01—Abstract
Summary
Summary of the 10-K filed February 22, 2017. Cited figures are marked; the original filing is the authoritative source.
YUM!
Brands, Inc. reported fiscal 2016 total revenues of $6.37 billiona, Operating Profit of $1.63 billion (up from $1.40 billion in 2015), and net income of $1.62 billion, including $625 million from discontinued operations tied to the October 31, 2016 spin-off of its China business into Yum China Holdings, Inc. (NYSE: YUMC). Diluted EPS from continuing operations was $2.48, and diluted EPS from continuing operations excluding Special Items was $2.45. Fiscal 2016 contained 53 weeks, which added an estimated $76 million to revenues and $27 million to Operating Profit.
The company's stated strategy, announced October 11, 2016, is to be more focused, more franchised (at least 98% franchised by the end of 2018), and more efficient, including reducing annual capital expenditures to approximately $100 millionb in 2019. The company's capital structure changed substantially in 2016. Total debt rose to $9.13 billion from $3.93 billion, and shareholders' equity moved to a deficit of $5.66 billion, driven by $5.4 billion in share repurchases and the China spin-off.
The filing states that the company now holds non-investment grade ratings of BB (Standard & Poor's) and Ba3 (Moody's). Management intends to return an additional $6.5 to $7.0 billionc to shareholders over the next three years, funded by free cash flow, refranchising proceeds (expected to exceed $2 billion net of tax), and maintenance of about five times EBITDA leverage. The filing highlights concentration and transition risks.
Yum China is now the largest franchisee and pays a 3% license fee on system sales in mainland China, and fiscal 2016 franchise fee revenue from Yum China was approximately $240 milliond. The company also faces a possible Chinese indirect transfer tax on the spin-off, which the filing says could be significant if challenged. Operating cash flow from continuing operations was $1.20 billion in 2016, compared with $1.21 billion in 2015.
02—Key points
Key Highlights
- Total revenues of $6,366 million in 2016, down from $6,440 million in 2015; franchise and license fees and income rose to $2,166 million from $2,084 million.
- GAAP Operating Profit of $1,625 million in 2016, up from $1,402 million; Core Operating Profit was $1,694 million, and Core Operating Profit excluding the 53rd week was $1,667 million.
- Diluted EPS from continuing operations was $2.48 (up 18%), and diluted EPS from continuing operations excluding Special Items was $2.45 (up 5%).
- Total debt increased to $9,127 million from $3,928 million, with about 90% effectively fixed-rate debt at an effective overall interest rate of approximately 4.7%; annualized interest expense is expected to be approximately $430 million.
- Shareholders' equity (deficit) declined to $(5,656) million from $969 million, due primarily to $5.4 billion in share repurchases and the China spin-off.
- The company plans to return $6.5 to $7.0 billion to shareholders over the next three years and targets a dividend payout ratio of approximately 45% to 50% of net income.
- Restaurant system totals 43,617 units at year end 2016, of which 40,758 are franchised; the company plans to be at least 98% franchised by the end of 2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 22, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $6.36B$6.42B | −1.0% |
| Operating Income | $1.68B$1.43B | +17.3% |
| Interest Expense | $331.00M$153.00M | +116.3% |
| Net Income | $1.64B$1.28B | +28.1% |
| EPS (Basic) | $4.17$2.95 | +41.4% |
| EPS (Diluted) | $4.10$2.90 | +41.4% |
| Shares Outstanding (Basic) | 394.00M435.00M | −9.4% |
| Shares Outstanding (Diluted) | 400.00M443.00M | −9.7% |
05—Questions
Frequently Asked Questions
What was the effect of the China spin-off on YUM's reported results?
The China business was spun off on October 31, 2016 as Yum China Holdings, Inc. Its results are presented as discontinued operations for all periods, contributing $625 million to 2016 net income. Continuing operations reflect KFC, Pizza Hut and Taco Bell, and Yum China is now the company's largest franchisee under a Master License Agreement that pays a 3% license fee on system sales.
Why did debt increase so significantly in 2016?
The company issued $6.9 billion of new debt in 2016, including $2.3 billion of Securitization Notes, $2.1 billion of Subsidiary Senior Unsecured Notes, and a credit agreement with a $500 million Term Loan A and a $2.0 billion Term Loan B. The proceeds were primarily used to return capital to shareholders through share repurchases and dividends.
What are the company's stated plans for future shareholder returns and capital spending?
The company intends to return an additional $6.5 to $7.0 billion to shareholders over the next three years through share repurchases and dividends, funded by free cash flow, refranchising proceeds, and maintenance of about five times EBITDA leverage. It also plans to reduce annual capital expenditures to approximately $100 million in 2019, from $422 million in 2016, and to reduce G&A expenses by a cumulative approximately $300 million over three years.
What major risks does the filing highlight for investors?
Key risks include dependence on franchisees as the company becomes at least 98% franchised, heavy exposure to China through Yum China, foreign currency risk (a 10% weakening of all foreign currencies would reduce Operating Profit by approximately $105 million), and the non-investment grade credit rating with substantially higher leverage. The filing also flags a possible Chinese indirect transfer tax on the spin-off and a U.S. tax challenge to the spin-off's tax-free treatment.
06—Continue