NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in millions, except per share data)
Note 1 - Financial Statement Presentation
We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
(“
2016
Form 10-K”).
YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as “YUM” or the “Company”) comprise the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”). YUM has nearly
44,000
units, of which
59%
are located outside the U.S., in
137
countries and territories. YUM was created as an independent, publicly-owned company on October 6, 1997 via a tax-free distribution by our former parent, PepsiCo, Inc., of our Common Stock to its shareholders. References to YUM throughout these Financial Statements are made using the first person notations of “we,” “us” or “our.”
As of
June 30, 2017
, YUM consisted of three operating segments:
|
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•
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The KFC Division which includes our worldwide operations of the KFC concept
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•
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The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
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•
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The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
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On
October 31, 2016
(the “Distribution Date”), we completed the spin-off of our China business (the "Separation") into an independent, publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). Concurrent with the Separation, a subsidiary of the Company entered into a Master License Agreement with a subsidiary of Yum China for the exclusive right to use and sublicense the use of intellectual property owned by YUM and its affiliates for the development and operation of KFC, Pizza Hut and Taco Bell restaurants in China. Prior to the Separation, our operations in mainland China were reported in our former China Division segment results. As a result of the Separation, the results of operations and cash flows of the separated business are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows for periods presented prior to the Separation. See additional information related to the impact of the Separation in Note 4.
Our fiscal year has historically ended on the last Saturday in December and, as a result, a 53rd week was added every five or six years. The first three quarters of each fiscal year consisted of
12
weeks and the fourth quarter consisted of
16
weeks in fiscal years with
52
weeks and
17
weeks in fiscal years with
53
weeks. Our U.S. subsidiaries and certain international subsidiaries operated on similar fiscal calendars. Our remaining international subsidiaries operated on a monthly calendar, and thus never had a 53rd week, with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter. Certain international subsidiaries within our KFC, Pizza Hut and Taco Bell divisions have historically closed approximately one month or one period earlier to facilitate consolidated reporting.
On January 27, 2017, YUM’s Board of Directors approved a change in the Company's fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending December 31 of each year, commencing with the year ending December 31, 2017. In connection with this change, the Company moved from a 52-week periodic fiscal calendar with three
12
-week interim quarters and a
16
-week fourth quarter to a monthly reporting calendar with each quarter comprised of three months. Our U.S. subsidiaries continue to report on a period calendar as described above.
Concurrent with the change in the Company's fiscal year, we also eliminated the one month or one period reporting lags of our international subsidiaries. As a result of removing these reporting lags, each international subsidiary operates either on a monthly calendar consistent with the Company’s new calendar or on a periodic calendar consistent with our U.S. subsidiaries. We believe this change in our international subsidiary reporting calendars and the resulting elimination of reporting lags is preferable because a more current reporting calendar allows the Financial Statements to more consistently and more timely reflect the impact of current events, economic conditions and global trends.
The change to the Company’s fiscal year and removal of the international reporting lags is effective in 2017. We have applied this change in accounting principle retrospectively to all prior financial periods presented and the impact of this change is summarized in Note 5. The impact of the change in accounting principle on the current period financial statements is similar to the impact on the prior period results discussed in Note 5.
Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our
2016
Form 10-K, our financial position as of
June 30, 2017
, our cash flows for the years to date ended June 30, 2017 and 2016, and the results of our operations and comprehensive income for the quarters and years to date ended
June 30, 2017
and
2016
. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year.
Our significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance related to stock-based compensation which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including their income tax consequences, classification of awards as either equity or liabilities and
classification on the statement of cash flows. We adopted this standard beginning with the quarter ended March 31, 2017.
The impact of adoption included the recognition of excess tax benefits within our income tax provision for share-based payments made of
$15 million
and
$64 million
during the quarter and year to date ended June 30, 2017, respectively. Additionally, the standard requires these excess tax benefits be reported as operating activities in the Condensed Consolidated Statements of Cash Flows as opposed to within financing activities as they have been historically reported. We elected retrospective presentation of excess tax benefits as operating cash flows for prior years. As a result,
$27 million
of excess tax benefits previously presented as a financing activity have been reclassified to operating activities for the year to date ended June 30, 2016, in our Condensed Consolidated Statements of Cash Flows. No other provisions of this standard had a material impact on the Company's Financial Statements or disclosures.
In March 2017, the FASB issued guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, "Benefit Costs"). The standard does not change the requirement that an employer report the service cost component of these Benefit Costs in the same line item or items as other compensation costs arising from services rendered by employees during the period. However, the standard requires that the non-service components of these Benefit Costs be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. We early adopted the standard beginning with the quarter ended March 31, 2017, on a retrospective basis. As a result, we have reclassified amounts related to non-service components of Benefit Costs from their prior Financial Statement captions (Payroll and employee benefits and General and administrative "G&A" expenses) into a new Financial Statement caption titled Other pension (income) expense in our Condensed Consolidated Statements of Income. The adoption of this standard does not impact Net Income.
We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended
June 30, 2017
. These reclassifications had no effect on previously reported Net Income.
Note 2 - Earnings Per Common Share (“EPS”)
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Quarter ended
|
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Year to date
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income from continuing operations
|
|
$
|
206
|
|
|
$
|
266
|
|
|
$
|
486
|
|
|
$
|
492
|
|
Income from discontinued operations
|
|
—
|
|
|
70
|
|
|
—
|
|
|
208
|
|
Net Income
|
|
$
|
206
|
|
|
$
|
336
|
|
|
$
|
486
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (for basic calculation)
|
|
350
|
|
|
408
|
|
|
354
|
|
|
411
|
|
Effect of dilutive share-based employee compensation
|
|
8
|
|
|
7
|
|
|
7
|
|
|
7
|
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
|
|
358
|
|
|
415
|
|
|
361
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
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$
|
0.59
|
|
|
$
|
0.65
|
|
|
$
|
1.37
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|
|
$
|
1.20
|
|
Basic EPS from discontinued operations
|
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N/A
|
|
|
0.17
|
|
|
N/A
|
|
|
0.51
|
|
Basic EPS
|
|
$
|
0.59
|
|
|
$
|
0.82
|
|
|
$
|
1.37
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
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|
Diluted EPS from continuing operations
|
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$
|
0.58
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|
|
$
|
0.64
|
|
|
$
|
1.34
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|
|
$
|
1.18
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|
Diluted EPS from discontinued operations
|
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N/A
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|
|
0.17
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|
|
N/A
|
|
|
0.50
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|
Diluted EPS
|
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$
|
0.58
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|
|
$
|
0.81
|
|
|
$
|
1.34
|
|
|
$
|
1.68
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|
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation
(a)
|
|
2.7
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|
6.0
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|
2.3
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|
|
6.9
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|
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(a)
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These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.
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Note 3 - Shareholders’ Deficit
Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended
June 30, 2017
and
2016
as indicated below. All amounts exclude applicable transaction fees.
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Shares Repurchased (thousands)
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Dollar Value of Shares Repurchased
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Remaining Dollar Value of Shares that may be Repurchased
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Authorization Date
|
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2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
|
December 2015
|
|
—
|
|
|
|
13,369
|
|
|
|
$
|
—
|
|
|
|
$
|
933
|
|
|
|
$
|
—
|
|
|
|
|
March 2016
|
|
—
|
|
|
|
2,823
|
|
|
|
—
|
|
|
|
228
|
|
|
|
—
|
|
|
|
|
May 2016
|
|
—
|
|
|
|
12,352
|
|
|
|
—
|
|
|
|
1,020
|
|
|
|
—
|
|
|
|
|
November 2016
|
|
12,462
|
|
|
|
—
|
|
|
|
826
|
|
|
|
—
|
|
|
|
1,089
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|
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Total
|
|
12,462
|
|
(a)
|
|
28,544
|
|
(b)
|
|
$
|
826
|
|
(a)
|
|
$
|
2,181
|
|
(b)
|
|
$
|
1,089
|
|
|
|
|
|
|
|
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(a)
|
Includes the effect of
$15 million
in share repurchases (
0.2 million
shares) with trade dates on, or prior to, June 30, 2017, but cash settlement dates subsequent to June 30, 2017, and excludes the effect of
$45 million
in share repurchases (
0.7 million
shares) with trade dates on, or prior to, December 31, 2016, but cash settlement dates subsequent to December 31, 2016.
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(b)
|
Includes the effect of
$115 million
in share repurchases (
1.4 million
shares) with trade dates on, or prior to, June 30, 2016, but cash settlement dates subsequent to June 30, 2016.
|
Changes in accumulated other comprehensive income (loss) ("OCI") are presented below.
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|
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Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature
|
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Pension and Post-Retirement Benefits
|
|
Derivative Instruments
|
|
Total
|
Balance at December 31, 2016, net of tax
|
|
$
|
(332
|
)
|
|
$
|
(127
|
)
|
|
$
|
5
|
|
|
$
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the period classified into accumulated OCI, net of tax
|
|
53
|
|
|
(8
|
)
|
|
(37
|
)
|
|
8
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified from accumulated OCI, net of tax
|
|
(5
|
)
|
|
23
|
|
|
36
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
OCI, net of tax
|
|
48
|
|
|
15
|
|
|
(1
|
)
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017, net of tax
|
$
|
(284
|
)
|
|
$
|
(112
|
)
|
|
$
|
4
|
|
|
$
|
(392
|
)
|
Note 4 - Discontinued Operations
As discussed in Note 1, on October 31, 2016, the Company completed the separation of our China business.
As a result of the Separation, all royalty revenues earned by us under the Master License Agreement with Yum China that were previously eliminated in consolidation are now reflected as Franchise and license fees and income in our Condensed Consolidated Statements of Income. For the quarter and year to date ended June 30, 2016, the combined KFC and Pizza Hut Divisions' Franchise and license fees and income, as a result of the Separation, increased by
$60 million
and
$125 million
, respectively. The value added tax associated with this royalty revenue increased Franchise and license expenses for the combined KFC and Pizza Hut Divisions by
$4 million
and
$8 million
for the quarter and year to date ended June 30, 2016, respectively. The net increases in the KFC and Pizza Hut Divisions' Operating Profit were offset with a corresponding reduction in Income from discontinued operations such that there was no impact from the Separation on total Net income.
The financial results of Yum China presented in discontinued operations reflect the results of the former China Division, which was an operating segment of the Company until the Separation, adjusted for the transactions discussed above and the inclusion of certain G&A expenses, non-cash impairment charges, refranchising gains, interest and taxes that were previously not allocated to but were related to the former China Division's historical results of operations. The following table presents the financial results of the Company’s discontinued operations:
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|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
|
2016
(a)
|
|
2016
(b)
|
|
Company sales
|
|
$
|
1,558
|
|
|
$
|
2,836
|
|
|
Franchise and license fees and income
|
|
30
|
|
|
55
|
|
|
Company restaurant expenses
|
|
(1,363
|
)
|
|
(2,408
|
)
|
|
G&A expenses
|
|
(112
|
)
|
|
(186
|
)
|
|
Franchise and license expenses
|
|
(13
|
)
|
|
(25
|
)
|
|
Closure and impairment expenses
|
|
(31
|
)
|
|
(31
|
)
|
|
Refranchising gain
|
|
2
|
|
|
5
|
|
|
Other income
|
|
10
|
|
|
26
|
|
|
Interest income, net
|
|
2
|
|
|
3
|
|
|
Income from discontinued operations before income taxes
(c)
|
|
83
|
|
|
275
|
|
|
Income tax provision
|
|
(17
|
)
|
|
(67
|
)
|
|
Income from discontinued operations - including noncontrolling interests
|
|
66
|
|
|
208
|
|
|
(Income) loss from discontinued operations - noncontrolling interests
|
|
4
|
|
|
—
|
|
|
Income from discontinued operations - YUM! Brands, Inc.
|
|
$
|
70
|
|
|
$
|
208
|
|
|
|
|
(a)
|
Includes historical Yum China financial results from March 1, 2016 to May 31, 2016.
|
|
|
(b)
|
Includes historical Yum China financial results from January 1, 2016 to May 31, 2016, plus an additional month of expense associated with the license fee paid to YUM to conform to the new YUM reporting calendar.
|
|
|
(c)
|
Includes costs incurred to execute the Separation of
$10 million
and
$18 million
for the quarter and year to date ended June 30, 2016. Such costs primarily related to transaction advisors, legal and other consulting fees.
|
Cash inflows from Yum China to the Company during the quarter and year to date ended June 30, 2017, related to the Master License Agreement were
$49 million
and
$104 million
, respectively, net of taxes paid, and primarily related to royalty revenues.
Note 5 - Items Affecting Comparability of Net Income and Cash Flows
Refranchising (Gain) Loss
The Refranchising (gain) loss by reportable segment is presented below. Given the size and volatility of refranchising initiatives, our chief operating decision maker ("CODM") does not consider the impact of Refranchising (gain) loss when assessing segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes.
During the quarter ended
June 30, 2017
, we refranchised
244
restaurants. We received
$136 million
in proceeds and recorded
$19 million
of net pre-tax refranchising gains related to these transactions. During the year to date ended
June 30, 2017
, we refranchised
365
restaurants. We received
$321 million
in proceeds and recorded
$130 million
of net pre-tax refranchising gains related to these transactions.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
KFC Division
|
|
$
|
41
|
|
|
$
|
—
|
|
|
42
|
|
|
1
|
|
Pizza Hut Division
|
|
11
|
|
|
(54
|
)
|
|
13
|
|
|
(54
|
)
|
Taco Bell Division
|
|
(71
|
)
|
|
—
|
|
|
(185
|
)
|
|
(1
|
)
|
Worldwide
|
|
$
|
(19
|
)
|
|
$
|
(54
|
)
|
|
$
|
(130
|
)
|
|
$
|
(54
|
)
|
KFC U.S. Acceleration Agreement
During 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we anticipate investing approximately
$120 million
from 2015 through 2018 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges of
$5 million
and
$8 million
for the quarters ended
June 30, 2017
and
2016
, respectively, for these investments. We recorded pre-tax charges of
$8 million
and
$17 million
for the years to date ended
June 30, 2017
and
2016
, respectively. These amounts were recorded primarily as Franchise and license expenses. We recorded total pre-tax charges of
$98 million
during the two year period ended December 31, 2016, and we currently expect a total pre-tax charge of approximately
$20 million
in 2017 for these investments. Due to their size and unique and long-term brand building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these charges are not being allocated to the KFC Division segment operating results.
In addition to the investments above we agreed to fund
$60 million
of incremental system advertising from 2015 through 2018. During both of the quarters ended
June 30, 2017
and
2016
, we incurred
$5 million
in incremental system advertising expense. During both the years to date ended
June 30, 2017
and
2016
, we incurred
$9 million
in incremental system advertising expense. We funded approximately
$30 million
of such advertising during the two year period ended December 31, 2016. We currently expect to fund approximately
$20 million
of such advertising in 2017 and
$10 million
in 2018. All of these advertising amounts were recorded primarily in Franchise and license expenses and are included in the KFC Division segment operating results.
YUM's Strategic Transformation Initiatives
In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated separation of our China business on October 31, 2016. Major features of the Company’s growth and transformation strategy involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. During both the quarters ended June 30, 2017 and 2016, we recognized pre-tax charges of
$4 million
related to these initiatives. During the years to date ended June 30, 2017 and 2016, we recognized pre-tax charges of
$11 million
and
$4 million
, respectively. These costs primarily related to severance and relocation costs that were recorded within G&A expense. Due to the scope of the initiatives as well as their significance, our CODM does not consider the impact of these initiatives when assessing segment performance. As such, costs associated with the initiatives are not being allocated to any segment for performance reporting purposes.
Pizza Hut U.S. Transformation Agreement
On May 1, 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising and digital and technology contributions by franchisees. In connection with this agreement, we anticipate investing approximately
$90 million
to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. We currently expect the majority of this investment will be split between 2017 and 2018. During the quarter ended
June 30, 2017
, we recorded pre-tax charges of
$12 million
primarily related to digital and e-commerce initiatives that were recorded as Franchise and license expenses. Due to their unique and long-term brand-building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these amounts are not being allocated to the Pizza Hut Division segment operating results.
In addition to the investments above, we have agreed to fund incremental system advertising dollars of approximately
$25 million
in the second half of 2017 and
$12.5 million
in 2018. No expense related to these incremental advertising amounts has yet to be recorded as of June 30, 2017. Such expense will be included in Pizza Hut's segment operating results as they are incurred.
Modifications of Share-based Compensation Awards
In connection with the Separation, we modified certain share-based compensation awards held as part of our Executive Income Deferral ("EID") Plan in phantom shares of YUM Common Stock to provide one phantom Yum China share-based award for each outstanding phantom YUM share-based award. These Yum China awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards each quarter within G&A in our Condensed Consolidated Income Statement. During the quarter and year to date ended
June 30, 2017
, we recorded pre-tax charges related to these awards of
$16 million
and
$18 million
, respectively, due to appreciation in the market price of Yum China's stock. Given these charges were a direct result of the Separation, our CODM does not consider their impact when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results.
Impact of Change in Reporting Calendar
As discussed in Note 1, we have changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year commencing with the year ending December 31, 2017. We also removed the monthly or period reporting lags certain of our international subsidiaries historically used to report results. The impacts on our Financial Statements of retrospectively applying these changes are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2016
|
|
|
As Previously Reported
|
|
Adjustments
|
|
After Change in Reporting Calendar
|
Total Revenues
|
|
$
|
1,477
|
|
|
$
|
32
|
|
|
$
|
1,509
|
|
|
Operating profit
|
|
408
|
|
|
7
|
|
|
415
|
|
|
Net Income from continuing operations
|
|
265
|
|
|
1
|
|
|
266
|
|
|
Income from discontinued operations, net of tax
|
|
74
|
|
|
(4
|
)
|
|
70
|
|
|
Net Income
|
|
$
|
339
|
|
|
$
|
(3
|
)
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing operations
|
|
$
|
0.64
|
|
|
$
|
—
|
|
|
$
|
0.64
|
|
|
Diluted EPS from discontinued operations
|
|
0.17
|
|
|
—
|
|
|
0.17
|
|
|
Diluted EPS
|
|
$
|
0.81
|
|
|
$
|
—
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date ended June 30, 2016
|
|
|
As Previously Reported
|
|
Adjustments
|
|
After Change in Reporting Calendar
|
Total Revenues
|
|
$
|
2,841
|
|
|
$
|
111
|
|
|
$
|
2,952
|
|
|
Operating profit
|
|
764
|
|
|
1
|
|
|
765
|
|
(a)
|
Net Income from continuing operations
|
|
505
|
|
|
(13
|
)
|
|
492
|
|
|
Income from discontinued operations, net of tax
|
|
225
|
|
|
(17
|
)
|
|
208
|
|
|
Net Income
|
|
$
|
730
|
|
|
$
|
(30
|
)
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing operations
|
|
$
|
1.20
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.18
|
|
|
Diluted EPS from discontinued operations
|
|
0.54
|
|
|
(0.04
|
)
|
|
0.50
|
|
|
Diluted EPS
|
|
$
|
1.74
|
|
|
$
|
(0.06
|
)
|
|
$
|
1.68
|
|
|
|
|
(a)
|
Amount does not reconcile to our Condensed Consolidated Statements of Income for the year to date ended June 30, 2016 due to the impact of retrospectively adopting a new accounting standard on Benefit Costs of
$1 million
. See Note 1.
|
The impact on Total Assets within the Condensed Consolidated Balance Sheet as of December 31, 2016, versus amounts previously reported, was a decrease of
$25 million
.
The impact on our June 30, 2016 Condensed Consolidated Statement of Cash Flows was a decrease in cash provided by operating activities of
$26 million
, an increase in cash used in investing activities of
$16 million
and an increase in cash provided by financing activities of
$3,299 million
versus amounts previously reported. The increase in cash used in financing activities is due to timing of proceeds from Long-term debt issuances.
Non-cash Pension Adjustment
During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of
$22 million
to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM does not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost is not being allocated to any of our segment operating results.
Note 6 - Other (Income) Expense
Other (income) expense primarily includes net foreign exchange (gains) losses.
Note 7 - Supplemental Balance Sheet Information
Accounts and Notes Receivable, net
The Company’s receivables are primarily generated as a result of ongoing business relationships with our franchisees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees are generally due within
30
days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable on our Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
6/30/2017
|
|
12/31/2016
|
Accounts and notes receivable, gross
|
$
|
375
|
|
|
$
|
384
|
|
Allowance for doubtful accounts
|
(19
|
)
|
|
(14
|
)
|
Accounts and notes receivable, net
|
$
|
356
|
|
|
$
|
370
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
6/30/2017
|
|
12/31/2016
|
Property, plant and equipment, gross
|
$
|
4,011
|
|
|
$
|
4,108
|
|
Accumulated depreciation and amortization
|
(1,990
|
)
|
|
(1,995
|
)
|
Property, plant and equipment, net
|
$
|
2,021
|
|
|
$
|
2,113
|
|
Assets held for sale at
June 30, 2017
and
December 31, 2016
, total
$21 million
and
$57 million
, respectively, and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
Reconciliation of Cash and cash equivalents for Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
6/30/2017
|
|
12/31/2016
|
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets
|
$
|
970
|
|
|
$
|
725
|
|
Restricted cash included in Prepaid expenses and other current assets
(a)
|
53
|
|
|
55
|
|
Restricted cash included in Other assets
(b)
|
33
|
|
|
51
|
|
Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows
|
$
|
1,056
|
|
|
$
|
831
|
|
|
|
(a)
|
Restricted cash within Prepaid expenses and other current assets primarily relates to the Taco Bell Securitization interest reserves.
|
|
|
(b)
|
Primarily cash balances required to meet statutory minimum net worth requirements for legal entities which enter into U.S. franchise agreements and trust accounts related to our self-insurance program.
|
Note 8 - Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income tax provision
|
$
|
105
|
|
|
$
|
98
|
|
|
$
|
172
|
|
|
$
|
180
|
|
Effective tax rate
|
33.8
|
%
|
|
27.0
|
%
|
|
26.2
|
%
|
|
26.8
|
%
|
Our effective tax rate is lower than the U.S. federal statutory rate of
35%
primarily due to the majority of our income being earned outside the U.S. where tax rates are generally lower than the U.S. rate.
Our second quarter effective tax rate was higher than the prior year primarily due to the unfavorable impacts associated with our 2017 planned refranchising gains, substantially all of which will be taxed at the U.S. rate, and the pre-tax charges recorded in the current quarter associated with refranchising certain international markets for which we are not able to record a tax benefit. The second quarter tax rate was also higher than the prior year due to lapping the benefit associated with a prior year income tax return amendment, partially offset by the inclusion in the current year of
$15 million
of excess benefits on share based compensation related to the adoption of a new accounting standard in the quarter ended March 31, 2017. See Note 1.
Our year to date effective tax rate was lower than prior year primarily due to the inclusion of
$64 million
of excess tax benefits on share-based compensation related to the adoption of a new accounting standard in the quarter ended March 31, 2017. See Note 1. These excess benefits were largely associated with the deferred compensation payouts to recently retired employees. This benefit was partially offset by the unfavorable impacts associated with our 2017 planned refranchising gains, substantially all of which will be taxed at the U.S. rate, the pre-tax charges recorded in the quarter ended June 30, 2017 associated with refranchising certain international markets for which we are not able to record a tax benefit and the repatriation of foreign earnings.
Note 9 - Reportable Operating Segments
We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
Revenues
|
2017
|
|
2016
|
|
2017
|
|
2016
|
KFC Division
|
$
|
770
|
|
|
$
|
779
|
|
|
$
|
1,502
|
|
|
$
|
1,515
|
|
Pizza Hut Division
|
222
|
|
|
267
|
|
|
456
|
|
|
548
|
|
Taco Bell Division
|
456
|
|
|
464
|
|
|
907
|
|
|
890
|
|
Unallocated
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
$
|
1,448
|
|
|
$
|
1,509
|
|
|
$
|
2,865
|
|
|
$
|
2,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
Operating Profit
|
2017
|
|
2016
|
|
2017
|
|
2016
|
KFC Division
|
$
|
243
|
|
|
$
|
203
|
|
|
$
|
450
|
|
|
$
|
388
|
|
Pizza Hut Division
|
85
|
|
|
81
|
|
|
168
|
|
|
172
|
|
Taco Bell Division
|
152
|
|
|
139
|
|
|
293
|
|
|
257
|
|
Unallocated Franchise and license fees and income
(a)
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Unallocated Franchise and license expenses
(a)
|
(13
|
)
|
|
(7
|
)
|
|
(16
|
)
|
|
(16
|
)
|
Unallocated and Corporate expenses
(b)
|
(69
|
)
|
|
(59
|
)
|
|
(122
|
)
|
|
(102
|
)
|
Unallocated Refranchising gain (loss) (See Note 5)
|
19
|
|
|
54
|
|
|
130
|
|
|
54
|
|
Unallocated Other income (expense)
|
2
|
|
|
5
|
|
|
—
|
|
|
12
|
|
Operating Profit
|
$
|
419
|
|
|
$
|
415
|
|
|
$
|
903
|
|
|
$
|
764
|
|
Other pension income (expense) (See Note 10)
|
(4
|
)
|
|
—
|
|
|
(32
|
)
|
|
1
|
|
Interest expense, net
|
(104
|
)
|
|
(51
|
)
|
|
(213
|
)
|
|
(93
|
)
|
Income from continuing operations before income taxes
|
$
|
311
|
|
|
$
|
364
|
|
|
$
|
658
|
|
|
$
|
672
|
|
|
|
(a)
|
Costs associated with the KFC U.S. Acceleration Agreement and, in the quarter ended June 30, 2017, the Pizza Hut U.S. Transformation Agreement . See Note 5.
|
|
|
(b)
|
Primarily Corporate and Unallocated G&A expenses for the quarters and years to date ended
June 30, 2017
and
June 30, 2016
. Amounts also include non-cash charges associated with share-based compensation of
$16 million
and
$18 million
for the quarter and year to date ended June 30, 2017, respectively, and charges associated with YUM's Strategic Transformation Initiatives of
$4 million
and
$11 million
for the quarter and year to date ended
June 30, 2017
, respectively. The quarter and year to date ended June 30, 2016 both include
$4 million
associated with YUM's Strategic Transformation Initiatives. See Note 5.
|
Note 10 - Pension Benefits
We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the "Plan"), is funded. We fund our other U.S. plans as benefits are paid. The Plan and our most significant non-qualified plan in the U.S. are closed to new salaried participants.
The components of net periodic benefit cost associated with our significant U.S. pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
8
|
|
Interest cost
|
10
|
|
|
12
|
|
|
20
|
|
|
25
|
|
Expected return on plan assets
|
(11
|
)
|
|
(15
|
)
|
|
(23
|
)
|
|
(30
|
)
|
Amortization of net loss
|
1
|
|
|
2
|
|
|
3
|
|
|
3
|
|
Amortization of prior service cost
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Net periodic benefit cost
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
Additional loss recognized due to settlements
(a)
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
Pension data adjustment
(b)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
|
(a)
|
Losses are a result of settlement transactions in each of our U.S. plans which exceeded the sum of annual service and interest costs for each plan. These losses were recorded in Other pension (income) expense.
|
|
|
(b)
|
Reflects a non-cash, out-of-year charge related to the adjustment of certain historical deferred vested liability balances in the Plan during the first quarter of 2017. This charge was recorded in Other pension (income) expense. See Note 5.
|
Note 11 - Short-term Borrowings and Long-term Debt
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
6/30/2017
|
|
12/31/2016
|
|
Current maturities of long-term debt
|
|
$
|
376
|
|
|
$
|
66
|
|
Other
|
|
9
|
|
|
8
|
|
|
|
$
|
385
|
|
|
$
|
74
|
|
Less current portion of debt issuance costs and discounts
|
|
(10
|
)
|
|
(8
|
)
|
Short-term borrowings
|
|
$
|
375
|
|
|
$
|
66
|
|
|
|
|
|
|
Long-term Debt
|
|
|
|
|
Securitization Notes
|
|
$
|
2,282
|
|
|
$
|
2,294
|
|
Subsidiary Senior Unsecured Notes
|
|
2,850
|
|
|
2,100
|
|
Term Loan A Facility
|
|
500
|
|
|
500
|
|
Term Loan B Facility
|
|
1,985
|
|
|
1,990
|
|
YUM Senior Unsecured Notes
|
|
2,200
|
|
|
2,200
|
|
Capital lease obligations
|
|
128
|
|
|
120
|
|
|
|
$
|
9,945
|
|
|
$
|
9,204
|
|
Less debt issuance costs and discounts
|
|
(95
|
)
|
|
(79
|
)
|
Less current maturities of long-term debt
|
|
(376
|
)
|
|
(66
|
)
|
Long-term debt
|
|
$
|
9,474
|
|
|
$
|
9,059
|
|
On March 21, 2017, KFC Holding Co., Pizza Hut Holdings, LLC, a limited liability company, and Taco Bell of America, LLC, a limited liability company, each of which is a wholly-owned subsidiary of the Company, as co-borrowers (the “Borrowers”) completed the repricing of the then existing
$1,990 million
under the Term Loan B Facility pursuant to an amendment to the Credit Agreement (as defined in our 2016 Form 10-K). The amendment reduces the interest rate applicable to the Term Loan B Facility by
75
basis points to LIBOR plus
2.00%
, with an additional rate stepdown to LIBOR plus
1.75%
in the event the secured net leverage ratio (as defined in the Credit Agreement) is less than 1 to 1. As a result of repricing the Term Loan B Facility,
$192 million
in principal was assigned to new lenders or existing lenders electing to increase their holdings in the loan. The maturity date and all other material provisions under the Credit Agreement remained unchanged as a result of this amendment.
On June 7, 2017, the Borrowers completed the repricing of the existing
$500 million
under the Term Loan A Facility and
$1 billion
under the Revolving Facility pursuant to an amendment to the Credit Agreement. The amendment reduces the interest rate applicable to the Term Loan A Facility and for borrowings under the Revolving Facility by
75
basis points. Subsequent to the repricing the interest rate ranges from
1.25%
to
1.75%
plus LIBOR or from
0.25%
to
0.75%
plus the Base Rate, at the Borrower’s election, based upon the total net leverage ratio of the Borrowers and the Specified Guarantors (as defined in the Credit Agreement). As a result of repricing the Term Loan A Facility,
$146 million
in principal was assigned to new lenders or existing lenders electing to increase their holdings in the loan. There was no change in lender participation in the Revolving Facility. The maturity date for the Term Loan A Facility and the Revolving Facility has been extended to June 7, 2022. Amortization payments on the Term Loan A Facility will begin one full fiscal quarter after the first anniversary of the amendment effective date, which delays the original amortization schedule by approximately one year. All other material provisions under the Credit Agreement remain unchanged.
As a result of these repricing transactions,
$23 million
of fees were capitalized as debt issuance costs primarily within Long-term debt on our Condensed Consolidated Balance Sheet as of June 30, 2017. During the year to date ended June 30, 2017,
$8 million
of fees and unamortized debt issuance costs were recognized within Interest expense, net due to these repricings.
On June 15, 2017, the Borrowers issued
$750 million
aggregate principal amount of
4.75%
Senior Notes due June 1, 2027 (the “2027 Notes”). Interest on the 2027 Notes is payable
semi-annually
in arrears on June 1 and December 1, beginning on December 1, 2017. The 2027 Notes are guaranteed on a senior unsecured basis by (i) the Company, (ii) the Specified Guarantors and (iii) by each of the Borrower’s and the Specified Guarantors’ domestic subsidiaries that guarantee the Borrower’s obligations under the Credit Agreement, except for any of the Company’s foreign subsidiaries. The indenture governing the Notes contains covenants and events of default that are customary for debt securities of this type. During the quarter ended
June 30, 2017
the Company paid debt issuance costs of
$9 million
in connection with the issuance of the 2027 Notes. These issuance costs are primarily recorded as a reduction in Long-term debt on our Condensed Consolidated Balance Sheet.
Details of our short-term borrowings and long-term debt as of December 31, 2016 can be found within our 2016 Form 10-K. Cash paid for interest during the years to date ended
June 30, 2017
and 2016 was
$207 million
and
$80 million
, respectively.
Note 12 - Derivative Instruments
We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Swaps
We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments. At June 30, 2017 and December 31, 2016, our interest rate swaps outstanding had notional amounts of
$1.55 billion
. These interest rate swaps will expire in July 2021 and are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of June 30, 2017.
The effective portion of gains or losses on the interest rate swaps is reported as a component of Accumulated OCI ("AOCI") and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Gains or losses on the swaps representing hedge ineffectiveness are recognized in current earnings. Through June 30, 2017, the swaps were highly effective cash flow hedges and no ineffectiveness has been recorded.
Foreign Currency Contracts
We enter into foreign currency forward and swap contracts with the objective of reducing our exposure to earnings volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying intercompany receivables or payables. Our foreign currency contracts are designated cash flow hedges as the future cash flows of the contracts are expected to offset changes in intercompany receivables and payables due to foreign currency exchange rate fluctuations.
The effective portion of gains or losses on the foreign currency contracts is reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Gains or losses on the foreign currency contracts representing hedge ineffectiveness are recognized in current earnings. Through June 30, 2017, all foreign currency contracts were highly effective cash flow hedges and no ineffectiveness has been recorded.
As of June 30, 2017, and December 31, 2016, foreign currency forward and swap contracts outstanding had total notional amounts of
$452 million
and
$437 million
, respectively. As of June 30, 2017 we have foreign currency forward and swap contracts with durations expiring as early as 2017 and as late as 2020.
As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At June 30, 2017, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. All counterparties have performed in accordance with their contractual obligations as of June 30, 2017.
Gains and losses on derivative instruments designated as cash flow hedges recognized in OCI and reclassifications from AOCI into Net Income:
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|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
Gains/(Losses) Recognized in OCI
|
|
(Gains)/Losses Reclassified from AOCI into Net Income
|
|
Gains/(Losses) Recognized in OCI
|
|
(Gains)/Losses Reclassified from AOCI into Net Income
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
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|
|
$
|
(8
|
)
|
|
$
|
—
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|
|
$
|
2
|
|
|
$
|
—
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
(30
|
)
|
|
9
|
|
|
30
|
|
|
(15
|
)
|
|
(32
|
)
|
|
(6
|
)
|
|
35
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax benefit/(expense)
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
As of June 30, 2017, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is
$5 million
, based on current LIBOR interest rates.
See Note 13 for the fair value of our derivative assets and liabilities.
Note 13 - Fair Value Disclosures
As of June 30, 2017, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short -term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair value of notes receivable net of allowances and lease guarantees less subsequent amortization approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations:
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|
|
|
|
6/30/2017
|
|
12/31/2016
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
|
|
|
|
|
|
|
Securitization Notes
(a)
|
$
|
2,282
|
|
|
|
$
|
2,389
|
|
|
|
$
|
2,294
|
|
|
|
$
|
2,315
|
|
|
Subsidiary Senior Unsecured Notes
(b)
|
2,850
|
|
|
|
2,995
|
|
|
|
2,100
|
|
|
|
2,175
|
|
|
Term Loan A Facility
(b)
|
500
|
|
|
|
498
|
|
|
|
500
|
|
|
|
501
|
|
|
Term Loan B Facility
(b)
|
1,985
|
|
|
|
1,998
|
|
|
|
1,990
|
|
|
|
2,016
|
|
|
YUM Senior Unsecured Notes
(b)
|
2,200
|
|
|
|
2,284
|
|
|
|
2,200
|
|
|
|
2,216
|
|
|
|
|
|
(a)
|
We estimated the fair value of the Securitization Notes by obtaining broker quotes from two separate brokerage firms that are knowledgeable about the Company’s Securitization Notes and, at times, trade these notes. The markets in which the Securitization Notes trade are not considered active markets.
|
|
|
(b)
|
We estimated the fair value of the YUM and Subsidiary Senior Unsecured Notes, Term Loan A Facility, and Term Loan B Facility using market quotes and calculations based on market rates.
|
Recurring Fair Value Measurements
The Company has interest rate swaps and foreign currency contracts accounted for as cash flow hedges and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 12 for discussion regarding derivative instruments). The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall. No transfers among the levels within the fair value hierarchy occurred during the quarter and year to date ended June 30, 2017.
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|
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|
Fair Value
|
|
|
|
Level
|
|
6/30/2017
|
|
12/31/2016
|
|
Condensed Consolidated Balance Sheet
|
Interest Rate Swaps - Liability
|
|
2
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Accounts payable and other current liabilities
|
Interest Rate Swaps - Asset
|
|
2
|
|
3
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
Interest Rate Swaps - Asset
|
|
2
|
|
35
|
|
|
47
|
|
|
Other assets
|
Foreign Currency Contracts - Liability
|
|
2
|
|
18
|
|
|
—
|
|
|
Other liabilities and deferred credits
|
Foreign Currency Contracts - Asset
|
|
2
|
|
2
|
|
|
6
|
|
|
Prepaid expenses and other current assets
|
Foreign Currency Contracts - Asset
|
|
2
|
|
—
|
|
|
10
|
|
|
Other assets
|
Other Investments
|
|
1
|
|
26
|
|
|
24
|
|
|
Other assets
|
The fair value of the Company’s foreign currency contracts and interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based upon observable inputs. The other investments include investments in mutual funds, which are used to offset fluctuations in deferred compensation liabilities that employees have chosen to invest in phantom shares of a stock index fund or bond index fund. The other investments' fair value is determined based on the closing market prices of the respective mutual funds as of June 30, 2017 and December 31, 2016.
Note 14 - Contingencies
Lease Guarantees
As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company restaurants and guaranteeing certain other leases, we are frequently contingently liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of
June 30, 2017
, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessees was approximately
$550 million
. The present value of these potential payments discounted at our pre-tax cost of debt at
June 30, 2017
, was approximately
$470 million
. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our probable exposure under such leases as of
June 30, 2017
, was not material.
Franchise Loan Pool and Equipment Guarantees
We have agreed to provide financial support, if required, to a variable interest entity that operates a franchisee lending program used primarily to assist franchisees in the development of new restaurants or the upgrade of existing restaurants and, to a lesser extent, in connection with the Company’s refranchising programs in the U.S. We have determined that we are not required to consolidate this entity as we share the power to direct this entity’s lending activity with other parties. We have provided guarantees of
20%
of the outstanding loans of the franchisee loan program. As such, at June 30, 2017, our guarantee exposure under this program is approximately
$4 million
based on total loans outstanding of
$18 million
.
In addition to the guarantees described above, we have provided guarantees of up to approximately
$43 million
on behalf of franchisees for several financing programs related to specific initiatives. At June 30, 2017, our guarantee exposure under these financing programs is approximately
$8 million
based on total loans outstanding under these financing programs of
$11 million
.
Legal Proceedings
We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable.
The Company and Taco Bell were named as defendants in a number of putative class action suits filed in 2007, 2008, 2009 and 2010 alleging violations of California labor laws including unpaid overtime, failure to timely pay wages on termination, failure to pay accrued vacation wages, failure to pay minimum wage, denial of meal and rest breaks, improper wage statements, unpaid
business expenses, wrongful termination, discrimination, conversion and unfair or unlawful business practices in violation of California Business & Professions Code §17200. Some plaintiffs also sought penalties for alleged violations of California’s Labor Code under California’s Private Attorneys General Act (“PAGA”) as well as statutory “waiting time” penalties and alleged violations of California’s Unfair Business Practices Act. Plaintiffs sought to represent a California state-wide class of hourly employees.
These matters were consolidated, and the consolidated case was styled
In Re Taco Bell Wage and Hour Actions
. The
In Re Taco Bell Wage and Hour Actions
plaintiffs filed a consolidated complaint in June 2009, and in March 2010 the court approved the parties’ stipulation to dismiss the Company from the action, leaving Taco Bell as the sole defendant. Plaintiffs filed their motion for class certification on the vacation and final pay claims in December 2010, and on September 26, 2011, the court issued its order denying the certification of the vacation and final pay claims. Plaintiffs then sought to certify four separate meal and rest break classes. On January 2, 2013, the court rejected three of the proposed classes but granted certification with respect to the late meal break class. The parties thereafter agreed on a list of putative class members, and the class notice and opt out forms were mailed on January 21, 2014.
Per order of the court, plaintiffs filed a second amended complaint to clarify the class claims. Plaintiffs also filed a motion for partial summary judgment. Taco Bell filed motions to strike and to dismiss, as well as a motion to alter or amend the second amended complaint. On August 29, 2014, the court denied plaintiffs’ motion for partial summary judgment. On that same date, the court granted Taco Bell’s motion to dismiss all but one of the PAGA claims. On October 29, 2014, plaintiffs filed a motion to amend the operative complaint and a motion to amend the class certification order. On December 16, 2014, the court partially granted both motions, rejecting plaintiffs’ proposed on-duty meal period class but certifying a limited rest break class and certifying an underpaid meal premium class, and allowing the plaintiffs to amend the complaint to reflect those certifications. On December 30, 2014, plaintiffs filed the third amended complaint. On February 26, 2015, the court denied a motion by Taco Bell to dismiss or strike the underpaid meal premium class.
Beginning on February 22, 2016, the late meal period class claim, the limited rest break class claim, the underpaid meal premium class claim, and the associated statutory “waiting time” penalty claim were tried to a jury. On March 9, 2016, the jury returned verdicts in favor of Taco Bell on the late meal period claim, the limited rest break claim, and the statutory “waiting time” penalty claim. The jury found for the plaintiffs on the underpaid meal premium class claim, awarding approximately
$0.5 million
. A bench trial was subsequently conducted with respect to the PAGA claims and plaintiffs’ Business & Professions Code §17200 claim. On April 8, 2016, the court returned a verdict in favor of Taco Bell on the PAGA claims and the §17200 claim. In a separate ruling issued the same day, the court also ruled that plaintiffs were entitled to prejudgment interest on the underpaid meal premium class claim, awarding approximately
$0.3 million
. Taco Bell denied liability as to the underpaid meal premium class claim and filed a post-trial motion to overturn the verdict. Plaintiffs also filed various post-trial motions.
On July 15, 2016, the court denied Taco Bell’s motion to overturn the verdict. The court denied Plaintiffs’ motions: (1) for a new trial, (2) for judgment as a matter of law to overturn the verdicts in favor of Taco Bell, (3) challenging the jury instructions and special verdict forms, and (4) to overturn the court’s rejection of the §17200 claims for meal and rest break violations. The court also denied Plaintiffs’ motions for additional costs and for enhanced awards to two of the named Plaintiffs. The court granted Plaintiffs’ motion for judgment on the §17200 claim regarding the underpaid meal premium claim, but rejected awarding any additional damages, finding that the jury verdict sufficiently compensated the class. The court granted Plaintiffs’ motion for attorneys’ fees, but awarded only approximately
$1.1 million
of the
$7.3 million
requested. The court also granted Plaintiffs’ bill of costs, but only awarded approximately
$0.1 million
of Plaintiffs’
$0.2 million
. Thereafter, both Plaintiffs and Taco Bell timely filed notices of appeal.
Subsequently, the parties agreed to dismiss the appeals and settle the matter. The settlement agreement has been executed and approved by the court, all appeals have been dismissed and all payments required by the settlement have been made.
The proposed settlement amount was previously accrued in our Condensed Consolidated Financial Statements, and the associated cash payments were not material.
We are engaged in various other legal proceedings and have certain unresolved claims pending, the ultimate liability for which, if any, cannot be determined at this time. However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Condensed Consolidated Financial Statements.