Yum! Brands, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2022. Yum! franchises or operates nearly 54,000 KFC, Taco Bell, Pizza Hut and Habit Burger Grill restaurants across more than 155 countries and territories; 98% were franchisee-operated.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Total revenue | $1,640 | $1,606 | $4,823 | $4,694 |
| Operating profit | $546 | $527 | $1,609 | $1,637 |
| Net income | $331 | $528 | $954 | $1,245 |
| Diluted EPS | $1.14 | $1.75 | $3.28 | $4.10 |
| Operating cash flow | — | — | $975 | $1,292 |
- Quarter revenue increased 2% and YTD revenue increased 3%. Franchise and property revenues rose 6% in both periods; company sales fell 7% in the quarter and 4% YTD.
- Comparable system sales growth was 5% globally in the quarter and 3% YTD. Excluding foreign exchange, system sales growth was 7% and 6%, respectively. YTD same-store sales growth was 3%, down from 12% a year earlier.
- Core operating profit, excluding special items and foreign exchange, increased 8% in the quarter and was flat YTD. Diluted EPS excluding special items declined 11% to $1.09 in the quarter and 7% to $3.20 YTD.
- Company restaurant profit was $77 million in the quarter versus $92 million; company restaurant margin declined to 16.2% from 17.9%. YTD profit was $229 million versus $279 million and margin was 15.8% versus 18.5%, with commodity and wage inflation cited as drivers.
- Net cash from operations was $975 million YTD, down $317 million. Management attributed the decline primarily to incentive compensation payments, advertising-spending timing, and lower operating profit before special items, including foreign-exchange effects. Capital spending was $158 million.
- At September 30, cash and cash equivalents were $410 million; current assets were $1.60 billion and current liabilities $1.24 billion. Long-term debt was $11.52 billion and short-term borrowings $72 million. Total debt excluding finance leases was approximately $11.6 billion; 94% was fixed-rate, including swaps, with an effective overall rate of approximately 4.4%. Shareholders’ deficit was $8.54 billion.
Material changes and management commentary
- Net income and GAAP EPS fell sharply, largely reflecting the comparison with a $152 million one-time tax benefit in Q3 2021 tied to an intellectual-property reorganization. Q3 2022’s effective tax rate was 25.8%, versus a 17.0% benefit rate in Q3 2021. YTD tax expense also included $69 million associated with exiting Russia, partly offset by an $82 million discrete tax benefit.
- Foreign exchange reduced divisional operating profit by $39 million in the quarter and $76 million YTD. Management expected an approximately $100 million full-year 2022 adverse impact on divisional operating profit from currency.
- Yum removed 1,165 Russian KFC and Pizza Hut units from unit counts and system sales beginning in Q2. It suspended development and its 70 company-operated KFC restaurants; Pizza Hut Russia was transferred to a local operator. In October, Yum announced an agreement to sell its KFC Russia business, subject to approvals and other conditions.
- Quarterly segment operating profit: KFC $304 million (down 3% reported), Taco Bell $204 million (up 10%), Pizza Hut $92 million (down 8%), and Habit Burger Grill a $4 million loss. Taco Bell’s sales and unit growth supported results; KFC and Pizza Hut faced Russia, foreign-exchange, cost, or other operating pressures.
- Yum generated 979 gross openings and 644 net new units in the quarter; YTD it generated 2,757 gross openings and 1,735 net new units. Total unit count was 53,994, up 4% year over year.
Liquidity, outlook, risks and contingencies
- Management said operating cash flow had exceeded $1.3 billion annually in each of the prior three years and expected that to continue in 2022. It stated cash on hand, ongoing operating cash flow, and an undrawn $1.25 billion revolver should be sufficient for requirements over the next 12 months. No specific earnings or EPS guidance was provided.
- The company targets consolidated leverage of approximately 5.0x EBITDA, net of available cash. Its stated ratings were BB+ from S&P and Ba2 from Moody’s. It paid $489 million in common dividends and repurchased $714 million of shares YTD; a new $2 billion repurchase authorization was approved in September, becoming effective when the prior authorization expires or is exhausted.
- IRS dispute: An August 2022 IRS report proposed $2.1 billion of tax plus $418 million of penalties for 2014, with approximately $740 million of estimated interest through Q3 2022. Yum disputes the position, is pursuing IRS review, and recorded no reserve, believing its tax position is more likely than not to be sustained. An unfavorable outcome could materially adversely affect future financial statements.
- Other contingencies: An Indian regulatory penalty of approximately $135 million remains stayed while Yum contests it; the company does not consider significant loss probable. Potential undiscounted lease-guarantee payments were approximately $375 million, with an estimated present value of $300 million; the recorded expected-loss liability was not material.
- COVID-19 restrictions continued to affect some markets, primarily China; management said the evolving situation made the balance-of-year impact difficult to forecast. Other notable pressures included commodity and wage inflation and currency fluctuations.
- The interim financial statements received an independent accountant’s review, not an audit. Management concluded disclosure controls were effective and reported no material quarterly changes in internal control over financial reporting.
Investor verification priorities
- Track resolution and potential financial exposure of the IRS proposed adjustment, including interest and penalties; no reserve was recorded.
- Verify completion and proceeds, if disclosed, of the KFC Russia sale, along with remaining Russia-related costs, tax effects, and changes to reported growth comparisons.
- Assess whether operating cash flow and restaurant margins recover from YTD declines amid inflation, advertising-spending timing, and incentive payments.
- Monitor currency impacts against management’s approximately $100 million full-year divisional operating-profit estimate and the continuing China-related effects.
- Review debt maturities, leverage, liquidity, and capital returns in light of the company’s approximately $11.6 billion debt and ongoing dividends and repurchases.