YUM! Brands, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2013 (52 weeks). The filing also provides fourth-quarter results. YUM operated more than 40,000 KFC, Pizza Hut and Taco Bell restaurants in over 125 countries and territories.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $13.084 billion | $13.633 billion |
| Company restaurant sales | $11.184 billion | $11.833 billion |
| Franchise and license fees and income | $1.900 billion | $1.800 billion |
| Company restaurant profit margin | 15.0% | 16.7% |
| Operating profit | $1.798 billion | $2.294 billion |
| Net income attributable to YUM | $1.091 billion | $1.597 billion |
| Diluted EPS | $2.36 | $3.38 |
| Diluted EPS before special items | $2.97 | $3.25 |
| Operating cash flow | $2.139 billion | $2.294 billion |
| Capital spending | $1.049 billion | $1.099 billion |
| Total debt | $2.989 billion | $2.942 billion |
Cash and cash equivalents were $573 million at year-end; the company also had $1.2 billion of unused revolving-credit capacity. Operating cash flow less capital spending was approximately $1.09 billion. Fiscal-year dividends declared were $1.41 per share; cash dividends paid totaled $615 million.
Fourth-quarter 2013 revenue was $4.179 billion, operating profit $571 million, net income attributable to YUM $321 million, and diluted EPS $0.70. The corresponding 2012 figures were $4.153 billion, $505 million, $337 million and $0.72.
Material changes and operating performance
- Revenue declined 4% and reported operating profit declined 22%; diluted EPS before special items fell 9%. Reported results included material impairment and debt-extinguishment charges.
- China was the principal operating weakness: same-store sales fell 13%, system sales fell 4% excluding currency effects, and operating profit fell 26% excluding currency effects to $777 million. China restaurant margin declined to 15.4% from 18.1%.
- Management attributed China’s performance primarily to publicity surrounding a poultry-supply investigation and avian flu, which hurt KFC China sales. KFC China fourth-quarter same-store sales fell 4%, an improvement from the 15% full-year decline.
- YRI operating profit was $760 million, up 10% excluding currency effects; U.S. operating profit was $684 million, up 3%. U.S. same-store sales were flat, while YRI same-store sales grew 1%.
- Worldwide system sales grew 2% excluding currency effects. The system ended the year with 40,311 units, up from 39,014.
Special items, outlook and risks
- YUM recorded $295 million of non-cash Little Sheep impairment charges: $222 million for goodwill, $69 million for the trademark and $4 million for restaurant assets. The after-tax charge attributable to YUM was $258 million.
- The fourth-quarter tender offer repurchased $550 million principal amount of notes. Related premiums and costs totaled $120 million, including $118 million classified as net interest expense. New notes totaling $600 million were issued in the quarter.
- Management forecast 2014 EPS growth of at least 20% before special items, driven substantially by an expectation that China operating profit would return to 2012 levels of more than $1 billion. The filing cautions that forward-looking results are uncertain.
- Key risks include food-safety or poultry-supply issues, avian flu and other health concerns, China and foreign-market exposure, currency movements, commodity and labor costs, competition, franchisee performance, and regulatory and data-security requirements. A uniform 10% weakening of foreign currencies against the U.S. dollar was estimated to reduce 2013 operating profit by about $155 million.
- The IRS proposed additional tax adjustments concerning transferred intangible rights: approximately $700 million plus interest for 2004–2006, $270 million plus interest for 2007–2008, and an estimated $140 million plus interest for 2009–2013 on a similar basis. YUM disputes the proposals; resolution was not expected within 12 months, and any final payment could exceed recorded reserves.
- Contingencies include securities and derivative litigation, wage-and-hour and accessibility claims, and lease and franchise-loan guarantees. Management said it could not estimate possible losses for certain cases; it considered overall unprovided legal exposure unlikely to materially affect results, financial condition or cash flows.
- Management expected 2014 capital spending of approximately $1.2 billion. It also planned a 2014 reporting change to global KFC, Pizza Hut and Taco Bell divisions, with China and India reported separately.
Most important facts for investors to verify
- Whether China sales and operating profit recovered as projected, and whether food-safety concerns or avian flu affected customer demand or supply practices.
- How much of the reported earnings decline reflects continuing operations versus Little Sheep impairment, debt-extinguishment costs, tax effects and other special items.
- The outcome and reserve adequacy of the IRS intangible-valuation dispute, including potential interest and subsequent tax years.
- Debt maturities, lease commitments and contingent guarantees, alongside cash generation, capital spending, dividends and share repurchases.
- Developments in material litigation and the consequences, if any, of the January 2014 accounting-firm suspension ruling affecting the Chinese affiliate of YUM’s auditor.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 28, 2013.