155 countries and territories; 98% were franchisee-operated.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1.547 billion | $1.486 billion | +4% |
| Operating profit | $509 million | $543 million | -6% |
| Net income | $399 million | $326 million | +22% |
| Diluted EPS | $1.36 | $1.07 | +27% |
| Diluted EPS excluding special items | $1.05 | $1.07 | -2% |
| Operating cash flow | $253 million | $324 million | -$71 million |
| Company restaurant margin | 14.5% | 17.6% | -3.1 percentage points |
- System sales were $14.146 billion, up 6% reported and 8% excluding foreign currency effects. Same-store sales grew 3%; the company opened 997 gross units and added 628 net units.
- Cash and cash equivalents were $365 million at quarter-end; total cash, including restricted cash, was $618 million. Current assets were $1.356 billion and current liabilities $1.302 billion.
- Debt was approximately $11.4 billion excluding finance leases. Management reported approximately 92% fixed-rate debt, including swaps, and an effective overall interest rate of about 4.3%. The revolving facility was $1.25 billion, with $174 million drawn.
- Capital spending was $42 million. The company repurchased $407 million of shares and paid $165 million in dividends during the quarter.
Material changes and segment performance
- Revenue rose mainly on higher franchise and property revenue. Operating profit fell as general and administrative, franchise/property, and advertising expenses increased; company restaurant costs also reflected commodity and wage inflation.
- Core Operating Profit declined 5% overall, excluding special items and foreign exchange. By division, KFC core profit rose 1%, Taco Bell 4%, Pizza Hut 2%, and Habit Burger Grill recorded an $8 million loss. Foreign exchange reduced divisional operating profit by $14 million.
- KFC, Taco Bell, and Pizza Hut same-store sales were up 3%, 5%, and approximately flat, respectively. Habit same-store sales rose 3%; excluding its reporting-calendar change, system sales growth was 17%.
- Net income benefited from an $82 million discrete tax benefit after a valuation allowance release related to foreign tax credit carryforwards. The reported effective tax rate was -0.2%, versus 20.2% a year earlier; excluding special items, it was 20.3%.
Outlook, risks, and unusual items
- Management expected annual operating cash flow to exceed $1.3 billion in 2022 and believed cash, operating cash flow, and revolver availability would cover requirements for the next 12 months. No specific full-year earnings guidance was provided.
- Management expected the year-over-year decline in Russian core operating profit to reduce full-year Yum! core operating profit growth by approximately 3 percentage points. Russia historically represented about 3% of operating profit and 2% of system sales.
- In response to Russia’s invasion of Ukraine, Yum suspended investment and development in Russia, suspended operations at its 70 company-owned KFC restaurants, and was working to suspend Pizza Hut operations and transfer ownership to local operators. It recorded no impairment on Russian assets in Q1; future impairment and the transfer outcome remain uncertain. COVID-related restrictions continued to affect some markets, particularly China, and the full-year impact was difficult to forecast.
- The IRS proposed a potentially material tax adjustment relating to 2014 reorganizations and alleged taxable distributions of approximately $6.0 billion. Yum disputes the position, intends to contest it, and recorded no reserve; an unfavorable outcome could materially affect future results.
- Yum disclosed an Indian regulatory penalty of approximately $145 million, subject to an interim court stay; it denies liability and does not consider significant loss probable. Potential undiscounted lease-guarantee payments were approximately $400 million, though the recorded expected-loss liability was not material.
- After quarter-end, Yum redeemed $600 million of 7.75% notes due 2025 at a $23 million call premium and issued $1.0 billion of 5.375% notes due 2032, using proceeds for the redemption and general corporate purposes.
Key facts for investors to verify
- Whether underlying earnings and margins improve after adjusting for the $82 million tax benefit and the unusual Russia-related items.
- How inflation, China’s COVID restrictions, and currency movements affect same-store sales, restaurant margins, and divisional profit.
- Progress and financial consequences of the Russia ownership-transfer process, including any future impairment or loss of earnings.
- Developments in the IRS tax dispute and Indian regulatory proceeding, including potential exposure and timing.
- Debt, refinancing costs, liquidity, and shareholder returns relative to cash generation and management’s leverage target.