01—Abstract
Summary
Summary of the 10-K filed February 23, 2009. Cited figures are marked; the original filing is the authoritative source.
YUM!
Brands, Inc. (YUM) reported fiscal 2008 total revenues of $11.28 billiona, up from $10.42 billion in 2007, and Operating Profit of $1.51 billion versus $1.36 billion. Net income was $964 million, compared with $909 million in 2007, and diluted earnings per share were $1.96 versus $1.68. The company describes itself as the world's largest quick service restaurant company by system units, with more than 36,000 units in more than 110 countries and territories.
Growth was led by the China Division, where Operating Profit rose to $469 millionb from $375 million, and the YRI (International Division) reached $528 million from $480 million. U.S. Operating Profit declined to $694 million from $739 million, which the filing attributes to higher restaurant operating costs, particularly commodity costs. The filing shows a sharp shift in the balance sheet and cash flows.
Shareholders' equity moved to a deficit of $108 millionc at year end from equity of $1.14 billion a year earlier, driven primarily by about $2 billion returned to shareholders through share repurchases and dividends. Total debt rose to $3.59 billion from $3.21 billion, and cash and cash equivalents fell to $216 million from $789 million. Net cash provided by operating activities was $1.52 billion.
Management stated it does not currently plan to repurchase shares in 2009, expects capital spending of about $900 milliond in 2009, and says it does not expect to need to access credit markets during 2009. The company is pursuing a U.S. refranchising program, targeting Company ownership of U.S. restaurants of potentially below 10% by year end 2010, down from 19% at year end 2008, with about 500 U.S. refranchisings expected in 2009.
The filing also discloses ongoing wage-and-hour and disability access litigation at Taco Bell, KFC and LJS, and an E. coli outbreak lawsuit tied to Taco Bell restaurants in late 2006. The filing states management believes the ultimate liability in these matters is not likely to have a material adverse effect on annual results, though the Taco Bell California wage-and-hour and LJS Cole Arbitration matters carry uncertain outcomes.
02—Key points
Key Highlights
- Total revenues rose to $11.28 billion in 2008 from $10.42 billion in 2007, and Operating Profit increased to $1.51 billion from $1.36 billion.
- Net income was $964 million and diluted EPS was $1.96, compared with $909 million and $1.68 in 2007.
- China Division Operating Profit grew to $469 million from $375 million, and the International Division (YRI) grew to $528 million from $480 million, while U.S. Operating Profit declined to $694 million from $739 million.
- Shareholders' equity swung to a deficit of $108 million at year end 2008 from $1.14 billion a year earlier, after roughly $2 billion in share buybacks and dividends.
- Cash and cash equivalents declined to $216 million from $789 million, and total debt increased to $3.59 billion from $3.21 billion.
- Management does not plan to repurchase shares in 2009 and estimates 2009 capital spending of about $900 million.
- The U.S. refranchising program targets Company ownership of U.S. restaurants of potentially below 10% by year end 2010, down from 19%, with about 500 refranchisings expected in 2009.
03—Questions
Frequently Asked Questions
Why did U.S. Operating Profit decline while total company profit increased?
The filing attributes the 6% decline in U.S. Operating Profit to higher restaurant operating costs, primarily commodity costs, and higher closure and impairment expenses. Growth in the China Division and International Division offset this, and a $100 million gain on the sale of the Japan unconsolidated affiliate was recorded in unallocated Other income.
Why did the company's shareholders' equity become negative?
The MD&A states that equity fell about $1.2 billion during 2008, driven mainly by roughly $2 billion of shareholder payouts through share buybacks and dividends, a decline in the unrecognized funded status of U.S. pension plans of about $200 million, and about $200 million of foreign currency translation losses. These were partly offset by 2008 net income. The filing notes that a shareholders' deficit does not by itself preclude dividends or share repurchases.
What does the company plan for share repurchases and dividends in 2009?
The company does not currently plan to repurchase shares in 2009. A cash dividend of $0.19 per share was approved on November 21, 2008 for distribution on February 6, 2009, and the company targets an annual dividend payout ratio of 35% to 40% of net income.
How is the company managing its liquidity and credit ratings?
The company had approximately $1 billion of unused capacity under revolving credit facilities expiring in 2012 and states it does not expect to need the credit markets in 2009. It is managing cash and debt to maintain investment grade ratings from S&P (BBB-) and Moody's (Baa3).
What legal matters could affect the company?
The filing discloses several wage-and-hour class actions, mainly against Taco Bell and KFC in California, and the LJS Cole Arbitration, which may proceed as an opt-out class action. It also discloses disability access litigation involving Taco Bell and a 2006 E. coli outbreak lawsuit. Management believes the ultimate liability above amounts already provided is not likely to have a material adverse effect on annual results, but outcomes for several matters cannot be predicted.
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