Yum! Brands, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Yum! operates KFC, Pizza Hut, Taco Bell and Habit Burger Grill, with over 52,000 restaurants in more than 150 countries; 98% were franchised.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1,606 | $1,448 | $4,694 | $3,909 |
| Operating profit | $527 | $471 | $1,637 | $1,021 |
| Net income | $528 | $283 | $1,245 | $572 |
| Diluted EPS | $1.75 | $0.92 | $4.10 | $1.86 |
| Operating cash flow | Not provided for quarter | $1,292 | $853 |
- Q3 revenue increased 11%; operating profit increased 12%; net income increased 87%. Nine-month revenue rose 20%, operating profit 60%, and net income 118% year over year.
- Reported diluted EPS excluding special items was $1.22 for Q3, down from $1.01? No: it increased from $1.01 to $1.22. For the nine months, it increased from $2.47 to $3.44.
- System sales excluding foreign exchange grew 8% in Q3 and 15% year to date; same-store sales rose 5% and 12%, respectively. Net new units added: 760 in Q3 and 1,798 year to date.
- Company restaurant margin was 17.9% in Q3 versus 17.8%; year-to-date margin was 18.5% versus 15.9%. Taco Bell cited higher labor, advertising, commodity and other restaurant costs as Q3 margin pressures.
- Cash and cash equivalents were $1,001 at September 30, versus $730 at year-end 2020; cash, restricted cash and equivalents totaled $1,311. Total current assets were $2,062 and current liabilities $1,355.
- Long-term debt was $11,189 and short-term borrowings $64, for reported debt of $11,253, including finance leases. Management said approximately 93% of $11.3 billion total debt, including swaps, was fixed-rate, at an effective overall rate of about 4.2%. Shareholders’ deficit was $7,855.
- Nine-month investing cash outflow was $123 and financing cash outflow $881. The company repurchased $860 of stock and paid $446 of common dividends during the period.
Drivers, changes and unusual items
- The $152 Q3 one-time tax benefit from transferring KFC intellectual property to Switzerland materially lowered the reported effective tax rate to negative 17.0% (versus 10.5%); the nine-month rate was 1.8% (versus 14.4%). The filing reports a 18.9% Q3 and 19.7% year-to-date effective tax rate excluding special items.
- Q3 included $52 of pre-tax investment income from the remeasurement of the company’s minority investment in Devyani after its IPO. Q3 diluted EPS excluding special items was $1.22, compared with GAAP diluted EPS of $1.75.
- Prior-year comparisons include $144 of year-to-date 2020 Habit Burger Grill goodwill impairment and other differing special items. Consequently, GAAP profit growth is not directly indicative of underlying operating growth: core operating profit increased 3% in Q3 and 26% year to date.
- Segment Q3 operating profit: KFC $314 (up 14%), Pizza Hut $101 (up 13%), Taco Bell $184 (down 1%), and Habit Burger Grill $1 (versus a $7 loss). Taco Bell’s Q3 margin pressure offset sales and unit growth.
- Yum acquired Dragontail Systems for $66 net cash in September to enhance digital and restaurant technology capabilities; its results did not significantly affect the reported periods.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management said COVID-19’s ongoing effects make the balance-of-year impact difficult to forecast. It expected continued adverse effects in some regions; about 500 restaurants remained temporarily closed at September 30, primarily in parts of Asia, Latin America and Australia.
- Management cited off-premise and digital channels as helping offset closures and dining restrictions, while cautioning that sales benefits from pandemic-related shifts could diminish as restrictions ease. Franchisee financial condition remains an area of monitoring.
- Management expects Q4 operating profit growth to face a difficult comparison from prior-year franchise bad-debt recoveries. In Q3 2021, net bad-debt expense was $3, compared with $21 of recoveries in Q3 2020.
- Management believes cash, operating cash flow and the undrawn $1.25 billion revolving credit facility are sufficient for operations, anticipated capital spending and debt repayments over the next 12 months. The company targets net leverage of approximately 5.0x EBITDA.
- The IRS issued a proposed adjustment concerning 2014 reorganizations, asserting taxable distributions of approximately $6.0 billion. The potential tax assessment was not yet quantifiable but was expected to be material; Yum disputes the position, intends to contest it, and recorded no reserve, stating it believes its tax position is more likely than not to be sustained.
- An Indian regulatory action imposed an approximately $150 million penalty on a subsidiary. The penalty is stayed by a court; Yum denies liability and does not consider a significant loss probable. Lease guarantees had approximately $400 million of undiscounted potential payments; recorded expected-loss liability was not material.
Important facts for investors to verify
- How much reported earnings growth reflects the one-time Swiss tax benefit and Devyani fair-value gain, versus recurring operating performance.
- Whether same-store sales, unit growth and franchisee health remain resilient as COVID-related restrictions and consumer behavior change.
- The eventual IRS proposed assessment and outcome of Yum’s challenge, including any material financial-statement effect.
- Debt maturities, refinancing terms and leverage, particularly the securitization notes’ anticipated repayment dates and potential rapid amortization if not refinanced.
- Whether labor, commodity and other operating-cost inflation continues to pressure restaurant margins, especially at Taco Bell.