01—Abstract
Summary
Summary of the 10-K filed February 16, 2016. Cited figures are marked; the original filing is the authoritative source.
YUM!
Brands, Inc. ended fiscal 2015 with over 42,000 restaurants in more than 130 countries and territories, operated under the KFC, Pizza Hut and Taco Bell brands. Diluted EPS was $2.92a on reported net income attributable to YUM of $1.29 billion, up from $2.32 in 2014, while diluted EPS before Special Items rose 3% to $3.18. Total revenues were $13.105 billion versus $13.279 billion in 2014, and Operating Profit increased to $1.921 billion from $1.557 billion.
The filing attributes the 2015 EPS shortfall against the company's 10%b growth target to weaker-than-expected China Division sales and profits, along with adverse foreign currency translation that reduced EPS growth by 6 percentage points. The central strategic event is the planned spin-off of the China business into an independent, publicly traded company by the end of 2016. Upon completion, YUM expects to become a more "pure play" franchisor, and the new China entity will become a licensee of YUM.
Alongside this, the company intends to return approximately $6.2 billionc of capital to shareholders before the spin-off, mostly funded by incremental borrowings. Total debt rose to $3.977 billion at year end from $3.344 billion, and the company stated it is transitioning to a non-investment grade credit rating after Standard & Poor's (BB) and Moody's (Ba3) downgraded it. Shareholders received $730 million in dividends and $1.2 billion in share repurchases during 2015.
Investors should weigh the higher leverage and spin-off execution risk, including a potential China indirect transfer tax under PRC Bulletin 7, against the company's cash generation, with net cash provided by operating activities of $2.139 billiond. Restaurant margin improved to 16.0% from 14.5%, and system sales grew 5% excluding foreign exchange.
02—Key points
Key Highlights
- Diluted EPS was $2.92 in 2015 versus $2.32 in 2014; diluted EPS before Special Items was $3.18, up 3% from $3.09.
- Operating Profit rose to $1.921 billion from $1.557 billion, while total revenues declined to $13.105 billion from $13.279 billion.
- China Division same-store sales declined 4% for the year, and foreign currency translation reduced EPS growth by 6 percentage points.
- Company plans to spin off its China business by the end of 2016, with the new China entity becoming YUM's licensee in mainland China.
- YUM intends to return approximately $6.2 billion of capital to shareholders before the spin-off, with the majority funded by incremental borrowings; total debt increased to $3.977 billion from $3.344 billion.
- Credit ratings were lowered to non-investment grade by S&P (BB) and Moody's (Ba3) following the recapitalization announcement.
- Net cash provided by operating activities was $2.139 billion, and the company returned $1.2 billion through share repurchases and $730 million through dividends in 2015.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Yum! Brands kept $0.20.
- Revenue$6.42B100.0%
- Cost of revenue−$9.36B145.8%
- Gross profit−$2.94B45.8%
- Operating costs$4.38B68.2%
- Operating income$1.43B22.3%
- Interest, other & tax−$151.0M2.4%
- Net income$1.28B20.0%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 16, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $6.42B$13.28B | −51.7% |
| Cost of Revenue | $9.36B$9.68B | −3.3% |
| Gross Profit | -$2.94B$3.60B | −181.8% |
| R&D Expenses | $28.00M$30.00M | −6.7% |
| Operating Expenses | $11.18B$11.72B | −4.6% |
| Operating Income | $1.43B$1.52B | −5.5% |
| Interest Expense | $153.00M$151.00M | +1.3% |
| Net Income | $1.28B$1.05B | +22.1% |
| EPS (Basic) | $2.95$2.37 | +24.5% |
| EPS (Diluted) | $2.90$2.32 | +25.0% |
| Shares Outstanding (Basic) | 435.00M444.00M | −2.0% |
| Shares Outstanding (Diluted) | 443.00M453.00M | −2.2% |
05—Questions
Frequently Asked Questions
Why did YUM's 2015 EPS growth fall short of its target?
The filing states that diluted EPS increased 3% to $3.18 before Special Items versus a target of 10% growth, as sales and profits at the China Division did not recover as strongly as expected and adverse foreign currency translation significantly impacted reported earnings. China Division same-store sales declined 4% for the year, with Pizza Hut Casual Dining same-store sales falling 8% in Q4.
What is the planned China spin-off and what happens to YUM afterward?
YUM announced in October 2015 its intent to separate its China business into an independent, publicly traded company by the end of 2016 through a tax-free spin-off. The new China entity will become a licensee of YUM in mainland China with exclusive rights to the KFC, Pizza Hut and Taco Bell concepts. YUM would then be a more 'pure play' franchisor, targeting 96% franchisee ownership of its restaurants by the end of 2017.
How will YUM fund the $6.2 billion return of capital to shareholders?
The filing states that the majority of the return will be funded by incremental borrowings. In December 2015 YUM entered into a $1.5 billion short-term loan credit facility, with $600 million outstanding at year end, and expects to borrow an additional $5.2 billion in 2016. Its $1.3 billion revolving Credit Facility had $701 million outstanding at December 26, 2015.
What risks does the spin-off carry for investors?
The filing identifies several risks, including that the spin-off may not be completed by the end of 2016 or at all, that it could result in substantial U.S. tax liability if it were treated as taxable, and that it may be subject to China's Bulletin 7 indirect transfer tax of 10%. The company estimates the Bulletin 7 exposure could be significant given its minimal tax basis in the China business, though it believes such tax is more likely than not not to apply.
How did the restaurant base and profitability change in 2015?
System units reached 42,692 at year end versus 41,546 in 2014. Consolidated restaurant margin rose to 16.0% from 14.5%, and Company restaurant profit increased to $1.786 billion from $1.642 billion. Operating Profit benefited from net new unit growth and lower restaurant operating costs, partly offset by same-store sales declines in China.
06—Continue