Yum! Brands Reports First-Quarter EPS Growth of 21%, or $0.76 Per Share, Excluding Special Items

  • Strong Sales and Operating Profit Growth Across All Divisions;
  • Raises Full-Year 2012 EPS Growth Forecast to at least 12%, Excluding Special Items

LOUISVILLE, Ky.--(BUSINESS WIRE)--Yum! Brands Inc. (NYSE: YUM) today reported results for the first quarter ended March 24, 2012 including EPS of $0.76, excluding Special Items. Reported EPS for the quarter was $0.96.

FIRST QUARTER HIGHLIGHTS

  • Worldwide operating profit grew 15%, prior to foreign currency translation, including 14% in China, 9% at Yum! Restaurants International (YRI) and 27% in the U.S.
  • Worldwide system sales grew 7%, prior to foreign currency translation, including 28% in China, 8% at YRI and 1% in the U.S.
    • The 2011 fourth-quarter divestiture of Long John Silver's (LJS) and A&W All-American Restaurants (A&W) negatively impacted worldwide system sales growth by 2 percentage points, including an impact of 5 percentage points to the U.S. and 1 percentage point to YRI.
  • Same-store sales grew 14% in China, 5% at YRI and 5% in the U.S.
  • China new unit development set a first-quarter record with 168 new restaurants. Total international development was 297 new restaurants.
  • Worldwide restaurant margin increased 1.2 percentage points to 18.6%.
  • Foreign currency translation positively impacted operating profit by $8 million.
  • On February 1, 2012, we acquired a controlling interest in Little Sheep Group, Ltd., the leading hot-pot casual-dining concept based in China. Little Sheep operating results for February through April will be included in our second quarter results.

Full-year EPS growth forecast raised to at least 12%, or at least $3.22, excluding Special Items.

   
     

First Quarter

 
     

2012

   

2011

   

% Change

 
EPS Excluding Special Items     $ 0.76     $0.63       21 %  
Special Items Gain/(Loss)1     $ 0.20     ($0.09 )     NM    
EPS     $ 0.96     $0.54       76 %  
                           

1 See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of the Special Items. Special Items for 2012 are primarily related to the Little Sheep acquisition gain, U.S. refranchising gains and Pizza Hut UK impairment.

 

Note: All comparisons are versus the same period a year ago and exclude Special Items unless noted.

David C. Novak, Chairman and CEO, said, "I am pleased to report each of our divisions produced impressive sales and profit results, driving 21% first-quarter EPS growth. Given the strength of our first-quarter results, we are raising our full-year EPS growth forecast to at least 12%, excluding Special Items.

Our China business continues to fire on all cylinders, and our category-leading brands are as strong as ever. China system sales grew 28% as we opened 168 new restaurants and delivered same-store sales growth of 14%; operating profit grew 14%, prior to foreign currency translation. Yum! Restaurants International continues to generate consistent growth as system sales grew 8% and we opened 123 new units in 41 countries. Same-store sales growth of 5% was led by an 8% increase in emerging markets at YRI, driving 9% operating profit growth, prior to foreign currency translation. Yum! Restaurants India, our newest division, grew system sales 34% and we expect to open 100 new restaurants this year. Overall for the first quarter, we opened 250 new restaurants in high-growth emerging markets. We believe our new unit potential in emerging markets is the best in the restaurant industry and we're still on the ground floor of growth.

While we realize there is much work to do, we are optimistic we will dramatically improve our U.S. brand positions, consistency and returns. We are pleased with our first-quarter performance in the United States, with same-store sales growth of 5%, led by Taco Bell, and operating profit growth of 27%.

In summary, we're off to a strong start to the year in each of our businesses. These results give us even more confidence that we will continue our track record of double-digit annual EPS growth."

CHINA DIVISION

 
     

First Quarter

 
            % Change  
   

2012

   

2011

   

Reported

   

Ex F/X

 
System Sales Growth                 +34       +28    
Same-Store Sales Growth (%)     +14     +13     NM       NM    
Restaurant Margin (%)     23.6     25.1     (1.5 )     (1.5 )  
Operating Profit ($MM)     256     215     +19       +14    
                               
  • China Division system sales increased 28%, prior to foreign currency translation. Same-store sales increased 14%, driven by a 9% increase in same-store transactions. Our same-store sales growth was 13% at KFC and 18% at Pizza Hut Casual Dining.
  • China opened a first-quarter record of 168 new units.
 
China Units     Q1 2012     % Change2  
Traditional Restaurants1     4,649     +17  
KFC     3,819     +15  
Pizza Hut Casual Dining     662     +25  
               

1 Total includes Pizza Hut Home Service and East Dawning units and excludes Little Sheep units

2 Annual Rate of Change

 
  • Restaurant margin decreased 1.5 percentage points to 23.6%, driven primarily by wage rate inflation of 17%. Commodity inflation was 10%.
  • Foreign currency translation positively impacted operating profit by $11 million.
  • Leap year added an extra day in the quarter and resulted in an additional $5 million of operating profit. This was offset by $6 million of non-recurring expense related to the acquisition of Little Sheep.

YUM! RESTAURANTS INTERNATIONAL

 
     

First Quarter3

 
            % Change  
   

2012

   

2011

   

Reported

   

Ex F/X

 
Traditional Restaurants1     14,021     13,636     +3    

NA

 
System Sales Growth                 +6     +8  
Restaurant Margin (%)     12.2     12.8     (0.6)     (0.6)  
Franchise & License Fees ($MM)     199     186     +7     +9  
Operating Profit ($MM)2     168     158     +7     +9  
Operating Margin (%)     23.7     24.1     (0.4)     (0.3)  
                           

1 During the fourth quarter of 2011, we sold the LJS and A&W brands. As a result, 341 LJS and A&W restaurants have been removed from the 2011 unit balance. LJS and A&W results remain in all other 2011 financial numbers.

2 The 2011 divestiture of LJS and A&W had a negligible impact on operating profit.

3 Results for all periods exclude the India Division. India is now a standalone segment and reported separately.

 
  • YRI Divisionsystem sales increased 8%, prior to foreign currency translation.
    • Emerging markets system sales grew 13%, driven by 8% same-store sales growth and 6% unit growth.
    • Developed markets system sales grew 4%, driven by 2% same-store sales growth.
  • YRI opened 123 new units in 41 countries.
    • For the quarter, 76 new units were opened in emerging markets.
    • Our franchise partners opened 91% of all new units.
  • Restaurant margin decreased 0.6 percentage points. This was primarily driven by declines in KFC UK, Pizza Hut Korea and increased costs associated with last year's flooding in Thailand.
 
YRI MARKETS1     System Sales Ex F/X  
    Percent of YRI2     First Quarter Growth (%)  
Franchise              
Asia (ex Japan)     16%     +11  
Japan     11%     (2)  
Latin America     11%     +9  
Middle East     8%     +19  
Continental Europe     7%     +8  
Canada     6%     Even  
               
Combined Company / Franchise              
UK     12%     +6  
Australia / New Zealand     12%     Even  
Thailand     2%     +4  
Korea     1%     +2  
               
Key Growth              
Africa     6%     +14  
France     4%     +22  
Germany / Netherlands     2%     +15  
Russia     2%     +47  
 

1 See website www.yum.com under tab "Investors" for a list of the countries within each of the YRI markets.

2 Percentage of Total YRI System Sales for Full Year 2011.

 

U.S. DIVISION

 
     

First Quarter

 
     

2012

   

2011

   

% Change

 
Same-Store Sales Growth (%)     +5     (1)     NM  
Restaurant Margin (%)     14.4     10.7     3.7  
Franchise and License Fees ($MM)     178     172     +4  
Operating Profit ($MM)     158     123     +27  
Operating Margin (%)     19.7     14.5     5.2  
                     
  • U.S. Division same-store sales increased 5%, including growth of 6% at Taco Bell, 5% at Pizza Hut and 2% at KFC.
  • Restaurant margin increased 3.7 percentage points, driven by increased pricing and transaction growth.
  • The 2011 fourth-quarter divestiture of LJS and A&W negatively impacted revenue 1% and franchise and license fees 5%. The operating profit impact was negligible.

YUM! RESTAURANTS INDIA

  • India Division system sales increased 34%, prior to foreign currency translation. The system sales increase was driven by new unit development and same-store sales growth of 8%.
  • India Division reports on a monthly calendar, with two months in the first quarter, three months in the second and third quarters, and four months in the fourth quarter.
 
India Units     Q1 2012     % Change1  
Traditional Restaurants2     471     +31  
KFC     208     +41  
Pizza Hut Casual Dining     166     +6  
Pizza Hut Home Service     94     +74  
               

1 Annual rate of change

2 Total includes 3 Taco Bell units

 

OWNERSHIP / SPECIAL ITEMS UPDATE

  • In the U.S., we refranchised 126 units for proceeds of $96 million, primarily related to Taco Bell. We recorded pre-tax gains of $45 million related to these transactions in Special Items. Currently, our company ownership is 13% in the U.S. Over the next two years we plan to reduce company ownership in Taco Bell from 22% to about 16%. Our target for Pizza Hut and KFC is about 5% company ownership.
  • In 2011, we decided to sell our Pizza Hut UK dine-in business. Based on our latest estimates of proceeds, we recorded a non-cash pre-tax charge in Special Items of $20 million.
  • As required by U.S. GAAP, upon our acquisition of a controlling interest in Little Sheep, we adjusted our previously owned 27% interest up to fair value resulting in a $74 million non-cash gain in Special Items.

OTHER ITEMS UPDATE

  • Shares repurchased at an average price of $64 totaled $78 million for 1.2 million shares.

CONFERENCE CALL

Yum! Brands Inc. will host a conference call to review the company's financial performance and strategies at 9:15 a.m. Eastern Time Thursday, April 19, 2012. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers.

The call will be available for playback beginning at noon Eastern Time Thursday, April 19, through midnight Thursday, May 3, 2012. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 64974638.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands' Web site, www.yum.com/investors and selecting "Q1 2012 Earnings Conference Call" under "Investment Events." A podcast will be available within 24 hours.

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant-count details, and definitions of terms are available online at www.yum.com under "Investors."

This announcement, any related announcements and the related webcast may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected. Factors that can cause our actual results to differ materially include, but are not limited to: food borne-illness or food safety issues; economic and political conditions in the countries where we operate; currency exchange and interest rates; commodity, labor and other operating costs; our ability to secure and maintain distribution and adequate supply to our restaurants; the effectiveness of our operating initiatives and marketing; the success of our strategies for refranchising and international development; the continued viability and success of our franchise and license operators; publicity that may impact our business and/or industry; pending or future legal claims; the impact of any widespread illness; our effective tax rates; our actuarially determined casualty loss estimates; government regulations; accounting policies and practices; and competition, consumer preferences or perceptions. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We are not undertaking to update any of these statements.

Yum! Brands, Inc., based in Louisville, Kentucky, is the world's largest restaurant company in terms of system restaurants with over 37,000 restaurants in more than 120 countries and territories. Yum! is ranked #214 on the Fortune 500 List and generated revenues of more than $12 billion in 2011. The Company's restaurant brands - KFC, Pizza Hut and Taco Bell - are the global leaders of the chicken, pizza and Mexican-style food categories. Outside the United States, the Yum! Brands system opened approximately four new restaurants each day of the year, making it a leader in international retail development.

                         

YUM! Brands, Inc.

Condensed Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

                         
              Quarter         % Change
              3/24/12   3/19/11         B/(W)
                             
Company sales             $ 2,344     $ 2,051           14  
Franchise and license fees and income             399     374           7  
Total revenues             2,743     2,425           13  
                             
Company restaurant expenses, net                            
Food and paper             767     662           (16 )
Payroll and employee benefits             513     461           (11 )
Occupancy and other operating expenses             624     568           (10 )
Company restaurant expenses             1,904     1,691           (13 )
                             
General and administrative expenses             272     255           (7 )
Franchise and license expenses             26     30           15  
Closures and impairment (income) expenses             1     69           98  
Refranchising (gain) loss             (26 )   (2 )         NM  
Other (income) expense             (79 )   (19 )         NM  
Total costs and expenses, net             2,098     2,024           (4 )
                             
Operating Profit             645     401           61  
Interest expense, net             37     43           14  
Income before income taxes             608     358           70  
Income tax provision             147     91           (62 )
Net income - including noncontrolling interests             461     267           72  
Net income - noncontrolling interests             3     3           3  
Net income - YUM! Brands, Inc.             $ 458     $ 264           73  
                             

Effective tax rate

            24.1 %   25.2 %         1.1 ppts.  
                             

Effective tax rate before special items

            27.5 %   27.1 %         (0.4 ppts. )
                             

Basic EPS Data

                           
EPS             $ 0.99     $ 0.56           76  
Average shares outstanding             465     473           2  
                             

Diluted EPS Data

                           
EPS             $ 0.96     $ 0.54           76  
Average shares outstanding             478     486           2  
                             
Dividends declared per common share             $ 0.285     $ --            
                                     

See accompanying notes.

                                     

Percentages may not recompute due to rounding.

                                     
                         

YUM! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

                         
              Quarter         % Change
              3/24/12   3/19/11         B/(W)
                             
Company sales             $ 1,199     $ 893           34  
Franchise and license fees and income             19     13           40  
Total revenues             1,218     906           34  
                             
Company restaurant expenses, net                            
Food and paper             413     309           (34 )
Payroll and employee benefits             188     123           (53 )
Occupancy and other operating expenses             316     237           (33 )
              917     669           (37 )
General and administrative expenses             48     37           (28 )
Franchise and license expenses             1     --           NM  
Closures and impairment (income) expenses             1     --           NM  
Other (income) expense             (5 )   (15 )         (67 )
              962     691           (39 )
Operating Profit             $ 256     $ 215           19  
                             
Company sales             100.0 %   100.0 %          
Food and paper             34.4     34.6           0.2 ppts.  
Payroll and employee benefits             15.7     13.8           (1.9 ppts. )
Occupancy and other operating expenses             26.3     26.5           0.2 ppts.  
Restaurant margin             23.6 %   25.1 %         (1.5 ppts. )
                             
Operating margin             21.0 %   23.7 %         (2.7 ppts. )
                                 

See accompanying notes.

 

Percentages may not recompute due to rounding.

 
                       

YUM! Brands, Inc.

YUM! RESTAURANTS INTERNATIONAL DIVISION Operating Results

(amounts in millions)

(unaudited)

                       
          Quarter         % Change
              3/24/12   3/19/11         B/(W)
                             
Company sales             $ 509     $ 467           9  
Franchise and license fees and income             199     186           7  
Total revenues             708     653           9  
                             
Company restaurant expenses, net                            
Food and paper             167     144           (16 )
Payroll and employee benefits             130     121           (8 )
Occupancy and other operating expenses             150     142           (6 )
              447     407           (10 )
General and administrative expenses             82     76           (8 )
Franchise and license expenses             10     10           (2 )
Closures and impairment (income) expenses             1     2           47  
Other (income) expense             --     --           --  
              540     495           (9 )
Operating Profit             $ 168     $ 158           7  
                             
Company sales             100.0 %   100.0 %          
Food and paper             32.8     31.0           (1.8 ppts. )
Payroll and employee benefits             25.5     25.8           0.3 ppts.  
Occupancy and other operating expenses             29.5     30.4           0.9 ppts.  
Restaurant margin             12.2 %   12.8 %         (0.6 ppts. )
                             
Operating margin             23.7 %   24.1 %         (0.4 ppts. )
                                   

See accompanying notes.

 

Percentages may not recompute due to rounding.

 
                     

YUM! Brands, Inc.

UNITED STATES DIVISION Operating Results

(amounts in millions)

(unaudited)

                     
          Quarter         % Change
              3/24/12   3/19/11         B/(W)
                             
Company sales             $ 622     $ 681           (9 )
Franchise and license fees and income             178     172           4  
Total revenues             800     853           (6 )
                             
Company restaurant expenses, net                            
Food and paper             182     205           11  
Payroll and employee benefits             193     216           10  
Occupancy and other operating expenses             157     188           17  
              532     609           13  
General and administrative expenses             96     101           4  
Franchise and license expenses             15     19           28  
Closures and impairment (income) expenses             (1 )   1           NM  
Other (income) expense             --    

--

         

--

 
              642     730           12  
Operating Profit             $ 158     $ 123           27  
                             
Company sales             100.0 %   100.0 %          
Food and paper             29.2     30.0           0.8 ppts.  
Payroll and employee benefits             31.1     31.7           0.6 ppts.  
Occupancy and other operating expenses             25.3     27.6           2.3 ppts.  
              14.4 %   10.7 %         3.7 ppts.  
                             
Operating margin             19.7 %   14.5 %         5.2 ppts.  
 

See accompanying notes.

                                 

Percentages may not recompute due to rounding.

 
         

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

         
    (unaudited)    
    3/24/12   12/31/11
ASSETS        
Current Assets        
Cash and cash equivalents   $ 1,099     $ 1,198  
Accounts and notes receivable, less allowance: $23 in 2012 and $22 in 2011   341     286  
Inventories   291     273  
Prepaid expenses and other current assets   427     338  
Deferred income taxes   128     112  
Advertising cooperative assets, restricted   139     114  
Total Current Assets   2,425     2,321  
         

Property, plant and equipment, net of accumulated depreciation and amortization of $3,233 in 2012 and $3,225 in 2011

  4,041     4,042  
Goodwill   962     681  
Intangible assets, net   811     299  
Investments in unconsolidated affiliates   33     167  
Restricted cash   --     300  
Other assets   531     475  
Deferred income taxes   540     549  
Total Assets   $ 9,343     $ 8,834  
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Current Liabilities        
Accounts payable and other current liabilities   $ 1,752     $ 1,874  
Income taxes payable   181     142  
Short-term borrowings   319     320  
Advertising cooperative liabilities   139     114  
Total Current Liabilities   2,391     2,450  
         
Long-term debt   3,006     2,997  
Other liabilities and deferred credits   1,667     1,471  
Total Liabilities   7,064     6,918  
         
Shareholders' Equity        
Common stock, no par value, 750 shares authorized; 460 shares issued in 2012 and 2011   5     18  
Retained earnings   2,362     2,052  
Accumulated other comprehensive income (loss)   (225 )   (247 )
Total Shareholders' Equity - YUM! Brands, Inc.   2,142     1,823  
Noncontrolling interests   137     93  
Total Shareholders' Equity   2,279     1,916  
Total Liabilities and Shareholders' Equity   $ 9,343     $ 8,834  
                 

See accompanying notes.

                 
     

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

     
    Quarter
    3/24/12   3/19/11
Cash Flows - Operating Activities        
Net income - including noncontrolling interests   $ 461     $ 267  
Depreciation and amortization   138     123  
Closures and impairment (income) expenses   1     69  
Refranchising (gain) loss   (26 )   (2 )
Contributions to defined benefit pension plans   (8 )   (3 )
Gain upon acquisition of Little Sheep   (74 )   --  
Deferred income taxes   (4 )   (60 )
Equity income from investments in unconsolidated affiliates   (13 )   (16 )
Excess tax benefit from share-based compensation   (28 )   (8 )
Share-based compensation expense   11     13  
Changes in accounts and notes receivable   29     11  
Changes in inventories   27     34  
Changes in prepaid expenses and other current assets   (15 )   (25 )
Changes in accounts payable and other current liabilities   (124 )   (14 )
Changes in income taxes payable   70     85  
Other, net   39     34  
Net Cash Provided by Operating Activities   484     508  
         
Cash Flows - Investing Activities        
Capital spending   (184 )   (173 )
Proceeds from refranchising of restaurants   102     14  
Acquisitions   (540 )   (1 )
Sales of property, plant and equipment   4     --  
Decrease in restricted cash   300     --  
Increase in short-term investments   (79 )   --  
Other, net   (5 )   4  
Net Cash Used in Investing Activities   (402 )   (156 )
         
Cash Flows - Financing Activities        
Proceeds from long-term debt   --     --  
Repayments of long-term debt   (3 )   (4 )
Revolving credit facilities, three months or less, net   --     --  
Short-term borrowings   --     --  
Repurchase shares of Common Stock   (78 )   (152 )
Excess tax benefit from share-based compensation   28     8  
Employee stock option proceeds   16     9  
Dividends paid on Common Stock   (131 )   (118 )
Other, net   (20 )   (4 )
Net Cash Used in Financing Activities   (188 )   (261 )
Effect of Exchange Rate on Cash and Cash Equivalents   7     12  
Net Increase (Decrease) in Cash and Cash Equivalents   (99 )   103  
Cash and Cash Equivalents - Beginning of Year   $ 1,198     $ 1,426  
Cash and Cash Equivalents - End of Year   $ 1,099     $ 1,529  
                 

See accompanying notes.

                 

Reconciliation of Non-GAAP Measurements to GAAP Results
(amounts in millions, except per share amounts)
(unaudited)

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") throughout this document, the Company has provided non-GAAP measurements which present operating results in 2012 and 2011 on a basis before Special Items. Included in Special Items are the U.S. refranchising gain (loss), the gain on the acquisition of Little Sheep, the loss associated with the planned refranchising of the Pizza Hut UK business and the losses and other costs relating to our decision to divest the Long John Silver's ("LJS") and A&W All-American Food Restaurants ("A&W") brands. These amounts are described in (d), (e), (f) and (g) in the accompanying notes. Other Special Items include the depreciation reductions from KFC U.S. and Pizza Hut UK restaurants impaired upon our decision and/or offer to refranchise that remained Company stores for some or all of the periods presented and charges relating to U.S. General and Administrative ("G&A") productivity initiatives and realignment of resources.

The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of earnings before Special Items provides additional information to investors to facilitate the comparison of past and present operations, excluding items in 2012 and 2011 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

       
      Quarter
          3/24/12   3/19/11
Detail of Special Items              
U.S. Refranchising gain (loss)(d)         $ 45     $ 1  
Gain upon acquisition of Little Sheep(e)         74     --  

Loss associated with the planned refranchising of the Pizza Hut UK business(f)

        (21 )   --  
Losses and other costs relating to the LJS and A&W divestitures(g)         --     (68 )
Other Special Items         3     2  
Total Special Items Income (Expense)         101     (65 )
Tax Benefit (Expense) on Special Items         (7 )   24  
Special Items Income (Expense), net of tax         $ 94     $ (41 )
Average diluted shares outstanding         478     486  
Special Items diluted EPS         $ 0.20     $ (0.09 )
               
Reconciliation of Operating Profit Before Special Items to Reported Operating Profit              
Operating Profit Before Special Items         $ 544     $ 466  
Special Items Income (Expense)         101     (65 )
Reported Operating Profit         $ 645     $ 401  
               
Reconciliation of EPS Before Special Items to Reported EPS              
Diluted EPS Before Special Items         $ 0.76     $ 0.63  
Special Items EPS         0.20     (0.09 )

Reported EPS

        $ 0.96     $ 0.54  
               

Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate

             
Effective Tax Rate Before Special Items         27.5 %   27.1 %
Impact on Tax Rate as a result of Special Items         (3.4 )%   (1.9 )%
Reported Effective Tax Rate         24.1 %   25.2 %
                   
 

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

 
Quarter Ended 3/24/12     China     YRI    

United
States

    India    

Corporate
and
Unallocated

    Consolidated
Total revenues     $ 1,218       $ 708     $ 800       $ 17     $ --       $ 2,743  
                                     
Company restaurant expenses       917         447       532         12       (4 )       1,904  
General and administrative expenses       48         82       96         4       42         272  
Franchise and license expenses       1         10       15         --       --         26  
Closures and impairment (income) expenses       1         1       (1 )       --       --         1  
Refranchising (gain) loss       --         --       --         --       (26 )       (26 )
Other (income) expense       (5 )       --       --         --       (74 )       (79 )
        962         540       642         16       (62 )       2,098  
Operating Profit (loss)     $ 256       $ 168     $ 158       $ 1     $ 62       $ 645  
 
 
 
Quarter Ended 3/19/11     China     YRI    

United
States

    India    

Corporate
and
Unallocated

    Consolidated
Total revenues     $ 906       $ 653     $ 853       $ 13     $ --       $ 2,425  
                                     
Company restaurant expenses       669         407       609         9       (3 )       1,691  
General and administrative expenses       37         76       101         3       38         255  
Franchise and license expenses       --         10       19         1       --         30  
Closures and impairment (income) expenses       --         2       1         --       66         69  
Refranchising (gain) loss       --         --       --         --       (2 )       (2 )
Other (income) expense       (15 )       --       --         --       (4 )       (19 )
        691         495       730         13       95         2,024  
Operating Profit (loss)     $ 215       $ 158     $ 123       $ --     $ (95 )     $ 401  
                                     

The above tables reconcile segment information, which is based on management responsibility, with our Condensed Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Non-GAAP Measurements to GAAP Results.

Notes to the Condensed Consolidated Summary of Results, Condensed Consolidated Balance Sheets
and Condensed Consolidated Statements of Cash Flows
(amounts in millions, except per share amounts)
(unaudited)

       
(a)     Amounts presented as of and for the quarter ended March 24, 2012 are preliminary.
       
(b)     Other (income) expense for the China Division primarily consists of equity income from investments in unconsolidated affiliates. The quarter ended March 24, 2012 also includes costs related to the acquisition of Little Sheep Group Limited ("Little Sheep") (see note (e) for further explanation).
       
(c)     Beginning the first quarter of 2012, our India Division is being reported as a standalone reporting segment separate from YRI as a result of changes to our management reporting structure. While our consolidated results are not impacted, our historical segment information has been restated to be consistent with the current period presentation. This new segment also includes the franchise businesses in the neighboring countries of Bangladesh, Mauritius, Nepal and Sri Lanka.
       
(d)    

As part of our plan to transform our U.S. business we took several measures ("the U.S. business transformation measures") in 2012 and 2011 which includes the continuation of our U.S. refranchising, potentially reducing our Company ownership in the U.S. to about 8%, including a reduction of Taco Bell Company ownership from 23% to 16%. During the quarter ended March 24, 2012, we recorded gains of $45 million related to refranchising in the U.S., primarily at Taco Bell. We have traditionally not allocated refranchising (gains) losses for segment reporting purposes. Additionally, U.S. refranchising (gains) losses have been reflected as Special Items for certain performance measures (see accompanying reconciliation to reported results).

       
(e)     On February 1, 2012 we acquired an additional 66% interest in Little Sheep for $540 million, net of cash acquired of $44 million, increasing our ownership to 93%. The acquisition was driven by our strategy to build leading brands across China in every significant category. Prior to our acquisition of this additional interest, our 27% interest in Little Sheep was accounted for under the equity method of accounting. As a result of the acquisition we obtained voting control of Little Sheep, and thus we began consolidating Little Sheep upon acquisition. As required by GAAP, we remeasured our previously held 27% ownership in Little Sheep, which had a recorded value of $107 million at the date of acquisition, at fair value and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Condensed Consolidated Statement of Income during the quarter ended March 24, 2012 and was not allocated to any segment for performance reporting purposes (see accompanying reconciliation to reported results).
       
      Other than the $74 million gain discussed above, for the quarter ended March 24, 2012, the consolidation of Little Sheep did not impact Operating Profit or Net Income - YUM! Brands, Inc. While we have not yet completed our allocation of the purchase price, our Condensed Consolidated Balance Sheet at March 24, 2012 reflects the consolidation of this entity using preliminary amounts, including $283 million of goodwill and $521 million of other intangible assets. Also, we released from escrow $300 million of cash that was deemed restricted prior to our acquisition of Little Sheep.
       

(f)

    In 2011, we decided to sell our Pizza Hut UK dine-in business. Based on bids we received from prospective buyers in 2012, we recorded a non cash pre-tax impairment charge of $20 million to Refranchising (gain) loss to adjust the carrying amount of the asset group to its fair value. We had previously recorded a $74 million non cash pre-tax impairment charge to Refranchising (gain) loss to reduce the carrying amount of the asset group to its then estimated fair value upon our initial decision to sell the Pizza Hut dine-in business in the quarter ended September 3, 2011. Upon the ultimate sale of the restaurants, we could also be required to record a charge for the fair value of any guarantee of future leases we assign to a franchisee depending on the form of the transaction. This charge was not allocated to any segment for performance reporting purposes and was reflected as a Special Item for certain performance measures (see accompanying reconciliation to reported results).
       

(g)

    During the quarter ended March 19, 2011, we decided to sell the LJS and A&W brands resulting in a pre-tax non-cash write down of the brands' intangible assets totaling $66 million and other charges relating to the planned sale totaling $2 million. Neither the write-down nor the other charges were allocated to any segment for performance reporting purposes and both were reflected as a Special Item for certain performance measures (see accompanying reconciliation to reported results). The LJS and A&W brands were sold in the fourth quarter of 2011.
       

###

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