YUM! Brands, Inc. — FY2009 Form 10-K
Business context and reporting period
YUM operates KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W through company-owned, franchised and licensed restaurants. The fiscal year ended December 26, 2009 and comprised 52 weeks. At year-end, the system included 37,080 restaurants in more than 110 countries and territories. The filing is an annual report; fourth-quarter figures below are unaudited.
Financial highlights
| Metric | FY2009 | FY2008 |
|---|---|---|
| Total revenue | $10.836 billion | $11.304 billion |
| Operating profit | $1.590 billion | $1.517 billion |
| Net income attributable to YUM | $1.071 billion | $964 million |
| Diluted EPS | $2.22 | $1.96 |
| Diluted EPS before special items | $2.17 | $1.91 |
| Cash provided by operating activities | $1.404 billion | $1.521 billion |
| Capital spending | $797 million | $935 million |
| Total debt | $3.266 billion | $3.589 billion |
Company restaurant profit was $1.479 billion, with a 15.7% margin, compared with $1.378 billion and 14.0% in 2008. Year-end cash was $353 million; current assets were $1.208 billion and current liabilities $1.653 billion. The company reported $1.325 billion of unused revolving credit capacity, subject to facility terms. It paid $362 million in dividends and made no share repurchases during 2009.
Fourth quarter: Revenue was $3.365 billion versus $3.390 billion; operating profit was $375 million versus $363 million; net income attributable to YUM was $216 million versus $204 million; diluted EPS was $0.45 versus $0.43.
Material changes versus the prior comparable period
- Revenue fell 4%, primarily reflecting foreign currency translation and refranchising. Worldwide system sales grew 1% excluding foreign currency effects; reported system sales declined 2%.
- Operating profit increased 5%; diluted EPS rose 13% before special items. The reported effective tax rate declined to 22.4% from 24.7%, and net interest expense fell 14% to $194 million.
- Operating cash flow declined $117 million, principally due to higher pension contributions, including $280 million contributed in 2009 versus $66 million in 2008.
- U.S. same-store sales declined 5%, while YRI grew 1% and China declined 2%. System sales growth excluding currency effects was 5% for YRI and 9% for China.
- Operating profit by segment was $647 million in the U.S. (up 1%), $491 million at YRI (down 6% reported; up 5% excluding currency) and $602 million in China (up 25%). China’s increase reflected new-unit growth and commodity deflation.
Outlook, management commentary, risks and unusual items
- Management’s longer-term operating-profit growth model called for annual growth of 15% in China, 10% at YRI and 5% in the U.S.; these are strategic targets, not a quantified 2010 EPS forecast. Management estimated 2010 capital spending of approximately $1 billion and expected to refranchise 500 U.S. restaurants.
- The U.S. refranchising strategy targeted company ownership below 10%, versus approximately 16% at year-end 2009. Refranchising reduces reported company sales and restaurant profit, with timing and sale prices affecting results.
- Special items included a $68 million gain on consolidating a Shanghai affiliate, $26 million of U.S. LJS/A&W goodwill impairment, $12 million of Pizza Hut South Korea goodwill impairment, a $10 million loss on the planned refranchising of KFC Taiwan, and U.S. transformation costs and brand investments. In aggregate, special items added $23 million after tax, or $0.05 per diluted share, to reported 2009 results.
- Key risks include weak consumer demand and U.S. same-store sales, food safety and supply disruption, commodity and labor cost inflation, foreign exchange exposure, reliance on franchisee performance and financing, and significant international exposure—particularly in China. Management estimated that a uniform 10% weakening of foreign currencies against the U.S. dollar would reduce 2009 operating profit by approximately $120 million, assuming no other changes.
- Contingencies include wage-and-hour and other employment litigation, disability-access claims, lease guarantees and franchisee financing support. The company stated that additional liability beyond recorded amounts was not likely to materially affect results, but some case outcomes and potential losses could not be reasonably estimated. Lease guarantees had approximately $425 million present-value exposure; the recorded probable liability was not material.
- Management reported compliance with debt covenants with considerable cushion and said it was managing capital structure to preserve investment-grade ratings. The U.S. retirement plans were underfunded by $175 million at year-end; the U.K. plans were underfunded by $29 million. The filing also disclosed $301 million of unrecognized tax benefits.
Important facts for investors to verify
- Reconcile GAAP growth with results before special items, especially the Shanghai consolidation gain and impairment and transformation charges.
- Assess same-store sales and margin trends by geography, including whether China’s growth and U.S. margin gains persist.
- Review refranchising pace, proceeds, franchisee financing and the effect on reported revenue, profit and contingent lease exposure.
- Monitor operating cash flow, pension funding needs, debt maturities and access to revolving credit.
- Track material litigation, tax examinations and foreign-exchange exposure; the filing does not provide clear loss estimates for several legal matters.