01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
YUM!
Brands, Inc. reported fiscal 2017 GAAP diluted EPS from continuing operations of $3.77a, up from $2.54 in 2016, with diluted EPS from continuing operations excluding Special Items of $2.96. Total revenues were $5.88 billion versus $6.36 billion in 2016, while Operating Profit rose to $2.76 billion from $1.68 billion, largely reflecting $1.08 billion of net refranchising gains. Net income was $1.34 billion.
The company operated 45,084 system units at year end, with 97% franchised as stated in the MD&A, and continued its Strategic Transformation Initiatives, which target at least 98% franchise ownership by the end of 2018, annual capital expenditures of about $100 millionb in 2019, and G&A of 1.7% of system sales in 2019. Capital returns and balance sheet changes were significant. The company returned $2.4 billion to shareholders in 2017 through repurchases and dividends and remains committed to returning $6.5 to $7.0 billion from 2017 through 2019.
Total debt was $9.8 billionc, about 90% effectively fixed after interest rate swaps, and the company had a stated effective interest rate of about 4.7%. Operating cash flow from continuing operations declined to $1.03 billion from $1.25 billion, mainly due to higher interest payments. Cash and cash equivalents rose to $1.52 billion at year end.
The filing also highlights risks and developments that investors should weigh. The Tax Act resulted in a provisional charge of $434 milliond, and the company now expects an ongoing effective tax rate of 20 to 22%.
Yum China, the largest franchisee, remains a key dependency, and supply issues at about 900 KFC restaurants in the UK and Ireland, beginning February 14, 2018, have caused some closures and limited menus. In February 2018 the company agreed to invest $200 million in Grubhub stock to support digital delivery for KFC and Taco Bell.
02—Key points
Key Highlights
- Diluted EPS from continuing operations rose to $3.77 from $2.54, while diluted EPS excluding Special Items increased to $2.96 from $2.46.
- Operating Profit increased to $2.76 billion from $1.68 billion, driven by $1.08 billion of refranchising gains; total revenues declined to $5.88 billion from $6.36 billion.
- Refranchised 1,470 restaurants for $1.77 billion in pre-tax proceeds; company-operated units fell to 1,481 from 2,841 at year end 2016.
- Returned $2.4 billion to shareholders in 2017 and remains committed to returning $6.5 to $7.0 billion from 2017 through 2019.
- Total debt of $9.8 billion, with approximately 90% effectively fixed after swaps and an effective overall interest rate of about 4.7%.
- Tax Act enactment resulted in a $434 million provisional charge; the ongoing effective tax rate is now expected to be 20 to 22%.
- Operating cash flow from continuing operations fell to $1.03 billion from $1.25 billion, primarily due to higher interest payments.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Yum! Brands kept $0.23.
- Revenue$5.88B100.0%
- Cost of revenue−$2.95B50.3%
- Gross profit$2.92B49.7%
- Operating costs−$163.0M2.8%
- Operating income$2.76B47.0%
- Interest, other & tax−$1.42B24.2%
- Net income$1.34B22.8%
Where FY2017 revenue went
$5.88B- Cost of revenue: $2.95B, 50% of revenue
- Interest, other & tax: $1.42B, 24% of revenue
- Net income: $1.34B, 23% of revenue
- Operating costs: $163.0M, 2.8% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $5.88B$6.36B | −7.5% |
| Cost of Revenue | $2.95B— | — |
| Gross Profit | $2.92B— | — |
| Operating Expenses | $3.12B— | — |
| Operating Income | $2.76B$1.68B | +64.1% |
| Interest Expense | $473.00M$331.00M | +42.9% |
| Net Income | $1.34B$1.64B | −18.4% |
| EPS (Basic) | $3.86$4.17 | −7.4% |
| EPS (Diluted) | $3.77$4.10 | −8.0% |
| Shares Outstanding (Basic) | 347.00M394.00M | −11.9% |
| Shares Outstanding (Diluted) | 355.00M400.00M | −11.2% |
05—Questions
Frequently Asked Questions
What drove the large increase in reported earnings in 2017?
The filing attributes much of the increase to Special Items. Refranchising gains of $1,083 million, net of other Special Items, contributed a net $1,001 million to Operating Profit. GAAP diluted EPS from continuing operations was $3.77, while excluding Special Items it was $2.96.
How is YUM changing its business model?
Under its Strategic Transformation Initiatives, YUM intends to be at least 98% franchised by the end of 2018, reduce annual capital expenditures to about $100 million in 2019, and lower G&A to 1.7% of system sales in 2019. Company restaurants fell to 1,481 at year end 2017 from 2,841 a year earlier.
What are the main risks tied to Yum China and the UK supply issues?
Yum China is the largest franchisee, and its results significantly affect YUM's financial results. Royalty income is exposed to China risks such as currency and government policy. Since February 14, 2018, about 900 KFC restaurants in the UK and Ireland have faced supply availability problems, causing some closures and limited menus. The impact on profits had not been material through the filing date, but prolonged issues could have a material effect on revenues.
What is the company's debt position and how is it managed?
Total debt was $9.8 billion at December 31, 2017, with about 90% effectively fixed after interest rate swaps on $1.55 billion of Term Loan B debt. The company targets approximately five times EBITDA leverage and holds credit ratings of BB (S&P) and Ba3 (Moody's). Remaining debt includes a $325 million YUM note maturing in March 2018.
06—Continue