Why did China Division results decline in 2014?

The filing states that on July 20, 2014, an undercover report in China depicted improper food handling by supplier Shanghai Husi, a division of OSI. The resulting publicity shook consumer confidence, and the Shanghai FDA launched an investigation. YUM terminated its relationship with OSI globally, but sales at KFC and Pizza Hut were disproportionately affected, with China same-store sales down 5% for 2014 and KFC China same-store sales down 18% in the fourth quarter.

What drove the drop in operating profit and the Special Items?

Operating Profit fell to $1,557 million from $1,798 million, primarily reflecting $463 million of Little Sheep impairment losses recorded in 2014. The company wrote the Little Sheep trademark down by $284 million to $58 million fair value and wrote off the remaining $160 million of Little Sheep goodwill, as sales and profits were significantly below forecasts.

How much did YUM return to shareholders and what capacity remains?

The company repurchased $820 million of shares and paid $669 million in dividends on Common Stock during 2014. The Board authorized an additional $1 billion of repurchases in November 2014, and at December 27, 2014 YUM had $1.1 billion of remaining repurchase capacity. The payout policy targets 40% to 45% of net income, and a $0.41 per share dividend was distributed on February 6, 2015.

What is the outlook for 2015?

The filing states that 2015 EPS before Special Items is expected to grow at least 10%, consistent with the company's ongoing targeted growth rate. This outlook includes an expected negative impact of approximately $75 million from foreign currency translation. Capital spending for 2015 is estimated at approximately $1.1 billion.

How is the company's debt position and liquidity?

At December 27, 2014, long-term debt including hedge adjustments was $3.08 billion, and total debt was $3.34 billion. The company had a $1.3 billion unsecured revolving credit facility maturing in March 2017, with $416 million borrowed and $824 million unused net of letters of credit. The company held investment-grade ratings of BBB from S&P and Baa3 from Moody's, and operating cash flow exceeded $1 billion in each of the last thirteen fiscal years.

YUM 10-K FY2014 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 17, 2015. Cited figures are marked; the original filing is the authoritative source.

YUM!

Brands, Inc. reported fiscal 2014 total revenues of $13.28 billion^a, up from $13.08 billion in 2013, but Operating Profit fell to $1.56 billion from $1.80 billion, driven largely by $463 million of Little Sheep impairment charges. Reported diluted EPS was $2.32 versus $2.36 in 2013, while diluted EPS before Special Items rose to $3.09 from $2.97. The filing attributes the China Division's weaker performance to adverse publicity in July 2014 surrounding improper food handling practices by a former supplier, after which China same-store sales declined 5% for the full year and KFC China same-store sales fell 18% in the fourth quarter.

Outside China, the KFC Division grew system sales 6% excluding FX and Operating Profit 13%, the Taco Bell Division grew system sales 4% and Operating Profit 5%, and the Pizza Hut Division grew system sales 1% while Operating Profit declined 13%. The company operated over 41,000 restaurants in more than 125 countries and territories, with 79% operated by franchisees, licensees or unconsolidated affiliates. Management projects 2015 EPS before Special Items to grow at least 10%, including an expected negative FX impact of approximately $75 million^b.

Cash generation remained strong, with operating cash flow of $2.05 billion^c, capital spending of $1.03 billion, $820 million in share repurchases and $669 million in dividends paid. Remaining repurchase capacity was $1.1 billion, and the company held a $1.3 billion revolving credit facility with $416 million drawn at year end. The filing also discloses the reaching of a final agreement with the IRS Appeals Division on an intangibles valuation dispute, under which the company paid $200 million.

02—Key points

Key Highlights

Total revenues rose to $13.28 billion in 2014 from $13.08 billion in 2013, while Operating Profit declined to $1.56 billion from $1.80 billion.
Reported diluted EPS was $2.32 versus $2.36 in 2013; diluted EPS before Special Items increased to $3.09 from $2.97.
Special Items included $463 million of Little Sheep impairment charges, including a $284 million trademark impairment and $160 million goodwill write-off.
China Division Operating Profit fell 8% to $713 million, with same-store sales down 5% for the year after the July 2014 supplier publicity.
KFC Division Operating Profit rose 9% reported (13% excluding FX) and Taco Bell Division Operating Profit rose 5%, while Pizza Hut Division Operating Profit declined 13%.
Operating cash flow was $2.05 billion, with $820 million spent on share repurchases and $669 million paid in dividends.
Management expects 2015 EPS before Special Items to grow at least 10%, including an approximately $75 million negative FX impact.

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2014, Yum! Brands kept $0.08.

Revenue$13.28B100.0%100.0%
Cost of revenue−$9.68B72.9%72.9%
Gross profit$3.60B27.1%27.1%
Operating costs−$2.08B15.7%15.7%
Operating income$1.52B11.4%11.4%
Interest, other & tax−$466.0M3.5%3.5%
Net income$1.05B7.9%7.9%

10-KFY2014filed February 17, 2015Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2014 revenue went

$13.28B

Cost of revenue: $9.68B, 73% of revenue
Other operating costs: $2.05B, 15% of revenue
Net income: $1.05B, 7.9% of revenue
R&D: $30.0M, 0.2% of revenue
Interest, other & tax: $466.0M, 3.5% of revenue

Kept 7.9% as net incomeR&D $30.0M · 0.2%

Full revenue history →

04—Financials

Financial Highlights

10-KFY2014filed February 17, 2015

Revenue$13.28B27.1% Gross Margin Net Income$1.05B7.9% Net Margin EPS (Diluted)$2.32 Total Assets$8.33B Cash & Equivalents$578.00M Free Cash Flow$1.02B

Financial Statements

FY2014 against FY2013

Line item	FY2014FY2013	FY2013	Change
Revenue	$13.28B$13.08B	$13.08B	+1.5%
Cost of Revenue	$9.68B$9.50B	$9.50B	+1.9%
Gross Profit	$3.60B$3.58B	$3.58B	+0.4%
R&D Expenses	$30.00M$31.00M	$31.00M	−3.2%
Operating Expenses	$11.72B$11.29B	$11.29B	+3.9%
Operating Income	$1.52B$1.80B	$1.80B	−15.6%
Interest Expense	$151.00M$270.00M	$270.00M	−44.1%
Net Income	$1.05B$1.09B	$1.09B	−3.7%
EPS (Basic)	$2.37$2.41	$2.41	−1.7%
EPS (Diluted)	$2.32$2.36	$2.36	−1.7%
Shares Outstanding (Basic)	444.00M452.00M	452.00M	−1.8%
Shares Outstanding (Diluted)	453.00M461.00M	461.00M	−1.7%

05—Questions

Frequently Asked Questions

Why did China Division results decline in 2014?
The filing states that on July 20, 2014, an undercover report in China depicted improper food handling by supplier Shanghai Husi, a division of OSI. The resulting publicity shook consumer confidence, and the Shanghai FDA launched an investigation. YUM terminated its relationship with OSI globally, but sales at KFC and Pizza Hut were disproportionately affected, with China same-store sales down 5% for 2014 and KFC China same-store sales down 18% in the fourth quarter.
What drove the drop in operating profit and the Special Items?
Operating Profit fell to $1,557 million from $1,798 million, primarily reflecting $463 million of Little Sheep impairment losses recorded in 2014. The company wrote the Little Sheep trademark down by $284 million to $58 million fair value and wrote off the remaining $160 million of Little Sheep goodwill, as sales and profits were significantly below forecasts.
How much did YUM return to shareholders and what capacity remains?
The company repurchased $820 million of shares and paid $669 million in dividends on Common Stock during 2014. The Board authorized an additional $1 billion of repurchases in November 2014, and at December 27, 2014 YUM had $1.1 billion of remaining repurchase capacity. The payout policy targets 40% to 45% of net income, and a $0.41 per share dividend was distributed on February 6, 2015.
What is the outlook for 2015?
The filing states that 2015 EPS before Special Items is expected to grow at least 10%, consistent with the company's ongoing targeted growth rate. This outlook includes an expected negative impact of approximately $75 million from foreign currency translation. Capital spending for 2015 is estimated at approximately $1.1 billion.
How is the company's debt position and liquidity?
At December 27, 2014, long-term debt including hedge adjustments was $3.08 billion, and total debt was $3.34 billion. The company had a $1.3 billion unsecured revolving credit facility maturing in March 2017, with $416 million borrowed and $824 million unused net of letters of credit. The company held investment-grade ratings of BBB from S&P and Baa3 from Moody's, and operating cash flow exceeded $1 billion in each of the last thirteen fiscal years.

06—Continue

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