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Section 1: 8-K (YUM BRANDS, INC. FORM 8-K)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)

October 31, 2018

Commission file number 1-13163
________________________
YUM! BRANDS, INC.
(Exact name of registrant as specified in its charter)

North Carolina
 
13-3951308
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1441 Gardiner Lane, Louisville, Kentucky
 
40213
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code:  (502) 874-8300
 
 
 
Former name or former address, if changed since last report:   N/A

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). [ ] Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 





Section 2 – Financial Information

Item 2.02      Results of Operations and Financial Condition

On October 31, 2018, YUM! Brands, Inc. ("YUM") issued a press release announcing financial results for the quarter ended September 30, 2018.  A copy of the press release is attached hereto as Exhibit 99.1.


Section 9 – Financial Statements and Exhibits

Item 9.01      Financial Statements and Exhibits

 
(c)
Exhibits
 
99.1






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
 
 
YUM! BRANDS, INC.
 
 
 
 
(Registrant)
 



Date:
October 31, 2018
 
/s/ David E. Russell
 
 
 
 
Sr. Vice President, Finance and Corporate Controller
 
 
 
 
(Principal Accounting Officer)
 



(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit
395568334_yumlogo11.jpg
NEWS
Keith Siegner
Vice President, Investor Relations, Corporate Strategy and Treasurer

Yum! Brands Reports Third-Quarter GAAP Operating Profit Decline of (14)%;
Delivers Third-Quarter Core Operating Profit Growth of 2%;
System Sales Growth of 5%

Louisville, KY (October 31, 2018) - Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 30, 2018. Third-quarter GAAP EPS was $1.40, an increase of 18%. Third-quarter EPS excluding Special Items was $1.04, an increase of 52%.

GREG CREED COMMENTS
Greg Creed, CEO, said, “We are pleased to deliver third-quarter system sales growth of 5%, consisting of same store sales growth of 2% and net new unit growth of 4%. Core operating profit growth of 2% was consistent with our expectations. We are now two years into our three year transformation and remain firmly on-track to becoming more focused, more franchised and more efficient. The collective power of our three iconic brands, anchored by our four key growth drivers, is helping us deliver long-term sustainable growth and higher returns for our stakeholders."

THIRD-QUARTER HIGHLIGHTS
Worldwide system sales excluding foreign currency translation grew 5%, with Taco Bell at 8%, KFC at 7%, and Pizza Hut flat.
We opened 410 net new units for 4% net new unit growth.
We refranchised 134 restaurants, including 57 KFC, 31 Pizza Hut and 46 Taco Bell units, for pre-tax proceeds of $193 million. We recorded net refranchising gains of $100 million in Special Items. As of quarter end, our global franchise ownership mix was 97%.
We repurchased 6.3 million shares totaling $527 million at an average price of $83.
We reflected the change in fair value of our investment in Grubhub by recording $94 million of pre-tax investment income, resulting in $0.22 in EPS.
Foreign currency translation unfavorably impacted divisional operating profit by $9 million.
 
% Change
 
System Sales
Ex F/X
Same-Store Sales
Net New Units
GAAP Operating Profit
Core
Operating Profit
KFC Division
+7
+3
+5
(5)
(2)
Pizza Hut Division
Even
(1)
+2
+7
+9
Taco Bell Division
+8
+5
+3
+10
+10
Worldwide
+5
+2
+4
(14)
+2
 
Third Quarter
Year-to-Date
 
2018
2017
% Change
2018
2017
% Change
GAAP EPS
$1.40
$1.18
+18
$3.64
$2.52
+44
Special Items EPS1
$0.36
$0.50
NM
$0.89
$0.51
NM
EPS Excluding Special Items
$1.04
$0.68
+52
$2.75
$2.01
+37
1See Reconciliation of Non-GAAP Measurements to GAAP Results within this release for further detail of Special Items.

All comparisons are versus the same period a year ago. As required, we adopted a new accounting standard on revenue recognition effective January 1, 2018. Prior year results have not been restated for this change. See the Other Items section of this release for further details.

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.

Yum! Brands, Inc. • 1900 Colonel Sanders Lane • Louisville, KY 40213
P: 502 874-8300 • investors.yum.com




KFC DIVISION
 
Third Quarter
Year-to-Date
 
 
 
%/ppts Change
 
 
%/ppts Change
 
2018
2017
Reported
Ex F/X
2018
2017
Reported
Ex F/X
Restaurants
22,104
21,063
+5
N/A
22,104
21,063
+5
N/A
System Sales ($MM)
6,555
6,282
+4
+7
19,190
17,688
+8
+6
Same-Store Sales Growth (%)
+3
+4
NM
NM
+2
+3
NM
NM
Franchise and Property Revenues ($MM)
320
296
+8
+11
937
831
+13
+10
Operating Profit ($MM)
248
260
(5)
(2)
704
710
(1)
(3)
Operating Margin (%)
38.2
32.8
5.4
5.4
36.0
30.9
5.1
4.8

 
Third Quarter (% Change)
Year-to-Date (% Change)
 
International
U.S.
International
U.S.
System Sales Growth Ex F/X
+8
Even
+8
Even
Same-Store Sales Growth
+3
+1
+2
Even

KFC Division opened 345 gross new international restaurants in 48 countries.
Operating margin increased 5.4 percentage points driven by refranchising and same-store sales growth, partially offset by the gross up of advertising fund revenues and franchise service activities.
Foreign currency translation unfavorably impacted operating profit by $8 million.

KFC Markets1
Percent of KFC System Sales2
System Sales Growth Ex F/X
Third Quarter
(% Change)
Year-to-Date
(% Change)
China
27%
+6
+6
United States
18%
Even
Even
Asia
12%
+7
+5
Australia
7%
+6
+5
Russia & Eastern Europe
7%
+22
+22
United Kingdom
6%
+1
(4)
Latin America
5%
+9
+11
Western Europe
5%
+9
+11
Africa
4%
+11
+7
Middle East / Turkey / North Africa
4%
+14
+12
Canada
2%
Even
+2
Thailand
2%
+15
+9
India
1%
+25
+21
 
1Refer to investors.yum.com/financial-reports for a list of the countries within each of the markets.
2Reflects Full Year 2017.
 

2


PIZZA HUT DIVISION
 
Third Quarter
Year-to-Date
 
 
 
%/ppts Change
 
 
%/ppts Change
 
2018
2017
Reported
Ex F/X
2018
2017
Reported
Ex F/X
Restaurants
16,930
16,551
+2
N/A
16,930
16,551
+2
N/A
System Sales ($MM)
2,929
2,966
(1)
Even
8,855
8,665
+2
+1
Same-Store Sales Growth (%)
(1)
+1
NM
NM
(1)
(1)
NM
NM
Franchise and Property Revenues ($MM)
143
148
(3)
(2)
432
433
Even
(1)
Operating Profit ($MM)
88
82
+7
+9
257
250
+3
+2
Operating Margin (%)
38.7
40.5
(1.8)
(1.4)
36.1
38.0
(1.9)
(2.0)

 
Third Quarter (% Change)
Year-to-Date (% Change)
 
International
U.S.
International
U.S.
System Sales Growth Ex F/X
+1
(1)
+1
Even
Same-Store Sales Growth
(3)
+1
(2)
+2

Pizza Hut Division opened 184 gross new international restaurants in 43 countries.
Operating margin decreased 1.8 percentage points driven by the gross up of advertising fund revenues and franchise service activities.
Foreign currency translation unfavorably impacted operating profit by $1 million.

Pizza Hut Markets1
Percent of Pizza Hut System Sales2
System Sales Growth Ex F/X
Third Quarter
(% Change)
Year-to-Date
(% Change)
United States
46%
(1)
Even
China
18%
(2)
(1)
Asia
13%
+2
+4
Europe
10%
(1)
Even
Latin America
6%
+3
+1
Middle East / Turkey / North Africa
4%
+5
+3
Canada
2%
+3
+2
India
1%
+20
+21
Africa
<1%
+52
+41
1Refer to investors.yum.com/financial-reports for a list of the countries within each of the markets.
2Reflects Full Year 2017.

3






TACO BELL DIVISION
 
Third Quarter
Year-to-Date
 
 
 
%/ppts Change
 
 
%/ppts Change
 
2018
2017
Reported
Ex F/X
2018
2017
Reported
Ex F/X
Restaurants
6,942
6,738
+3
N/A
6,942
6,738
+3
N/A
System Sales ($MM)
2,604
2,423
+7
+8
7,440
7,058
+5
+5
Same-Store Sales Growth (%)
+5
+3
NM
NM
+3
+5
NM
NM
Franchise and Property Revenues ($MM)
142
124
+15
+15
404
358
+13
+13
Operating Profit ($MM)
161
147
+10
+10
442
440
+1
Operating Margin (%)
31.5
33.3
(1.8)
(1.8)
30.3
32.6
(2.3)
(2.3)
Taco Bell Division opened 59 gross new restaurants, including 22 gross new international restaurants.
Operating margin decreased 1.8 percentage points driven by the gross up of advertising fund revenues and franchise service activities, partially offset by refranchising, same-store sales growth and the expansion of equity restaurant margins.



OTHER ITEMS
Effective January 1, 2018, we adopted the new accounting standard on revenue recognition. As a result, we are now required to recognize upfront fees, such as initial and renewal fees we receive from franchisees, as revenue over the term of the related franchise agreement. We also record incentive payments we may make to franchisees (e.g., equipment funding provided under the KFC U.S. Acceleration Agreement) as a reduction of revenue over the period of expected cash flows from the franchise agreements to which the payment relates. Under our historical accounting, we recognized upfront fees from franchisees in full upon commencement of the related franchise agreements and incentive payments made to franchisees when we were obligated to make the payment.

Additionally, the new accounting standard requires us to begin recording other revenues we receive from franchisees and the related expenses on a gross basis within our Income Statement. Previously, these revenues and expenses, the largest of which relate to franchisee contributions to and subsequent expenditures from advertising cooperatives we consolidate, were reported on a net basis within our Income Statement. We have reported these revenues and expenses in our Income Statement on the two new line items of Franchise contributions for advertising and other services and Franchise advertising and other services expense.

Prior results have not been restated for the impact of this accounting change and therefore remain reported as they have been historically. However, the adoption was done on a modified retrospective basis resulting in the current year impact being reported as if the now-required accounting had been in place since the inception of currently active franchise agreements or when franchise incentive payments were originally made. On a full-year basis we anticipate that the non-cash impacts of adopting the new revenue recognition standard will negatively impact core operating profit growth by 2 to 3 percentage points. As a result of the new standard, core operating profit growth was negatively impacted by one percentage point during the third quarter and one percentage point year-to-date through September 30, 2018. A significant portion of our new unit development for which we receive upfront fees, which will now be spread versus recognized upfront, is expected to occur in the fourth quarter.
Disclosures pertaining to outstanding debt in our Restricted Group capital structure will be provided at the time of the filing of the third-quarter Form 10-Q.

4


CONFERENCE CALL
Yum! Brands, Inc. will host a conference call to review the company's financial performance and strategies at 8:15 a.m. Eastern Time October 31, 2018. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 4690947.
The call will be available for playback beginning at 11:00 a.m. Eastern Time October 31, 2018 through December 12, 2018. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 4690947.
The webcast and the playback can be accessed via the internet by visiting Yum! Brands' website, investors.yum.com/events-and-presentations and selecting “Q3 2018 Yum! Brands, Inc. Earnings Call.”
ADDITIONAL INFORMATION ONLINE
Quarter end dates for each division, restaurant count details, definitions of terms and Restricted Group financial information are available at investors.yum.com. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures are included within this release.
FORWARD-LOOKING STATEMENTS
This announcement may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “seek,” “project,” “model,” “ongoing,” “will,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on and reflect our current expectations, estimates, assumptions and/ or projections, our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those indicated by those statements. There can be no assurance that our expectations, estimates, assumptions and/or projections, including with respect to the future earnings and performance or capital structure of Yum! Brands, will prove to be correct or that any of our expectations, estimates or projections will be achieved.
Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: food safety and food borne-illness issues; health concerns arising from outbreaks of viruses or other diseases; the success of our franchisees and licensees, and the success of our transformation initiatives, including our refranchising strategy; our significant exposure to the Chinese market; changes in economic and political conditions in countries and territories outside of the U.S. where we operate; our ability to protect the integrity and security of individually identifiable data of our customers and employees; our increasing dependence on digital commerce platforms and information technology systems; the impact of social media; our ability to secure and maintain distribution and adequate supply to our restaurants; the success of our development strategy in emerging markets; changes in commodity, labor and other operating costs; pending or future litigation and legal claims or proceedings; changes in or noncompliance with government regulations, including labor standards and anti-bribery or anti-corruption laws; recent Tax Legislation (defined below) and other tax matters, including disagreements with taxing authorities; consumer preferences and perceptions of our brands; changes in consumer discretionary spending and general economic conditions; competition within the retail food industry; and risks relating to our significant amount of indebtedness. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Information regarding the impact of the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) consists of preliminary estimates which are forward-looking statements and are subject to change. Information regarding the impact of Tax Legislation is based on our current calculations, as well our current interpretations, assumptions and expectations relating to Tax Legislation, which are subject to further ongoing change.
The forward-looking statements included in this announcement are only made as of the date of this announcement and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Risk Factors” and “Forward-Looking Statements” in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q) for additional detail about factors that could affect our financial and other results.
Yum! Brands, Inc., based in Louisville, Kentucky, has over 45,000 restaurants in more than 140 countries and territories and is one of the Aon Hewitt Top Companies for Leaders in North America. In 2018, Yum! Brands was recognized as part of the inaugural Bloomberg Gender-Equality Index and ranked among the top 100 Best Corporate Citizens by Corporate Responsibility Magazine. In 2017, Yum! Brands was named to the Dow Jones Sustainability North America Index. The company’s restaurant brands – KFC, Pizza Hut and Taco Bell – are the global leaders of the chicken, pizza and Mexican-style food categories. Worldwide, the Yum! Brands system opens over seven new restaurants per day on average, making it a leader in global retail development.
Analysts are invited to contact:
 
Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer at 888/298-6986
 
Kelly Knybel, Director, Investor Relations, at 888/298-6986
Members of the media are invited to contact:
 
Virginia Ferguson, Director, Public Relations, at 502/874-8200

5


YUM! Brands, Inc.
Condensed Consolidated Summary of Results
(amounts in millions, except per share amounts)
(unaudited)
 
Quarter ended
 
% Change
 
Year to date
 
% Change
 
9/30/18
 
9/30/17
 
B/(W)
 
9/30/18
 
9/30/17
 
B/(W)
Revenues
 
 
 
 
 
 
 
 
 
 
 
Company sales
$
499

 
$
871

 
(43)
 
$
1,523

 
$
2,682

 
(43)
Franchise and property revenues
605

 
565

 
7
 
1,773

 
1,619

 
10
Franchise contributions for advertising and other services
287

 

 
N/A
 
834

 

 
N/A
Total revenues
1,391

 
1,436

 
(3)
 
4,130

 
4,301

 
(4)
 
 
 
 
 
 
 
 
 
 
 
 
Costs and Expenses, Net
 
 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
399

 
717

 
44
 
1,258

 
2,223

 
43
General and administrative expenses
204

 
215

 
5
 
631

 
699

 
10
Franchise and property expenses
40

 
61

 
35
 
127

 
161

 
21
Franchise advertising and other services expense
288

 

 
N/A
 
834

 

 
N/A
Refranchising (gain) loss
(100
)
 
(201
)
 
(50)
 
(285
)
 
(331
)
 
(14)
Other (income) expense
7

 
1

 
NM
 
10

 
3

 
NM
Total costs and expenses, net
838

 
793

 
(6)
 
2,575

 
2,755

 
7
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit
553

 
643

 
(14)
 
1,555

 
1,546

 
1
Investment (income) expense, net
(96
)
 
(1
)
 
NM
 
(185
)
 
(3
)
 
NM
Other pension (income) expense
4

 
10

 
59
 
10

 
42

 
76
Interest expense, net
111

 
110

 
 
330

 
325

 
(1)
Income before income taxes
534

 
524

 
2
 
1,400

 
1,182

 
18
Income tax provision
80

 
106

 
24
 
192

 
278

 
31
Net Income
$
454

 
$
418

 
9
 
$
1,208

 
$
904

 
34
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
15.1
%
 
20.2
%
 
5.1 ppts.
 
13.7
%
 
23.5
%
 
9.8 ppts.
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
EPS
$
1.43

 
$
1.21

 
18
 
$
3.72

 
$
2.58

 
44
Average shares outstanding
318


345

 
8
 
325

 
351

 
7
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
 
 
EPS
$
1.40

 
$
1.18

 
18
 
$
3.64

 
$
2.52

 
44
Average shares outstanding
325

 
353

 
8
 
332

 
358

 
7
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.36

 
$

 
 
 
$
1.08

 
$
0.60

 
 

See accompanying notes.
 Percentages may not recompute due to rounding.

6


YUM! Brands, Inc.
KFC DIVISION Operating Results
(amounts in millions)
(unaudited)

 
Quarter ended
 
% Change
 
Year to date
 
% Change
 
9/30/18
 
9/30/17
 
B/(W)
 
9/30/18
 
9/30/17
 
B/(W)
 
 
 
 
 
 
 
 
 
 
 
 
Company sales
$
221

 
$
498

 
(55)
 
$
707

 
$
1,465

 
(52)
Franchise and property revenues
320

 
296

 
8
 
937

 
831

 
13
Franchise contributions for advertising and other services
108

 

 
N/A
 
314

 

 
N/A
Total revenues
649

 
794

 
(18)
 
1,958

 
2,296

 
(15)
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
187

 
419

 
55
 
617

 
1,244

 
50
General and administrative expenses
81

 
85

 
5
 
247

 
259

 
5
Franchise and property expenses
24

 
29

 
17
 
78

 
80

 
4
Franchise advertising and other services expense
107

 

 
N/A
 
312

 

 
N/A
Other (income) expense
2

 
1

 
NM
 

 
3

 
NM
Total costs and expenses, net
401

 
534

 
25
 
1,254

 
1,586

 
21
Operating Profit
$
248

 
$
260

 
(5)
 
$
704

 
$
710

 
(1)
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant margin
15.4
%
 
15.9
%
 
(0.5) ppts.
 
12.7
%
 
15.1
%
 
(2.4) ppts.
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
38.2
%
 
32.8
%
 
5.4 ppts.
 
36.0
%
 
30.9
%
 
5.1 ppts.
 
See accompanying notes.

Percentages may not recompute due to rounding.



7


YUM! Brands, Inc.
PIZZA HUT DIVISION Operating Results
(amounts in millions)
(unaudited)
 
 
Quarter ended
 
% Change
 
Year to date
 
% Change
 
9/30/18
 
9/30/17
 
B/(W)
 
9/30/18
 
9/30/17
 
B/(W)
 
 
 
 
 
 
 
 
 
 
 
 
Company sales
$
13

 
$
55

 
(77)
 
$
55

 
$
226

 
(76)
Franchise and property revenues
143

 
148

 
(3)
 
432

 
433

 
Even
Franchise contributions for advertising and other services
73

 

 
N/A
 
226

 

 
N/A
Total revenues
229

 
203

 
12
 
713

 
659

 
8
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
13

 
54

 
76
 
56

 
212

 
74
General and administrative expenses
45

 
44

 
(2)
 
141

 
151

 
6
Franchise and property expenses
9

 
21

 
61
 
28

 
44

 
37
Franchise advertising and other services expense
74

 

 
N/A
 
229

 

 
N/A
Other (income) expense

 
2

 
NM
 
2

 
2

 
NM
Total costs and expenses, net
141

 
121

 
(16)
 
456

 
409

 
(11)
Operating Profit
$
88

 
$
82

 
7
 
$
257

 
$
250

 
3
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant margin
(2.2
)%
 
1.9
%
 
(4.1) ppts.
 
(1.3
)%
 
6.0
%
 
(7.3) ppts.
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
38.7
 %
 
40.5
%
 
(1.8) ppts.
 
36.1
 %
 
38.0
%
 
(1.9) ppts.
 
See accompanying notes.

Percentages may not recompute due to rounding.



8


YUM! Brands, Inc.
TACO BELL DIVISION Operating Results
(amounts in millions)
(unaudited)
 
 
Quarter ended
 
% Change
 
Year to date
 
% Change
 
9/30/18
 
9/30/17
 
B/(W)
 
9/30/18
 
9/30/17
 
B/(W)
 
 
 
 
 
 
 
 
 
 
 
 
Company sales
$
265

 
$
318

 
(17)
 
$
761

 
$
991

 
(23)
Franchise and property revenues
142

 
124

 
15
 
404

 
358

 
13
Franchise contributions for advertising and other services
106

 

 
N/A
 
294

 

 
N/A
Total revenues
513

 
442

 
16
 
1,459

 
1,349

 
8
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
200

 
249

 
20
 
587

 
772

 
24
General and administrative expenses
40

 
41

 
3
 
121

 
122

 
1
Franchise and property expenses
5

 
6

 
9
 
17

 
16

 
(10)
Franchise advertising and other services expense
107

 

 
N/A
 
293

 

 
N/A
Other (income) expense

 
(1
)
 
NM
 
(1
)
 
(1
)
 
NM
Total costs and expenses, net
352

 
295

 
(19)
 
1,017

 
909

 
(12)
Operating Profit
$
161

 
$
147

 
10
 
$
442

 
$
440

 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant margin
24.7
%
 
21.9
%
 
2.8 ppts.
 
22.9
%
 
22.1
%
 
0.8 ppts.
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
31.5
%
 
33.3
%
 
(1.8) ppts.
 
30.3
%
 
32.6
%
 
(2.3) ppts.
 
See accompanying notes.

Percentages may not recompute due to rounding.



9


YUM! Brands, Inc.
Condensed Consolidated Balance Sheets
(amounts in millions)

 
(unaudited) 9/30/18
 
12/31/17
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
198

 
$
1,522

Accounts and notes receivable, less allowance: $32 in 2018 and $19 in 2017
528

 
400

Prepaid expenses and other current assets
443

 
384

Advertising cooperative assets, restricted

 
201

Total Current Assets
1,169

 
2,507

 
 
 
 
Property, plant and equipment, net of accumulated depreciation and amortization of $1,291 in
 
 
 
2018 and $1,480 in 2017
1,378

 
1,697

Goodwill
489

 
512

Intangible assets, net
84

 
110

Other assets
886

 
346

Deferred income taxes
149

 
139

Total Assets
$
4,155

 
$
5,311

 
 
 
 
LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
 
Current Liabilities
 
 
 
Accounts payable and other current liabilities
$
885

 
$
813

Income taxes payable
14

 
123

Short-term borrowings
295

 
375

Advertising cooperative liabilities

 
201

Total Current Liabilities
1,194

 
1,512

 
 
 
 
Long-term debt
9,405

 
9,429

Other liabilities and deferred credits
1,014

 
704

Total Liabilities
11,613

 
11,645

 
 
 
 
Shareholders' Deficit
 
 
 
Common stock, no par value, 750 shares authorized; 313 shares and 332 shares issued in 2018 and 2017, respectively

 

Accumulated deficit
(7,141
)
 
(6,063
)
Accumulated other comprehensive loss
(317
)
 
(271
)
Total Shareholders' Deficit
(7,458
)
 
(6,334
)
Total Liabilities and Shareholders' Deficit
$
4,155

 
$
5,311

 See accompanying notes.



10


YUM! Brands, Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
(unaudited)
 
Year to date
 
9/30/18

9/30/17
Cash Flows - Operating Activities
 
 
 
Net Income
$
1,208

 
$
904

Depreciation and amortization
103

 
195

Refranchising (gain) loss
(285
)
 
(331
)
Investment (income) expense, net
(185
)
 
(3
)
Contributions to defined benefit pension plans
(9
)
 
(47
)
Deferred income taxes
32

 
122

Share-based compensation expense
36

 
53

Changes in accounts and notes receivable
(35
)
 
17

Changes in prepaid expenses and other current assets
10

 
(7
)
Changes in accounts payable and other current liabilities
(81
)
 
(168
)
Changes in income taxes payable
(47
)
 
(125
)
Other, net
49

 
108

Net Cash Provided by Operating Activities
796

 
718

 
 
 
 
Cash Flows - Investing Activities
 
 
 
Capital spending
(147
)
 
(228
)
Investment in Grubhub Inc. common stock
(200
)
 

Proceeds from refranchising of restaurants
445

 
716

Other, net
(9
)
 
1

Net Cash Provided by Investing Activities
89

 
489

 
 
 
 
Cash Flows - Financing Activities
 
 
 
Proceeds from long-term debt
106

 
1,088

Repayments of long-term debt
(462
)
 
(372
)
Revolving credit facilities, three months or less, net
273

 
35

Short-term borrowings by original maturity
 
 
 
More than three months - proceeds
59

 

More than three months - payments
(59
)
 

Three months or less, net

 

Repurchase shares of Common Stock
(1,684
)
 
(1,348
)
Dividends paid on Common Stock
(349
)
 
(315
)
Debt issuance costs

 
(32
)
Other, net
(45
)
 
(85
)
Net Cash Used in Financing Activities
(2,161
)
 
(1,029
)
Effect of Exchange Rate on Cash and Cash Equivalents
(55
)
 
42

Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
(1,331
)
 
220

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period
1,668

 
831

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period
$
337

 
$
1,051

 
 
 
 
 
 
 
 
See accompanying notes.


11


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 Generally Accepted Accounting Principles in the United States of America ("GAAP"), the Company provides the following non-GAAP measurements.

System sales and System sales excluding the impacts of foreign currency translation ("FX"). System sales include the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants that operate our Concepts. Sales of franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Franchise restaurant sales are not included in Company sales on the Condensed Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues. We believe System sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates our primary revenue drivers, Company and franchise same-store sales as well as net unit growth.

Diluted Earnings Per Share excluding Special Items (as defined below);

Effective Tax Rate excluding Special Items;

Core Operating Profit. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally.

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 these non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations.

Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special Items when assessing segment performance. The Special Items are described in (b), (c), (d), (e), (f), (g), (h) and (i) in the accompanying notes.

Certain non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
 
 
Quarter ended
 
Year to date
 
 
9/30/18
 
9/30/17
 
9/30/18
 
9/30/17
Detail of Special Items
 
 
 
 
 
 
 
 
Refranchising gain (loss)(b)
 
$
100

 
$
201

 
$
285

 
$
331

YUM's Strategic Transformation Initiatives(c)
 
(1
)
 
(4
)
 
(2
)

(15
)
Costs associated with Pizza Hut U.S. Transformation Agreement(d)
 
(1
)
 
(8
)
 
(3
)

(20
)
Costs associated with KFC U.S. Acceleration Agreement(e)
 

 
(4
)
 
(2
)

(12
)
Non-cash credits (charges) associated with share-based compensation(f)
 
2

 

 
3

 
(18
)
Other Special Items Income (Expense)
 

 
5

 
1


3

Special Items Income (Expense) - Operating Profit
 
100

 
190

 
282

 
269

Special Items - Other Pension Income (Expense)(g)
 

 
(1
)
 


(23
)
Special Items Income (Expense) before Income Taxes
 
100

 
189

 
282


246

Tax Benefit (Expense) on Special Items(h)
 
(12
)
 
(13
)
 
(49
)

(64
)
Tax Benefit (Expense) - U.S. Tax Act(i)
 
28

 

 
62



Special Items Income (Expense), net of tax
 
116

 
176

 
295

 
182

Average diluted shares outstanding
 
325

 
353

 
332

 
358

Special Items diluted EPS
 
$
0.36

 
$
0.50

 
$
0.89

 
$
0.51

 
 
 
 
 
 
 
 
 
Reconciliation of GAAP Operating Profit to Core Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
GAAP Operating Profit
 
$
553

 
$
643

 
$
1,555

 
$
1,546

Special Items Income (Expense)
 
100

 
190

 
282

 
269

Foreign Currency Impact on Divisional Operating Profit
 
(9
)
 
N/A

 
15

 
N/A

Core Operating Profit
 
$
462

 
$
453

 
$
1,258

 
$
1,277

 
 
 
 
 
 
 
 
 
KFC Division
 
 
 
 
 
 
 
 
GAAP Operating Profit
 
$
248

 
$
260

 
$
704

 
$
710

Foreign Currency Impact on Divisional Operating Profit
 
(8
)
 
N/A

 
12

 
N/A

Core Operating Profit
 
$
256

 
$
260

 
$
692

 
$
710

 
 
 
 
 
 
 
 
 

12


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

 
 
Quarter ended
 
Year to date
 
 
9/30/18
 
9/30/17
 
9/30/18
 
9/30/17
Pizza Hut Division
 
 
 
 
 
 
 
 
GAAP Operating Profit
 
$
88

 
$
82

 
$
257

 
$
250

Foreign Currency Impact on Divisional Operating Profit
 
(1
)
 
N/A

 
3

 
N/A

Core Operating Profit
 
$
89

 
$
82

 
$
254

 
$
250

 
 
 
 
 
 
 
 
 
Taco Bell Division
 
 
 
 
 
 
 
 
GAAP Operating Profit
 
$
161

 
$
147

 
$
442

 
$
440

Foreign Currency Impact on Divisional Operating Profit
 

 
N/A

 

 
N/A

Core Operating Profit
 
$
161

 
$
147

 
$
442

 
$
440

 
 
 
 
 
 
 
 
 
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items
 
 
 
 
 
 
 
 
Diluted EPS
 
$
1.40

 
$
1.18

 
$
3.64

 
$
2.52

Special Items Diluted EPS
 
0.36

 
0.50

 
0.89

 
0.51

Diluted EPS excluding Special Items
 
$
1.04

 
$
0.68

 
$
2.75

 
$
2.01

 
 
 
 
 
 
 
 
 
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items
 
 
 
 
 
 
 
 
GAAP Effective Tax Rate
 
15.1
 %
 
20.2
 %
 
13.7
 %
 
23.5
%
Impact on Tax Rate as a result of Special Items
 
(7.2
)%
 
(7.6
)%
 
(4.7
)%
 
0.7
%
Effective Tax Rate excluding Special Items
 
22.3
 %
 
27.8
 %
 
18.4
 %
 
22.8
%
 
 
 
 
 
 
 
 
 
Reconciliation of Company sales to System sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
GAAP Company sales
 
$
499

 
$
871

 
$
1,523

 
$
2,682

Franchise sales
 
11,589

 
10,800

 
33,962

 
30,729

System sales
 
12,088

 
11,671

 
35,485

 
33,411

Foreign Currency Impact on System sales
 
(203
)
 
N/A

 
526

 
N/A

System sales, excluding FX
 
$
12,291

 
$
11,671

 
$
34,959

 
$
33,411

 
 
 
 
 
 
 
 
 
KFC Division
 
 
 
 
 
 
 
 
GAAP Company sales
 
$
221

 
$
498

 
$
707

 
$
1,465

Franchise sales
 
6,334

 
5,784

 
18,483

 
16,223

System sales
 
6,555

 
6,282

 
19,190

 
17,688

Foreign Currency Impact on System sales
 
(158
)
 
N/A

 
408

 
N/A

System sales, excluding FX
 
$
6,713

 
$
6,282

 
$
18,782

 
$
17,688

 
 
 
 
 
 
 
 
 
Pizza Hut Division
 
 
 
 
 
 
 
 
GAAP Company sales
 
$
13

 
$
55

 
$
55

 
$
226

Franchise sales
 
2,916

 
2,911

 
8,800

 
8,439

System sales
 
2,929

 
2,966

 
8,855

 
8,665

Foreign Currency Impact on System sales
 
(43
)
 
N/A

 
116

 
N/A

System sales, excluding FX
 
$
2,972

 
$
2,966

 
$
8,739

 
$
8,665

 
 
 
 
 
 
 
 
 
Taco Bell Division
 
 
 
 
 
 
 
 
GAAP Company sales
 
$
265

 
$
318

 
$
761

 
$
991

Franchise sales
 
2,339

 
2,105

 
6,679

 
6,067

System sales
 
2,604

 
2,423

 
7,440

 
7,058

Foreign Currency Impact on System sales
 
(2
)
 
N/A

 
2

 
N/A

System sales, excluding FX
 
$
2,606

 
$
2,423

 
$
7,438

 
$
7,058

 
 
 
 
 
 
 
 
 


13


YUM! Brands, Inc.
Segment Results
(amounts in millions)
(unaudited)

Quarter Ended 9/30/18
KFC
 
Pizza Hut
 
Taco Bell
 
Corporate and Unallocated
 
Consolidated
Total revenues
$
649

 
$
229

 
$
513

 
$

 
$
1,391

 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
187

 
13

 
200

 
(1
)
 
399

General and administrative expenses
81

 
45

 
40

 
38

 
204

Franchise and property expenses
24

 
9

 
5

 
2

 
40

Franchise advertising and other services expense
107

 
74

 
107

 

 
288

Refranchising (gain) loss

 

 

 
(100
)
 
(100
)
Other (income) expense
2

 

 

 
5

 
7

Total costs and expenses, net
401

 
141

 
352

 
(56
)
 
838

Operating Profit
$
248

 
$
88

 
$
161

 
$
56

 
$
553



Quarter Ended 9/30/17
KFC
 
Pizza Hut
 
Taco Bell
 
Corporate and Unallocated
 
Consolidated
Total revenues
$
794

 
$
203

 
$
442

 
$
(3
)
 
$
1,436

 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
419

 
54

 
249

 
(5
)
 
717

General and administrative expenses
85

 
44

 
41

 
45

 
215

Franchise and property expenses
29

 
21

 
6

 
5

 
61

Refranchising (gain) loss

 

 

 
(201
)
 
(201
)
Other (income) expense
1

 
2

 
(1
)
 
(1
)
 
1

Total costs and expenses, net
534

 
121

 
295

 
(157
)
 
793

Operating Profit
$
260

 
$
82

 
$
147

 
$
154

 
$
643



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.


14


YUM! Brands, Inc.
Segment Results
(amounts in millions)
(unaudited)

Year to Date 9/30/18
KFC
 
Pizza Hut
 
Taco Bell
 
Corporate and Unallocated
 
Consolidated
Total revenues
$
1,958

 
$
713

 
$
1,459

 
$

 
$
4,130

 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
617

 
56

 
587

 
(2
)
 
1,258

General and administrative expenses
247

 
141

 
121

 
122

 
631

Franchise and property expenses
78

 
28

 
17

 
4

 
127

Franchise advertising and other services expense
312

 
229

 
293

 

 
834

Refranchising (gain) loss

 

 

 
(285
)
 
(285
)
Other (income) expense

 
2

 
(1
)
 
9

 
10

Total costs and expenses, net
1,254

 
456

 
1,017

 
(152
)
 
2,575

Operating Profit
$
704

 
$
257

 
$
442

 
$
152

 
$
1,555



Year to Date 9/30/17
KFC
 
Pizza Hut
 
Taco Bell
 
Corporate and Unallocated
 
Consolidated
Total revenues
$
2,296

 
$
659

 
$
1,349

 
$
(3
)
 
$
4,301

 
 
 
 
 
 
 
 
 
 
Company restaurant expenses
1,244

 
212

 
772

 
(5
)
 
2,223

General and administrative expenses
259

 
151

 
122

 
167

 
699

Franchise and property expenses
80

 
44

 
16

 
21

 
161

Refranchising (gain) loss

 

 

 
(331
)
 
(331
)
Other (income) expense
3

 
2

 
(1
)
 
(1
)
 
3

Total costs and expenses, net
1,586

 
409

 
909

 
(149
)
 
2,755

Operating Profit
$
710

 
$
250

 
$
440

 
$
146

 
$
1,546



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.


15


Notes to the Condensed Consolidated Summary of Results, Condensed Consolidated Balance Sheets
and Condensed Consolidated Statements of Cash Flows
(amounts in millions)
(unaudited)

(a)
Amounts presented as of and for the quarters and years to date ended September 30, 2018 and 2017 are preliminary.

(b)
In connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018, we recorded net refranchising gains during the quarters ended September 30, 2018 and 2017 of $100 million and $201 million, respectively, that have been reflected as Special Items. During the years to dated ended September 30, 2018 and 2017, we recorded net refranchising gains of $285 million and $331 million, respectively, that have been reflected as Special Items.

The third quarter 2018 net refranchising gains relate primarily to refranchising Taco Bell restaurants in the U.S. and KFC restaurants in the UK. The third quarter 2017 net refranchising gains relate primarily to refranchising Taco Bell restaurants in the U.S.

(c)
In the fourth quarter of 2016, we announced our plan to transform our business. Major features of the Company's strategic transformation plans involve being more focused on development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure (“YUM’s Strategic Transformation Initiatives”). During the quarters ended September 30, 2018 and 2017, we recognized Special Item charges of $1 million and $4 million, respectively, related to these initiatives. During the years to date ended September 30, 2018 and 2017, we recognized Special Item charges of $2 million and $15 million, respectively, related to these initiatives. These costs primarily related to severance and relocation costs that were recorded within G&A.

(d)
On May 1, 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising contributions by franchisees beginning in 2018. During the quarters ended September 30, 2018 and 2017, we recorded Special Item charges of $1 million and $8 million, respectively, for these investments. During the years to date ended September 30, 2018 and 2017, we recorded Special Item charges of $3 million and $20 million, respectively, for these investments. The majority of these costs were recorded within Franchise and property expenses.

(e)
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 of less than $1 million and $4 million for the quarters ended September 30, 2018 and 2017, respectively. During the years to date ended September 30, 2018 and 2017, we recognized Special Item charges of $2 million and $12 million, respectively. The majority of these costs were recorded within Franchise and property expenses.

(f)
In connection with the separation of Yum China, we modified certain share-based compensation awards held as part of our Executive Income Deferral Plan in YUM stock to provide one Yum China share-based award for each outstanding YUM share-based award. These Yum China awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards each quarter within G&A in our Consolidated Statements of Income. During the quarter and year to date ended September 30, 2018, we recorded Special Item credits of $2 million and $3 million, respectively, due to depreciation in the market price of Yum China's stock. During the quarter and year to date ended September 30, 2017, we recorded Special Item charges of less than $1 million and $18 million, respectively, related to these awards.

(g)
We recorded a non-cash charge of $22 million related to the adjustment of certain historical deferred vested liability balances in our qualified U.S. plan during the first quarter of 2017. Additionally, during the fourth quarter of 2016 the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan an opportunity to voluntarily elect an early payout of their pension benefits. In connection with this program we incurred an additional Special Items settlement charge of $1 million during the quarter ended September 30, 2017. These charges are recorded in Other pension (income) expense.

16



(h)
Tax Benefit (Expense) on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.  Additionally, during the second quarter of 2018, we recorded a $19 million increase to our Income tax provision for the correction of an error associated with the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item. 

(i)
During the quarter and year to date ended September 30, 2018 we recorded $16 million and $32 million decreases, respectively, related to our provisional deemed repatriation tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") that was reported as a Special Item. We also recorded benefit in the quarter and year to date ended September 30, 2018 related to current year U.S. foreign tax credits that became realizable directly as a result of the impact of the deemed repatriation.


17
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