YUM! Brands, Inc. — Form 10-Q Summary
Business context and period. The filing covers the 12-week quarter and 36 weeks ended September 5, 2009, compared with periods ended September 6, 2008. YUM operates KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W, through U.S., International (YRI) and China divisions. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
Amounts are in millions except per-share data. Comparisons are year over year.
| Metric | Quarter | Year to date |
|---|---|---|
| Total revenue | $2,778; down 2% | $7,471; down 6% |
| Operating profit | $470; up 14% | $1,215; up 5% |
| Net income attributable to YUM | $334; up 18% | $855; up 12% |
| Diluted EPS | $0.69; up 19% | $1.77; up 16% |
| Company restaurant margin | 17.5%, up 3.1 percentage points | 16.2%, up 2.0 percentage points |
| Operating cash flow | Not separately presented | $1,135, versus $1,147 |
| Capital spending | Not separately presented | $505, versus $583 |
- Quarterly segment operating profit: U.S. $171 million, up 18%; YRI $119 million, down 13%; China $217 million, up 32%. Year-to-date: U.S. $497 million, up 11%; YRI $342 million, down 13%; China $453 million, up 26%.
- Quarter worldwide system sales were flat excluding currency translation, while reported sales declined 4%. U.S. system sales fell 5%; China grew 11% (10% excluding currency); YRI declined 7% (grew 4% excluding currency). Worldwide same-store sales declined 3%.
- At September 5, cash was $424 million, current assets $1,206 million and current liabilities $1,534 million. Short-term borrowings were $35 million and long-term debt $3,258 million. Shareholders’ equity was $989 million, versus a $94 million deficit at year-end 2008.
- YTD financing cash outflow was $439 million, including $263 million of dividends; no shares were repurchased during the period. Cash ended at $424 million, up from $216 million at fiscal year-end.
Material changes and unusual items
- Revenue fell despite profit growth. U.S. company sales and same-store sales were pressured by refranchising and weaker comparable sales; China growth and unit expansion partly offset declines elsewhere.
- Restaurant margins improved in the U.S. and China, mainly from commodity deflation and, in the U.S., lower operating costs and refranchising. YRI margins were pressured by commodity and occupancy costs. Management cited fourth-quarter commodity-deflation benefits of about $10 million in the U.S. and $30 million in China.
- YTD results included a non-cash $68 million gain from remeasuring YUM’s previously held interest when it gained control of the Shanghai KFC operator. The gain had no related tax expense. Shanghai consolidation added $105 million to YTD company sales and $5 million to operating profit; its effect on YUM-attributable net income was not significant.
- The prior-year comparison included a $100 million gain on the sale of YUM’s Japan affiliate interest. These gains affect comparability of other income and tax rates.
- YUM acquired a 20% interest in Little Sheep for approximately $63 million and began equity-method accounting. It issued $500 million of senior notes at 4.25% and 5.30%, used part of the proceeds to repay a $375 million variable-rate term loan, and expects to use the remainder for pension contributions.
Outlook, liquidity and risks
- Management described ongoing growth-model targets of 20% annual China system-sales and operating-profit growth, 10% YRI operating-profit growth, and 5% U.S. operating-profit growth with 2%–3% U.S. same-store sales growth. These are strategic targets, not a complete 2009 forecast; the filing directs readers to the company website for detailed 2009 guidance.
- Management expected to refranchise 500 U.S. restaurants in 2009 for approximately $175 million in proceeds, and anticipated at least $70 million of ongoing G&A savings from U.S. transformation actions. It planned discretionary pension contributions of $150–$200 million in Q4.
- Operating cash flow remained above $1.1 billion. Management said it expected comparable cash-flow levels to continue, while noting that a business downturn could reduce cash generation and that discretionary spending could be reduced. Reported unused revolving-credit capacity was approximately $1.3 billion; the primary facility had $968 million available net of letters of credit and the international facility had $350 million available. YUM reported covenant compliance with substantial headroom and sought to maintain investment-grade ratings.
- Risks include consumer weakness and competition; commodity, supply-chain and food-safety exposure; foreign-market, China and currency risks; franchisee performance; refranchising execution; and litigation. Lease guarantees could require up to $450 million of undiscounted payments, although management said the recorded probable liability was not material and franchisee cross-default provisions mitigate exposure.
- Pending matters include wage-and-hour claims, including California class actions and the LJS arbitration; a Taco Bell accessibility class action with damages not reasonably estimable; and Pizza Hut delivery-driver reimbursement class actions. YUM said it intended to defend the claims; outcomes and potential losses are uncertain. Self-insured property and casualty liabilities were approximately $180 million, and management noted estimates could change materially.
Investor verification priorities
- Separate recurring operating performance from the $68 million Shanghai remeasurement gain and the prior-year $100 million Japan gain; assess the related tax and segment effects.
- Track comparable sales, refranchising, new-unit growth, and currency impacts by division, particularly the U.S. sales decline and China’s contribution to profit.
- Test whether margin gains and planned G&A savings are sustainable as commodity prices, labor, occupancy costs and sales trends change.
- Review debt maturities, interest-rate exposure, pension funding needs, available credit, covenants and the proposed share-repurchase authorization of up to $300 million.
- Monitor litigation reserves and outcomes, lease and franchise-loan guarantees, and the filing’s stated possibility of material changes in self-insurance estimates.