Yum! Brands Reports Fourth-Quarter EPS

LOUISVILLE, Ky.–(hospitalitybusinessnews.com)–Yum! Brands, Inc. today reported results for the fourth quarter ended December 26, 2015. Fourth-quarter EPS excluding Special Items was $0.68, an increase of 11%. Reported EPS was $0.63 for the quarter and $2.92 for the year.

FOURTH-QUARTER HIGHLIGHTS

  • Worldwide system sales grew 6%. Worldwide restaurant margin increased 3.4 percentage points to 13.6%. Worldwide operating profit increased 17%.
  • New global restaurants totaled 1,160, including 384 in China, 374 at KFC, 270 at Pizza Hut, 109 at Taco Bell and 23 in India; 83% of international development occurred in emerging markets.
  • China Division system sales increased 7%, driven by 7% unit growth and 2% same-store sales growth. Restaurant margin increased 4.3 percentage points to 11.4%. Operating profit increased 207%.
  • KFC Division system sales increased 6%, driven by 3% unit growth and 3% same-store sales growth. Operating margin increased 0.4 percentage points to 22.4%. Operating profit increased 7%.
  • Pizza Hut Division system sales increased 2%, driven by 1% unit growth and 1% same-store sales growth. Operating margin increased 1.0 percentage point to 23.4%. Operating profit increased 6%.
  • Taco Bell Division system sales increased 7%, driven by 3% unit growth and 4% same-store sales growth. Operating margin decreased 2.7 percentage points to 25.0%. Operating profit decreased 7%.
  • India Division system sales decreased 9%, driven by a 13% same-store sales decline.
  • Worldwide effective tax rate decreased to 29.4% from 30.0%.
  • Foreign currency translation negatively impacted operating profit by $37 million.

FULL-YEAR HIGHLIGHTS

  • Worldwide system sales grew 5%. Worldwide restaurant margin increased 1.5 percentage points to 16.0%. Worldwide operating profit increased 7%.
  • New global restaurants totaled 2,365, including 743 in China, 715 at KFC, 577 at Pizza Hut, 276 at Taco Bell and 54 in India; 80% of international development occurred in emerging markets.
  • China Division system sales increased 2%, driven by 7% unit growth and partially offset by a 4% same-store sales decline. Restaurant margin increased 1.1 percentage points to 15.9%. Operating profit increased 8%.
  • KFC Division system sales increased 7%, driven by 3% unit growth and 3% same-store sales growth. Operating margin increased 0.8 percentage points to 23.0%. Operating profit increased 8%.
  • Pizza Hut Division system sales increased 2%, driven by 1% unit growth and 1% same-store sales growth. Operating margin decreased 0.4 percentage points to 25.2%. Operating profit increased 1%.
  • Taco Bell Division system sales increased 8%, driven by 3% unit growth and 5% same-store sales growth. Operating margin increased 1.3 percentage points to 27.1%. Operating profit increased 12%.
  • India Division system sales decreased 5%, driven by a 13% same-store sales decline.
  • Worldwide effective tax rate increased to 25.6% from 25.5%.
  • Foreign currency translation negatively impacted operating profit by $107 million.

Note: All comparisons are versus the same period a year ago and exclude Special Items unless noted. System sales and operating profit figures on this page exclude foreign currency translation; restaurant margin and operating margin figures are as reported.

SUMMARY FINANCIAL TABLE

Fourth Quarter

Full Year

2015 2014 % Change 2015 2014 % Change
EPS Excluding Special Items $0.68 $0.61 11% $3.18 $3.09 3%
Special Items Gain/(Loss)1 $(0.05) $(0.81) NM $(0.26) $(0.77) NM
EPS $0.63 $(0.20) NM $2.92 $2.32 26%

1 See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of Special Items. Special Items for 2015 are primarily related to charges for the refranchising of certain international markets, U.S. refranchising gains and charges associated with the agreement reached with KFC U.S. franchisees. Special Items for 2014 are primarily related to the impairment of Little Sheep and U.S. refranchising gains.

GREG CREED COMMENTS

Greg Creed, CEO, said, “I’m pleased with the positive sales momentum we generated across the majority of Yum! in the fourth quarter. KFC China, for example, grew same-store sales 6% in the last quarter of 2015. Outside of China, each of our brand divisions grew same-store sales on a one-year and a two-year basis. Our U.S. results were particularly strong on a two-year basis, with growth of 2% at Pizza Hut, 8% at KFC and 10% at Taco Bell.

Fourth-quarter EPS grew 11%, with full-year EPS growth of 3% despite a 7% decline in the first half and six percentage points of foreign currency headwinds. For the full year, our brand divisions collectively grew operating profit 8% in constant currency, led by 12% operating profit growth at Taco Bell. Operating profit grew 8% in constant currency in China with impressive cost management partially offsetting weaker than originally anticipated sales results.

New-unit development continues to be a bright spot for our company. We added more than 2,300 new units globally in 2015. This year we expect to open nearly 2,400 new restaurants, which means we’re opening over six new restaurants a day, laying the groundwork for future growth. With all of this in mind, we are reiterating the guidance we initially gave in December. Given the results we have seen year-to-date and the plans we have laid out for each of the brands, we’re confident in our ability to deliver 10% operating profit growth in constant currency in 2016.

2016 will be a transformational year for Yum! as we are on track to complete the spin-off of our China Division, ultimately creating two powerful, independent, focused growth companies. The fundamental goal of Yum!, however, is unchanged. We are 100% dedicated to building and strengthening KFC, Pizza Hut and Taco Bell all around the world, as strong brands are critical to delivering sustained growth and creating shareholder value over the long term.”

CHINA DIVISION

Fourth Quarter

Full Year

% Change % Change
2015 2014 Reported Ex F/X 2015 2014 Reported Ex F/X
System Sales Growth +3 +7 Even +2
Same-Store Sales Growth (%) +2 (16) NM NM (4) (5) NM NM
Franchise & License Fees ($MM) 37 33 +12 +16 120 113 +7 +9
Restaurant Margin (%) 11.4 7.1 4.3 4.3 15.9 14.8 1.1 1.0
Operating Profit ($MM) 96 32 +195 +207 757 713 +6 +8
  • China Division system sales increased 7% for the quarter and 2% for the year, excluding foreign currency translation.
    • KFC same-store sales increased 6% for the quarter and declined 4% for the year.
    • Pizza Hut Casual Dining same-store sales declined 8% for the quarter and 5% for the year.
  • China Division opened 384 new restaurants in the quarter. For the year, China Division opened 743 new restaurants, including 351 at KFC, 280 at Pizza Hut Casual Dining and 75 at Pizza Hut Home Service.
China Units Q4 2015

% Change2

Restaurants1 7,176 +7
KFC 5,003 +4
Pizza Hut
Casual Dining 1,572 +20
Home Service 331 +28

1 Total includes East Dawning and Little Sheep units.

2 Represents year-over-year change.

  • Restaurant margin increased 4.3 percentage points to 11.4% for the quarter driven by productivity initiatives and KFC sales leverage. Restaurant margin increased 1.1 percentage points to 15.9% for the year driven by productivity initiatives, partially offset by sales deleverage.
  • Foreign currency translation negatively impacted operating profit by $4 million for the quarter and $15 million for the year.

KFC DIVISION

Fourth Quarter

Full Year

% Change % Change
2015 2014 Reported Ex F/X 2015 2014 Reported Ex F/X
Restaurants 14,577 14,197 +3 NA 14,577 14,197 +3 NA
System Sales Growth (5) +6 (4) +7
Same-Store Sales Growth (%) +3 +4 NM NM +3 +3 NM NM
Franchise & License Fees ($MM) 263 277 (5) +7 842 873 (4) +7
Restaurant Margin (%) 14.7 13.8 0.9 0.8 14.8 13.3 1.5 1.4
Operating Profit ($MM) 206 221 (7) +7 677 708 (4) +8
Operating Margin (%) 22.4 22.0 0.4 0.3 23.0 22.2 0.8 0.4
  • KFC Division system sales increased 6% for the quarter and 7% for the year, excluding foreign currency translation.
% Change
Int’l Emerging Markets Int’l Developed Markets U.S.

Fourth
Quarter

Full Year

Fourth
Quarter

Full Year

Fourth
Quarter

Full Year
System Sales Growth (Ex F/X) +10 +11 +6 +6 +1 +2
Same-Store Sales Growth +2 +3 +3 +3 +3 +4
  • KFC Division opened 370 new international restaurants during the quarter.
    • For the year, KFC Division opened 705 new international restaurants in 85 countries, including 524 units in emerging markets. 85% of these new units were opened by franchisees.
  • Operating margin increased 0.4 percentage points for the quarter and 0.8 percentage points for the year driven by same-store sales growth and new-unit development.
  • Foreign currency translation negatively impacted operating profit by $31 million for the quarter and $85 million for the year, as approximately 90% of division profits are generated outside the U.S.
KFC MARKETS1

Percent of KFC
System Sales 2

SYSTEM Sales Growth Ex F/X
Fourth Quarter (%) Full Year (%)
Emerging Markets
Asia (e.g. Malaysia, Indonesia, Philippines) 8% +8 +6
Africa 6% +4 +9
Latin America (e.g. Mexico, Peru) 6% +7 +8
Middle East / North Africa 6% +3 +3
Russia 5% +35 +42
Thailand 3% +6 +6
Continental Europe (e.g. Poland) 3% +12 +13
Developed Markets
U.S. 24% +1 +2
Australia 10% +7 +9
Asia (e.g. Japan, Korea, Taiwan) 9% +7 +5
U.K. 9% +2 +3
Continental Europe (e.g. France, Germany) 7% +11 +9
Canada 3% +4 +2
Latin America (e.g. Puerto Rico) 1% +3 +3

1 See website www.yum.com under tab “Investors” for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

PIZZA HUT DIVISION

Fourth Quarter

Full Year

% Change % Change
2015 2014 Reported Ex F/X 2015 2014 Reported Ex F/X
Restaurants 13,728 13,602 +1 NA 13,728 13,602 +1 NA
System Sales Growth (2) +2 (2) +2
Same-Store Sales Growth (%) +1 Even NM NM +1 (1) NM NM
Franchise & License Fees ($MM) 169 167 Even +5 536 541 (1) +3
Restaurant Margin (%) 9.6 6.4 3.2 2.4 9.7 8.2 1.5 1.0
Operating Profit ($MM) 81 80 +3 +6 289 295 (2) +1
Operating Margin (%) 23.4 22.4 1.0 0.6 25.2 25.6 (0.4) (0.6)
  • Pizza Hut Division system sales increased 2% for both the quarter and the year, excluding foreign currency translation.
% Change
Int’l Emerging Markets Int’l Developed Markets U.S.

Fourth
Quarter

Full Year

Fourth
Quarter

Full Year

Fourth
Quarter

Full Year
System Sales Growth (Ex F/X) +7 +7 Even +1 +2 +1
Same-Store Sales Growth +3 +3 (1) (1) +2 +1
  • Pizza Hut Division opened 223 new international restaurants during the quarter.
    • For the year, Pizza Hut Division opened 429 new international restaurants in 64 countries, including 243 units in emerging markets. 92% of these new units were opened by franchisees.
  • Operating margin increased 1.0 percentage point for the quarter led by an increase of 3.2 percentage points in restaurant margin. For the year, operating margin decreased 0.4 percentage points driven by strategic investments in international G&A.
  • Foreign currency translation negatively impacted operating profit by $2 million for the quarter and $8 million for the year.
PIZZA HUT MARKETS1

Percent of Pizza
Hut System Sales2

SYSTEM Sales Growth Ex F/X
Fourth Quarter (%) Full Year (%)
Emerging Markets
Latin America (e.g. Mexico, Peru) 7% +9 +9
Asia (e.g. Malaysia, Indonesia, Philippines) 5% +5 +4
Middle East / North Africa 5% +5 +6
Continental Europe (e.g. Poland) 1% +14 +11
Developed Markets
U.S. 55% +2 +1
Asia (e.g. Japan, Korea, Taiwan) 9% (2) (1)
U.K. 7% +4 +4
Continental Europe (e.g. France, Germany) 5% +4 +3
Canada 3% +7 +5
Australia 2% (12) (8)
Latin America (e.g. Puerto Rico) 1% (12) (4)

1 See website www.yum.com under tab “Investors” for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

TACO BELL DIVISION

Fourth Quarter

Full Year

% Change % Change
2015 2014 Reported Ex F/X 2015 2014 Reported Ex F/X
Restaurants 6,400 6,199 +3 NA 6,400 6,199 +3 NA
System Sales Growth +7 +7 +8 +8
Same-Store Sales Growth (%) +4 +6 NM NM +5 +3 NM NM
Franchise & License Fees ($MM) 138 130 +7 +7 447 411 +9 +9
Restaurant Margin (%) 23.7 20.6 3.1 3.1 22.3 18.9 3.4 3.4
Operating Profit ($MM) 152 163 (7) (7) 539 480 +12 +12
Operating Margin (%) 25.0 27.7 (2.7) (2.7) 27.1 25.8 1.3 1.3
  • Taco Bell Division system sales increased 7% for the quarter and 8% for the year.
  • Taco Bell Division opened 109 new restaurants in the fourth quarter. For the year, Taco Bell Division opened 276 new restaurants; 87% of these new units were opened by franchisees.
  • Restaurant margin increased 3.1 percentage points to 23.7% for the quarter driven by favorable U.S. commodities and same-store sales growth. Restaurant margin increased 3.4 percentage points to 22.3% for the year driven by same-store sales growth.
  • Operating margin decreased 2.7 percentage points for the quarter driven by an expected increase in G&A related to incentive compensation, investment spending on strategic growth and technology initiatives, legal costs and creation of the Live Más scholarship program. The majority of the increase is either nonrecurring in nature or represents investments to sustain positive brand momentum. This was partially offset by same-store sales growth. For the year, operating margin increased 1.3 percentage points driven by same-store sales growth, partially offset by an increase in G&A primarily attributable to incentive compensation, pension and previously mentioned investments.

INDIA DIVISION

  • India Division system sales decreased 9% for the quarter and 5% for the year, excluding foreign currency translation.
  • Operating loss was $4 million for the quarter and $19 million for the year.
  • During the quarter, we refranchised 86 KFC units, reducing equity ownership in India from 25% to 15%.
India Units Q4 2015 % Change2
Restaurants1 811 (3)
KFC 372 (6)
Pizza Hut
Casual Dining 170 (8)
Home Service 262 +7

1 Total includes 7 Taco Bell units.

2 Represents year-over-year change.

SPECIAL ITEMS / SHARE REPURCHASE UPDATE

  • For the fourth quarter in the U.S., we refranchised 36 Taco Bell units and sold real estate related to 19 previously refranchised KFC units, resulting in total proceeds of $75 million. We recorded pre-tax U.S. refranchising gains of $51 million in Special Items. At the end of the fourth quarter, our company ownership in the U.S. across our three branded divisions was 9%.
  • During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that will give us brand marketing control, as well as an accelerated path to expanded menu offerings, improved assets and an enhanced customer experience. In connection with this agreement, we recognized a Special Items charge of $41 million during the fourth quarter, primarily related to the funding of investments for new back-of-house equipment for franchisees.
  • In the fourth quarter, we repurchased 11.4 million shares totaling $830 million at an average price of $73. For the year, we repurchased 15.9 million shares totaling $1.2 billion at an average price of $75, with 420 million shares outstanding as of year end. During 2015, we reduced our outstanding share count by 14 million. For fiscal year 2016 through February 2, 2016, we repurchased 10.8 million shares totaling $749 million at an average price of $70.

 

YUM! Brands, Inc.

Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

Quarter ended % Change Year ended % Change
12/26/15 12/27/14 B/(W) 12/26/15 12/27/14 B/(W)
Company sales $ 3,339 $ 3,383 (1) $ 11,145 $ 11,324 (2)
Franchise and license fees and income 612 614 1,960 1,955
Total revenues 3,951 3,997 (1) 13,105 13,279 (1)
Company restaurant expenses
Food and paper 1,045 1,116 6 3,507 3,678 5
Payroll and employee benefits 797 824 3 2,517 2,579 2
Occupancy and other operating expenses 1,043 1,099 5 3,335 3,425 3
Company restaurant expenses 2,885 3,039 5 9,359 9,682 3
General and administrative expenses 528 473 (11) 1,504 1,419 (6)
Franchise and license expenses 96 51 (88) 242 160 (51)
Closures and impairment (income) expenses 49 505 90 79 535 85
Refranchising (gain) loss (50 ) (6 ) NM 10 (33 ) NM
Other (income) expense 2 (22 ) NM (10 ) (41 ) (75)
Total costs and expenses, net 3,510 4,040 13 11,184 11,722 5
Operating Profit (loss) 441 (43 ) NM 1,921 1,557 23
Interest expense, net 35 40 8 134 130 (4)
Income (loss) before income taxes 406 (83 ) NM 1,787 1,427 25
Income tax provision 131 36 NM 489 406 (20)
Net income (loss) – including noncontrolling interests 275 (119 ) NM 1,298 1,021 27
Net income (loss) – noncontrolling interests (33 ) (98) 5 (30 ) NM
Net income (loss) – YUM! Brands, Inc. $ 275 $ (86 ) NM $ 1,293 $ 1,051 23

Effective tax rate

32.2 % (44.1 )% NM 27.3 % 28.5 % 1.2 ppts.

Basic EPS Data

EPS $ 0.64 $ (0.20 ) NM $ 2.97 $ 2.37 25
Weighted average shares used in computation 433 441 2 436 444 2

Diluted EPS Data

EPS $ 0.63 $ (0.20 ) NM $ 2.92 $ 2.32 26
Weighted average shares used in computation 439 441 443 453 2
Dividends declared per common share $ 0.92 $ 0.82 $ 1.74 $ 1.56

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year ended % Change
12/26/15 12/27/14 B/(W) 12/26/15 12/27/14 B/(W)
Company sales $ 2,011 $ 1,973 2 $ 6,789 $ 6,821
Franchise and license fees and income 37 33 12 120 113 7
Total revenues 2,048 2,006 2 6,909 6,934
Company restaurant expenses
Food and paper 641 660 3 2,159 2,207 2
Payroll and employee benefits 453 463 2 1,386 1,407 2
Occupancy and other operating expenses 686 710 3 2,167 2,198 1
Company restaurant expenses 1,780 1,833 3 5,712 5,812 2
General and administrative expenses 139 132 (5) 397 391 (2)
Franchise and license expenses 5 5 (4) 20 16 (25)
Closures and impairment (income) expenses 42 31 (37) 64 54 (19)
Other (income) expense (14 ) (27 ) (46) (41 ) (52 ) (22)
Total costs and expenses, net 1,952 1,974 1 6,152 6,221 1
Operating Profit $ 96 $ 32 NM $ 757 $ 713 6
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 31.8 33.4 1.6 ppts. 31.8 32.4 0.6 ppts.
Payroll and employee benefits 22.6 23.5 0.9 ppts. 20.4 20.6 0.2 ppts.
Occupancy and other operating expenses 34.2 36.0 1.8 ppts. 31.9 32.2 0.3 ppts.
Restaurant margin 11.4 % 7.1 % 4.3 ppts. 15.9 % 14.8 % 1.1 ppts.
Operating margin 4.7 % 1.6 % 3.1 ppts. 11.0 % 10.3 % 0.7 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

KFC DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year ended % Change
12/26/15 12/27/14 B/(W) 12/26/15 12/27/14 B/(W)
Company sales $ 655 $ 727 (10) $ 2,106 $ 2,320 (9)
Franchise and license fees and income 263 277 (5) 842 873 (4)
Total revenues 918 1,004 (9) 2,948 3,193 (8)
Company restaurant expenses
Food and paper 222 254 12 717 809 11
Payroll and employee benefits 155 168 8 497 552 10
Occupancy and other operating expenses 182 206 12 580 651 11
Company restaurant expenses 559 628 11 1,794 2,012 11
General and administrative expenses 122 122 386 383 (1)
Franchise and license expenses 26 26 (3) 85 80 (7)
Closures and impairment (income) expenses 6 7 18 8 9 15
Other (income) expense (1 ) NM (2 ) 1 NM
Total costs and expenses, net 712 783 9 2,271 2,485 9
Operating Profit $ 206 $ 221 (7) $ 677 $ 708 (4)
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 33.8 34.8 1.0 ppts. 34.0 34.8 0.8 ppts.
Payroll and employee benefits 23.7 23.0 (0.7 ppts.) 23.6 23.8 0.2 ppts.
Occupancy and other operating expenses 27.8 28.4 0.6 ppts. 27.6 28.1 0.5 ppts.
Restaurant margin 14.7 % 13.8 % 0.9 ppts. 14.8 % 13.3 % 1.5 ppts.
Operating margin 22.4 % 22.0 % 0.4 ppts. 23.0 % 22.2 % 0.8 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

PIZZA HUT DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year ended % Change
12/26/15 12/27/14 B/(W) 12/26/15 12/27/14 B/(W)
Company sales $ 179 $ 185 (3) $ 609 $ 607
Franchise and license fees and income 169 167 536 541 (1)
Total revenues 348 352 (1) 1,145 1,148
Company restaurant expenses
Food and paper 49 54 9 169 180 6
Payroll and employee benefits 57 59 4 190 188 (1)
Occupancy and other operating expenses 56 60 7 191 189 (1)
Company restaurant expenses 162 173 6 550 557 1
General and administrative expenses 90 81 (9) 266 246 (8)
Franchise and license expenses 14 15 15 39 44 14
Closures and impairment (income) expenses 1 3 48 3 5 29
Other (income) expense 17 (2 ) 1 NM
Total costs and expenses, net 267 272 3 856 853
Operating Profit $ 81 $ 80 3 $ 289 $ 295 (2)
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 27.9 29.6 1.7 ppts. 27.8 29.7 1.9 ppts.
Payroll and employee benefits 31.3 31.6 0.3 ppts. 31.1 30.9 (0.2 ppts.)
Occupancy and other operating expenses 31.2 32.4 1.2 ppts. 31.4 31.2 (0.2 ppts.)
9.6 % 6.4 % 3.2 ppts. 9.7 % 8.2 % 1.5 ppts.
Operating margin 23.4 % 22.4 % 1.0 ppts. 25.2 % 25.6 % (0.4 ppts.)

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

TACO BELL DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year ended % Change
12/26/15 12/27/14 B/(W) 12/26/15 12/27/14 B/(W)
Company sales $ 470 $ 460 2 $ 1,541 $ 1,452 6
Franchise and license fees and income 138 130 7 447 411 9
Total revenues 608 590 3 1,988 1,863 7
Company restaurant expenses
Food and paper 124 134 8 421 431 2
Payroll and employee benefits 128 127 427 414 (3)
Occupancy and other operating expenses 107 104 (3) 350 333 (5)
Company restaurant expenses 359 365 2 1,198 1,178 (2)
General and administrative expenses 88 57 (56) 228 185 (23)
Franchise and license expenses 10 5 NM 22 18 (24)
Closures and impairment (income) expenses 1 NM 3 3 (35)
Other (income) expense (1 ) (1 ) (11) (2 ) (1 ) NM
Total costs and expenses, net 456 427 (7) 1,449 1,383 (5)
Operating Profit $ 152 $ 163 (7) $ 539 $ 480 12
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 26.4 29.2 2.8 ppts. 27.3 29.7 2.4 ppts.
Payroll and employee benefits 27.2 27.7 0.5 ppts. 27.7 28.5 0.8 ppts.
Occupancy and other operating expenses 22.7 22.5 (0.2 ppts.) 22.7 22.9 0.2 ppts.
23.7 % 20.6 % 3.1 ppts. 22.3 % 18.9 % 3.4 ppts.
Operating margin 25.0 % 27.7 % (2.7 ppts.) 27.1 % 25.8 % 1.3 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

Consolidated Balance Sheets

(amounts in millions)

(unaudited)
12/26/2015 12/27/2014
ASSETS
Current Assets
Cash and cash equivalents $ 737 $ 578
Accounts and notes receivable, less allowance: $16 in 2015 and $12 in 2014 377 325
Inventories 229 301
Prepaid expenses and other current assets 242 254
Advertising cooperative assets, restricted 103 95
Total Current Assets 1,688 1,553

Property, plant and equipment, net of accumulated depreciation and amortization of $3,643 in 2015 and $3,584 in 2014

4,189 4,498
Goodwill 656 700
Intangible assets, net 271 318
Investments in unconsolidated affiliates 61 52
Other assets 534 560
Deferred income taxes 676 653
Total Assets $ 8,075 $ 8,334
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other current liabilities $ 1,985 $ 1,970
Income taxes payable 77 77
Short-term borrowings 923 267
Advertising cooperative liabilities 103 95
Total Current Liabilities 3,088 2,409
Long-term debt 3,054 3,077
Other liabilities and deferred credits 958 1,235
Total Liabilities 7,100 6,721
Redeemable noncontrolling interest 6 9
Shareholders’ Equity
Common stock, no par value, 750 shares authorized; 420 shares and 434 shares issued in 2015 and 2014, respectively
Retained earnings 1,150 1,737
Accumulated other comprehensive income (loss) (239 ) (190 )
Total Shareholders’ Equity – YUM! Brands, Inc. 911 1,547
Noncontrolling interests 58 57
Total Shareholders’ Equity 969 1,604
Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity $ 8,075 $ 8,334

See accompanying notes.

YUM! Brands, Inc.

Consolidated Statements of Cash Flows

(amounts in millions)

Year ended
(unaudited)
12/26/15 12/27/14
Cash Flows – Operating Activities
Net income – including noncontrolling interests $ 1,298 $ 1,021
Depreciation and amortization 747 739
Closures and impairment (income) expenses 79 535
Refranchising (gain) loss 10 (33 )
Contributions to defined benefit pension plans (98 ) (18 )
Losses and other costs related to the extinguishment of debt
Deferred income taxes (89 ) (172 )
Equity income from investments in unconsolidated affiliates (41 ) (30 )
Distribution of income received from unconsolidated affiliates 21 28
Excess tax benefit from share-based compensation (50 ) (42 )
Share-based compensation expense 57 55
Changes in accounts and notes receivable

(54

) (21 )
Changes in inventories 58 (22 )
Changes in prepaid expenses and other current assets (22 ) 12
Changes in accounts payable and other current liabilities

128

60
Changes in income taxes payable 20 (143 )
Other, net

75

80
Net Cash Provided by Operating Activities 2,139 2,049
Cash Flows – Investing Activities
Capital spending (973 ) (1,033 )
Proceeds from refranchising of restaurants 246 114
Acquisitions (9 ) (28 )
Other, net 54 11
Net Cash Used in Investing Activities (682 ) (936 )
Cash Flows – Financing Activities
Proceeds from long-term debt
Repayments of long-term debt (263 ) (66 )
Revolving credit facilities, three months or less, net 285 416
Short-term borrowings, by original maturity
More than three months – proceeds 609 2
More than three months – payments (2 )
Three months or less, net
Repurchase shares of Common Stock (1,200 ) (820 )
Excess tax benefit from share-based compensation 50 42
Employee stock option proceeds 12 29
Dividends paid on Common Stock (730 ) (669 )
Other, net (55 ) (46 )
Net Cash Used in Financing Activities (1,292 ) (1,114 )
Effect of Exchange Rate on Cash and Cash Equivalents (6 ) 6
Net Increase in Cash and Cash Equivalents 159 5
Cash and Cash Equivalents – Beginning of Period 578 573
Cash and Cash Equivalents – End of Period $ 737 $ 578

See accompanying notes.

Reconciliation of Non-GAAP Measurements to GAAP Results
(amounts in millions, except per share amounts)
(unaudited)

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this document, the Company has provided non-GAAP measurements which present operating results in 2015 and 2014 on a basis before Special Items. Included in Special Items are gains/(losses) associated with the refranchising of equity markets outside the U.S., costs associated with the KFC U.S. Acceleration Agreement, a loss associated with the planned sale of an aircraft in China, costs associated with the planned spin-off of the China business and YUM! recapitalization, U.S. refranchising gains and the impairment of certain Little Sheep assets in 2014. These amounts are described in (c), (d), (e), (f), (g) and (h) in the accompanying notes.

The Company uses earnings before Special Items as a key performance measure of results of the operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of earnings before Special Items provides additional information to investors to facilitate the comparison of past and present operations, excluding items in the quarters and years to date ended December 26, 2015 and December 27, 2014 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

Quarter ended Year ended
12/26/15 12/27/14 12/26/15 12/27/14
Detail of Special Items

Gains (Losses) associated with the refranchising of equity markets outside the U.S.(c)

$ (3 ) $ $ (96 ) $ 7

Costs associated with KFC U.S. Acceleration Agreement(d)

(41 ) (72 )
Loss associated with planned sale of China aircraft(e) (15 ) (15 )
Costs associated with the planned spin-off of the China business and YUM recapitalization(f) (9 ) (9 )
U.S. Refranchising gain (loss)(g) 51 (5 ) 75 6
Little Sheep impairment(h) (463 ) (463 )
Other Special Items Income (Expense) 3 1 3
Special Items Income (Expense) before income taxes (17 ) (465 ) (116 ) (447 )
Tax Benefit (Expense) on Special Items (6 ) 78 (1 ) 72
Special Items Income (Expense), net of tax – including noncontrollng interests (23 ) (387 ) (117 ) (375 )
Special Items Income (Expense), net of tax – noncontrolling interests 26 26
Special Items Income (Expense), net of tax – Yum Brands, Inc. $ (23 ) $ (361 ) $ (117 ) $ (349 )
Weighted average shares used in computation 439 441 443 453
Special Items diluted EPS $ (0.05 ) $ (0.81 ) $ (0.26 ) $ (0.77 )
Reconciliation of Operating Profit Before Special Items to Reported Operating Profit
Operating Profit Before Special Items $ 458 $ 422 $ 2,037 $ 2,004
Special Items Income (Expense) – Operating Profit (17 ) (465 ) (116 ) (447 )
Reported Operating Profit (loss) $ 441 $ (43 ) $ 1,921 $ 1,557
Reconciliation of EPS Before Special Items to Reported EPS
Diluted EPS Before Special Items $ 0.68 $ 0.61 $ 3.18 $ 3.09
Special Items EPS (0.05 ) (0.81 ) (0.26 ) (0.77 )
Reported EPS $ 0.63 $ (0.20 ) $ 2.92 $ 2.32
Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate
Effective Tax Rate Before Special Items 29.4 % 30.0 % 25.6 % 25.5 %
Impact on Tax Rate as a result of Special Items 2.8 % (74.1 )% 1.7 % 3.0 %
Reported Effective Tax Rate 32.2 % (44.1 )% 27.3 % 28.5 %

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Quarter Ended 12/26/15 China KFC Pizza Hut Taco Bell India

Corporate

and

Unallocated

Consolidated
Total revenues $ 2,048 $ 918 $ 348 $ 608 $ 29 $ $ 3,951
Company restaurant expenses 1,780 559 162 359 25 2,885
General and administrative expenses 139 122 90 88 7 82 528
Franchise and license expenses 5 26 14 10 1 40 96
Closures and impairment (income) expenses 42 6 1 49
Refranchising (gain) loss (50 ) (50 )
Other (income) expense (14 ) (1 ) (1 ) 18 2
1,952 712 267 456 33 90 3,510
Operating Profit (loss) $ 96 $ 206 $ 81 $ 152 $ (4 ) $ (90 ) $ 441
Quarter Ended 12/27/14 China KFC Pizza Hut Taco Bell India

Corporate

and

Unallocated

Consolidated
Total revenues $ 2,006 $ 1,004 $ 352 $ 590 $ 45 $ $ 3,997
Company restaurant expenses 1,833 628 173 365 39 1 3,039
General and administrative expenses 132 122 81 57 8 73 473
Franchise and license expenses 5 26 15 5 51
Closures and impairment (income) expenses 31 7 3 1 463 505
Refranchising (gain) loss (6 ) (6 )
Other (income) expense (27 ) (1 ) 6 (22 )
1,974 783 272 427 47 537 4,040
Operating Profit (loss) $ 32 $ 221 $ 80 $ 163 $ (2 ) $ (537 ) $ (43 )

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Non-GAAP Measurements to GAAP Results.

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Year Ended 12/26/15 China KFC Pizza Hut Taco Bell India

Corporate

and

Unallocated

Consolidated
Total revenues $ 6,909 $ 2,948 $ 1,145 $ 1,988 $ 115 $ $ 13,105
Company restaurant expenses 5,712 1,794 550 1,198 105 9,359
General and administrative expenses 397 386 266 228 23 204 1,504
Franchise and license expenses 20 85 39 22 5 71 242
Closures and impairment (income) expenses 64 8 3 3 1 79
Refranchising (gain) loss 10 10
Other (income) expense (41 ) (2 ) (2 ) (2 ) 37 (10 )
6,152 2,271 856 1,449 134 322 11,184
Operating Profit (loss) $ 757 $ 677 $ 289 $ 539 $ (19 ) $ (322 ) $ 1,921
Year Ended 12/27/14 China KFC Pizza Hut Taco Bell India

Corporate

and

Unallocated

Consolidated
Total revenues $ 6,934 $ 3,193 $ 1,148 $ 1,863 $ 141 $ $ 13,279
Company restaurant expenses 5,812 2,012 557 1,178 122 1 9,682
General and administrative expenses 391 383 246 185 25 189 1,419
Franchise and license expenses 16 80 44 18 2 160
Closures and impairment (income) expenses 54 9 5 3 1 463 535
Refranchising (gain) loss (33 ) (33 )
Other (income) expense (52 ) 1 1 (1 ) 10 (41 )
6,221 2,485 853 1,383 150 630 11,722
Operating Profit (loss) $ 713 $ 708 $ 295 $ 480 $ (9 ) $ (630 ) $ 1,557

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Non-GAAP Measurements to GAAP Results.

Notes to the Consolidated Summary of Results, Consolidated Balance Sheets

and Consolidated Statements of Cash Flows

(amounts in millions, except per share amounts)

(unaudited)

(a) Amounts presented as of and for the quarter and year ended December 26, 2015 are preliminary.
(b) Other (income) expense for the China Division primarily consists of equity income (loss) from investments in unconsolidated affiliates. The quarters ended December 26, 2015 and December 27, 2014 also include insurance recoveries of $5 million and $25 million, respectively, related to the 2012 poultry supply incident.
(c) In 2010 we refranchised our then remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing it to the franchisee. During the quarter ended June 13, 2015 we initiated plans to sell this real estate and determined it was held for sale in accordance with GAAP. During the quarter ended December 26, 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represented a substantial liquidation of our Mexican operations under U.S. GAAP. Accordingly, we were required to write-off accumulated translation losses associated with our Mexican business. As such, during the year to date ended December 26, 2015 we recorded charges of $80 million, representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the sales price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising Loss within Special Items. Additionally, during the quarter and year to date ended December 26, 2015 we recognized Special Items charges of $3 million and $16 million, respectively, associated with the refranchising of our Pizza Hut Korea restaurants. The carrying value of the remaining restaurants not yet sold as of year end is not significant. While additional charges may occur as the refranchising plans move forward, such charges are not expected to be material at this time.
(d) During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to improved assets and customer experience. In connection with this agreement we recognized Special Item charges for the quarter and year to date ended December 26, 2015 of $41 million and $72 million, respectively, primarily related to the funding of investments for new back-of-house equipment for franchisees.
(e) During the quarter ended December 26, 2015, we initiated plans to sell an aircraft used in our China Division and determined it was held for sale, resulting in a write down of $15 million.
(f)

In October 2015 we announced our intent to spin off YUM!’s China Division from YUM! Brands into a separate independent, publicly-traded company by the end of 2016. A part of this plan is to optimize the capital structure of YUM! Brands through the issuance of new debt that will allow us to return significant capital to shareholders. During the quarter ended December 26, 2015 we incurred costs of $9 million related to these initiatives.

(g) During the quarters ended December 26, 2015 and December 27, 2014, we recorded Special Item gains of $51 million and losses of $5 million, respectively, related to refranchising in the U.S. During the years to date ended December 26, 2015 and December 27, 2014, we recorded Special Item gains of $75 million and $6 million, respectively, related to refranchising in the U.S. Refranchising gains and losses in the U.S. have been reflected as Special Items due to the scope of our U.S. refranchising program in recent years and the volatility in associated gains and losses.
(h) During the quarter ended December 27, 2014, we recorded an impairment charge related to Little Sheep totaling $361 million (net of income tax benefit of $76 million and amounts allocated to noncontrolling interests of $26 million). This charge was driven by a write down in trademark from $342 million to $58 million and a write off of all remaining goodwill of $160 million.
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