Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934 for the quarterly period ended	September 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _________________

Commission file number 1-13163

________________________

YUM! BRANDS, INC.

(Exact name of registrant as specified in its charter)



North Carolina				13-3951308
(State or other jurisdiction of				(I.R.S. Employer
incorporation or organization)				Identification No.)

1441 Gardiner Lane,	Louisville,	Kentucky		40213
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code:			(502)	874-8300



Securities registered pursuant to Section 12(b) of the Act

	Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
	Common Stock, no par value	YUM	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	x	Accelerated Filer	o

Non-accelerated Filer	o	Smaller Reporting Company	☐

Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of shares outstanding of the registrant’s Common Stock as of October 29, 2019 was 302,462,172 shares.

YUM! BRANDS, INC.

INDEX



		Page
		No.
Part I.	Financial Information

	Item 1 - Financial Statements

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Balance Sheets	7

	Condensed Consolidated Statements of Shareholders' Deficit	8

	Notes to Condensed Consolidated Financial Statements	9

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3 - Quantitative and Qualitative Disclosures About Market Risk	41

	Item 4 – Controls and Procedures	41

	Report of Independent Registered Public Accounting Firm	42

Part II.	Other Information and Signatures

	Item 1 – Legal Proceedings	43

	Item 1A – Risk Factors	43

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 6 – Exhibits	44

	Signatures	45

PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
	Quarter ended						Year to date
Revenues	9/30/2019			9/30/2018			9/30/2019			9/30/2018
Company sales	$	364		$	499		$	1,056		$	1,523
Franchise and property revenues	645			605			1,890			1,773
Franchise contributions for advertising and other services	330			287			957			834
Total revenues	1,339			1,391			3,903			4,130
Costs and Expenses, Net
Company restaurant expenses	292			399			850			1,258
General and administrative expenses	208			204			617			631
Franchise and property expenses	43			40			124			127
Franchise advertising and other services expense	325			288			941			834
Refranchising (gain) loss	(8		)	(100		)	(18		)	(285		)
Other (income) expense	(1		)	7			5			10
Total costs and expenses, net	859			838			2,519			2,575
Operating Profit	480			553			1,384			1,555
Investment (income) expense, net	59			(96		)	50			(185		)
Other pension (income) expense	1			4			4			10
Interest expense, net	120			111			354			330
Income before income taxes	300			534			976			1,400
Income tax provision	45			80			170			192
Net Income	$	255		$	454		$	806		$	1,208

Basic Earnings Per Common Share	$	0.83		$	1.43		$	2.63		$	3.72

Diluted Earnings Per Common Share	$	0.81		$	1.40		$	2.57		$	3.64

Dividends Declared Per Common Share	$	0.42		$	0.36		$	1.26		$	1.08

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Quarter ended						Year to date
	9/30/2019			9/30/2018			9/30/2019			9/30/2018

Net Income	$	255		$	454		$	806		$	1,208
Other comprehensive income (loss), net of tax
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature
Adjustments and gains (losses) arising during the period	(42		)	(47		)	(37		)	(77		)
Reclassification of adjustments and (gains) losses into Net Income	—			(4		)	—			(4		)
	(42		)	(51		)	(37		)	(81		)
Tax (expense) benefit	5			5			5			5
	(37		)	(46		)	(32		)	(76		)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	—			1			—			1
Reclassification of (gains) losses into Net Income	3			5			8			16
	3			6			8			17
Tax (expense) benefit	(1		)	(1		)	(2		)	(4		)
	2			5			6			13
Changes in derivative instruments
Unrealized gains (losses) arising during the period	(5		)	16			(65		)	43
Reclassification of (gains) losses into Net Income	(12		)	(8		)	(26		)	(23		)
	(17		)	8			(91		)	20
Tax (expense) benefit	4			(2		)	23			(5		)
	(13		)	6			(68		)	15

Other comprehensive income (loss), net of tax	(48		)	(35		)	(94		)	(48		)
Comprehensive Income	$	207		$	419		$	712		$	1,160

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Year to date
	9/30/2019			9/30/2018
Cash Flows – Operating Activities
Net Income	$	806		$	1,208
Depreciation and amortization	84			103
Refranchising (gain) loss	(18		)	(285		)
Investment (income) expense, net	50			(185		)
Contributions to defined benefit pension plans	(13		)	(9		)
Deferred income taxes	(10		)	32
Share-based compensation expense	45			36
Changes in accounts and notes receivable	(4		)	(35		)
Changes in prepaid expenses and other current assets	(9		)	10
Changes in accounts payable and other current liabilities	(96		)	(81		)
Changes in income taxes payable	(64		)	(47		)
Other, net	112			49
Net Cash Provided by Operating Activities	883			796

Cash Flows – Investing Activities
Capital spending	(109		)	(147		)
Investment in Grubhub Inc. common stock	—			(200		)
Proceeds from refranchising of restaurants	55			445
Other, net	—			(9		)
Net Cash Provided by (Used in) Investing Activities	(54		)	89

Cash Flows – Financing Activities
Proceeds from long-term debt	800			106
Repayments of long-term debt	(311		)	(462		)
Revolving credit facilities, three months or less, net	—			273
Short-term borrowings by original maturity
More than three months - proceeds	80			59
More than three months - payments	(70		)	(59		)
Three months or less, net	—			—
Repurchase shares of Common Stock	(472		)	(1,684		)
Dividends paid on Common Stock	(385		)	(349		)
Debt issuance costs	(9		)	—
Other, net	(73		)	(45		)
Net Cash Used in Financing Activities	(440		)	(2,161		)
Effect of Exchange Rates on Cash and Cash Equivalents	(27		)	(55		)
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents	362			(1,331		)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period	474			1,668
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period	$	836		$	337





See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	(Unaudited) 9/30/2019			12/31/2018
ASSETS
Current Assets
Cash and cash equivalents	$	691		$	292
Accounts and notes receivable, net	527			561
Prepaid expenses and other current assets	330			354
Total Current Assets	1,548			1,207

Property, plant and equipment, net	1,151			1,237
Goodwill	521			525
Intangible assets, net	243			242
Other assets	1,316			724
Deferred income taxes	224			195
Total Assets	$	5,003		$	4,130

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	870		$	911
Income taxes payable	33			69
Short-term borrowings	84			321
Total Current Liabilities	987			1,301

Long-term debt	10,491			9,751
Other liabilities and deferred credits	1,622			1,004
Total Liabilities	13,100			12,056

Shareholders’ Deficit
Common Stock, no par value, 750 shares authorized; 303 shares issued in 2019 and 306 issued in 2018	—			—
Accumulated deficit	(7,669		)	(7,592		)
Accumulated other comprehensive loss	(428		)	(334		)
Total Shareholders’ Deficit	(8,097		)	(7,926		)
Total Liabilities and Shareholders’ Deficit	$	5,003		$	4,130

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
Quarters and years to date ended September 30, 2019 and 2018
(in millions)
	Yum! Brands, Inc.
	Issued Common Stock					Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders' Deficit
	Shares		Amount			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders' Deficit
Balance at June 30, 2019	304		$	—		$	(7,614	)	$	(380	)	$	(7,994	)
Net Income						255						255
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)									(37		)	(37		)
Pension and post-retirement benefit plans (net of tax impact of $1 million)									2			2
Net loss on derivative instruments (net of tax impact of $4 million)									(13		)	(13		)
Comprehensive Income												207
Dividends declared						(130		)				(130		)
Repurchase of shares of Common Stock	(2	)	—			(174		)				(174		)
Employee share-based award exercises	1		(15		)	(5		)				(20		)
Share-based compensation events			15			(1		)				14
Balance at September 30, 2019	303		$	—		$	(7,669	)	$	(428	)	$	(8,097	)

Balance at December 31, 2018	306		$	—		$	(7,592	)	$	(334	)	$	(7,926	)
Net Income						806						806
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)									(32		)	(32		)
Pension and post-retirement benefit plans (net of tax impact of $2 million)									6			6
Net loss on derivative instruments (net of tax impact of $23 million)									(68		)	(68		)
Comprehensive Income												712
Dividends declared						(387		)				(387		)
Repurchase of shares of Common Stock	(5	)	(1		)	(475		)				(476		)
Employee share-based award exercises	2		(53		)	(18		)				(71		)
Share-based compensation events			54			(1		)				53
Adoption of accounting standard						(2		)				(2		)
Balance at September 30, 2019	303		$	—		$	(7,669	)	$	(428	)	$	(8,097	)

Balance at June 30, 2018	319		$	—		$	(6,965	)	$	(282	)	$	(7,247	)
Net Income						454						454
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)									(46		)	(46		)
Pension and post-retirement benefit plans (net of tax impact of $1 million)									5			5
Net gain on derivative instruments (net of tax impact of $2 million)									6			6
Comprehensive Income												419
Dividends declared						(114		)				(114		)
Repurchase of shares of Common Stock	(6	)	(11		)	(516		)				(527		)
Employee share-based award exercises			(3		)							(3		)
Share-based compensation events			14									14
Balance at September 30, 2018	313		$	—		$	(7,141	)	$	(317	)	$	(7,458	)

Balance at December 31, 2017	332		$	—		$	(6,063	)	$	(271	)	$	(6,334	)
Net Income						1,208						1,208
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)									(76		)	(76		)
Pension and post-retirement benefit plans (net of tax impact of $4 million)									13			13
Net gain on derivative instruments (net of tax impact of $5 million)									15			15
Comprehensive Income												1,160
Dividends declared						(351		)				(351		)
Repurchase of shares of Common Stock	(20	)	(18		)	(1,680		)				(1,698		)
Employee share-based award exercises	1		(32		)	(4		)				(36		)
Share-based compensation events			50									50
Adoption of accounting standards						(251		)	2			(249		)
Balance at September 30, 2018	313		$	—		$	(7,141	)	$	(317	)	$	(7,458	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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, 2018 (“2018 Form 10-K”).

YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchises or operates a system of over 49,000 quick service restaurants in more than 145 countries and territories. At September 30, 2019, 98% of these restaurants were owned and operated by franchisees. The Company’s KFC, Pizza Hut and Taco Bell brands (collectively the “Concepts”) are global leaders of the chicken, pizza and Mexican-style food categories.

As of September 30, 2019, YUM consisted of three operating segments:


•	The KFC Division which includes our worldwide operations of the KFC concept


•	The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept


•	The Taco Bell Division which includes our worldwide operations of the Taco Bell concept

YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. Our U.S. subsidiaries and certain international subsidiaries operate on a weekly periodic calendar where the first three quarters of each fiscal year consists of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks. For our subsidiaries that operate on this weekly periodic calendar, 2019 will include a 53rd week. Our remaining international subsidiaries operate on a monthly calendar similar to that on which YUM operates.

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 2018 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit 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 advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 30, 2019. These reclassifications had no effect on previously reported Net Income.

Note 2 - Lease Accounting

Starting in February 2016 and continuing into 2019, the Financial Accounting Standards Board ("FASB") issued standards on the recognition and measurement of leases ("Topic 842"). We adopted these standards beginning with the quarter ended March 31, 2019, using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of 2019 and have not recast the comparative periods presented in the Condensed Consolidated Financial Statements. The standards provide a number of optional practical expedients and policy elections in transition. We elected the ‘package of practical expedients’ under which we did not reassess under the standards our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements. Refer to Note 5 for information regarding the adjustments recorded to our Condensed Consolidated Balance Sheet as of the beginning of the quarter ended March 31, 2019 to reflect the adoption of Topic 842. Below is information about the nature of our leases, accounting policies and assumptions subsequent to adopting Topic 842 and other required disclosures.

In certain instances, we lease or sublease certain restaurants to franchisees. Our lessor and sublease portfolio primarily consists of stores that have been leased to franchisees subsequent to refranchising transactions. Our most significant leases with lease and non-lease components are leases with our franchisees that include both the right to use a restaurant as well as a license of the intellectual property associated with our Concepts’ brands. For these leases, which are primarily classified as operating leases, we account for the lease and non-lease components separately. Revenues from rental agreements with franchisees are presented within Franchise and property revenues in our Condensed Consolidated Statements of Income and related expenses (e.g. depreciation and rent expense) are presented within Franchise and property expenses. The impact of adopting Topic 842 on the accounting for our lessor and sublease portfolio was not significant.

We lease land, buildings or both for certain of our restaurants and restaurant support centers worldwide. Rental expense for leased restaurants is presented in our Condensed Consolidated Statements of Income as Company restaurant expenses and rental expense for restaurant support centers is presented as General and administrative expenses. The length of our lease terms, which vary by country and often include renewal options, are an important factor in determining the appropriate accounting for leases including the initial classification of the lease as finance (referred to as “capital” leases prior to the adoption of Topic 842) or operating as well as the timing of recognition of rent expense over the duration of the lease. We include renewal option periods in determining the term of our leases when failure to renew the lease would impose a penalty on the Company in such an amount that a renewal appears to be reasonably certain at the commencement of the lease. The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements that might be impaired if we choose not to continue the use of the leased property. Our leasing activity for other assets, including equipment, is not significant.

Prior to the adoption of Topic 842 (“Legacy GAAP”) liabilities for future rental payments under operating leases were not recognized on the balance sheet of the Company except when recognizing a liability was necessary to reflect the impact of recognizing rent expense on a straight-line basis. Upon the adoption of Topic 842, right-of-use assets and liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. Such assets and liabilities have historically always been recorded for finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Subsequent amortization of the right-of-use asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. For finance leases, the right-of-use asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. As most of our leases do not provide an implicit discount rate, we use our incremental secured borrowing rate based on the information available at commencement date, including the lease term and currency, in determining the present value of lease payments for both operating and finance leases. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Right-of-use assets are assessed for impairment in accordance with our long-lived asset impairment policy, which is performed annually or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We reassess lease classification and remeasure right-of-use assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with Topic 842. The difference between operating lease rental expense recognized in our Condensed Consolidated Statements of Income and cash payments for operating leases is recognized within Other, net within Net Cash Provided by Operating Activities in our Condensed Consolidated Statements of Cash Flows.



The components of lease expense were as follows:	Quarter Ended 9/30/2019			Year to date 9/30/2019
Operating lease cost	$	18		$	55
Finance lease cost
Amortization of right-of-use assets	—			2
Interest on lease liabilities	1			2
Total finance lease cost	1			4
Sublease income	(16		)	(50		)



Supplemental cash flow information related to leases was as follows:	Year to date 9/30/2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	73
Operating cash flows from finance leases	2
Financing cash flows from finance leases	3
Right-of-use assets obtained in exchange for lease obligations
Operating leases	67
Finance leases	8

Supplemental balance sheet information related to leases was as follows:



	9/30/2019			Condensed Consolidated Balance Sheet
Assets
Operating lease right-of-use assets	$	657		Other assets
Finance lease right-of-use assets	36			Property, plant and equipment, net
Total right-of-use assets^(a)	$	693

Liabilities
Current
Operating	$	69		Accounts payable and other current liabilities
Finance	7			Short-term borrowings
Non-current
Operating	653			Other liabilities and deferred credits
Finance	62			Long-term debt
Total lease liabilities^(a)	$	791

Weighted-average Remaining Lease Term (in years)
Operating leases	12.8
Finance leases	12.6

Weighted-average Discount Rate
Operating leases	5.5		%
Finance leases	6.1		%


(a)	U.S. operating lease right-of-use assets and liabilities totaled $298 million and $352 million, respectively, as of September 30, 2019 and primarily related to Taco Bell U.S.

Future minimum lease payments as of September 30, 2019, including rental payments for lease renewal options we are reasonably certain to exercise were as follows:



	Commitments
	Finance			Operating
Less than 1 year	$	10		$	110
1-2 years	9			101
2-3 years	9			92
3-4 years	8			83
4-5 years	7			79
Thereafter	54			548
Total lease payments	97			1,013
Less imputed interest	(28		)	(291		)
Total lease liabilities	$	69		$	722

Future minimum lease payments under the non-cancellable term of leases as of December 31, 2018 as required to be disclosed under Legacy GAAP were as follows:



	Commitments
	Capital		Operating
2019	$	10	$	103
2020	10		89
2021	9		78
2022	8		71
2023	8		61
Thereafter	58		384
Total lease payments	$	103	$	786

Note 3 - Earnings Per Common Share (“EPS”)



	Quarter ended				Year to date
	2019		2018		2019		2018
Net Income	$	255	$	454	$	806	$	1,208

Weighted-average common shares outstanding (for basic calculation)	306		318		307		325
Effect of dilutive share-based employee compensation	7		7		7		7
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	313