Yum! Brands Reports Third-Quarter GAAP Operating Profit Growth of 8%

LOUISVILLE, Ky.–(hospitalitybusinessnews.com)–Yum! Brands, Inc. today reported results for the third quarter ended September 3, 2016, including GAAP EPS of $1.56 and EPS excluding Special Items of $1.09.

System sales growth figures exclude foreign currency translation (“F/X”) and core operating profit growth figures exclude F/X and Special Items. Special Items are not allocated to any segment and therefore only impact worldwide GAAP results. See reconciliation of non-GAAP measurements to GAAP results within this release for further details.

THIRD-QUARTER HIGHLIGHTS

  • KFC Division same-store sales increased 4%, with U.S. same-store sales growing 6%; system sales increased 7%.
  • Taco Bell Division same-store sales increased 3% and system sales increased 5%, while achieving a 21.7% restaurant margin.
  • Worldwide core operating profit grew 11%, with the brand divisions excluding China delivering 11% core operating profit growth in aggregate, ahead of expectations.
  • China core operating profit grew 14%.
  • Opened 475 new restaurants worldwide; 78% of international development occurred in emerging markets.
  • On track to finalize China separation with Yum China Holdings, Inc. expected to begin trading on November 1, 2016 on the NYSE under the ticker symbol “YUMC.”
  • Foreign currency translation negatively impacted operating profit by $34 million.
% Change
System Sales

Same-Store
Sales

Net New Units

GAAP
Operating Profit

Core
Operating Profit

China Division +3 (1) +7 +7 +14
KFC Division +7 +4 +3 +11 +19
Pizza Hut Division Even (1) +1 (6) (5)
Taco Bell Division +5 +3 +3 +9 +9
Worldwide +4 +1 +3 +8 +11

Third Quarter

Year-to-Date

2016

2015

% Change

2016

2015

% Change

EPS Excluding Special Items $1.09 $1.00 9% $2.79 $2.50 12%
Special Items Gain/(Loss)1

$0.47

$(0.05)

NM

$0.49

$(0.21)

NM

EPS $1.56 $0.95 64% $3.28 $2.29 43%

1 See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of Special Items. Special Items in 2016 are primarily related to a U.S. tax benefit related to previously recognized Little Sheep impairment losses, gains associated with Pizza Hut and Taco Bell U.S. refranchising and costs associated with the planned separation of our China business, U.S. voluntary retirement packages and the agreement reached in 2015 with KFC U.S. franchisees. Special Items in 2015 are primarily related to a non-cash charge associated with refranchising our Mexico business and costs associated with the agreement reached in 2015 with KFC U.S. franchisees, partially offset by U.S. refranchising gains.

Note: All comparisons are versus the same period a year ago. Effective January 2016, the Company’s India business integrated its three restaurant brands into our global KFC, Pizza Hut and Taco Bell Divisions. Prior year figures have been restated to present comparable results.

Full-year GAAP operating profit growth guidance is not provided due to our inability to forecast when gains and losses related to refranchising transactions classified as Special Items will occur, as the timing of these transactions is often outside our control, and the resulting gains and losses are dependent upon future market conditions. 2016 core operating profit growth guidance assumes the China business remains part of the Company through the end of 2016.

GREG CREED COMMENTS

Greg Creed, CEO, said “Yum! Brands delivered third-quarter core operating profit growth of 11% and EPS growth, excluding Special Items, of 9%. For the full year, we are raising our core operating profit growth guidance from at least 14% to at least 15%.

In the third quarter, I was pleased with both KFC’s and Taco Bell’s performance, each of which returned to a focus on core menu items, but in ways that were distinctive, disruptive and relevant. Both brands had accelerating same-store sales growth, despite sluggish QSR industry trends, especially in the U.S. Excluding China, our brand divisions in aggregate delivered core operating profit growth of 11%, which was ahead of our expectations. System sales for the brand divisions excluding China grew 5% in constant currency, driven by KFC where system sales grew 7% with international emerging markets up an impressive 12%. We are excited about the momentum we are seeing in our base business as we embark on the next chapter of growth at our company.

Sales were off to a good start in the first six weeks of the quarter in the China Division. However, anticipated tougher laps in the second half of the third quarter were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth. The good news is the incident was short-lived and the sales impact continued to dissipate through August and September. Despite the protests, Pizza Hut Casual Dining continued its trend of quarterly sequential improvement.

2016 marks the beginning of a massive transformation for Yum! Brands. Step one is the formal separation of our China business, which will become one of China’s largest publicly-traded retail companies with meaningful growth opportunities supported by U.S. governance. New Yum! Brands will become a unique and focused world-class franchisor with consistent, stable cash flow generation and an efficient cost structure that encourages growth. We look forward to sharing the details of our strategic plans for both companies at our New York investor conference on Tuesday, October 11.”

New Global Yum! Core Operating Profit Growth

After the spin-off of our China business, we will reclassify China Division’s historical results and related tax expense, including the first ten months of 2016, to Discontinued Operations within our Income Statement. The China Division’s results presented in Discontinued Operations will include an incremental license fee expense similar to what will be paid by China to Yum! going forward. Likewise, Yum!’s historical results for our KFC and Pizza Hut Divisions, including the first ten months of 2016, will include incremental license fee income from our China business such that recast total net income, including Discontinued Operations, is the same as previously reported results. While we expect to spin-off our China business on October 31, 2016, our operating profit growth targets assume China will remain part of Yum! through the end of 2016.

CHINA DIVISION

Third Quarter

Year-to-Date

%/ppts Change %/ppts Change

2016

2015

Reported

Ex F/X

2016

2015

Reported

Ex F/X

System Sales Growth (3) +3 Even +5
Same-Store Sales Growth (%) (1) +2 NM NM +1 (6) NM NM
Franchise & License Fees ($MM) 35 34 +2 +9 90 83 +8 +14
Restaurant Margin (%) 22.2 19.6 2.6 2.6 20.1 17.7 2.4 2.4
Operating Profit ($MM) 348 327 +7 +14 751 661 +14 +20
Operating Margin (%) 18.5 16.6 1.9 2.0 15.7 13.6 2.1 2.2
  • China Division system sales increased 3%, excluding foreign currency translation.
    • Same-store sales decreased 1%, with declines of 1% at KFC and 4% at Pizza Hut Casual Dining.
  • China Division opened 133 new units during the quarter.
China Units Q3 2016

% Change2

Restaurants1 7,330 +7
KFC 5,087 +4
Pizza Hut
Casual Dining 1,643 +16
Home Service 350 +23

1 Total includes East Dawning and Little Sheep units.

2 Represents year-over-year change.

  • Operating profit increased as a result of recent value-added tax reform in China and new-unit development, partially offset by higher labor costs, increased G&A and sales deleverage.
  • Foreign currency translation negatively impacted operating profit by $23 million.
  • Consistent with prior years, China Division’s third quarter includes June, July and August results.

KFC DIVISION

Third Quarter

Year-to-Date

%/ppts Change %/ppts Change

2016

2015

Reported

Ex F/X

2016

2015

Reported

Ex F/X

Restaurants 15,065 14,694 +3 N/A 15,065 14,694 +3 N/A
System Sales Growth +3 +7 +1 +6
Same-Store Sales Growth (%) +4 +3 NM NM +2 +3 NM NM
Franchise & License Fees ($MM) 202 195 +4 +8 591 584 +1 +6
Restaurant Margin (%) 14.5 12.9 1.6 1.6 14.6 13.9 0.7 0.6
Operating Profit ($MM) 160 144 +11 +19 469 459 +2 +9
Operating Margin (%) 22.2 20.0 2.2 2.3 22.8 21.8 1.0 1.0
  • KFC Division system sales increased 7%, excluding foreign currency translation.
Third Quarter (% Change)

Int’l Emerging Markets

Int’l Developed Markets

U.S.
System Sales Growth (Ex F/X) +12 +4 +4
Same-Store Sales Growth +5 +1 +6
  • KFC Division opened 138 new international restaurants in 42 countries, including 96 units in emerging markets.
  • Operating margin increased 2.2 percentage points driven by same-store sales growth.
  • Foreign currency translation negatively impacted operating profit by $11 million, 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
Third Quarter (%) Year-to-Date (%)
Emerging Markets
Asia (e.g. Malaysia, Indonesia, Philippines) 7% +7 +9
Africa 6% +11 +9
Latin America (e.g. Mexico, Peru) 6% +10 +7
Middle East / North Africa 6% +5 +4
Russia 5% +35 +33
Thailand 3% +12 +8
Continental Europe (e.g. Poland) 3% +16 +17
India 1% +13 +4
Developed Markets
U.S. 24% +4 +1
Australia 10% +4 +4
Asia (e.g. Japan, Korea, Taiwan) 9% (1) +4
U.K. 9% +5 +2
Continental Europe (e.g. France, Germany) 7% +9 +9
Canada 3% +4 +5
Latin America (e.g. Puerto Rico) 1% +5 (1)

1 See website www.yum.com/investors for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

PIZZA HUT DIVISION

Third Quarter

Year-to-Date

%/ppts Change %/ppts Change

2016

2015

Reported

Ex F/X

2016

2015

Reported

Ex F/X

Restaurants 14,179 14,042 +1 N/A 14,179 14,042 +1 N/A
System Sales Growth (2) Even Even +2
Same-Store Sales Growth (%) (1) +1 NM NM +1 Even NM NM
Franchise & License Fees ($MM) 124 123 +1 +3 378 372 +2 +4
Restaurant Margin (%) 3.1 7.8 (4.7) (4.8) 8.2 9.8 (1.6) (1.9)
Operating Profit ($MM) 61 65 (6) (5) 212 206 +3 +4
Operating Margin (%) 26.7 24.7 2.0 1.8 28.6 25.7 2.9 2.6
  • Pizza Hut Division system sales were even, excluding foreign currency translation.
Third Quarter (% Change)

Int’l Emerging Markets

Int’l Developed Markets

U.S.
System Sales Growth (Ex F/X) +4 +2 (3)
Same-Store Sales Growth (1) +1 (2)
  • Pizza Hut Division opened 105 new international restaurants in 40 countries, including 71 units in emerging markets.
  • Restaurant margin was 3.1%, a decrease of 4.7 percentage points, driven by refranchising and higher property and casualty insurance costs.
  • Foreign currency translation negatively impacted operating profit by less than $1 million.
PIZZA HUT MARKETS1

Percent of Pizza Hut
System Sales2

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

1 See website www.yum.com/investors for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

TACO BELL DIVISION

Third Quarter

Year-to-Date

%/ppts Change %/ppts Change

2016

2015

Reported

Ex F/X

2016

2015

Reported

Ex F/X

Restaurants 6,511 6,321 +3 N/A 6,511 6,321 +3 N/A
System Sales Growth +5 +5 +4 +4
Same-Store Sales Growth (%) +3 +4 NM NM +1 +5 NM NM
Franchise & License Fees ($MM) 115 107 +8 +8 326 309 +6 +6
Restaurant Margin (%) 21.7 22.1 (0.4) (0.4) 21.6 21.6
Operating Profit ($MM) 143 132 +9 +9 401 386 +4 +4
Operating Margin (%) 29.8 27.8 2.0 2.0 29.3 27.9 1.4 1.4
  • Taco Bell Division system sales increased 5%, excluding foreign currency translation.
  • Taco Bell Division opened 63 new restaurants.
  • Restaurant margin was 21.7%, a decrease of 0.4 percentage points, driven by higher labor costs, partially offset by same-store sales growth and lower commodity costs.
  • Operating margin increased 2.0 percentage points driven by same-store sales growth.

SPECIAL ITEMS / SHARE REPURCHASE / RECAPITALIZATION UPDATE

  • During the quarter, we recorded a tax benefit of $198 million in Special Items due to our ability to now realize tax benefits associated with previous impairment losses related to Little Sheep that were recognized as Special Items in 2013 and 2014.
  • During the quarter, we incurred a Special Items charge of $20 million for restructuring costs related to U.S. voluntary retirement packages.
  • During the quarter, we incurred a Special Items charge of $10 million for costs related to the planned separation of our China business.
  • During the quarter, we refranchised 94 units outside of China, more than half of which were Pizza Hut units, for proceeds of $61 million. We recorded refranchising gains of $21 million in Special Items.
  • To complete our recapitalization strategy, $4.6 billion of new debt was issued in the third quarter.
  • Year-to-date through October 4, 2016, we repurchased 54.5 million shares totaling $4.5 billion at an average price of $82. Since we announced our intention to separate the China business, we have repurchased approximately $5.3 billion in shares at an average price of $81, reducing our share count by approximately 15%. We expect to repurchase an additional $0.9 billion in shares before the end of 2016 to achieve our previously announced plan to return $6.2 billion of capital to shareholders (excluding dividends) in connection with the separation of our China business.

 

YUM! Brands, Inc.

Condensed Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

Quarter ended % Change Year to date % Change
9/3/16 9/5/15 B/(W) 9/3/16 9/5/15 B/(W)
Company sales $ 2,841 $ 2,968 (4) $ 7,560 $ 7,806 (3)
Franchise and license fees and income 475 459 4 1,383 1,348 3
Total revenues 3,316 3,427 (3) 8,943 9,154 (2)
Company restaurant expenses
Food and paper 817 933 12 2,230 2,462 9
Payroll and employee benefits 638 625 (2) 1,727 1,720
Occupancy and other operating expenses 816 871 6 2,192 2,292 4
Company restaurant expenses 2,271 2,429 6 6,149 6,474 5
General and administrative expenses 377 328 (15) 1,028 976 (5)
Franchise and license expenses 47 65 27 145 146 1
Closures and impairment (income) expenses 7 3 (99) 47 30 (58)
Refranchising (gain) loss (25 ) 2 NM (85 ) 60 NM
Other (income) expense (15 ) (3 ) NM (50 ) (12 ) NM
Total costs and expenses, net 2,662 2,824 6 7,234 7,674 6
Operating Profit 654 603 8 1,709 1,480 15
Interest expense, net 87 32 NM 164 99 (67)
Income before income taxes 567 571 (1) 1,545 1,381 12
Income tax (benefit) provision (65 ) 145 NM 183 358 49
Net income – including noncontrolling interests 632 426 48 1,362 1,023 33
Net income (loss) – noncontrolling interests 10 5 (81) 10 5 (81)
Net income – YUM! Brands, Inc. $ 622 $ 421 48 $ 1,352 $ 1,018 33

Effective tax rate

(11.6 )% 25.3 % 36.9 ppts. 11.8 % 25.9 % 14.1 ppts.

Basic EPS Data

EPS $ 1.59 $ 0.97 64 $ 3.33 $ 2.33 43
Average shares outstanding 392 436 10 406 437 7

Diluted EPS Data

EPS $ 1.56 $ 0.95 64 $ 3.28 $ 2.29 43
Average shares outstanding 398 444 10 412 445 7
Dividends declared per common share $ $ $ 0.92 $ 0.82
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 to date % Change
9/3/16 9/5/15 B/(W) 9/3/16 9/5/15 B/(W)
Company sales $ 1,848 $ 1,935 (4) $ 4,684 $ 4,778 (2)
Franchise and license fees and income 35 34 2 90 83 8
Total revenues 1,883 1,969 (4) 4,774 4,861 (2)
Company restaurant expenses
Food and paper 514 611 16 1,361 1,518 10
Payroll and employee benefits 376 356 (6) 963 933 (3)
Occupancy and other operating expenses 547 589 7 1,420 1,481 4
Company restaurant expenses 1,437 1,556 8 3,744 3,932 5
General and administrative expenses 102 90 (14) 270 258 (5)
Franchise and license expenses 6 6 (5) 15 15
Closures and impairment (income) expenses 5 3 (42) 36 22 (65)
Other (income) expense (15 ) (13 ) 33 (42 ) (27 ) 61
Total costs and expenses, net 1,535 1,642 7 4,023 4,200 4
Operating Profit $ 348 $ 327 7 $ 751 $ 661 14
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 27.8 31.6 3.8 ppts. 29.1 31.8 2.7 ppts.
Payroll and employee benefits 20.4 18.4 (2.0 ppts.) 20.5 19.5 (1.0 ppts.)
Occupancy and other operating expenses 29.6 30.4 0.8 ppts. 30.3 31.0 0.7 ppts.
Restaurant margin 22.2 % 19.6 % 2.6 ppts. 20.1 % 17.7 % 2.4 ppts.
Operating margin 18.5 % 16.6 % 1.9 ppts. 15.7 % 13.6 % 2.1 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 to date % Change
9/3/16 9/5/15 B/(W) 9/3/16 9/5/15 B/(W)
Company sales $ 521 $ 526 (1) $ 1,469 $ 1,525 (4)
Franchise and license fees and income 202 195 4 591 584 1
Total revenues 723 721 2,060 2,109 (2)
Company restaurant expenses
Food and paper 178 182 2 499 526 5
Payroll and employee benefits 121 124 2 346 354 2
Occupancy and other operating expenses 146 152 4 409 432 5
Company restaurant expenses 445 458 3 1,254 1,312 4
General and administrative expenses 89 96 7 259 275 6
Franchise and license expenses 27 23 (17) 71 61 (16)
Closures and impairment (income) expenses 2 NM 7 3 NM
Other (income) expense 24 (1 ) (97)
Total costs and expenses, net 563 577 2 1,591 1,650 4
Operating Profit $ 160 $ 144 11 $ 469 $ 459 2
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 34.2 34.5 0.3 ppts. 34.0 34.5 0.5 ppts.
Payroll and employee benefits 23.4 23.6 0.2 ppts. 23.6 23.2 (0.4 ppts.)
Occupancy and other operating expenses 27.9 29.0 1.1 ppts. 27.8 28.4 0.6 ppts.
Restaurant margin 14.5 % 12.9 % 1.6 ppts. 14.6 % 13.9 % 0.7 ppts.
Operating margin 22.2 % 20.0 % 2.2 ppts. 22.8 % 21.8 % 1.0 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 to date % Change
9/3/16 9/5/15 B/(W) 9/3/16 9/5/15 B/(W)
Company sales $ 106 $ 141 (25) $ 363 $ 430 (16)
Franchise and license fees and income 124 123 1 378 372 2
Total revenues 230 264 (13) 741 802 (8)
Company restaurant expenses
Food and paper 29 40 25 100 120 16
Payroll and employee benefits 36 44 21 116 133 13
Occupancy and other operating expenses 37 46 19 117 135 13
Company restaurant expenses 102 130 21 333 388 14
General and administrative expenses 57 60 7 163 180 10
Franchise and license expenses 12 10 (15) 32 28 (14)
Closures and impairment (income) expenses (1 ) NM 3 2 (51)
Other (income) expense (2 ) NM (2 ) (2 ) (20)
Total costs and expenses, net 169 199 15 529 596 11
Operating Profit $ 61 $ 65 (6) $ 212 $ 206 3
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 28.0 28.0 27.6 27.8 0.2 ppts.
Payroll and employee benefits 33.2 31.4 (1.8 ppts.) 31.8 31.0 (0.8 ppts.)
Occupancy and other operating expenses 35.7 32.8 (2.9 ppts.) 32.4 31.4 (1.0 ppts.)
Restaurant margin 3.1 % 7.8 % (4.7 ppts.) 8.2 % 9.8 % (1.6 ppts.)
Operating margin 26.7 % 24.7 % 2.0 ppts. 28.6 % 25.7 % 2.9 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 to date % Change
9/3/16 9/5/15 B/(W) 9/3/16 9/5/15 B/(W)
Company sales $ 366 $ 366 $ 1,044 $ 1,073 (3)
Franchise and license fees and income 115 107 8 326 309 6
Total revenues 481 473 2 1,370 1,382 (1)
Company restaurant expenses
Food and paper 96 100 5 270 298 9
Payroll and employee benefits 105 101 (4) 302 300 (1)
Occupancy and other operating expenses 86 84 (1) 246 244 (1)
Company restaurant expenses 287 285 818 842 3
General and administrative expenses 49 50 4 140 141 1
Franchise and license expenses 3 5 42 12 11 (6)
Closures and impairment (income) expenses 1 56 1 3 60
Other (income) expense (1 ) NM (2 ) (1 ) 53
Total costs and expenses, net 338 341 1 969 996 3
Operating Profit $ 143 $ 132 9 $ 401 $ 386 4
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 26.1 27.3 1.2 ppts. 25.9 27.8 1.9 ppts.
Payroll and employee benefits 28.6 27.5 (1.1 ppts.) 28.9 27.9 (1.0 ppts.)
Occupancy and other operating expenses 23.6 23.1 (0.5 ppts.) 23.6 22.7 (0.9 ppts.)
Restaurant margin 21.7 % 22.1 % (0.4 ppts.) 21.6 % 21.6 %
Operating margin 29.8 % 27.8 % 2.0 ppts. 29.3 % 27.9 % 1.4 ppts.
See accompanying notes.
Percentages may not recompute due to rounding.

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

(unaudited)
9/3/16 12/26/15
ASSETS
Current Assets
Cash and cash equivalents $ 2,885 $ 737
Accounts and notes receivable, less allowance: $20 in 2016 and $16 in 2015 440 377
Inventories 255 229
Prepaid expenses and other current assets 287 241
Advertising cooperative assets, restricted 136 103
Total Current Assets 4,003 1,687

Property, plant and equipment, net of accumulated depreciation and amortization of $3,698 in 2016 and $3,643 in 2015

4,010 4,189
Goodwill 635 656
Intangible assets, net 258 271
Investments in unconsolidated affiliates 64 61
Other assets 562 521
Deferred income taxes 900 676
Total Assets $ 10,432 $ 8,061

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current Liabilities
Accounts payable and other current liabilities $ 2,058 $ 1,985
Income taxes payable 57 77
Short-term borrowings 48 922
Advertising cooperative liabilities 136 103
Total Current Liabilities 2,299 3,087
Long-term debt 9,119 3,041
Other liabilities and deferred credits 844 958
Total Liabilities 12,262 7,086
Redeemable noncontrolling interest 6

Shareholders’ Equity (Deficit)

Common stock, no par value, 750 shares authorized; 376 shares and 420 shares issued in 2016 and 2015, respectively

Retained earnings (accumulated deficit)

(1,572 ) 1,150
Accumulated other comprehensive income (loss) (324 ) (239 )

Total Shareholders’ Equity (Deficit) – YUM! Brands, Inc.

(1,896 ) 911
Noncontrolling interests 66 58

Total Shareholders’ Equity (Deficit)

(1,830 ) 969

Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity (Deficit)

$ 10,432 $ 8,061

 See accompanying notes.

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

Year to date
9/3/16 9/5/15
Cash Flows – Operating Activities
Net income – including noncontrolling interests $ 1,362 $ 1,023
Depreciation and amortization 489 505
Closures and impairment (income) expenses 47 30
Refranchising (gain) loss (85 ) 60
Contributions to defined benefit pension plans (4 ) (83 )
Deferred income taxes (215 ) (42 )
Equity income from investments in unconsolidated affiliates (44 ) (31 )
Distributions of income received from unconsolidated affiliates 18 9
Excess tax benefit from share-based compensation (66 ) (46 )
Share-based compensation expense 41 40
Changes in accounts and notes receivable (31 ) (15 )
Changes in inventories (32 ) 62
Changes in prepaid expenses and other current assets 5 (27 )
Changes in accounts payable and other current liabilities 146 201
Changes in income taxes payable 41 111
Changes in restricted cash (82 ) (4 )
Other, net (48 ) 24
Net Cash Provided by Operating Activities 1,542 1,817
Cash Flows – Investing Activities
Capital spending (546 ) (642 )
Proceeds from refranchising of restaurants 165 72
Other, net 35 48
Net Cash Used in Investing Activities (346 ) (522 )
Cash Flows – Financing Activities
Proceeds from long-term debt 6,900
Repayments of long-term debt (308 ) (10 )
Short-term borrowings by original maturity
More than three months – proceeds 1,400
More than three months – payments (2,000 )
Three months or less, net
Revolving credit facilities, three months or less, net (701 ) (116 )
Repurchase shares of Common Stock (3,652 ) (370 )
Excess tax benefit from share-based compensation 66 46
Dividends paid on Common Stock (559 ) (532 )
Debt establishment costs (86 )
Other, net (77 ) (37 )
Net Cash Provided by (Used in) Financing Activities 983 (1,019 )
Effect of Exchange Rate on Cash and Cash Equivalents (31 ) 7
Net Increase in Cash and Cash Equivalents 2,148 283
Cash and Cash Equivalents – Beginning of Period 737 578
Cash and Cash Equivalents – End of Period $ 2,885 $ 861

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 earnings before Special Items, our effective tax rate before Special Items, and Operating profit on a basis before Special Items and foreign currency translation (“Core Operating Profit”). Included in Special Items are costs associated with the planned spin-off of the China business and YUM recapitalization, costs associated with a voluntary retirement program offered to U.S. employees, costs associated with the KFC U.S. Acceleration Agreement, certain refranchising initiatives, a U.S. tax benefit related to previous impairments of our Little Sheep investment, and the impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (c), (d), (e), (f), (g) and (h) in the accompanying notes.

The Company excludes Special Items and foreign currency translation impacts for the purposes of evaluating performance internally. Special Items are not included in any of our externally reported segment results. Additionally, we believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations, which is quantified by translating current year results at prior year average exchange rates. These non-GAAP measurements are 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, our effective tax rate before Special Items, and Core Operating Profit provide additional information to investors to facilitate the comparison of past and present operations, excluding items in the quarters and years to date ended September 3, 2016 and September 5, 2015 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

Quarter ended Year to date
9/3/16 9/5/15 9/3/16 9/5/15
Detail of Special Items
Costs associated with the planned spin-off of the China business and YUM recapitalization(c) $ (10 ) $ $ (29 ) $
Voluntary Retirement Program costs(d) (20 ) (20 )
Costs associated with KFC U.S. Acceleration Agreement(e) (21 ) (17 ) (31 )
Refranchising initiatives(f) 21 (4 ) 77 (69 )
Other Special Items Income (Expense) (5 ) (1 ) (11 ) 1
Special Items Income (Expense) – Operating Profit (14 ) (26 ) (99 )
Tax Benefit (Expense) on Special Items(g) 202 4 193 5
Special Items Income (Expense), net of tax – including noncontrolling interests 188 (22 ) 193 (94 )
Special Items Income (Expense), net of tax – noncontrolling interests(h) (8 )
Special Items Income (Expense), net of tax – Yum! Brands, Inc. $ 188 $ (22 ) $ 201 $ (94 )
Average diluted shares outstanding 398 444 412 445
Special Items diluted EPS $ 0.47 $ (0.05 ) $ 0.49 $ (0.21 )
Reconciliation of Core Operating Profit to GAAP Operating Profit
Core Operating Profit $ 702 $ 629 $ 1,787 $ 1,579
Special Items Income (Expense) (14 ) (26 ) (99 )
Foreign Currency Impact on Reported Operating Profit (34 ) N/A (78 ) N/A
GAAP Operating Profit $ 654 $ 603 $ 1,709 $ 1,480
Reconciliation of EPS Before Special Items to GAAP EPS
Diluted EPS Before Special Items $ 1.09 $ 1.00 $ 2.79 $ 2.50
Special Items EPS 0.47 (0.05 ) 0.49 (0.21 )
GAAP EPS $ 1.56 $ 0.95 $ 3.28 $ 2.29
Reconciliation of Effective Tax Rate Before Special Items to GAAP Effective Tax Rate
Effective Tax Rate Before Special Items 23.5 % 24.8 % 24.3 % 24.6 %
Impact on Tax Rate as a result of Special Items (35.1 )% 0.5 % (12.5 )% 1.3 %
GAAP Effective Tax Rate (11.6 )% 25.3 % 11.8 % 25.9 %

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Quarter Ended 9/3/16 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated
Total revenues $ 1,883 $ 723 $ 230 $ 481 $ (1 ) $ 3,316
Company restaurant expenses 1,437 445 102 287 2,271
General and administrative expenses 102 89 57 49 80 377
Franchise and license expenses 6 27 12 3 (1 ) 47
Closures and impairment (income) expenses 5 2 7
Refranchising (gain) loss (25 ) (25 )
Other (income) expense (15 ) (2 ) (1 ) 3 (15 )
1,535 563 169 338 57 2,662
Operating Profit (loss) $ 348 $ 160 $ 61 $ 143 $ (58 ) $ 654
Quarter Ended 9/5/15 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated
Total revenues $ 1,969 $ 721 $ 264 $ 473 $ $ 3,427
Company restaurant expenses 1,556 458 130 285 2,429
General and administrative expenses 90 96 60 50 32 328
Franchise and license expenses 6 23 10 5 21 65
Closures and impairment (income) expenses 3 (1 ) 1 3
Refranchising (gain) loss 2 2
Other (income) expense (13 ) 10 (3 )
1,642 577 199 341 65 2,824
Operating Profit (loss) $ 327 $ 144 $ 65 $ 132 $ (65 ) $ 603

The above tables reconcile segment information, which is based on management responsibility, with our Condensed 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 to Date 9/3/16 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated
Total revenues $ 4,774 $ 2,060 $ 741 $ 1,370 $ (2 ) $ 8,943
Company restaurant expenses 3,744 1,254 333 818 6,149
General and administrative expenses 270 259 163 140 196 1,028
Franchise and license expenses 15 71 32 12 15 145
Closures and impairment (income) expenses 36 7 3 1 47
Refranchising (gain) loss (85 ) (85 )
Other (income) expense (42 ) (2 ) (2 ) (4 ) (50 )
4,023 1,591 529 969 122 7,234
Operating Profit (loss) $ 751 $ 469 $ 212 $ 401 $ (124 ) $ 1,709
Year to Date 9/5/15 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated
Total revenues $ 4,861 $ 2,109 $ 802 $ 1,382 $ $ 9,154
Company restaurant expenses 3,932 1,312 388 842 6,474
General and administrative expenses 258 275 180 141 122 976
Franchise and license expenses 15 61 28 11 31 146
Closures and impairment (income) expenses 22 3 2 3 30
Refranchising (gain) loss 60 60
Other (income) expense (27 ) (1 ) (2 ) (1 ) 19 (12 )
4,200 1,650 596 996 232 7,674
Operating Profit (loss) $ 661 $ 459 $ 206 $ 386 $ (232 ) $ 1,480
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