The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June 30, 20192022, computed by reference to the closing price of the registrant’s Common Stock on the New York Stock Exchange Composite Tape on such date was approximately $33.6$32 billion. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant. The number of shares outstanding of the registrant’s Common Stock as of February 12, 202017, 2023, was 300,822,322280,107,863 shares.
Portions of the definitive proxy statement furnished to shareholders of the registrant in connection with the annual meeting of shareholders to be held on May 14, 202018, 2023, are incorporated by reference into Part III.
PART I
Yum! Brands, Inc. (referred to herein as “YUM”, the “Registrant” or the “Company”), was incorporated under the laws of the state of North Carolina in 1997. The principal executive offices of YUM are located at 1441 Gardiner Lane, Louisville, Kentucky 40213, and the telephone number at that location is (502) 874-8300. Our website address is https://www.yum.com.
YUM, together with its subsidiaries, is referred to in this Form 10-K annual report (“Form 10-K”) as the Company. The terms “we,” “us” and “our” are also used in the Form 10-K to refer to the Company. Throughout this Form 10-K, the terms “restaurants,” “stores” and “units” are used interchangeably. While YUM does not directly own or operate any restaurants, throughout this document we may refer to restaurants that are owned or operated by our subsidiaries as being Company-owned.
Overview of Business
YUM has over 50,00055,000 restaurants in more than 150155 countries and territories primarily operating under the threefour concepts of KFC, Taco Bell, Pizza Hut and Taco BellThe Habit Burger Grill (the “Concepts”). These three conceptsThe Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, pizza and Mexican-style food and pizza categories, respectively. The Habit Burger Grill is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. At December 31, 2019,2022, 98% of our Concepts’ units are operated by independent franchisees or licensees under the terms of franchise or license agreements. The terms "franchise"franchise or "franchisee"franchisee within this Form 10-K are meant to describe third parties that operate units under either franchise or license agreements.
FollowingThe following is a summary of our Concepts' operations and a brief description of each Concept and a summary of our Concepts’ operations as of and for the year ended December 31, 2019:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Units | | % of Units International | | Number of Countries and Territories | | % Franchised | | System Sales(a) (in Millions) | |
KFC Division | | 27,760 | | | 86 | % | | 149 | | | 99 | % | | $ | 31,116 | | |
Taco Bell Division | | 8,218 | | | 12 | % | | 32 | | | 94 | % | | 14,653 | | |
Pizza Hut Division | | 19,034 | | | 66 | % | | 106 | | | 99 | % | | 12,853 | | |
Habit Burger Grill Division | | 349 | | | 3 | % | | 3 | | | 18 | % | | 661 | | |
YUM | | 55,361 | | | 67 | % | | 156 | | | 98 | % | | $ | 59,283 | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Number of Units | | % of Units International | | Number of Countries and Territories | | % Franchised | | System Sales(a) (in Millions) | |
KFC Division | | 24,104 |
| | 83 | % | | 144 |
| | 99 | % | | $ | 27,900 |
| |
Pizza Hut Division | | 18,703 |
| | 61 | % | | 113 |
| | 99 | % | | 12,900 |
| |
Taco Bell Division | | 7,363 |
| | 8 | % | | 30 |
| | 94 | % | | 11,784 |
| |
YUM | | 50,170 |
| | 64 | % | | 152 |
| | 98 | % | | $ | 52,584 |
| |
| | | | | | | | | | | |
(a) Constitutes sales of all restaurants, both Company-owned and franchised. See further discussion of this performance metric within Part II, Item 7 of this Form 10-K. | |
(a) | Constitutes sales of all restaurants, both Company-owned and franchised. See further discussion of this non-GAAP measure within Part II, Item 7 of this Form 10-K. |
KFC
KFC was founded in Corbin, Kentucky, by Colonel Harland D. Sanders, an early developer of the quick service food business and a pioneer of the restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952. KFC restaurants across the world offer fried and non-fried chicken products such as sandwiches, chicken strips, chicken-on-the-bone and other chicken products marketed under a variety of names.
Pizza Hut
The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and within a year, the first franchise unit was opened. Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. Pizza Hut operates in the delivery, carryout and casual dining segments around the world.
Taco Bell
The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey, California, and in 1964, the first Taco Bell franchise was sold. Taco Bell specializes in Mexican-style food products, including various types of tacos, burritos, quesadillas, salads, nachos and other related items.
Pizza Hut
The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and within a year, the first franchise unit was opened. Today, Pizza Hut specializes in the sale of ready-to-eat pizza products and operates in the delivery, carryout and casual dining segments around the world.
Habit Burger Grill
The first Habit Burger Grill restaurant opened in 1969 in Santa Barbara, California. The Habit Burger Grill restaurant concept is built around a distinctive and diverse menu that includes chargrilled burgers and sandwiches made-to-order over an open flame and topped with fresh ingredients.
Business Strategy
Through our Recipe for Good Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of digital and technology and better leverage of our systemwide scale.
Our Recipeglobal citizenship and sustainability strategy is reflected in our Good agenda, which includes our priorities for social responsibility, risk management and sustainable stewardship of our people, food and planet.
Our Growth agenda is based on four key drivers:
•Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success
•Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences
•Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion
•Bold Restaurant Development: Drive market and franchise expansion with strong economics and value
Our Recipe for Good reflects our global citizenship and sustainability strategy and practices, while reinforcing our public commitment to drive socially responsible growth, risk management and sustainable stewardship of our food, planet and people.
Information about Operating Segments
As of December 31, 2019,2022, YUM consists of threefour operating segments:
•The KFC Division which includes theour worldwide operations of the KFC concept
•The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
•The Pizza Hut Division which includes theour worldwide operations of the Pizza Hut concept
•The Taco BellHabit Burger Grill Division which includes theour worldwide operations of the Taco BellHabit Burger Grill concept
Franchise Agreements
The franchise programs of the Company are designed to promote consistency and quality, and the Company is selective in granting franchises. The Company is focused on partnering with franchisees who have the commitment, capability and capitalization to grow our Concepts. Franchisees can range in size from individuals owning just one restaurant to large publicly-traded companies.
The Company has franchise relationships that are particularly important to our business, such as our relationship with Yum China (defined below) and our relationships with certain other large franchisees.
T
heThe Company has successfully increased franchise restaurant ownership in recent years, and currently has approximately 1,500 franchisees with whom we have franchise contracts. The Company utilizes both store-level franchise and master franchise programs to grow itsour businesses. Of our over 49,00054,000 franchised units at December 31, 2019,2022, approximately 30%35% operate under our master franchise programs, including over 8,800nearly 12,100 units in mainland China.The remainder of our franchise units operate under store-level franchise agreements. Under both types of franchise programs, franchisees supply capital by purchasing or leasing the land, building, equipment, signs, seating, inventories and supplies and, over the longer term, by reinvesting in the business. In certain historical refranchising transactions the Company may have retained ownership of land and building and continues to lease them to the franchisee. Store-level franchise agreements typically require payment to the Company of certain upfront fees such as initial fees paid upon opening of a store, fees paid to renew the term of the franchise agreement and fees paid in the event the franchise agreement is transferred to another franchisee. Franchisees also pay monthly continuing fees based on a percentage of their restaurants'restaurants’ sales (typically between 4% -to 6%) and are required to spend a certain amount to advertise and promote the brand. Under master franchise arrangements, the Company enters into agreements that allow master franchisees to operate restaurants as well as sub-franchise restaurants within certain geographic territories. Master franchisees are typically responsible for overseeing development within their territories and performing certain other administrative duties with regard to the oversight of sub-franchisees. In exchange, master franchisees retain a certain percentage of fees payable by the sub-franchisees under their franchise agreements and typically pay lower fees for the restaurants they operate. Our
On October 31, 2016, we completed the spin-off of our China business into an independent, publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). As our largest master franchisee, Yum China, pays the Company a continuing fee of 3% on system sales of our Concepts in mainland China. The use by Yum China of certain of our material trademarks and service marks is governed by a master license agreement between Yum Restaurants Consulting (Shanghai) Company Limited, a wholly-owned indirect subsidiary of Yum China, and YUM, through YRI China Franchising LLC, a subsidiary of YUM.
The Company seeks to maintain strong and open relationships with itsour franchisees and their representatives. To this end, the Company invests a significant amount of time working with the franchisee community and their representative organizations on key aspects of the business, including products, technology, equipment, operational improvements and standards and management techniques.standards.
Restaurant Operations
Through its Concepts, YUM develops, operates and franchises a worldwide system of both traditional and non-traditional Quick Service Restaurants ("QSR"(“QSR”). Traditional units can feature dine-in, carryout, drive-thru and delivery services. Non-traditional units include express units and kiosks that have a more limited menu, usually generate lower sales volumes and operate in non-traditional locations like malls, airports, gasoline service stations, train stations, subways, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient.
Most restaurants in each Concept offer consumers the ability to dine in, carryout and/or carryout food.have the Concepts’ food delivered either through store-level or third-party delivery services. In addition, Taco Bell and KFC offer a drive-thru option in many stores. Pizza Hut offersand Habit Burger Grill offer a drive-thru option on a much more limited basis. Pizza Hut typically offers delivery service, while, on a more limited but expanding basis, KFC and Taco Bell allow for consumers to have the Concepts' food delivered either through store-level or third-party delivery services.
Restaurant management structure varies by Concept, unit size and unit size.franchise organization. Generally, each restaurant is led by a restaurant general manager (“RGM”), together with one or more assistant managers, depending on the operating complexity and sales volume of the restaurant. Each Concept issues detailed manuals, which may then be customized to meet local regulations and customs. These manuals set forth standards and requirements for all aspects of restaurant operations, including food safety and quality, food handling and product preparation procedures, equipment maintenance, facility standards and accounting control procedures. TheEach franchise organization and their respective restaurant management teams are responsible for the day-to-day operation of each unit, including all matters related to employment of restaurant staff, and for ensuring compliance with operating standards. CHAMPS –
We have accelerated our deployment of digital and technology initiatives to enhance the customer experience and our off-premise capabilities. This includes increasing our focus on driving digital sales where customers utilize ordering interaction that is primarily facilitated by automated technology. In 2022, our system restaurants generated digital sales of $24 billion and over 47,000 restaurants now offer delivery, which stands for Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service – is our proprietary systemwide program for training, measuring and rewarding employee performance against key customer measures. CHAMPS is intended to align the operating processesrepresents approximately 85% of our entireglobal system. Delivery can be provided through either a delivery system around one core setowned and operated by our restaurants or through third-party delivery companies such as aggregators.
The Company and its Concepts own numerous registered trademarks. The Company believes that many of standards. RGMs’ efforts,these marks, including CHAMPS performance measures,our Kentucky Fried Chicken®, KFC®, Taco Bell®, Pizza Hut® and The Habit® marks, have significant value and material importance to our business. The Company’s policy is to pursue registration of important marks whenever feasible and to challenge any infringement of our marks vigorously. The use of certain of these marks by franchisees has been authorized in our franchise agreements. Under current law and with proper use, the Company’s rights in our marks can generally last indefinitely. The Company also has certain patents on restaurant equipment and technology which, while valuable, are monitored by Area Coaches, where sufficient scale allows. Area Coaches typically work with approximately sixnot currently considered material to twelve restaurants. our business.
Supply and Distribution
The Company and franchisees of the Concepts are substantial purchasers of a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include chicken, cheese, beef and pork products, paper and packaging materials. Prices paid for these supplies fluctuate. When prices increase, the Concepts may attempt to pass on such increases to their customers, although there is no assurance that this can be done practically.in practice. The Company does not typically experience significant continuous shortages of supplies, and alternative sources for most of these productssupplies are generally available.
In the U.S., the Company, along with the representatives of the Company’s KFC, Taco Bell and Pizza Hut and Taco Bell franchisee groups, are members of Restaurant Supply Chain Solutions, LLC (“RSCS"RSCS”), a third party which is responsible for purchasing certain restaurant products and equipment. Additionally, The Habit Burger Grill entered into a purchasing agreement with RSCS effective July 31, 2020. The core mission of RSCS is to provide the lowest possible sustainable store-delivered prices for
restaurant products and equipment. This arrangement combines the purchasing power of the Company-owned and franchisee restaurants, which the Company believes leverages the system’s scale to drive cost savings and effectiveness in the purchasing function. The Company also believes that RSCS fosters closer alignment of interests and a stronger relationship with itsour franchisee community.
Most food products, paper and packaging supplies, and equipment used in restaurant operations are distributed to individual restaurant units by third-party distribution companies. In the U.S., McLane Foodservice, Inc. is the exclusive distributor for the majority of items used in Company-owned restaurants and for a substantial number of franchisee stores.restaurants. Outside the U.S., we and our Concepts'Concepts’ franchisees primarily use decentralized sourcing and distribution systems involving many different global, regional and local suppliers and distributors. Our international franchisees generally select and manage their own third-party suppliers and distributors, subject to our internal standards. All suppliers and distributors are expected to provide products/products and/or services that comply with all applicable laws, rules and regulations in the state and/or country in which they operate as well as comply with our internal standards.
Advertising and Promotional Programs
Company-owned and franchise restaurants are required to spend a percentage of their respective restaurants’ sales on advertising programs with the goal of increasing sales and enhancing the reputation of the Concepts. Advertising may be conducted nationally, regionally and locally. When multiple franchisees operate in the same country or region, the national and regional advertising spending is typically conducted by a cooperative to which the franchisees and Company-owned stores,restaurants, if any, contribute funds as a percentage of restaurants’ sales. The contributions are primarily used to pay for expenses relating to purchasing media for advertising, market research, commercial production, talent payments and other support functions for the respective Concepts. We have the right to control the advertising activities of certain advertising cooperatives, typically in markets where we have Company-owned stores,restaurants, through our majority voting rights.
Trademarks and Patents
The Company and its Concepts own numerous registered trademarks and service marks. The Company believes that many of these marks, including its Kentucky Fried Chicken®, KFC®, Pizza Hut® and Taco Bell® marks, have significant value and are materially important to its business. The Company’s policy is to pursue registration of its important marks whenever feasible and to oppose vigorously any infringement of its marks.
The use of certain of these marks by franchisees has been authorized in our franchise agreements. Under current law and with proper use, the Company’s rights in its marks can generally last indefinitely. The Company also has certain patents on restaurant equipment which, while valuable, are not currently considered material to its business.
Working Capital
Information about the Company’s working capital is included in MD&A in Part II, Item 7 and the Consolidated Statements of Cash Flows in Part II, Item 8.
Seasonal Operations
The Company does not consider its operations to be seasonal to any material degree.
Competition
The retail food industry, in which our Concepts compete, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including those in the QSR segment), and is intensely competitive with respect to price and quality of food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service reputation, restaurant location and attractiveness and maintenance of properties. Competition has also increased from and been enabled by delivery aggregators and other food delivery services in recent years, particularly in urbanized areas. Our Concepts also face competition as a result of convergence in grocery, convenience, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. The retail food industry is often affected byby: changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Within the retail food industry, each of our Concepts competes with international, national and regional chains as well as locally-owned establishments, not only for customers, but also for management and hourly personnel, suitable real estate sites and qualified franchisees. Given the various types and vast number of competitors, our Concepts do not constitute a significant portion of the retail food industry in terms of number of system units or system sales, either on a worldwide or individual country basis.
Environmental Matters
The Company is not aware of any federal, state or local environmental laws or regulations that will materially affect itsour earnings or competitive position, or result in material capital expenditures. However, the Company cannot predict the effect on itsour operations ofdue to possible future environmental legislation or regulations. During 2019,2022, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
Government Regulation
U.S. Operations. The Company and its U.S. operations, as well as our franchisees, are subject to various federal, state and local laws affecting itsour business, including laws and regulations concerning information security, privacy, labor and employment, health, marketing, food labeling, competition, public accommodation, sanitation and safety. Each of our and our Concepts’ franchisees'franchisees’ restaurants in the U.S. must comply with licensing requirements and regulations promulgated by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located. In addition, each Concept must comply with various state and federal laws that regulate the franchisor/franchisee relationship. To date, the Company has not been materially adversely affected by such licensing requirements and regulations or by any difficulty, delay or failure to obtain required licenses or approvals.
International Operations. Our and our Concepts' franchisees'Concepts’ franchisees’ restaurants outside the U.S. are subject to national and local laws and regulations which are similarhave similarities to those affecting U.S. restaurants.restaurants but may differ among jurisdictions. The restaurants outside the U.S. are also subject to tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment as well asand anti-bribery and anti-corruption laws.
See Item 1A "Risk Factors"“Risk Factors” of this Form 10-K for a discussion of risks relating to federal, state, local and international regulation of our business.
Employees
Human Capital Management
Overview
As of year end 2019,December 31, 2022, the Company and its subsidiaries employed approximately 34,000 persons. The Company believes that it provides working conditions36,000 persons, including approximately 23,000 employees in the U.S. and compensation that compare favorably with thoseapproximately 13,000 employees outside the U.S. Approximately 85% of its principal competitors. The majorityour employees work in restaurants while the remainder work in our restaurant-support centers. In the U.S., approximately 90% of our Company-owned restaurant employees are paid on an hourly basis.part-time and approximately 50% have been employed by the Company for less than a year. Some of our International employees are subject to labor council relationships thatwhose terms vary due to the diverse countries in which the Company operates. The
In addition to the persons employed by the Company and its Concepts considersubsidiaries, our approximately 54,000 franchise restaurants around the world are responsible for the employment of over an estimated 1 million people who work in and support those restaurants. Each year YUM and our franchisees around the world create thousands of restaurant jobs, which are part-time, entry-level opportunities to grow careers at our KFC, Taco Bell, Pizza Hut and The Habit Burger Grill brands. As evidence of the opportunities these positions create, approximately 80% of the Company-owned Restaurant General Managers (“RGMs”) located in the U.S. have been promoted from other positions in our brands’ restaurants and such RGMs often earn pay greater than the average American household income.
Human capital management considerations are integral to our Recipe for Good Growth strategy, the drivers of which include leveraging our culture and people capability to fuel brand performance and franchise success, as well as recruiting and equipping the best restaurant operators in the world to deliver great customer experiences. Our investment in people includes creating a culture of engagement that attracts, retains and grows the best people and creates high performance in our restaurants. We are also highly focused on building an inclusive culture among our employees, franchisees, suppliers and partners to reflect the diversity of our customers and communities. Our commitments and progress towards executing this strategy are reflected below.
Culture & Talent
We believe that our culture and talent provide us with a competitive advantage with respect to the performance of our business. Our areas of focus in this regard include the following:
•Measuring YUM employee relationsengagement regularly. For example, every other year we conduct a global employee engagement survey of all employees working in our restaurant support centers. The most recent survey conducted was in 2021 and reflected an engagement level among our employees significantly exceeding the average engagement levels of benchmarked companies.
•Providing YUM employees with training and development that builds world-class leaders and drives business results. We promote these efforts through initiatives such as our leadership development program (Heartstyles), our unconscious bias program (Inclusive Leadership) and training programs with respect to our compliance polices,
including our Code of Conduct. Our Heartstyles program is also available to our franchisees so that their employees may benefit as well.
•Enabling a culture that fuels results and cross-brand collaboration on operational execution, people capability and customer experience initiatives throughout our system.
•Assessing progress towards lowering turnover and increasing retention rates, particularly at the restaurant-employee level.
Equity, Inclusion & Belonging
In connection with our focus on equity, inclusion and belonging, our areas of focus include the following:
•Continually building upon ongoing inclusion efforts to help ensure our workplaces are environments where all people can be successful.
•Consistent with our Code of Conduct, making employment-related decisions based on an individual’s abilities and merit, not personal characteristics that are unrelated to the job.
•Significantly increasing the number of women in our senior leadership globally, with a goal of achieving gender parity by 2030. In 2021, approximately 42% of our global corporate leadership roles were held by women and approximately 51% of our global workforce were women.
•Increasing representation of underrepresented U.S. associates among our executive and management ranks, franchisees and suppliers over the next 10 years to achieve our aspirational goals to be good.representative of our customers and communities. Through our membership with the OneTen coalition, we are partnering with a group of U.S. businesses to create career mobility and advancement opportunities for underrepresented people and communities.
•Continuing to make Inclusive Leadership training and anti-racism training available across our system. We intend to expand our Inclusive Leadership training to employees and franchisees around the world and have started development of an online module of this training program to help provide even greater access.
Available Information
The Company makes available, through the Investor Relations section of its internet website at https://www.yum.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission ("SEC"(“SEC”) at https://www.sec.gov.
Our Corporate Governance Principles and our Code of Conduct are also located within the Investor Relations section of the Company'sCompany’s website. The referencereferences to the Company’s website address doesin this Form 10-K do not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.Form 10-K. These documents, as well as our SEC filings, are available in print free of charge to any shareholder who requests a copy from our Investor Relations Department.
|
| | | | |
Item 1A. | Risk Factors.Factors. |
You should carefully review the risks described below as they identify important factors that could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. Any of the following risk factors, either by itself or together with other risk factors, could materially adversely affect our business, growth prospects, results of operations, cash flows and/or financial condition.
Risks Related to COVID-19, Food Safety and Catastrophic Events
The coronavirus (COVID-19) global pandemic has had, and may continue to have, an adverse effect on our business, growth prospects and results of operations.
Developments related to the COVID-19 global pandemic have had, and may continue to have, adverse impacts on our business, growth prospects and results of operations. As a result of the pandemic, governmental authorities implemented measures to reduce the spread of COVID-19, some of which remain in place today. These measures have included, and in some instances continue to include restrictions on travel outside the home and limitations on business and other activities as well as encouraging social distancing. As a result of the pandemic, we and our Concepts’ franchisees have experienced store closures and reduced store-level operations, including reduced operating hours and dining room closures. The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities as well as our reliance on dine-in sales in the market. During 2022, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in certain key markets such as China.
We are unable to fully predict the impact that COVID-19 will have on our and our Concepts’ franchisees’ operations going forward due to various uncertainties, including the severity and duration of the pandemic and future outbreaks of COVID-19, the timing, availability, acceptance and effectiveness of medical treatments and vaccines, the spread of potentially more contagious and/or virulent forms of COVID-19, and actions that may be taken by governmental authorities.
Food safety and food-bornefood- or beverage-borne illness concerns may have an adverse effect on our business.business and/or our growth prospects.
Food-borneFood or beverage-borne illnesses (that can be caused by food-borne pathogens such as E. coli, Listeria, Salmonella, Cyclospora and Trichinosis, occurTrichinosis) and food safety issues (such as food tampering, contamination including with respect to allergens) or adulteration have occurred and may occur within our system from time to time. Furthermore, due to the COVID-19 pandemic, there are now stricter health regulations and guidelines and increased public concern over food safety standards and controls. In addition, food safety issues such as food tampering, contaminationthe health and adulteration occur or may occur within our system from time to time.environmental risks of certain ubiquitous substances (including per-and polyfluoroalkyl substances (PFAS)) commonly found in packaging have been the subject of increased regulatory scrutiny and lawsuits against other restaurant companies. Any report or publicity linking us or one of our Concepts’ restaurants, including restaurants operated by us or our Concepts’ franchisees,franchisees’ restaurants, our suppliers or distributors or otherwise involving the types of products used at our restaurants, or linking our competitors, suppliers, distributors or the retail food industry generally, to instances of food-bornefood- or beverage-borne illness or food safety issues or substances having perceived health or environmental risks could result in adverse publicity and otherwise adversely affect our Concepts’ brands and reputations as well as our revenues and profits,us and possibly lead to product liability claims, litigation, governmental investigations or actions and damages. If a customer of oneMoreover, the reliance of our Concepts’ restaurants becomeson third-party food suppliers and distributors and increasing reliance on food delivery aggregators increases the risk that food- or beverage-borne illness incidents and food safety issues could be caused by factors outside of our control. If a customer is believed to have become ill from food borneor beverage-borne illnesses or as a result of food safety issues, steps will be taken that could include restaurants in our system may bebeing temporarily closed, which could disrupt our operations and have a material adverse effect onadversely affect our business financial condition and results of operations. In addition, instances or allegations of food-borne illness or food safety issues, real or perceived, involving our restaurants, restaurants of competitors, and/or our suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our restaurants, could result in negative publicity that could adversely affect either our or our Concepts’ franchisees’ revenues and profits.growth prospects. The occurrence of food-borne illnessespathogens in restaurant products or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our Concepts’ franchisees.
Health concerns arising fromOur business and/or growth prospects may be adversely affected by catastrophic or unforeseen events, such as future health epidemics or pandemics, natural disasters, and events that lead to avoidance of public places or restrictions on public gatherings.
Our business and/or growth prospects could be adversely impacted by various future occurrences (which may be beyond our control), including future health epidemics or pandemics, natural disasters, geopolitical events, acts of war, terrorism, political, financial or social instability, boycotts, social or civil unrest, workplace violence, or other events that lead to avoidance of public places or restrictions on public gatherings such as in our and our Concepts’ restaurants.For example, the outbreak of a
widespread future health epidemic or pandemic, including the coronavirus, may have an adverse effect on our business.
Our business could be materially and adversely affected by the outbreak of a widespread health epidemic or pandemic, including arising from various strains of avian flu or swine flu, such as H1N1, or the coronavirus, particularly if located in regions from whichwhere we derive a significant amount of revenue or profit. The occurrence of such an outbreak or other adverse public health developmentsprofit could materially disruptadversely affect our business and operations. Such events could also significantly impact our industry and cause a temporary closure of restaurants, which could severely disrupt our or our franchisees' operations and have a material adverse effect on our business, financial condition and results of operations.
In late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed. We have a significant number of KFC and Pizza Hut Concept restaurants located in mainland China, operated by our master franchisee, Yum China. Many of our restaurants located within mainland China have been temporarily closed, have shortened operating hours and/or have otherwise been adversely affected by the impact of the coronavirus, and these developments have also impacted the ability of Yumgrowth prospects.
China's suppliers to provide food and other needed supplies at our Concepts’ restaurants in mainland China. Additionally, other nearby franchisees, such as those in Hong Kong and Taiwan, have experienced significant sales declines as well. We are unable to accurately predict the impact that the coronavirus will have on our results of operations, due to uncertainties including the ultimate geographic spread of the virus within and outside of China, the severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities to contain the coronavirus or to treat its impact. However, while it is premature to accurately predict the ultimate impact of these developments, we expect our results for the quarter ending March 31, 2020 to be significantly impacted with potential continuing, adverse impacts beyond March 31, 2020.
In addition, our operations could be disrupted if any of our employees or employees of our business partnerspartner employees were suspected of having the avian flu or swine flu, or other illnesses such as hepatitis A norovirus or coronavirus,norovirus, since this could require us or our business partners to quarantine some or all of such employees or disinfectclose our restaurant facilities. OutbreaksPrior outbreaks of avian flu occur from time to time around the world, and such outbreaks have resulted in confirmed human cases. Itcases and it is possible that outbreaks could reach pandemic levels. Public concern over avian flu generally may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. Becauseproducts, which would adversely affect us given poultry is a menu offering for our Concepts, this would likely result in lower revenues and profits for us andoffered at our Concepts’ franchisees.restaurants. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact profit margins and revenues for us and our Concepts'Concepts’ franchisees.
Furthermore, other viruses may be transmitted through human contact, and the risk or perceived risk of contracting viruses could cause employees or guests to avoid gathering in public, places, which could adversely affect restaurant guest traffic or the ability to adequately staff restaurants. We could also be adversely affected if government authorities impose mandatory closures, seekor voluntary closures, impose restrictions on operations of restaurants, or restrict the import or export of products, or if suppliers issue mass recalls of products. Even if such measures are not implemented
Risks Related to our Business Strategy and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may adversely affect our business and operating results.reliance upon Franchisees
Our operating results and growth strategies are closely and increasingly tied to the success of our Concepts’ franchisees.
The vast majority (98%) of our restaurants are operated by our Concepts’ franchisees, and our percentage of franchise-owned restaurants has increased in recent years.franchisees. Our refranchising efforts have increased our dependence on the financial success and cooperation of our Concepts��� franchisees. In addition, our long-term system sales growth targets dependdepends on maintaining the pace of our net systemnew unit growth rate. Nearly all of this unit growth is expected to result from new unit openings byrate through our Concepts’ franchisees. We increasingly also rely on master franchisees, who have rights to license to sub-franchisees the right to develop and operate restaurants, to achieve our expectations for new unit development. If our Concepts’ franchisees and master franchisees do not meet our expectations for new unit development, we may fall short ofnot achieve our system sales targets. In addition, we have franchise relationships that are particularly important to our business, such as our relationship with Yum China as described in a subsequent risk factor below, our strategic alliance with Telepizza Group S.A., who is the master franchisee of Pizza Hut in Latin America (excluding Brazil) and portions of Europe, and our relationship with certain large franchisees, such as NPC International, Inc. the largest operator of Pizza Hut restaurants in the United States. Any failure to realize the expected benefits of such franchise relationships may adversely impact our business and operating results.desired growth.
We have limited control over how our Concepts’ franchisees’ businesses are run, and their inability to operate successfully could adversely affect our operating results through decreased royalties, advertising funds contributions, and fees paid to us for royalties, advertising funds contributions, and other discrete services we may provide to our Concept’sConcepts’ franchisees (e.g.(e.g. management of e-commerce platform)platforms). Our control is further limited where we utilize master franchise arrangements, which require us to rely on our master franchisees to enforce sub-franchisee compliance with our operating standards. If our Concepts’ franchisees fail to adequately capitalize their businesses or incur too much debt, if their operating expenses or commodity prices increase or if economic or sales trends deteriorate such that they are unable to operate profitably or repay existing debt, it could result in their financial distress, including insolvency or bankruptcy, or the inability to meet development targets or obligations. If a significant franchisee of one of our Concepts becomes, or a significant number of our Concepts’ franchisees in the aggregate become, financially distressed our operating results could be impacted through reduced or delayed fee payments that cause us to record bad debt expense, reduced advertising fund contributions, and reduced new unit development.
In addition, we are secondarily liable on certain of our Concepts’ franchisees’ restaurant lease agreements, including lease agreements that we have guaranteed or assigned to franchisees in connection with the refranchising of certain Company-owned restaurants. Ourand our operating results and/or growth prospects could be impacted by any increased rent obligations for such leased properties to the extent our Concepts’such franchisees default on suchthese lease agreements. In addition, the failure of our Concepts’ franchisees to adequately engage in succession planning may adversely affect their restaurant operations and the development of new restaurants, which in turn could hurt our business.
Our success also depends on the willingness and ability ofwhether our Concepts’ franchisees to implement marketing programs and major initiatives such as restaurant remodels or equipment or technology upgrades, which may require financial investment.investment by such franchisees. Our Concepts may be unable to successfully implement strategies that we believe are necessary for further growth if theirour Concepts’ franchisees do not participate, which in turn may harm theour growth prospects and financial condition of the Company. condition.
Additionally, the failure of our
Concepts’ franchisees to focus on key elements of restaurant operations, such as compliance with our operating standards addressing quality, service and cleanliness (even if such failures do not rise tobreach the level of breaching the related franchise documents), may be attributed by guests to our Concepts’ entire brand and could have a negativenegatively impact on our business.
Our reliance on master franchise arrangements can decreasebusiness and/or our level of control over our Concepts' restaurants and increase certain risks arising from franchise operations. For example, we rely on our master franchisees to monitor and enforce sub-franchisee compliancegrowth prospects. Moreover, franchisee noncompliance with our operatingfranchise agreements may reduce the overall customer perception and goodwill of our Concepts’ brands, including by failing to meet health and safety standards (e.g., additional sanitation protocols and a failureguidelines connected to the COVID-19 pandemic), to engage in quality control or maintain product consistency, or to comply with cybersecurity requirements, or through the participation in improper business practices.
We have franchise relationships that are particularly important to our business, such standards couldas our relationship with Yum China. Any failure to realize the expected benefits of such franchise relationships, including with Yum China, may adversely affectimpact our business.
business, growth prospects and operating results. In connection with the spin-off of our China business in 2016 into an independent publicly-traded company (the “Separation” or “Yum China spin-off”), we entered into a Master License Agreement (“MLA”) pursuant to which Yum China is the exclusive licensee of the KFC, Taco Bell and Pizza Hut Concepts and their related marks and other intellectual property rights for restaurant services in mainland China. Following the Separation, Yum China became, and continues to be, our largest franchisee. Our financial results are significantly affected by Yum China’s results as we are entitled to receive a 3% sales-based royalty on all Yum China system sales related to these Concepts.
We may not achieve our target restaurant development goals, aggressive development could cannibalize existing salesgoal and new restaurants may not be profitable.
Our growth strategy depends on our and our Concepts’ franchisees’ ability to increase the number of restaurants around the world. The successful development of new units depends in large part on the ability of our Concepts’ franchisees to open new restaurants and to operate these restaurants profitably. Effectively managing growth can be challenging, particularly as we expand into new markets, internationally, and we cannot guarantee that we, or our Concepts’ franchisees, including Yum China, will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce operatingprofitably, consistent with results similar to those of existing restaurants or with our existing restaurants.or our Concepts’ franchisees’ expectations. Other risks that could impact our ability to increase the number of ouropen new restaurants include prevailing economic conditions and trade or economic policies or sanctions, our ability to attract new franchisees, construction and development costs of new restaurants, and our, or our Concepts’ franchisees’, ability to obtain suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, obtain required permits and approvals in a timely manner, hire, train and trainretain qualified management teams and restaurant crews, and meet construction schedules.
Expansion into markets could also be affected by our Concepts’ franchisees’ willingness to invest capital or ability to obtain financing to construct and open new restaurants. If it becomes more difficult or more expensive for our Concepts’ franchisees to obtain financing to develop new restaurants, or if the perceived return on invested capital is not sufficiently attractive, the expected growth of our system could slow and our future revenues and operating cash flows could be adversely impacted.
In addition, the development of new restaurantsexpansion could impact the sales of our Concepts’ existing restaurants nearby. There can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets.
We may not realize the anticipated benefits from past or potential future acquisitions, investments or other strategic transactions, or our portfolio business model.
From time to time we have completed, and we may evaluate and continue to complete mergers, acquisitions, divestitures, joint ventures, strategic partnerships, minority investments (including minority investments in third parties, such as, franchisees or master franchisees) and other strategic transactions, including our acquisition of The Habit Restaurants, Inc. completed in March 2020.
Past and potential future strategic transactions may involve various inherent risks, including, without limitation:
•expenses, delays or difficulties in integrating acquired companies, joint ventures, strategic partnerships or investments into our organization, including the failure to realize expected synergies and/or the inability to retain key personnel;
•diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy;
•inability to generate sufficient revenue, profit, and cash flow from acquired companies, joint ventures, strategic partnerships or investments;
•the possibility that we have acquired substantial contingent or unanticipated liabilities in connection with acquisitions or other strategic transactions;
•the possibility that our Concepts and potential future acquisitions have divergent interests; and
•the possibility that our interests and strategic direction do not align with those of acquired companies or other parties that maintain an interest in our investments.
Past and potential future strategic transactions may not ultimately create value for us and may harm our reputation and adversely affect our business, growth prospects, financial condition and results of operations. In addition, we account for certain investments, including minority investments in certain franchisees such as Devyani International Limited, on a mark-to-market basis and, as a result, changes in the fair value of these investments impact our reported results. Changes in market prices for equity securities are unpredictable, and our investments have caused, and could continue to cause, fluctuations in our results of operations and/or growth prospects.
Risks Related to Operating a Global Business
We have significant exposure to the Chinese market through our largest franchisee, Yum China, which subjects us to risks that could negatively affect our business.business and/or our growth prospects.
A significant portion of our total business, is conducted in mainland China, particularly with respect to our KFC Concept. In connection with the spin-off of our China business in 2016 into an independent publicly-traded company (the "Separation" or “Yum China spin-off”), we entered into a Master License Agreement with Yum China pursuant to which Yum ChinaConcept, is the exclusive licensee of the KFC, Pizza Hut and Taco Bell Concepts and their related marks and other intellectual property rights for restaurant servicesconducted in mainland China. Following the Separation, Yum China became, and continues to be,through our largest franchisee. Our financial results are significantly affected byfranchisee, Yum China’s results as we are entitled to receive a 3% sales-based royalty on allChina. Yum China system sales related to our Concepts. Yum China'sChina’s business is exposed to risks in mainland China, which include, among others, potential political, financial orand social instability, changes in economic conditions (including consumer spending, unemployment levels and ongoing wage and commodity inflation), consumer preferences, the regulatory environment (including uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations), food safety related matters (including compliance with food safety regulations and tax lawsability to ensure product quality and regulations includingsafety), and the tax treatmenteffect of the royalty paid to YUM, as well as increased media scrutiny of our ConceptsCOVID-19 pandemic and industry, fluctuationsrelated restrictions in foreign exchange rates, increased restrictions or tariffs on imported supplies as a result of trade disputes, any epidemics or pandemics arising out of mainland China, and increased competition. Further, anyChina. Any significant or prolonged deterioration in U.S.-ChinaU.S.–China relations, including as the result of current U.S.–China tensions, could adversely affect our Concepts in mainland China if Chinese consumers reduce the frequency of their visits to Yum China’s restaurants.China. Chinese law regulates Yum China'sChina’s business conducted within mainland China. Our royalty income from the Yum China business is therefore subject to numerous uncertainties based on theChinese laws, regulations and policies, of the Chinese government, as theywhich may change from time to time. If Yum China’s business is harmed or development of our Concepts’ restaurants is slowed in mainland China due to any of these factors, it could negatively impact the royalty paid by Yum China to us, which would negatively impact our financial results or our growth prospects.
Our relationship with Yum China is governed primarily by a Master License Agreement,MLA, as amended from time to time, which may be terminated upon the occurrence of certain events, such as the insolvency or bankruptcy of Yum China. In addition, if we are unable to enforce our intellectual property or contract rights in mainland China, if Yum China is unable or unwilling to satisfy its obligations under the Master License Agreement,MLA, or if the Master License AgreementMLA is otherwise terminated, it could result in an interruption in the
operation of our brands that have been exclusively licensed to Yum China for use in mainland China. Disputes over the proper interpretation of the MLA have arisen in the past and may arise from time to time in the future. Such interruption or disputes could cause a delay in, or loss of, royalty income to us, which would negatively impact our financial results.
Our internationalglobal operations subject us to risks that could negatively affect our business.
A significant portion of our Concepts’ restaurants are operated in countries and territories outside of the U.S., including in emerging markets, and we intend to continue expansion of our internationalglobal operations. As a result, our business and the businesses of our Concepts’ franchiseesfranchisees’ business and/or growth prospects are increasingly exposed to risks inherent in internationalglobal operations. These risks, which can vary substantially by country, include political, financial or social instability or conditions, geopolitical events, corruption, anti-American sentiment, and social and ethnic unrest, natural disasters, military conflicts and terrorism, as well as changesexposure to the macroeconomic environment in economic conditionssuch markets (including consumer preferences and spending, unemployment levels and wage and commodity inflation), the regulatory environment (including the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation and enforceability of legal requirements and the enforceability of contract rights and intellectual property rights), and income and non-income based tax rates and laws,laws. Additional risks include the impact of import restrictions or controls, sanctions, foreign exchange control regimes including(including restrictions on currency conversion, natural disasters,conversion), health guidelines and safety protocols related to the impact ofCOVID-19 pandemic, labor costs and conditions, consumer preferencescompliance with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices, and the laws and policies that govern foreign investment in countries where our Concepts'Concepts’ restaurants are operated. For example, we have been subject to a regulatory enforcement action in India alleging violation of foreign exchange laws for failure to satisfy conditions of certain operating approvals, such as minimum investment and store build requirements as well as limitations on the remittance of fees outside of the country (See(see Note 19)20).
Following the Russian invasion of Ukraine in early 2022, we suspended all investment and restaurant development in Russia as well as the operations of all company-owned KFC restaurants in Russia. During the second quarter of 2022, we transferred ownership of the Pizza Hut Russia business to a local operator who has initiated the process of re-branding locations to a non-YUM concept. Moreover, in October 2022, we entered into a sale and purchase agreement to transfer ownership of our KFC restaurants, operating systems and master franchise rights, including the network of franchised restaurants in Russia, to a local operator who will be responsible for re-branding locations to a non-YUM concept. Completion of this transaction is subject to regulatory and governmental approvals in Russia, as well as other conditions. There can be no guarantee that our efforts to transfer ownership or re-brand will be successful, and any transfer or re-brand, or failure to transfer or re-brand, could result in damage to our and our Concepts’ brand reputations. In addition, the Russian invasion of Ukraine, including associated macroeconomic conditions, increased energy and other prices, regional instability, and heightened economic sanctions from the international community has adversely affected, and may continue to adversely impact, us and our Concepts’ restaurants located in Russia and Eastern Europe, including to the extent that any such sanctions restrict our ability in this region to conduct business with certain suppliers or vendors, and/or to utilize the banking system and repatriate cash. We are unable to predict the
full impact of the Russian invasion of Ukraine, associated sanctions, macroeconomic impacts and geopolitical instability, and the possibility of broadened military conflict, may have on us.
In addition to the sanctions associated with the Russian invasion of Ukraine as noted above, we and our Concepts’ franchisees do business in jurisdictions that may be subject to trade or economic sanction regimes and such sanctions could be expanded. Any failure to comply with such sanction regimes or other similar laws or regulations could result in the assessment of damages, the imposition of penalties, suspension of business licenses, or a cessation of operations at our or our Concepts’ franchisees’ businesses, as well as damage to our and our Concepts’ brands’brand images and reputations, all of which could harm our profitability.reputations.
Foreign currency risks and foreign exchange controls could adversely affect our financial results.
Our results of operations, growth prospects and the value of our foreign assets are affected by fluctuations in currency exchange rates, which has had, and may adversely affectcontinue to have adverse effects on our reported earnings. More specifically, an increase in the value of the U.S. dollar, relative to other currencies, such as the Chinese Renminbi (“RMB”), Australian Dollar, the British Pound and the Euro, as well as currencies in certain other markets such as the Malaysian Ringgit and Russian Ruble, could have an adverse effect on our reported earnings. Any significant fluctuation in the value of currencies of countries in which we or our Concepts’ franchisees operate, and in particular RMB in China, could materially impact the U.S. dollar value of royalty payments made to us, which could result in lower revenues. In addition, fluctuations in the value of currencies in which we or our Concepts’ franchisees operate could lead to increased costs and lower profitability to us or our Concepts’ franchisees and/or cause us or our Concepts’ franchisees to increase prices to customers, which could negatively impact sales in these markets and harm our financial condition and operating results. There can be no assurance as to the future effect of any such changes on our results of operations, growth prospects, financial condition or cash flows. In addition, the governments in certain countries where weour Concepts operate, including China and certain others, restrict the conversion of local currency into foreign currencies and, in certain cases, the remittance of currency out of the country. Yum China’s income is almost exclusively derived from the earnings of its Chinese subsidiaries, with substantially all revenues of its Chinese subsidiaries denominated in RMB. Any significant fluctuation in the value of the RMB could materially impact the U.S. dollar value of royalty payments made to us by Yum China, which could result in lower revenues. In addition, restrictionsRestrictions on the conversion of RMBother currencies to U.S. dollars or further restrictions on the remittance of currency out of Chinaoccurrences could result in delays in the remittance of Yum China’scause royalty payments to us to be delayed, remitted only partially or not remitted at all, which could impact our liquidity.
FailureRisks Related to Technology, Data Privacy and Intellectual Property
Any cybersecurity incident, including the failure to protect the integrity andor availability of IT systems or the security of personal informationConfidential Information, or the introduction of malware or ransomware, could materially affect our customersbusiness and/or our growth prospects and employees could result in substantial costs, expose uslitigation, reputational harm and a loss of consumer confidence.
Our business relies heavily on computer systems, hardware, software, technology infrastructure and online websites, platforms and networks (collectively, “IT Systems”) to litigationsupport both internal and damage our reputation.
external, including franchisee-related, operations. We receiveown and manage some of these IT Systems but also rely on third parties for a range of IT Systems and related products and services. In addition, we and other parties (such as vendors and franchisees), collect, transmit and/or maintain certain personal, financial and other information about our customers, employees, vendors and franchisees. In addition,franchisees, as well as proprietary information pertaining to our vendors and/or franchisees receivebusiness (collectively, “Confidential Information”). The security and maintain certain personal, financialavailability of our IT Systems and other information aboutConfidential Information is critical to our employeesbusiness and customers. The use and handling of this information is regulated by evolving and increasingly demanding laws and regulations in various jurisdictions, as well as by certain third-party contracts. contracts and industry standards.
We have experienced cyber- attacksexperience cyber-attacks and security breachesincidents from time to time.time and we may experience such attacks and incidents in the future. Despite the security measures that we and many third parties have implemented, our IT Systems may be disrupted or damaged and our Confidential Information may be compromised, corrupted, lost or stolen. The number and frequency of cyber-attacks and other security incidents may escalate. These risks are exacerbated by an increase in the use of and reliance on our digital commerce platforms. In addition, advanced new attacks against IT Systems and devices by potential malicious attackers, including nation-state actors, state-sanctioned groups, advanced persistent threats, and known and unknown ransomware groups, increase the risk of cybersecurity incidents, including ransomware, malware and phishing attacks. On January 18, 2023, we announced a ransomware attack that impacted certain IT Systems which resulted in the closure of fewer than 300 restaurants in one market for one day, temporarily disrupted certain of our affected systems and resulted in data being taken from our network. We have incurred, and may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter. We remain subject to risks and uncertainties as a result of the incident, including as a result of the data that was taken from the Company’s network.
Other adversarial cyber actions that may occur, such as credential stuffing or distributed denial-of-service attacks, may affect consumer confidence, our ability to provide digital commerce platforms, or lead to regulatory actions or litigation.Furthermore, the significant increase in remote working and personal device use, increases the risks of cyber incidents and the improper dissemination of personal or Confidential Information. If our security and information systemsIT Systems, or those of businesses with which we interact are
disrupted or compromised as a result of data corruption or loss,a cyber-attack or a networkother security incident, or if our employees, franchisees or vendors fail to comply with theseapplicable laws and regulations or fail to meet contractual and this informationindustry standards, and Confidential Information is obtained or accessed by unauthorized persons or used inappropriately, it could result in liabilities and penalties, and could damage our brands and reputation, cause interruption of normal business performance, cause us to incur substantial costs, and result in a loss of customerconsumer confidence whichand sales and disrupt our supply chain, business and plans. Additionally, such events could adversely affectresult in the release of Confidential Information about our results of operations and financial condition. Additionally, we could be subject us to litigation and government enforcement actions, asthe losses associated with which may not be covered by insurance. Moreover, any significant cybersecurity events could require us to devote significant management time and resources to address such events, interfere with the pursuit of other important business strategies and initiatives, and cause us to incur additional expenditures, which could be material, including to investigate such events, remedy cybersecurity problems, recover lost data, prevent future compromises and adapt systems and practices in response to such events. There is no assurance that any remedial actions will meaningfully limit the success of future attempts to breach our IT Systems, particularly because malicious actors are increasingly sophisticated and utilizing tools and techniques specifically designed to circumvent security measures, avoid detection and obfuscate forensic evidence, which means we may be unable to identify, investigate or remediate effectively or in a result of any such failure.timely manner.
Further, the standards and the technology currently used for transmission and approval of electronic payment transactions can put such data at risk, and are determined and controlled by the payment card industry, not by us. If we or our Concepts’ franchisees fail to adequately control fraudulent credit card and debit card transactions or to comply with the Payment Card Industry Data Security Standards, we or our Concepts’ franchisees may face civil liability, diminished public perception of our security measures, fines and assessments from the card brands, and significantly higher credit card and debit card related costs, any of which could adversely affect our business, growth prospects, financial condition and results of operations.
The failure to maintain satisfactory compliance with data privacy and data protection legal requirements may adversely affect our business and/or growth prospects and subject us to penalties.
Data privacy is subject to frequently changing rules and regulations,legal requirements, which sometimes conflict among the various jurisdictions and countries where we our Concepts and our Concepts’ franchisees do business. For example, we are subject to numerous global laws including but not limited to, the European Union’s (“E.U.”) General Data Protection Regulation ("GDPR"(“GDPR”) and the UK General Data Protection Regulations (which implements the GDPR into UK law), which was adopted by the European Union effective May 2018, requires companies to meet newimpose strict data protection requirements regarding the handling of personal data.and provide for significant penalties for noncompliance. In addition, within the State of California enactedU.S., the California Consumer Privacy Act (the “CCPA”), which became effective January 2020 and requires companies that process information on California residents to, among other things, provide new disclosures and options to consumers about data collection, use and sharing practices.
Further, the CCPA has been subject to revision and amendments, including significant modifications made by the California Privacy Rights Act (“CPRA”), under which the majority of requirements took effect January 1, 2023. Other states have enacted similar laws that take effect in 2023 and 2024, and the federal government along with other states are considering expanding or passing privacy laws in the near term. These and other newly enacted and evolving legal requirements, such as the E.U.’s Directive 2011/16/EU on administrative cooperation in the field of taxation (referred to as “DAC7”), have required, and may continue to require, us and our Concepts’ franchisees to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Moreover, each of the GDPR and the CCPA confer a private right-of-action onto certain individuals and associations. Ourassociations, and the CPRA will fund the creation of a regulatory body enforcing its provisions. Enforcement priorities from this body and others tasked with enforcing new privacy laws may be unclear or changing. Failure to comply with these and any other comprehensive privacy laws passed at the international, federal or state level may result in regulatory enforcement action, the imposition of monetary penalties, and damage our reputation.
The Federal Trade Commission (“FTC”) and many state attorneys general are also interpreting federal and state consumer protection laws to impose standards for the collection, use, dissemination and security of data. The FTC has also been pursuing privacy as a dedicated enforcement priority, with specialized attorneys seeking enforcement action for violation of US privacy laws including unfair or deceptive practices relating to privacy policies, consumer data collection and processing consent, and digital advertising practices. Various other jurisdictions, where our Concepts have operations, have significantly strengthened, and may continue to strengthen, their data privacy requirements. Moreover, new and changing cross-border data transfer requirements, including the implementation of Standard Contractual Clauses published by the European Commission in June 2021 and the UK International Data Transfer Agreement finalized by the UK in March 2022, will require us to incur costs to comply and may impact the transfer of personal data throughout our organization and to third parties. Other areas of particular focus for increasing requirements or risk of penalties include data collected from minors, biometric information, and data used in machine learning, all of which are subject to rapidly changing laws which are not consistent across jurisdictions.
The increasingly complex, restrictive and evolving regulatory environment at the international, federal and state level related to data privacy and data protection may require significant continued effort and cost, changes to our business practices and impact
our ability to obtain and use data to provide personalized experiences for our customers. In addition, failure to adhere to or successfully implement appropriate processes to adhere to thecomply with applicable requirements of GDPR, CCPA and other evolving laws and regulations in this area could result in financial penalties, legal liability and could damage ourmay subject us and our Concepts’ brands’ reputations.franchisees to fines, sanctions, governmental investigation, lawsuits and other potential liability, as well as reputational harm.
Unreliable or inefficient restaurant or consumer-facing technology or the failure to successfully implement technology initiatives in the future could adversely impact operating results.results, growth prospects and the overall consumer experience.
We and our Concepts’ franchisees rely heavily on information technology systemsIT Systems in the conduct of our business, some of which are managed, hosted, provided and/or used by third parties, including, for example, point-of-sale processing in our restaurants, management of our supply chain, and various other processes and procedures. These systems are subject to damage, interruption or failure due to theft, fire, power outages, telecommunications failure, computer viruses, employee misuse, security breaches, malicious cyber-attacks including the introduction of malware or ransomware or other disruptive behavior by hackers, or other catastrophic events. Certain technology systemsIT Systems may also be unreliable or inefficient, and technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systemssystems’ operations. If our or our Concepts' franchisees' information technology systemsConcepts’ franchisees’ IT Systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process transactions, which could result in lost sales, customer or employee dissatisfaction, or negative publicity that could negativelyadversely impact our reputation, growth prospects, results of operations and financial condition.
We and our Concepts’ franchisees rely on technology not only to efficiently operate our restaurants but also toand drive the customer experience, sales growth and margin improvement. Execution of ourOur growth strategy will be dependent on our initiatives to implement proprietary and third-party technology solutions and gather and leverage data to enhance restaurant operations and improve the customer experience. WeIt may not be abledifficult to recruit and retain qualified individuals for these efforts and there isdue to intense competition for qualified technology systemssystems’ developers necessary to innovate, develop and implement new technologies for our growth initiatives, including increasing our digital relationshipsrelationship with customers. Our strategic digital and technology initiatives may not be implemented in a timely mannerimplemented or may not achieve the desired results. Failure to adequately manage implementations, updates or enhancements of new technology or interfaces between platforms could place us at a competitive disadvantage, and disrupt and otherwise adversely impact our operations and/or growth prospects. Even if we effectively implement and manage our technology initiatives, they may notthere is no guarantee that this will result in sales growth or margin improvement. Additionally, developing and implementing theconsumers’ evolving technology demands of the consumer may place a significant financial burden on us and our Concepts’ franchisees.franchisees, and our Concepts’ franchisees may have differing views on investment priorities. Moreover, our failure to adequately invest in new technology or adapt to technological developmentsadvancements and industry trends, particularly with respect to digital commerce capabilities, could result in a loss of customers and related market share. If our Concepts’ digital commerce platforms do not meet customers’ expectations in terms of security, speed, privacy, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could negatively impact our business.business and/or growth prospects.
We cannot predict the impact that alternative methods of delivery, including autonomous vehicle delivery and third-party delivery technology solutions, or changes in consumer behavior facilitated by these alternative methods of delivery will have on our business. Advances in alternative methods of delivery, including advances in digital ordering technology, or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business, growth prospects and market position.
Moreover, technology and consumer offerings continue to develop and evolve and we cannot predict consumer or team member acceptance of these existing and new technologies, such as new delivery channels or their impact on our business, and/or our growth prospects, nor can we be certain of our ability to implement or execute such technologies, which could result in loss of sales; dissatisfaction from our customers, employees, or employees of our Concepts’ franchisees; or negative publicity that could adversely impact our reputation, results of operations, growth prospects and financial condition.
There are risks associated with our increasing dependence on digital commerce platforms to maintain and grow sales. Such platforms may experience disruptions, which could harm our ability to compete and conduct our business.
Customers are increasingly using e-commerce websites and apps, both domestically and internationally, likesuch as kfc.com, tacobell.com, pizzahut.com, habitburger.com, KFC, Taco Bell, Pizza Hut KFC and Taco BellThe Habit Burger Grill apps, as well asand apps owned by third-party delivery aggregators such as Grubhub and third-party mobile payment processors, to order and pay for our Concepts’ products. Moreover, there has been a rapid increase in the use of store-level or third-party delivery services by our Concepts. As a result, our Concepts and our Concepts’ franchisees are increasingly reliant on digital ordering and payment as a sales channel.channel and our business and/or growth prospects could be negatively impacted if we are unable to successfully implement, execute or maintain our consumer-facing digital initiatives, such as delivery, curbside pick-up and mobile carryout. If the third-party aggregators that we utilize for delivery, including marketplace and delivery as a service, cease or curtail their operations, fail to maintain sufficient labor force
to satisfy demand, materially change fees, access or visibility to our products or give greater priority or promotions to our competitors, our business and/or growth prospects may be negatively impacted. In addition, third-party delivery services typically charge restaurants a per order fee, and as such utilizing third-party delivery services may not be as profitable as sales directly to our customers, and may also introduce food quality and customer satisfaction risks outside of our control. These digital ordering and payment platforms also could be damaged or interrupted by power loss, technological failures, user errors, cyber-attacks, other forms of sabotage, inclement weather or acts of God. In particular, Pizza Hut relies on digital orders for a significant portion of its salesnatural disasters and have experienced interruptions and could experience and has experiencedfurther interruptions, of its digital ordering platforms, which limitedcould limit or delayeddelay customers’ ability to order through such platforms or mademake customers less inclined to return to such platforms. AnyThe rapid acceleration in growth of digital sales has placed additional stress on those platforms that are more reliant upon legacy technology, such limitation as certain platforms used by Pizza Hut, which may result in more frequent and potentially more severe interruptions. Moreover, our reliance on multiple digital commerce platforms to support our global footprint, multiple Concepts and highly franchised business model could increase our vulnerability to cyber-attacks and/or delay would negatively impact Pizza Hut’s salessecurity breaches and customer experiencecould necessitate additional expenditures as we endeavor to consolidate and perception.standardize such platforms.
Yum China, our largest franchisee, utilizes third-party mobile payment apps such as Alipay, WeChat Pay and WeChatUnion Pay as a means through which to generate sales and process payments. Should customers become unable to access mobile payment apps in China, or should the relationship between Yum China and one or more third-party mobile payment processors become interrupted, our results ofor should Yum China’s ability to use Alipay, WeChat Pay, Union Pay or other third-party mobile payment apps in its operations be restricted, its business could be negatively impacted.adversely affected, which could have a negative impact on the royalty paid to us.
Our inability or failure to recognize, respond to and effectively manage the acceleratedincreased impact of social media could adversely impact our business.business and/or growth prospects.
In recent years, thereThere has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination.dissemination and given users the ability to more effectively organize collective actions such as boycotts and other brand-damaging behaviors. Many social media platforms immediately publish the content, their subscribers and participants post, often without filters or checks on accuracy of the content posted.accuracy. Information posted on such
platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business reputation, financial condition, and results of operations,and/or growth prospects, regardless of the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction.
In addition, social media is frequently used by our Concepts to communicate with their respective customers and the public in general.public. Failure by our Concepts to use social media effectively or appropriately, particularly as compared to our Concepts’ respective competitors, could lead to a decline in brand value, customer visits and revenue. Social media is also increasingly used to compel companies to express public positions on issues and topics not directly related to their core business, which could prove controversial or divisive to consumers and result in lost sales or a misallocation of resources. In addition, laws and regulations, including FTC enforcement, are rapidly evolving to govern social media platforms and communications. A failure of us, our employees, our Concepts’ franchisees or third parties acting at our direction, or others perceived to be associated with us or our Concepts’ franchisees, to abide by applicable laws and regulations regarding the use of social media, or to appropriately use social media, could adversely impact our Concepts’ brands, our reputation, our business and our growth prospects, result in negative publicity, or subject us or our Concepts’ franchisees to fines, other penalties or litigation. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our Concepts’ brands, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information.
Failure to protect our trademarks or other intellectual property could harm our Concepts’ brands and overall business and/or growth prospects.
We regard our registered trademarks (e.g., Yum®, KFC®, Taco Bell®, Pizza Hut® and The inappropriate useHabit®) and unregistered trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. Our trademarks, many of social mediawhich are registered in various jurisdictions, create brand awareness and help build goodwill among our customers.
We rely on a combination of legal protections provided by trademark registrations, contracts, copyrights, patents and common law rights, such as unfair competition, passing off and trade secret laws to protect our customersintellectual property from potential infringement. However, from time to time we become aware of other persons or employeescompanies using names and marks that are identical or confusingly similar to our brands’ names and marks. Although our policy is to challenge infringements and other unauthorized uses of marks similar or identical to our brands’ marks, certain or unknown unauthorized uses or other
misappropriation of our trademarks could increasediminish the value of our costs, lead to litigation or result in negative publicity that could damage our reputationConcepts’ brands and adversely affect our business, growth prospects and goodwill.
In addition, effective intellectual property protection may not be available in every country in which our Concepts have, or may in the future open or franchise, a restaurant and the laws of some countries do not protect intellectual property rights to the same extent as the laws of the U.S. There can be no assurance that the steps we have taken to protect our intellectual property or the legal protections that may be available will be adequate or that our Concepts’ franchisees will maintain the quality of the goods and services offered under our brands’ trademarks or always act in accordance with guidelines we set for maintaining our brands’ intellectual property rights and defending or enforcing our trademarks and other intellectual property could result in the expenditure of significant resources any of which could result in significant harm to our business, growth prospects, reputation, financial condition and results of operations.
Our brands may also be targets of infringement claims that could interfere with the use of certain names, trademarks and/or the proprietary know-how, recipes, or trade secrets used in our business. Defending against such claims can be costly, and as a result of defending such claims, we may be prohibited from using such intellectual property or proprietary information in the future or forced to pay damages, royalties, or other fees for using such proprietary information, any of which could negatively affect our business, growth prospects, reputation, financial condition, and results of operations.
Risks Related to Our Supply Chain and Employment
Shortages or interruptions in the availability and delivery of food, equipment and other supplies may increase costs or reduce revenues.
The products sold or used by our Concepts and their franchisees are sourced from a wide variety of domestic and international suppliers although certain products and equipment have limited suppliers, which increases our reliance on those suppliers. We, along with our Concepts’ franchisees, are also dependent upon third parties to make frequent deliveries of food products, equipment and supplies that meet our specifications at competitive prices. Shortages or interruptions in the supply of food items, equipment and other supplies to our Concepts’ restaurants have happened from time to time and could reduce sales, harm our Concepts’ reputations and delay the planned openings of new restaurants by us and our Concepts’ franchisees. We have experienced and may continue to experience, certain supply chain disruptions resulting from, among other things, capacity, transportation, staffing and operational challenges associated with the pandemic and the current macroeconomic environment, which have adversely affected and may continue to adversely affect the availability, qualityour business, growth prospects and costresults of items we use and the operations of our restaurants.operations. Future shortages or disruptions could also be caused by inclement weather,factors such as natural disasters, health epidemics and pandemics, social unrest, the impacts of climate change, inaccurate forecasting of customer demand, problems in production or distribution, restrictions on imports or exports including due to trade disputes or restrictions, the inability of vendors to obtain credit, political instability in the countries in which the suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards or requirements, transitioning to new suppliers or distributors, product quality issues or recalls, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories, or the prospect of such pronouncements, product recalls, the cancellation of supply or distribution agreements or an inability to renew such arrangements or to find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our Concepts’ franchisees. terms.
Moreover, the withdrawal of the United Kingdom from the European Union which occurred effective as of January 31, 2020, to be followed by a transition period which is scheduled to expire on December 31, 2020 (unless otherwise extended) in which the United Kingdom and the European Union will negotiate the terms of this withdrawal, may give to rise to economic, financial, legal, tax and trade uncertainties that may adversely impact us and could, depending on the terms negotiated during the transition period, result in the reimposition of customs and border controls, which in turn may result in shortages or interruptions in supply to our Concepts in the United Kingdom with consequences similar to those described above.
In addition, in the U.S., the Company along with representatives ofand the Company’s KFC, Taco Bell and Pizza Hut and Taco Bell franchisee groups are members of Restaurant Supply Chain Solutions, LLC (“RSCS"RSCS”), which is a third-partythird party responsible for purchasing certain restaurant products and equipment, andequipment. The Habit Burger Grill entered into a purchasing agreement with RSCS in 2020. McLane Foodservice, Inc. ("McLane"(“McLane”) serves as the largest distributor for each of the Company’s KFC, Taco Bell and Pizza Hut Concepts in the U.S. Any failure or inability of our significant suppliers or distributors, including RSCS or McLane to performmeet their respective service requirements, could result in shortages or interruptions in the availability of food and other supplies.
A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales. In addition, failure by a key supplier or distributor for our Concepts and/or our Concepts’ franchisees to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disruption could have an adverse effect on our business.
The loss of key personnel, or labor shortages or difficulty finding qualified employeesand increased labor costs could slow our growth, harmadversely effect our business and reduce our profitability.and/or growth prospects.
Much of our future success depends on the continued availability and service of senior management personnel. The loss or failure to engage in adequate succession planning of any of our executive officers or other key senior management personnel could harm our business.business and/or our growth prospects.
In addition, our restaurant operations are highly service-oriented and our success depends in part uponon our and our Concepts’ franchisees’ ability to attract, retain and motivate a sufficient number of qualified employees, including franchisee management, restaurant managers and other crew members. The marketOur Concepts and their franchisees have experienced and may continue to experience increased labor shortages and employee turnover at many of our restaurants and increased competition for qualified employees, due to ongoing challenging labor market conditions. These labor market conditions and the ongoing inflationary
environment in countries where our Concepts and their franchisees operate have increased, and may continue to increase , the labor costs for our Concepts and their franchisees, including due to the payment of higher wages to attract or retain qualified employees (including franchisee management, restaurant managers and other crew members) and increased overtime costs to meet demand. Such increases in labor costs have also resulted from, and may continue to result from higher minimum wages at the federal, state or local level, including in connection with the increases in state minimum wages that have recently been enacted by various states and (if ultimately enacted) the potential increase in the retail food industryfederal minimum wage in the U.S. proposed by the current presidential administration. Moreover, there may be a long-term trend toward higher wages in emerging markets and higher labor costs more generally. For example, California passed the Fast Food Accountability and Standards Recovery Act (the “FAST Act”) in September 2022, a state law which authorizes the establishment of a council to set standards with respect to the wages, working hours, and health and safety conditions of employees at certain quick service restaurants which, if enacted, would apply to our Concepts’ restaurants in California. The implementation of the FAST Act, which was set to take effect on January 1, 2023, has been paused pending the outcome of a California voter referendum to repeal this law scheduled for November 2024. If this voter referendum fails and the FAST Act goes into effect, and/or if similar legislation is very competitive. Any futureenacted in other jurisdictions, this may increase our and our Concepts’ franchisees’ costs, and otherwise disrupt and adversely affect our operations and/or growth prospects.
The inability to recruit and retain a sufficient number of qualified individuals at the store level may result in reduced operating hours, have a negative impact on service or customer experience, delay our planned use, development or deployment of technology, or impact the planned openings of new restaurants by us and our Concepts’ franchisees, any of which could adversely affect our business and/or our growth prospects. In addition, union organizers have a material adverse impact on the operationengaged in efforts to organize employees at certain of our Concepts’ existing restaurants.
In addition,restaurants and those of other restaurant companies, and strikes, work slowdownsslowdown or other job actionslabor unrest impacting us may become more common. In the event of a strike, work slowdown or other labor unrest, the ability to adequately staff our Concepts’ restaurantsat the store level could be impaired, which could result in reduced revenueadversely impact our operations, growth prospects and customer claims, and may distract our management from focusing on our business and strategic priorities.
Changes in labor and other operating costs could adversely affect our and our franchisees’ results of operations.
An increase in the costs of employee wages, benefits and insurance (including workers’ compensation, general liability, property and health) as well as other operating costs such as rent and energy costs could adversely affect our and our franchisees’ operating results. Such increases could result from general economic or competitive conditions or from government imposition of higher minimum wages at the federal, state or local level. Moreover, there may be a long-term trend toward higher wages in developing markets Any increase in such operating expenses could adversely affect our and our Concepts’ franchisees’ profit margins. In addition, competition for qualified employees could also compel us or our Concepts’ franchisees to pay higher wages to attract or retain key crew members, which could result in higher labor costs and decreased profitability.
An increase in food prices and other operating costs may have an adverse impact on our andbusiness and/or our Concepts’ franchisees’ profit margins.growth prospects.
Our and our Concepts’ franchisees’ businesses depend on reliable sources of large quantities of raw materials such as proteins (including poultry, pork, beef and seafood), cheese, oil, flour and vegetables (including potatoes and lettuce). Raw materials purchased for use in our Concepts’ restaurants are subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions, such as weather and climate conditions, (which may be exacerbated by climate change), energy costs or natural events or disasters that affect expected harvests of such raw materials, taxes and tariffs (including as a result of trade disputes), industry demand, inflationary conditions, labor shortages, transportation issues, fuel costs, food safety concerns, product recalls, governmental regulation and other factors, all of which are beyond our control and in many instances are unpredictable. As a result,Taking into account ongoing inflationary conditions, we have recently experienced and expect to continue to experience, an increase in the historical pricesprice of various raw materials usedand other operating costs (such as rent and energy costs) as well as increased volatility in the operationsuch prices and costs, which has adversely affected, and may continue to adversely affect our results of our Concepts’ restaurants have fluctuated. We cannot assure that we operations and/or our Concepts’ franchisees will continue to be able to purchase raw materials at reasonable prices, or that the cost of raw materials will remain stable in the future.growth prospects. In addition, a significant increase in gasoline prices could result in the imposition of fuel surcharges by our distributors.
BecauseAs the result of the significant increases in food and other operating costs noted above, we and our Concepts’ franchisees have recently increased food prices beyond typical pricing patterns at certain of our Concepts’ restaurants. However, because we and our Concepts’ franchisees provide competitively priced food, we may not have the ability to pass through to our customers the full amount of any commodity price or other cost increases. If we and our Concepts’ franchisees are unable to manage the cost of raw materials or to increase the prices of products proportionately, our and our Concepts’ franchisees’ profit margins and return on invested capital may be adversely impacted. Moreover, to the extent that we raise menu prices to offset these costs, this could result in decreased consumer demand and adversely affect our business and/or our growth prospects.
Risks Related to our Concepts’ Brands and Reputation
Our success depends substantially on our corporate reputation and on the value and perception of our brands.
Our success depends in large part upon our ability and our Concepts’ franchisees’ ability to maintain and enhance our corporate reputation and the value and perception of our brands. Brand value is based in part on consumer perceptions on a variety of subjective factors, including the nutritional content and preparation of our food, our ingredients, food safety, and our business practices, including with respect to how we source commodities, and our pricing (including price increases and discounting). Consumer acceptance of our offerings is subject to change and some changes can occur rapidly. For example, nutritional, health and other scientific studies and conclusions, which constantly evolve and may have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that may affect
perceptions of our Concepts’ brands generally or relative to alternatives. In addition, the retail food industry has been subject to scrutiny and claims that the menus and practices of restaurant chains have led to customer health issues, such as weight gain and other adverse effects. Publicity about these matters (particularly directed at the quick service and fast-casual segments of the retail food industry) may harm our Concepts’ reputations and adversely affect our business and/or our growth prospects. Moreover, this scrutiny could lead to increased regulation of the content or marketing of our products, including legislation or regulation taxing and/or regulating food with high-fat, sugar and salt content, or foods otherwise deemed to be harmed“unhealthy,” which may increase costs of compliance and remediation to us and our Concepts’ franchisees.
In addition, business or dilutedother incidents, whether isolated or recurring, and whether originating from us, our Concepts’ restaurants, franchisees, competitors, governments, suppliers or distributors, can significantly reduce brand value and consumer perception, particularly if the incidents receive considerable publicity or result in litigation or investigations. For example, the reputation of our Concepts’ brands could be damaged by claims or perceptions about the quality, safety or reputation of our products, suppliers, distributors or franchisees or by claims or perceptions that we, founders of our Concepts, our Concepts’ franchisees or other business partners have acted or are acting in an unethical, illegal, racially-biased or socially irresponsible manner or are not fostering an inclusive and diverse environment, including with respect to the service and treatment of customers at our Concepts’ restaurants, and our or our Concepts’ franchisees’ treatment of employees, regardless of whether real or perceived. Our corporate reputation could also suffer from negative publicity or consumer sentiment regarding Company action or brand imagery, misconduct by any of our or our Concepts’ franchisees’ employees, or a real or perceived failure of corporate governance. Any such developments could cause a decline directly or indirectly in consumer confidence in, or the perception of, our Concepts’ brands and/or our products and reduce consumer demand for our products, likely resulting in lower revenues and profits.
We cannot guarantee that franchisees or other third parties with licenses to use our intellectual property will not take actions that may harm the value of our intellectual property. Franchisee use of our Concepts’ trademarks are governed through franchiseefranchise agreements and third-party activity.
Although we monitor use of our trademarks by both franchisees and regulate franchisee activities through our Concepts’ franchise agreements,third parties, but franchisees or other third parties may refer to or make statements about our Concepts’ brands that do not make proper use of our trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our Concepts’ brands or place our Concepts’ brands in a context that may tarnish their reputation. This may result in dilution of, or harm to, our intellectual property or the value of our Concepts’ brands.
Franchisee noncompliance with the terms and conditions of our franchise agreements may reduce the overall goodwill of our Concepts’ brands, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties, including our Concepts’ current and former franchisees, may use our intellectual property to trade on the goodwill of our Concepts’ brands, resulting in consumer confusion or brand dilution. Any reduction
Our ability to reach consumers and drive results is heavily influenced by brand marketing and advertising and our ability to adapt to evolving consumer preferences, including developing and launching new and innovative products and offerings. Our marketing and advertising programs may not be as successful, or may not be as successful as our competitors, and thus, may adversely affect our business, our growth prospects and the strength of our Concepts’ brands’ goodwill, consumer confusion, or brand dilution isbrand.
We are subject to increasing and evolving expectations and requirements with respect to social and environmental sustainability matters, which could expose us to numerous risks.
There has been an increased focus, including from investors, the public and governmental and nongovernmental authorities, on social and environmental sustainability matters, such as climate change, greenhouse gases, packaging and waste, human rights, diversity, sustainable supply chain practices, animal health and welfare, deforestation, land, energy and water use and other corporate responsibility matters. We are and may become subject to changing rules and regulations promulgated by a number of governmental and self-regulatory organizations with respect to social and environmental sustainability matters. These changing rules, regulations and stakeholder expectations have resulted in, and are likely to continue to result in, an increase in expenses and management focus associated with satisfying such regulations and expectations. As the result of these increased expectations and evolving requirements, as well as our commitment to social and environmental sustainability matters, we may continue to establish or expand goals, commitments or targets, and take actions to meet such goals, commitments and targets. These goals could be difficult and expensive to implement, the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace, and we may be criticized for the accuracy, adequacy or completeness of disclosures. Further, goals may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, assumptions that are subject to change, and other risks and uncertainties, many of which are outside of our control. If our data, processes and reporting with respect to social and environmental matters are incomplete or inaccurate, or if we fail to achieve progress with respect to these goals on a timely basis, consumer and investor trust in our brands may suffer.
We may be adversely affected by climate change.
We could be adversely affected by the physical and/or transitional effects of climate change. Our properties and operations may be vulnerable to the adverse effects of climate change, which is predicted to result in ongoing changes in global weather patterns and more frequent and severe weather-related events such as droughts, wildfires, hurricanes and other natural disasters. Such adverse weather related impacts may also adversely affect the general economy in countries where we operate, disrupt our operations, cause restaurant closures or delay the opening of new restaurants, adversely impact sales,our supply chain and increase the costs of (and decrease the availability of) food and other supplies needed for our operations. In addition, various legislative and regulatory efforts to combat climate change may increase in the future, which could materiallyresult in additional taxes, increased expenses and otherwise disrupt and adversely impact our business and results of operations.
Our success depends substantially on our corporate reputation and on the value and perception of our brands.
Our success depends in large part upon our ability and our Concepts’ franchisees’ ability to maintain and enhance the value of our brands and our customers’ loyalty to our brands. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Those perceptions are affected by a variety of factors, including the nutritional content and preparation of our food, the ingredients we use, and the manner in which we source the commodities we use. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly. For example, nutritional, health and other scientific studies and conclusions, which constantly evolve and may have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that may affect perceptions of our Concepts’ brands generally or relative to available alternatives. In addition, business incidents, whether isolated or recurring, and whether originating from us, our Concepts’ restaurants, franchisees, competitors, governments, suppliers or distributors, can significantly reduce brand value
and consumer trust, particularly if the incidents receive considerable publicity or result in litigation or investigations. For example, our Concepts’ brands could be damaged by claims or perceptions about the quality or safety of our products or the quality or reputation of our suppliers, distributors or franchisees or that we, our Concepts’ franchisees or other business partners are acting in an unethical, illegal, racially-biased or socially irresponsible manner, regardless of whether such claims or perceptions are true. Similarly, entities in our supply chain may engage in conduct, including alleged human rights abuses or environmental wrongdoing, and any such conduct could damage our or our Concepts’ brands’ reputations. Any such incidents (even if resulting from actions of a competitor or franchisee) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our Concepts’ brands and/or our productsgrowth prospects.
Risks Related to Government Regulation and reduce consumer demand for our products, which would likely result in lower revenues and profits. Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by a Company officer, or an employee or representative of us or a franchisee.Litigation
We couldmay be partysubject to litigation that could adversely affect us by increasing our expenses, diverting management attention or subjecting us to significant monetary damages and other remedies.
We are regularly involved in legal proceedings, which include regulatory claims or disputes consumer,by claimants such as franchisees, suppliers, employees, customers, governments and others related to operational, foreign exchange, tax, franchise, contractual or employment issues. These claims or disputes may relate to personal injury, claims from franchisees employment, real estate related, environmental, tort, intellectual property, breach of contract, data privacy, securities, derivative and other litigation.litigation matters. See the discussion of legal proceedings in Note 1920 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and lawsuits are subject to inherent uncertainties (some of which are beyond the Company’s control), and unfavorable. Unfavorable rulings or developments could occur.may also occur in cases we are not involved in. Moreover, regardless of whether any such claimslawsuits have merit, or whether we are ultimately held liable or settle, such litigation may be expensive to defend, may divert resources and management attention away from our operations, and may negatively impact our results of operations.operations and/or our growth prospects. With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations. Moreover, anyoperations and/or growth prospects. Any adverse publicity resulting from these allegations may also adversely affect our Concepts’ reputations, which in turn could adversely affect our results of operations.financial results.
In addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain and other adverse effects. We may also be subject to such claims in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and fast-casual segments of the retail food industry) may harm our Concepts’ reputations and adversely affect our business, financial condition and results of operations. Moreover, these could lead to an increase in the regulation of the content or marketing of our products, including legislation or regulation seeking to tax and/or regulate high-fat foods, foods with high sugar and salt content, or foods otherwise deemed to be “unhealthy,” which could increase costs of compliance and remediation to us and our franchisees.
Changes in, or noncompliance with, governmental regulationslegal requirements may adversely affect our business operations, growth prospects or financial condition.
The Company, and our Concepts and their franchisees, are subject to numerous laws and regulations around the world. These laws and regulations change regularly and are increasingly complex. For example, we are subject to:
•The Americans with Disabilities Act in the U.S. and similar state laws that give civil rights protectionsprovide protection to individuals with disabilities in the context of employment, public accommodations and other areas.
•The U.S. Fair Labor Standards Act as well as a variety of similar laws, which governsgovern matters such as minimum wages, and overtime, and other working conditions,the U.S. Family and Medical Leave Act as well as family leave mandates and a variety of similar state laws that govern thesewhich provide protected leave rights to employees.
•Employment laws related to workplace health and safety, non-discrimination, non-harassment, whistleblower protections, and other employment law matters.terms and conditions of employment.
•Laws and regulations in government-mandated health care benefits such as the Patient Protection and Affordable Care Act in the U.S.
•Laws and regulations relating to nutritional content, nutritional labeling, product safety, product marketing and menu labeling.
•Laws relating to state and local licensing.
•Laws relating to the relationship between franchisors and franchisees.
•Laws and regulations relating to health, sanitation, food, workplace safety, child labor, including laws regulating the use of certain “hazardous equipment”, building and zoning, and fire safety and prevention.
•Laws and regulations relating to union organizing rights and activities.
•Laws relating to information security, privacy, (including the European Union's GDPR and California's CCPA), cashless payments, and consumer protection.
•Laws relating to currency conversion or exchange.
•Laws relating to international trade and sanctions.
Tax laws and regulations.
•Anti-bribery and anti-corruption laws.laws, including the U.S. Foreign Corrupt Practices Act.
•Environmental laws and regulations.regulations, including with respect to climate change and greenhouse gas emissions.
•Federal and state immigration laws and regulations in the U.S.
•Regulations, health guidelines and safety protocols related to the COVID-19 pandemic.
Compliance with new or existing laws and regulations could impact our or our Concepts’ franchisees’ operations. The compliance costs associated with these laws and regulations could be substantial.
In addition, if any governmental authority were to adopt and implement a broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under laws such as the National Labor Relations Act (the “NLRA”) in a manner that is applied generally to franchise relationships, (which broader standards in the past have been adopted by U.S. governmental agencies such as the National Labor Relations Board), this could cause us or our Concepts to be liable or held responsible for unfair labor practices and other violations and could subject our Concepts to other liabilities, and/or require our Concepts to conduct collective bargaining negotiations, regarding employees of totally separate, independent employers, most notably our Concepts’ franchisees. Further,For example, the National Labor Relations Board issued a recently-enacted lawproposed rule in California sets out an employment classificationSeptember 2022 regarding the joint-employer test under the NLRA which would take into account the indirect control that established a new standard for determining employee or independent contractor status. This law and any similar laws enacted atcompany has over the federal, state or local level, could increase our and our franchisees’ labor costs and decrease profitability or could cause our franchisees to be deemed employees of our Concepts.another entity, thereby increasing the likelihood of a joint-employer relationship under the NLRA. Moreover, many states (including California) have increasingly focused on and/or enacted legislation around the misclassification of independent contractors.
Any failure or alleged failure to comply with applicable laws or regulations or related standards or guidelines could adversely affect our reputation, internationalglobal expansion efforts, growth prospects and financial results or result in, among other things, litigation, revocation of required licenses, internal investigations, governmental investigations or proceedings, administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance or perception that we are not paying a sufficient amount of taxes could also harm our Concepts’ reputations and adversely affect our revenues. In addition, the compliance costs associated with complying with new or existing legal requirements could be substantial.
Additionally, we are working to manage the risks and costs to us, our franchisees and our supply chain of the effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include the increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. These risks also include the increased pressure to make commitments, set targets, or establish additional goals and take actions to meet them. These risks could expose us to market, operational, reputational and execution costs or risks.
Failure to comply with anti-bribery or anti-corruption laws could adversely affect our business operations.
The U.S. Foreign Corrupt Practices Act, the UK Bribery Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices are the subject of increasing emphasis and enforcement around the world. There can be no assurance that our employees, contractors, agents or other third parties will not take actions in violation of our policies or applicable law, particularly as we expand our operations in emerging markets and elsewhere. Any such violations or suspected violations could subject us to civil or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our reputation, brands, international expansion efforts and growth prospects, business and operating results. Publicity relating to any noncompliance or alleged noncompliance could also harm our Concepts’ reputations and adversely affect our revenues and results of operations.
Tax matters, including changes in tax rates or laws, disagreements with taxing authorities, imposition of new taxes and our restructurings could impact our results of operations, growth prospects and financial condition.
We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property, withholding and franchise taxes in both the U.S. and various foreign jurisdictions. We are also subject to ongoing and/or regular reviews, examinations and audits by the U.S. Internal Revenue Service (“IRS”) and other taxing authorities with respect to such income and non-income based taxes inside and outside of the U.S. Our accruals for tax liabilities are based on past experience, interpretations of applicable law, and judgments about potential actions by tax authorities, but such accruals require significant judgment which may be incorrect and may result in payments greater than the amounts accrued. If the IRSInternal Revenue Service (“IRS”) or another taxing authority disagrees with our tax positions, we could face additional tax liabilities, including interest and penalties. Paymentpenalties, which could be material. For example, as disclosed in Note 20, as a result of additional amounts upon final settlement or adjudicationan audit by the IRS for fiscal years 2013 through 2015, in August 2022, we received a Revenue Agent’s Report that includes a proposed adjustment for the 2014 fiscal year relating to a series of any disputesreorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines. While we disagree with the position of the IRS and intend to contest it vigorously, an unfavorable resolution of this matter could have a material, adverse impact on our results of operations and financial position.Consolidated Financial Statements in future periods.
In addition, if jurisdictions in which we are directly and indirectly affected by newor our Concepts operate enact tax laws and regulation and the interpretation oflegislation, modify tax laws and regulations worldwide. Changes in laws, regulation treaties and/or interpretation of existing laws and regulations in the U.S. and other jurisdictions where we are subject to taxationincrease audit scrutiny, it could increase our taxes and have an adverse effect on our results of operations and financial condition. Changes in tax laws may arise as a result of tax policy guidance issued by the Organisation for Economic Co-operation and Development (“OECD”), a coalition of member nations including the United States. The OECD guidance, referred to as the Base Erosion and Profit Shifting (“BEPS”) Action Plan, does not have the force of law, but certain countries may enact tax legislation,
modify tax treaties, and/or increase audit scrutiny based on the BEPS guidance. To the extent BEPS principles are adopted by major jurisdictions in which we operate, it could increase our taxes and have a material adverse impact on our results of operations, growth prospects and financial position. WeFor example, the Organization for Economic Cooperation and Development (the “OECD”), the European Union and other countries (including countries in which we operate) have committed to enacting substantial changes to numerous long-standing tax principles impacting how large multinational enterprises are taxed in an effort to limit perceived base erosion and profit shifting incentives. In particular, the pastOECD’s Pillar Two initiative introduces a 15% global minimum tax applied on a country-by-country basis, for which many jurisdictions have now committed to an effective enactment date starting January 1, 2024. If these proposals are implemented in any jurisdictions in which we operate, they could negatively impact our effective tax rate as well as increase the tax compliance and may inreporting costs related to such requirements.
Risks Related to the future adapt our entity and operating structure in response to and in compliance with changes in tax laws, regulations, or interpretation of existing laws and regulations. Such restructurings could result in material incremental tax costs associated with restructuring transactions or operations of the structure. In addition, public perception that we are not paying a sufficient amount of taxes could damage our Concepts’ reputations, which could harm our profitability.Yum China Spin-Off
The Yum China spin-off and certain related transactions could result in substantial U.S. tax liability.
We received opinions of outside counsel substantially to the effect that, for U.S. federal income tax purposes, the Yum China spin-off and certain related transactions qualified as generally tax-free under Sections 355 and 361 of the U.S. Internal Revenue Code. The opinions relied on various facts and assumptions, as well as certain representations as to factual matters and undertakings (including with respect to future conduct) made by Yum China and us. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, we may not be able to rely on these opinions of outside counsel. Accordingly, notwithstanding receipt of the opinions of outside counsel, the conclusions reached in the tax opinions may be challenged by the IRS. Because the opinions are not binding on the IRS or the courts, there can be no assurance that the IRS or the courts will not prevail in any such challenge.
If, notwithstanding receipt of any opinion, the IRS were to conclude that the Yum China spin-off was taxable, in general, we would recognize taxable gain as if we had sold the Yum China common stock in a taxable sale for its fair market value. In
addition, each U.S. holder of our Common Stock who received shares of Yum China common stock in connection with the spin-off transaction would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the shares of Yum China common stock received. That distribution would be taxable to each such U.S. stockholder as a dividend to the extent of our current and accumulated earnings and profits.profits as of the date of the spin-off. For each such U.S. stockholder, any amount that exceeded our earnings and profits would be treated first as a non-taxable return of capital to the extent of such stockholder’s tax basis in our shares of Common Stock with any remaining amount being taxed as a capital gain.
The Yum China spin-off may be subject to China’s indirect transfer tax.
In February 2015, the Chinese State Tax Administration of Taxation (“SAT”STA”) issued the Bulletin on Several Issues of Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-resident Enterprises (“Bulletin 7”). Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a China resident enterprise (“Chinese interests”), by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. Using general anti-tax avoidance provisions, the SATSTA may treat an indirect transfer as a direct transfer of Chinese interests if the transfer has avoided Chinese tax by way of an arrangement without reasonable commercial purpose. As a result, gains derived from such indirect transfer may be subject to Chinese enterprise income tax, and the transferee or other person who is obligated to pay for the transfer would be obligated to withhold the applicable taxes, currently at a rate of up to 10% of the capital gain in the case of an indirect transfer of equity interests in a China resident enterprise.
We evaluated the potential applicability of Bulletin 7 in connection with the Separation in the form of a tax free restructuring and continue to believe it is more likely than not that Bulletin 7 does not apply. We believeapply and that the restructuring hashad reasonable commercial purpose.
However, there are significant uncertainties regardingon what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the Chinese tax authorities will ultimately view the spin-off. As a result, our position could be challenged by the Chinese tax authorities resulting in a tax at a rate of 10% assessed on the difference between the fair market value and the tax basis of Yum China.China at the date of the spin-off. As our tax basis in Yum China was minimal, the amount of such a tax could be significant and have a materialan adverse effect on our results of operations, growth prospects and our financial condition.
FailureRisks Related to protect our service marks or other intellectual property could harm our business.Consumer Discretionary Spending and Macroeconomic Conditions
We regard our Yum®, KFC®, Pizza Hut®, and Taco Bell® service marks, and other service marks and trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks in the U.S. and foreign jurisdictions. However, from time to time we become aware of names and marks identical or confusingly similar to our service marks being used by other persons. Although our policy is to oppose any such infringement,
further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which our Concepts have, or may in the future open or franchise, a restaurant, and the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. There can be no assurance that the steps we have taken to protect our intellectual property or the legal protections which may be available will be adequate, and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources or result in significant harm to our business, reputation, financial condition, and results of operations. We may also face claims of infringement that could interfere with the use of the proprietary know-how, recipes, or trade secrets used in our business. Defending against such claims may be costly, and we may be prohibited from using such proprietary information in the future or forced to pay damages, royalties, or other fees for using such proprietary information, any of which could negatively affect our business, reputation, financial condition, and results of operations.
Our business and/or our growth prospects may be adversely impacted by changes in consumer discretionary spending and general economic conditions.conditions in the various markets, including inflationary pressures.
Our and our franchisees' results of operations areAs a company dependent upon consumer discretionary spending, by consumers, which may be affected by general economicwe (and our Concepts’ franchisees) are sensitive to changes in or uncertainty regarding macroeconomic conditions globally or in one or more of the markets where we serve, and are susceptible to economic slowdowns and recessions.Concepts’ franchisees operate. Some of the factors that impact discretionary consumer spending include unemployment and underemployment rates, fluctuations in the level of disposable income, the price of gasoline, and other inflationary pressures, higher taxes, reduced access to credit, elevated interest rate levels, stock market performance and changes in the level of consumer confidence. TheseIn this regard, we and our Concepts’ franchisees have been adversely impacted by, and may continue to be adversely impacted by, negative macroeconomic conditions in markets where we and our Concepts’ franchisees operate, including impacts from increased commodity prices and other inflationary pressures, challenging labor market conditions, elevated interest rates, supply chain disruptions, and governmental restrictions implemented to mitigate against the pandemic. Any significant deterioration in current negative macroeconomic factorsconditions, or any recovery therefrom that is significantly slower than anticipated, could have an adverse effect on our business, growth prospects, financial conditions, or results of operations. In addition, negative macroeconomic conditions or other adverse business developments may result in future asset impairment charges. Moreover, if negative macroeconomic conditions result in significant disruptions to capital and financial markets, or negatively impact our franchisees’ sales, profitability or development plans, whichcredit ratings, our cost of borrowing, our ability to access capital on favorable terms and our overall liquidity and capital structure could harm our financial condition and operating results.be adversely impacted.
Risks Related to Competition
The retail food industry in which we operate is highly competitive.
Our ConceptConcepts’ restaurants compete with international, national and regional restaurant chains as well as locally-owned restaurants, and the retail food industry in which our Conceptswe operate is highly competitive with respect to price and quality of food products, new product development, digital engagement, advertising levels and promotional initiatives (including the frequent use by our competitors ofand price discounting such as through value meal menu options, coupons and other methods),initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. In addition, our Concepts compete within the retail food industry forproperties, management and hourly personnel suitable real estate sites, and qualified franchisees. IfMoreover, if we are unable to successfully respond to changing consumer or dietary preferences, change, if our marketing efforts and/or launch of new products are unsuccessful, or if our Concepts’ restaurants are unable to compete
successfully with other retail food outlets, in new and existing markets, our and our franchisees'Concepts’ franchisees’ businesses and/or our growth prospects could be adversely affected. In addition, the COVID-19 pandemic has also resulted in a change of consumer routines and behavior, and it is difficult to fully assess the impacts of such developments on us or our Concepts, or the extent to which any such consumer patterns may continue after the COVID-19 pandemic has ended. We also face growingongoing competition as a result ofdue to convergence in grocery, convenience, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly in urbanized areas, and is expected to continue to increase.increase, particularly in urbanized areas. Finally, not all of our competitors may seek to establish environmental or sustainability goals comparable to ours, which could result in lower supply chain or operating costs for our competitors. Increased competition and other competitive factors could have an adverse effect on sales, profitabilityour business or development plans, which could harm our or our franchisees’ financial condition and operating results.plans.
We may not realize the anticipated benefits from past or potential future acquisitions, investments or other strategic transactions.Risks Related to Our Indebtedness
From time to time we evaluate and may complete mergers, acquisitions, divestitures, joint ventures, strategic partnerships, minority investments (which may include minority investments in third parties, such as franchisees or master franchisees) and other strategic transactions, including our pending acquisition of The Habit Restaurants, Inc. (in respect of which a definitive agreement was signed in January 2020), our strategic alliance with Telepizza Group S.A. effectuated in December 2018, our acquisition of QuikOrder, LLC completed in December 2018 and our minority investment in Grubhub, Inc. completed in April 2018. While we currently contemplate that the acquisition of The Habit Restaurants, Inc. will be completed by the end of the first quarter of 2020, there is no guarantee that this acquisition will be completed on this time frame or at all.
Past and potential future strategic transactions may involve various inherent risks, including, without limitation:
expenses, delays or difficulties in integrating acquired companies, joint venture operations, strategic partnerships or investments into our organization, including the failure to realize expected synergies and/or the inability to retain key personnel;
diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy;
inability to generate sufficient revenue, profit, and cash flow from acquired companies, joint ventures, strategic partnerships or investments;
the possibility that we have acquired substantial contingent or unanticipated liabilities in connection with acquisitions or other strategic transactions; and
the possibility that investments we have made may decline significantly in value.
Past and potential future strategic transactions may not ultimately create value for us and may harm our reputation and materially adversely affect our business, financial condition and results of operations. In addition, we account for certain investments, including our investment in Grubhub, on a mark-to-market basis and, as a result, changes in the fair value of these investments impact our reported results. Changes in market prices for equity securities are unpredictable, and our investment in Grubhub has caused, and could continue to cause, significant fluctuations in our results of operations.
Our substantial indebtedness makes us more sensitive to adverse economic conditions, may limit our ability to plan for or respond to significant changes in our business, and requires a significant amount of cash to service our debt payment obligations that we may be unable to generate or obtain.
As of December 31, 2019,2022, our total outstanding short-term borrowings and long-term debt was approximately $10.6$11.9 billion. Subject to the limits contained in the agreements governing our outstanding indebtedness, we may incur additional debt from time to time, which would increase the risks related to our high level of indebtedness.
Specifically, our Our high level of indebtedness could have important potential consequences, including, but not limited to:
•increasing our vulnerability to, and reducing our flexibility to plan for and respond to, adverse economic and industry conditions and changes in our business and the competitive environment;
•requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, dividends, share repurchases or other corporate purposes;
•increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•placing us at a disadvantage compared to other less leveraged competitors or competitors with comparable debt at more favorable interest rates;
•increasing our exposure to the risk of increased interest rates insofar as current and future borrowings are subject to variable rates of interest;interest or we are forced to refinance indebtedness at higher interest rates, which risk is heightened by the current elevated interest rate environment;
•increasing our exposure to the risk of discontinuance, replacement or modification of certain reference rates, including LIBOR, which are used to calculate applicable interest rates of our indebtedness and certain derivative instruments that hedge interest rate risk;rates;
•making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
•limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing;
•imposing restrictive covenants on our operations as the result ofdue to the terms of our indebtedness, which, if not complied with, could result in an event of default, which in turn, if not cured or waived, could result in the acceleration of the applicable debt, and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies; and
•increasing our exposure to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around the world and our debt is primarily denominated in U.S. dollars.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other liquidity needs. If our business does not generate sufficient cash flow from operations or if future borrowingsdebt or equity financings are not available to us on acceptable terms in amounts sufficient to pay our indebtedness or to fund other liquidity needs, our financial condition and results of operations may be adversely affected. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a materialan adverse effect on our business, growth prospects and financial condition.
|
| | | | |
Item 1B. | Unresolved Staff Comments. |
The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 20192022 fiscal year and that remain unresolved.
As of year end 2019,2022, the Company’s Concepts owned land, building or both for 337322 restaurants worldwide in connection with the operation of our 913990 Company-owned restaurants. These restaurants are further detailed as follows:
•The KFC Division owned land, building or both for 7366 restaurants.
•The Taco Bell Division owned land, building or both for 254 restaurants.
•The Pizza Hut Division owned land, building or both for 52 restaurants.
The Taco Bell Division owned land, building or both for 259 restaurants.
The Company currently also owns land, building or both related to approximately 500 franchise restaurants that it leases to franchisees and leases land, building or both related to approximately 400250 franchise restaurants not included in the property counts above, that it leases or subleases to franchisees, principally in the U.S., United Kingdom, Australia Germany and France.Germany.
Company-owned restaurants in the U.S. with leases are generally leased for initial terms of 15 or10 to 20 years and generally have renewal options; however, Pizza Hut delivery/carryout units in the U.S. generally are leased for significantly shorter initial terms with shorter renewal options. Company-owned restaurants outside the U.S. with leases have initial lease terms and renewal options that vary by country.
The KFC Division and Pizza Hut Division corporate headquarters and a KFC and Pizza Hut research facility in Plano, Texas are owned by Pizza Hut. A leased building in Irvine, California contains the Taco Bell leases itsDivision and The Habit Burger Grill Division corporate headquarters and a Taco Bell research facility in Irvine, California.facility. The YUM corporate headquarters and a KFC research facility in Louisville, Kentucky are owned by KFC. Additional information about the Company’s properties is included in the Consolidated Financial Statements in Part II, Item 8.
The Company believes that its properties are generally in good operating condition and are suitable for the purposes for which they are being used.
|
| | | | |
Item 3. | Legal Proceedings. |
The Company is subject to various lawsuits covering a variety of allegations. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s annual results of operations, financial condition or cash flows. Matters faced by the Company include, but are not limited to, claims from franchisees, suppliers, employees, customers, governments and others related to operational, foreign exchange, tax, franchise, contractual or employment issues as well as claims that the Company has infringed on third-party intellectual property rights. In addition, the Company brings claims from time-to-time relating to infringement of, or challenges to, our intellectual property, including registered marks. Finally, as a publicly-traded company, disputes arise from time-to-time with our shareholders, including allegations that the Company breached federal securities laws or that officers and/or directors breached fiduciary duties. Descriptions of significant current specific claims and contingencies appear in Note 19,20, Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, which is incorporated by reference into this item.
|
| | | | |
Item 4. | Mine Safety Disclosures. |
Not applicable.
Executive Officers of the Registrant.
The executive officers of the Company as of February 19, 2020,24, 2023, and their ages and current positions as of that date are as follows:
David Gibbs, 56,59, is Chief Executive Officer of YUM a position he has held since January 2020. Prior to that, he served as President and Chief Operating Officer from August 2019 to December 2019, as President, Chief Financial Officer and Chief Operating Officer from January 2019 to August 2019 and as President and Chief Financial Officer from May 2016 to December 2018. Prior to these positions, he served as Chief Executive Officer of Pizza Hut Division from January 2015 to April 2016. From January 2014 to December 2014, Mr. Gibbs served as President of Pizza Hut U.S. Prior to this position, Mr. Gibbs served as President and Chief Financial Officer of Yum! Restaurants International, Inc. (“YRI”) from May 2012 through December
2013. Mr. Gibbs served as Chief Financial Officer of YRI from January 2011 to April 2012. He was Chief Financial Officer of Pizza Hut U.S. from September 2005 to December 2010.
Scott Catlett 43,, 46, is General CounselChief Legal and Franchise Officer and Corporate Secretary of YUM. He has severedserved in this position since July 2018.2020. Prior to servingthat, he served as General Counsel and Corporate Secretary of YUM from July 2018 to June 2020 and he served as Vice President and Deputy General Counsel of YUM from November 2015 to June 2018. From September 2007 to October 2015 Mr. Catlett held various YUM positions including Vice President & Associate General Counsel.
Mark King, 60,63, is Chief Executive Officer of Taco Bell Division, a position he has held since August 2019. Before joining YUM, Mr. King served as President, adidas Group North America from June 2014 to June 2018 and as Chief Executive Officer of TaylorMade-adidas Golf from 2003 to 2014.
Tony LowingsAaron Powell,, 61, 51, is Chief Executive Officer of KFCPizza Hut Division, a position he has held since January 2019. Prior to that, he served as President and Chief Operations Officer of KFC Division from August 2018 to December 2018. From November 2016 to July 2018 he served as Managing Director of Asia-Pacific and from February 2013 to October 2016 as Managing Director of KFC SOPAC (Australia and New Zealand).September 2021. Before joining YUM, Mr. LowingsPowell served in various positions including Chief Operations Officer of YRIat Kimberly-Clark from September 2007 to August 2021. Prior to joining Kimberly-Clark, he served in various positions at Bain & Company and Managing Director of Latin America and the Caribbean for KFC, Pizza Hut and Taco Bell and General Manager of KFC and Pizza Hut in Australia and New Zealand from January 2010 to January 2013.Proctor & Gamble.
David Russell, 50,53, is Senior Vice President, Finance and Corporate Controller of YUM. He has served as YUM'sYUM’s Corporate Controller since February 2011 and as Senior Vice President, Finance since February 2017. Prior to serving as Corporate Controller, Mr. Russell served in various positions at the Vice President level in the YUM Finance Department, including Controller-Designate from November 2010 to February 2011 and Vice President, Assistant Controller from January 2008 to December 2010.
Sabir Sami, 55, is Chief Executive Officer of KFC Division, a position he has held since January 2022. From January 2020 to December 2021 he served in a dual role as KFC Division Chief Operating Officer and Managing Director of KFC Asia. Prior to this, from April 2013 to December 2019, he was Managing Director for the KFC Middle East, North Africa, Pakistan and Turkey markets. Before joining YUM in 2009, Mr. Sami served in various leadership roles at Procter & Gamble, the Coca-Cola Company and Reckitt Benckiser.
Tracy Skeans, 47,50, is Chief TransformationOperating Officer and Chief People Officer of YUM. She has served as Chief Operating Officer since January 2021 and Chief People Officer since January 2016 and2016. She also served as Chief Transformation Officer sincefrom November 2016.2016 to December 2020. From January 2015 to December 2015, she was President of Pizza Hut International. Prior to this position, Ms. Skeans served as Chief People Officer of Pizza Hut Division from December 2013 to December 2014 and Chief People Officer of Pizza Hut U.S. from October 2011 to November 2013. From July 2009 to September 2011, she served as Director of Human Resources for Pizza Hut U.S and was on the Pizza Hut U.S. Finance team from September 2000 to June 2009.
Arthur Starrs, 43, is Chief Executive Officer of Pizza Hut Division, a position he has held since August 2019. He served as President of Pizza Hut U.S. from May 2016 to July 2019 and he served as General Manager and Chief Financial Officer of Pizza Hut U.S. from November 2013 to April 2016.
Christopher Turner, 45,48, is Chief Financial Officer of YUM, a position he has held since August 2019. Before joining YUM, he served as Senior Vice President and General Manager in PepsiCo’s retail and e-commerce businesses with Walmart in the U.S. and more than 25 countries and across PepsiCo’s brands from December 2017 to July 2019. Prior to leading PepsiCo’s Walmart business, he served in various positions including Senior Vice President of Transformation for PepsiCo’s Frito-Lay North America business from July 2017 to December 2017 and Senior Vice President of Strategy for Frito-Lay from February 2016 to June 2017. Prior to joining PepsiCo, he was a partner in the Dallas office of McKinsey & Company, a strategic management consulting firm.
Executive officers are elected by and serve at the discretion of the Board of Directors.
PART II
|
| | | | |
Item 5. | Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information and Dividend Policy
The Company’s Common Stock trades under the symbol YUM and is listed on the New York Stock Exchange ("NYSE"(“NYSE”).
As of February 12, 2020,17, 2023, there were 40,95835,943 registered holders of record of the Company’s Common Stock.
In 2019,2022, the Company declared and paid four cash dividends of $0.42$0.57 per share. OverIn February 2023, the long term,Company’s Board of Directors declared a dividend of $0.605 per share to be distributed March 10, 2023 to shareholders of record at the Company targets an annual dividend payout ratioclose of 45%business on February 22, 2023. Future decisions to 50%pay cash dividends continue to be at the discretion of Net Income, before Special Itemsthe Company’s Board of Directors and excluding mark-to-market adjustments related towill be dependent on our investment in Grubhub common stock.operating performance, financial condition, capital expenditure requirements and other factors that the Company’s Board of Directors considers relevant.
Issuer Purchases of Equity Securities
The following table provides information as of December 31, 2019,2022, with respect to shares of Common Stock repurchased by the Company during the quarter then ended.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Periods | | Total number of shares purchased (thousands) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (thousands) | | Approximate dollar value of shares that may yet be purchased under the plans or programs (millions) |
10/1/22 - 10/31/22 | | 2,037 | | $ | 110.44 | | | 2,037 | | $ | 2,011 | |
11/1/22 - 11/30/22 | | 935 | | $ | 123.82 | | | 935 | | $ | 1,895 | |
12/1/22 - 12/31/22 | | 1,124 | | $ | 129.30 | | | 1,124 | | $ | 1,750 | |
Total | | 4,096 | | $ | 118.67 | | | 4,096 | | |
|
| | | | | | | | | | | | |
Fiscal Periods | | Total number of shares purchased (thousands) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (thousands) | | Approximate dollar value of shares that may yet be purchased under the plans or programs (millions) |
10/1/19 - 10/31/19 | | 1,108 | | $ | 110.34 |
| | 1,108 | | $ | 507 |
|
11/1/19- 11/30/19 | | 2,140 | | $ | 98.63 |
| | 2,140 | | $ | 2,296 |
|
12/1/19 - 12/31/19 | | — | | $ | — |
| | — | | $ | 2,000 |
|
Total | | 3,248 | | | | 3,248 | |
|
|
On November 21, 2019,In May 2021, our Board of Directors authorized share repurchases from July 1, 2021 through June 2021December 31, 2022, of up to $2$2.0 billion (excluding applicable transaction fees) of our outstanding Common Stock. AsShares repurchased under this authorization during the quarter totaled $236 million and this authorization was exhausted as of December 31, 2019, we have remaining capacity to repurchase2022. In September 2022, our Board of Directors authorized share repurchases of up to $2$2.0 billion (excluding applicable transaction fees) of our outstanding Common Stock through June 30, 2024. The new authorization took effect during the fourth quarter of 2022 upon the exhaustion of the authorization approved in May 2021 and $250 million in shares were repurchased under this authorization. An August 2018 share repurchase authorization with unutilized share repurchase capacity of $296 million, expired onduring the quarter ended December 31, 2019.2022.
Stock Performance Graph
This graph compares the cumulative total return of our Common Stock to the cumulative total return of the S&P 500 Index and the S&P 500 Consumer Discretionary Sector Index, a peer group that includes YUM, for the period from December 31, 201430, 2017 to December 31, 2019.2022. The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 31, 201429, 2017, and that all cash dividends were reinvested.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/29/2017 | | 12/31/2018 | | 12/31/2019 | | 12/30/2020 | | 12/31/2021 | | 12/30/2022 |
YUM | | $ | 100 | | | $ | 115 | | | $ | 128 | | | $ | 140 | | | $ | 182 | | | $ | 171 | |
S&P 500 | | $ | 100 | | | $ | 96 | | | $ | 126 | | | $ | 149 | | | $ | 191 | | | $ | 157 | |
S&P Consumer Discretionary | | $ | 100 | | | $ | 101 | | | $ | 129 | | | $ | 172 | | | $ | 214 | | | $ | 135 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2014 | | 12/31/2015 | | 12/30/2016 | | 12/29/2017 | | 12/31/2018 | | 12/31/2019 |
YUM | | $ | 100 |
| | $ | 103 |
| | $ | 127 |
| | $ | 166 |
| | $ | 190 |
| | $ | 212 |
|
S&P 500 | | $ | 100 |
| | $ | 101 |
| | $ | 113 |
| | $ | 138 |
| | $ | 132 |
| | $ | 174 |
|
S&P Consumer Discretionary | | $ | 100 |
| | $ | 110 |
| | $ | 117 |
| | $ | 144 |
| | $ | 145 |
| | $ | 185 |
|
Source of total return data: Bloomberg
|
| | | | |
Item 6. | Selected Financial Data.[Reserved] |
Selected Financial Data
Yum! Brands, Inc. and Subsidiaries
(in millions, except per share and unit amounts)
|
| | | | | | | | | | | | | | | | | | | |
| |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Income Statement Data | | | | | | | | | |
Revenues | | | | | | | | | |
Company sales | $ | 1,546 |
| | $ | 2,000 |
| | $ | 3,572 |
| | $ | 4,189 |
| | $ | 4,336 |
|
Franchise and property revenues | 2,660 |
| | 2,482 |
| | 2,306 |
| | 2,167 |
| | 2,082 |
|
Franchise contributions for advertising and other services | 1,391 |
| | 1,206 |
| | — |
| | — |
| | — |
|
Total | 5,597 |
| | 5,688 |
| | 5,878 |
| | 6,356 |
| | 6,418 |
|
Refranchising (gain) loss | (37 | ) | | (540 | ) | | (1,083 | ) | | (163 | ) | | 23 |
|
Operating Profit | 1,930 |
| | 2,296 |
| | 2,761 |
| | 1,682 |
| | 1,434 |
|
Other pension (income) expense | 4 |
| | 14 |
| | 47 |
| | 32 |
| | 40 |
|
Interest expense, net | 486 |
| | 452 |
| | 445 |
| | 307 |
| | 141 |
|
Income from continuing operations before income taxes | 1,373 |
| | 1,839 |
| | 2,274 |
| | 1,345 |
| | 1,253 |
|
Income from continuing operations | 1,294 |
| | 1,542 |
| | 1,340 |
| | 1,018 |
| | 926 |
|
Income from discontinued operations, net of tax | N/A |
| | N/A |
| | N/A |
| | 625 |
| | 357 |
|
Net Income | 1,294 |
| | 1,542 |
| | 1,340 |
| | 1,643 |
| | 1,283 |
|
Basic earnings per share from continuing operations | 4.23 |
| | 4.80 |
| | 3.86 |
| | 2.58 |
| | 2.13 |
|
Basic earnings per share from discontinued operations | N/A |
| | N/A |
| | N/A |
| | 1.59 |
| | 0.82 |
|
Basic earnings per share | 4.23 |
| | 4.80 |
| | 3.86 |
| | 4.17 |
| | 2.95 |
|
Diluted earnings per share from continuing operations | 4.14 |
| | 4.69 |
| | 3.77 |
| | 2.54 |
| | 2.09 |
|
Diluted earnings per share from discontinued operations | N/A |
| | N/A |
| | N/A |
| | 1.56 |
| | 0.81 |
|
Diluted earnings per share | 4.14 |
| | 4.69 |
| | 3.77 |
| | 4.10 |
| | 2.90 |
|
Diluted earnings per share from continuing operations excluding Special Items | 3.55 |
| | 3.17 |
| | 2.96 |
| | 2.46 |
| | 2.31 |
|
Cash Flow Data | | | | | | | | | |
Provided by operating activities | $ | 1,315 |
| | $ | 1,176 |
| | $ | 1,030 |
| | $ | 1,248 |
| | $ | 1,260 |
|
Capital spending | 196 |
| | 234 |
| | 318 |
| | 427 |
| | 442 |
|
Proceeds from refranchising of restaurants | 110 |
| | 825 |
| | 1,773 |
| | 370 |
| | 213 |
|
Repurchase shares of Common Stock | 815 |
| | 2,390 |
| | 1,960 |
| | 5,403 |
| | 1,200 |
|
Dividends paid on Common Stock | 511 |
| | 462 |
| | 416 |
| | 744 |
| | 730 |
|
Balance Sheet Data | | | | | | | | | |
Total assets | $ | 5,231 |
| | $ | 4,130 |
| | $ | 5,311 |
| | $ | 5,453 |
| | $ | 4,939 |
|
Long-term debt | 10,131 |
| | 9,751 |
| | 9,429 |
| | 9,059 |
| | 2,988 |
|
Total debt | 10,562 |
| | 10,072 |
| | 9,804 |
| | 9,125 |
| | 3,908 |
|
Other Data | | | | | | | | | |
Number of units at year end | | | | | | | | | |
Franchise | 49,257 |
| | 47,268 |
| | 43,603 |
| | 40,834 |
| | 39,320 |
|
Company | 913 |
| | 856 |
| | 1,481 |
| | 2,841 |
| | 3,163 |
|
System | 50,170 |
| | 48,124 |
| | 45,084 |
| | 43,675 |
| | 42,483 |
|
System net new unit growth | 4 | % | | 7 | % | | 3 | % | | 3 | % | | 3 | % |
System and same-store sales | | | | | | | | | |
KFC Division System sales | $ | 27,900 |
| | $ | 26,239 |
| | $ | 24,515 |
| | $ | 23,242 |
| | $ | 22,628 |
|
System sales growth (decline) | 6 | % | | 7 | % | | 5 | % | | 3 | % | | (3 | )% |
System sales growth, ex FX and 53rd week | 9 | % | | 6 | % | | 6 | % | | 6 | % | | 5 | % |
Same-store sales growth | 4 | % | | 2 | % | | 3 | % | | 2 | % | | 1 | % |
Pizza Hut Division System sales | $ | 12,900 |
| | $ | 12,212 |
| | $ | 12,034 |
| | $ | 12,019 |
| | $ | 11,999 |
|
System sales growth (decline) | 6 | % | | 1 | % | | — | % | | — | % | | (1 | )% |
System sales growth, ex FX and 53rd week | 7 | % | | 1 | % | | 2 | % | | 1 | % | | 3 | % |
Same-store sales growth (decline) | — | % | | — | % | | — | % | | (2 | )% | | — | % |
Taco Bell Division System sales | $ | 11,784 |
| | $ | 10,786 |
| | $ | 10,145 |
| | $ | 9,660 |
| | $ | 9,102 |
|
System sales growth | 9 | % | | 6 | % | | 5 | % | | 6 | % | | 8 | % |
System sales growth, ex FX and 53rd week | 8 | % | | 6 | % | | 7 | % | | 5 | % | | 8 | % |
Same-store sales growth | 5 | % | | 4 | % | | 4 | % | | 2 | % | | 5 | % |
Shares outstanding at year end | 300 |
| | 306 |
| | 332 |
| | 355 |
| | 420 |
|
Cash dividends declared per common share | $ | 1.68 |
| | $ | 1.44 |
| | $ | 0.90 |
| | $ | 1.73 |
| | $ | 1.74 |
|
Market price per share at year end | $ | 100.73 |
| | $ | 91.92 |
| | $ | 81.61 |
| | $ | 63.33 |
| | $ | 73.05 |
|
The table above reflects the impact of the adoption of new lease accounting standards in fiscal year 2019. Refer to Note 2 in our Consolidated Financial Statements for information regarding our adoption of the new lease standards.
The table above reflects the impact of the adoption of new revenue recognition accounting standards in fiscal year 2018. Refer to Note 2 in our Consolidated Financial Statements for further information.
System sales growth measures in 2019 and System unit growth in 2018 reflects the addition of approximately 1,300 Telepizza units in December 2018. See Management's Discussion and Analysis ("MD&A") Part II, Item 7 for a description of the Telepizza strategic alliance.
Fiscal years for our U.S. and certain international subsidiaries that operate on a weekly periodic calendar include 52 weeks in 2018, 2017 and 2015 and 53 weeks in 2019 and 2016. Refer to Note 2 in our Consolidated Financial Statements for additional details related to our fiscal calendar, including the impact of the 53rd week on our results in 2019. In 2019, the 53rd week added $24 million to Operating Profit and $17 million to our Net Income. In 2016, the 53rd week added $28 million to Operating Profit.
Discontinued operations in 2016 and 2015 reflects the spin-off of our China business into an independent, publicly-traded company (the "Separation").
The historical stock price for year end 2015 does not reflect any adjustment for the impact of the Separation.
The non-GAAP measures of System sales growth, System sales growth excluding the impacts of foreign currency translation ("FX") and 53rd week and Diluted earnings per share from continuing operations excluding Special Items are discussed in further detail in our MD&A within Part II, Item 7.
Same-store sales growth and System net new unit growth are performance metrics and discussed in further detail in our MD&A within Part II, Item 7.
See discussion of our 2019, 2018 and 2017 Special Items in our MD&A. Special Items in 2016 positively impacted Operating Profit by $35 million and positively impacted Net Income by $33 million, primarily due to Refranchising gains, partially offset by $67 million in costs associated with YUM's Strategic Transformation Initiatives, $30 million in share-based compensation charges related to the Separation and $26 million due to costs associated with the KFC Acceleration Agreement. Additionally, in 2016, we incurred $26 million within Other Pension (income) expense primarily due to a settlement charge associated with an option for certain employees to voluntarily elect an early payout of their pension benefits. Special Items in 2015 negatively impacted Operating Profit by $91 million and negatively impacted Net Income by $95 million, due to costs associated with the KFC Acceleration Agreement and Refranchising losses.
Selected financial data for years 2016 and 2015 has been recast from that originally presented to present a change in our reporting calendar and the retroactive adoption of an accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost.
The selected financial data should be read in conjunction with the Consolidated Financial Statements.
|
| | | | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Introduction and Overview
The following Management’s Discussion and Analysis (“MD&A”), should be read in conjunction with the Consolidated Financial Statements (“Financial Statements”) in Item 8 and the Forward-Looking Statements and the Risk Factors set forth in Item 1A. All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding.
Yum! Brands, Inc. ("Company"and its subsidiaries (collectively referred to herein as the “Company”, “YUM”, "we"“we”, "us"“us” or "our"“our”) franchisesfranchise or operatesoperate a worldwide system of over 50,00055,000 restaurants in more than 150155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”). The Company’s KFC, Taco Bell (collectively, the "Concepts"). These three Conceptsand Pizza Hut brands are global leaders of the chicken, pizza and Mexican-style food and pizza categories, respectively. The Habit Burger Grill is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 50,00055,000 restaurants, 98% are operated by franchisees.
As of December 31, 2019,2022, YUM consists of threefour operating segments:
•The KFC Division which includes our worldwide operations of the KFC concept
•The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
•The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
•The Taco BellHabit Burger Grill Division which includes our worldwide operations of the Taco BellHabit Burger Grill concept
Through our Recipe for Good Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of digital and technology and better leverage of our systemwide scale.
Our Recipeglobal citizenship and sustainability strategy is reflected in our Good agenda, which includes our priorities for social responsibility, risk management and sustainable stewardship of our people, food and planet.
Our Growth agenda is based on four key drivers:
•Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success
•Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences
•Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion
•Bold Restaurant Development: Drive market and franchise expansion with strong economics and value
Our Recipe for Good reflects our global citizenship and sustainability strategy and practices, while reinforcing our public commitmentWe intend to drive socially responsiblelong-term growth risk management and sustainable stewardshipshareholder returns primarily through consistent same-store sales growth and new unit development across all of our food, planetConcepts. We intend to support this growth and people.
On October 11, 2016 YUM announced our transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands (“YUM's Strategic Transformation Initiatives”) following the spin-off of our China business into an independent publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). At this time, we established transformation goals that were met by the end of 2019 including becoming:
| |
• | More Focused. By focusing on four growth drivers similar to those that make up our Recipe for Growth above we accelerated system sales growth to 8% in 2019 (excluding the impacts of the 53rd week and foreign currency translation).
|
More Franchised. The Company successfully increased franchise restaurant ownership to 98% as of the end of 2018.
More Efficient. The Company revamped its financial profile, improving the efficiency of its organization and cost structure globally, by:
| |
• | Reducing annual capital expenditures associated with Company-operated restaurant maintenance and other projects and funded additional capital for new Company units through the refranchising of existing Company units. Capital spending in 2019 net of refranchising proceeds was $86 million.
|
Lowering General and administrative expenses ("G&A") to 1.7% of system sales in 2019; and
Maintaining an optimized capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) leverage.
From 2017 through 2019, we returned $6.5 billion to shareholders through share repurchases and cash dividends. We funded these shareholder returnsdevelopment through a combination of refranchising proceeds, free cash flow generationcapital and maintenance of our ~5.0xoperating structure that:
EBITDA leverage. We generated pre-tax proceeds of $2.8 billion through our refranchising initiatives to achieve targeted franchise ownership of 98%. Refer to the Liquidity and Capital Resources section of this MD&A for additional details.
Going forward, we expect to:
Maintain a capital structure of ~5.0x EBITDA leverage;
Invest•Invests capital in a manner consistent with an asset light, franchisor model; and
Allocate•Allocates G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives.initiatives;
•Pays a competitive dividend and returns excess cash to shareholders through share repurchases; and
•Targets a consolidated net leverage ratio that balances shareholder returns, cost of capital and flexibility against various risk factors.
We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company'sCompany’s performance. Throughout this MD&A, we commonly discuss the following performance metrics:
•Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more (except as noted below), including those temporarily closed. From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues. Throughout 2022, 2021 and 2020 we had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as a result of COVID-19. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts'Concepts’ existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends. In 2019,2021 and 2020, when calculating respective same-store sales growth we also included in our prior year base the sales of stores that were added as a result of the Telepizza strategic alliance in December 2018our acquisition of The Habit Restaurants, Inc. on March 18, 2020, and that were open for one year or more. See description of the Telepizza strategic alliance within this MD&A.
•Gross unit openings reflects new openings by us and our franchisees. Net new unit growth reflects newgross unit openings offset by permanent store closures, by us and our franchisees. To determine whether a restaurant meets the definition of a unit we consider factors such as whether the restaurant has operations that are ongoing and independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales. We believe gross unit openings and net new unit growth isare useful to investors because we depend on net new units for a significant portion of our growth. Additionally, gross unit openings and net new unit growth isare generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants.
Company restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales. Restaurant profit is useful to investors as it provides a measure of profitability for our Company-owned stores.
In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP"), the Company provides the following non-GAAP measurements.
•System sales, System sales excluding the impacts of foreign currency translation ("FX"(“FX”), and in 2019, System sales excluding FX and the impact of the 53rd week in 2019 for our U.S. subsidiaries andor certain international subsidiaries that operate on a weekly periodicperiod calendar. System sales includereflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants. Sales at franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Increasingly, customers are paying a fee to a third party to deliver or facilitate the ordering of our Concepts’ products. We also include in System sales any portion of the amount customers pay these third parties for which the third party is obligated to pay us a license fee as a percentage of such amount. Franchise restaurant sales and fees paid by customers to third parties to deliver or facilitate the ordering of our Concepts’ products are not included in Company sales on the Consolidated Statements of Income; however, theany resulting franchise and license fees derived from franchise restaurantswe receive are included in the Company’s revenues. We believe System sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our significantprimary revenue drivers, Company and franchise same-store sales as well as net unit growth.
As of the beginning of the second quarter of 2022, as a result of our progress towards exiting Russia and our decision to reclass future net profits attributable to Russia subsequent to the date of invasion from the Division segments in which those profits were earned to Unallocated Other income (see Notes 3 and 19), we elected to remove all Russia units from our unit count as well as to begin excluding those units’ associated sales from our system sales totals. We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut unit counts, respectively. These units were treated similar to permanent store closures for purposes of our same-store sales calculations and thus they were removed from our same-store sales calculations beginning April 1, 2022.
In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”), the Company provides the following non-GAAP measurements.
•Diluted Earnings Per Share excluding Special Items (as defined below);
•Effective Tax Rate excluding Special Items;
•Core Operating Profit and in 2019, Core Operating Profit excluding the impact of the 53rd week.week in 2019. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally.internally;
•Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below).
These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations.
Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special Items when assessing segment performance.
Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales (“Company restaurant margin %”) is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry.
Certain performance metrics and non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
For 2019 we provided Core Operating Profit excluding the impact of the 53rd week and System sales excluding FX and the impact of the 53rd week to further enhance the comparability given the 53rd week that was part of our fiscal calendar in 2019.
Results of Operations
Summary
All comparisons within this summary are versus the same period a year ago andago. Comparisons versus 2019, unless otherwise stated, include the impact of a 53rd week in 2019. For discussion of our results of operations for 20182021 compared to 2017,2020, refer to the Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2018,2021, filed with the SEC on February 21, 2019.23, 2022.
For 2019, GAAP diluted EPS decreased 12% to $4.14 per share, and diluted EPS, excluding Special Items, increased 12% to $3.55 per share.
20192022 financial highlights:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % Change |
| System Sales,
ex FX
| | Same-Store Sales | | Net New Units | | GAAP Operating Profit | | Core Operating Profit |
KFC Division | +10 | | +4 | | +7 | | +10 | | +14 |
Pizza Hut Division | +8 | | Even | | +1 | | +6 | | +8 |
Taco Bell Division | +9 | | +5 | | +4 | | +8 | | +8 |
Worldwide | +9 | | +3 | | +4 | | (16) | | +12 |
|
| System Sales, ex FX | | |
Same-Store Sales | Results Excluding 53rd Week in 2019
(% Change)
|
| System Sales, ex FXUnits | | GAAP Operating Profit | | Core Operating Profit |
KFC Division | +96 | | +134 | | +3 | | (3) | | +5 |
Taco Bell Division | +11 | | +8 | | +5 | | +12 | | +12 |
Pizza Hut Division | +73 | | Even | | +74 | | Even | | +4 |
Taco Bell DivisionWorldwide | +86 | | +4 | | +4 | | +2 | | +6 |
Worldwide | +8 | | +11 |
Additionally:
Adjusting•As of the prior year basebeginning of the second quarter, we elected to includeremove 1,165 Russia units addedfrom our unit count and begin excluding their associated sales from our total system sales. We removed 1,112 units and 53 units in Russia from our KFC and Pizza Hut units counts, respectively. As a result:
◦YUM and KFC Division year-over-year unit growth as a result of our fourth quarter 2018 strategic alliance with Telepizza,shown above were negatively impacted by two and four percentage points, respectively.
◦YUM and KFC Division system sales growth excluding the impacts of foreign currency translationas shown above were negatively impacted by two and 53rd week, would have been 7% and 2% for Worldwide and the Pizza Hut Division,three percentage points, respectively.
During the year,•Also, we opened 2,040elected to reclass future net new units for 4% net new unit growth.
During the year, we refranchised 25 restaurants and sold certain restaurant assets associated with existing franchise restaurantsprofits attributable to Russia subsequent to the franchisee for total pre-tax proceedsdate of $110 million. We recorded net refranchising gains of $37 million relatedinvasion from the Division segments in which those profits were earned to these transactions.Unallocated Other income and reflected such profits as a Special Item
During the year, we repurchased 7.8 million shares totaling $810 million at an average price of $104.
During the year, we recognized pre-tax expense of $77 million related to the change in fair valueas they are not indicative of our investmentongoing results. As a result of the decline in Grubhub, which resulted in a negative ($0.19) impactCore Operating Profits attributable to diluted EPS on the year.Russia:
◦YUM and KFC Division Core Operating Profit as shown above were negatively impacted by two and four percentage points, respectively.
•Foreign currency translation unfavorably impacted Divisional Operating Profit unfavorablyby $118 million for the year by $46 million.ended December 31, 2022.
Our effective tax rate for | | | | | | | | | | | | | | |
| | | | 2022 | 2021 | % Change |
GAAP EPS | | | | $4.57 | $5.21 | (12) |
Special Items EPS | | | | $0.06 | $0.75 | NM |
EPS Excluding Special Items | | | | $4.51 | $4.46 | +1 |
•In addition to the year was 5.7% andaforementioned factors impacting Operating Profit, our effective tax rate,diluted EPS, excluding Special Items, was 19.8%.also impacted by lower Investment income, net year over year. Investment income, net added approximately $0.03 and $0.26 to our diluted EPS, excluding Special Items for the years ended December 31, 2022 and 2021, respectively,
•Gross unit openings for the year were 4,560 units resulting in 3,076 net new units.
Worldwide
GAAP Results | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount | | % B/(W) |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Company sales | $ | 2,072 | | | $ | 2,106 | | | $ | 1,810 | | | (2) | | | | | 16 | | | |
Franchise and property revenues | 3,096 | | | 2,900 | | | 2,510 | | | 7 | | | | | 16 | | | |
Franchise contributions for advertising and other services | 1,674 | | | 1,578 | | | 1,332 | | | 6 | | | | | 18 | | | |
Total revenues | 6,842 | | | 6,584 | | | 5,652 | | | 4 | | | | | 16 | | | |
| | | | | | | | | | | | | |
Company restaurant expenses | $ | 1,745 | | | $ | 1,725 | | | $ | 1,506 | | | (1) | | | | | (15) | | | |
G&A expenses | 1,140 | | | 1,060 | | | 1,064 | | | (8) | | | | | — | | | |
Franchise and property expenses | 123 | | | 117 | | | 145 | | | (4) | | | | | 18 | | | |
Franchise advertising and other services expense | 1,667 | | | 1,576 | | | 1,314 | | | (6) | | | | | (20) | | | |
Refranchising (gain) loss | (27) | | | (35) | | | (34) | | | (22) | | | | | 2 | | | |
Other (income) expense | 7 | | | 2 | | | 154 | | | NM | | | | NM | | |
Total costs and expenses, net | 4,655 | | | 4,445 | | | 4,149 | | | (5) | | | | | (7) | | | |
Operating Profit | 2,187 | | | 2,139 | | | 1,503 | | | 2 | | | | | 42 | | | |
| | | | | | | | | | | | | |
Investment (income) expense, net | (11) | | | (86) | | | (74) | | | (88) | | | | | 16 | | | |
Other pension (income) expense | 9 | | | 7 | | | 14 | | | (26) | | | | | 48 | | | |
Interest expense, net | 527 | | | 544 | | | 543 | | | 3 | | | | | — | | | |
Income before income taxes | 1,662 | | | 1,674 | | | 1,020 | | | (1) | | | | 64 | | | |
Income tax provision | 337 | | | 99 | | | 116 | | | (242) | | | | | 15 | | | |
Net Income | $ | 1,325 | | | $ | 1,575 | | | $ | 904 | | | (16) | | | | | 74 | | | |
| | | | | | | | | | | | | |
Diluted EPS(a) | $ | 4.57 | | | $ | 5.21 | | | $ | 2.94 | | | (12) | | | | | 77 | | | |
Effective tax rate | 20.3 | % | | 5.9 | % | | 11.4 | % | | (14.4) | | | ppts. | | 5.5 | | | ppts. |
(a)See Note 4 for the number of shares used in this calculation.
|
| | | | | | | | | | | | | | | | | | | | | |
| Amount | | % B/(W) |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
Company sales | $ | 1,546 |
| | $ | 2,000 |
| | $ | 3,572 |
|
| (23 | ) | | | | (44 | ) | | |
Franchise and property revenues | 2,660 |
| | 2,482 |
| | 2,306 |
|
| 7 |
| | | | 8 |
| | |
Franchise contributions for advertising and other services | 1,391 |
| | 1,206 |
| | — |
| | 15 |
| | | | N/A |
| | |
Total revenues | $ | 5,597 |
| | $ | 5,688 |
| | $ | 5,878 |
|
| (2 | ) | | | | (3 | ) | | |
| | | | | | | | | | | | | |
Restaurant profit | $ | 311 |
| | $ | 366 |
| | $ | 618 |
|
| (15 | ) | | | | (41 | ) | | |
Restaurant margin % | 20.1 | % | | 18.3 | % | | 17.3 | % | | 1.8 |
| | ppts. | | 1.0 |
| | ppts. |
| | | | | | | | | | | | | |
G&A expenses | $ | 917 |
| | $ | 895 |
| | $ | 999 |
| | (2 | ) | | | | 10 |
| | |
Franchise and property expenses | 180 |
| | 188 |
| | 237 |
| | 4 |
| | | | 21 |
| | |
Franchise advertising and other services expense | 1,368 |
| | 1,208 |
| | — |
| | (13 | ) | | | | N/A |
| | |
Refranchising (gain) loss | (37 | ) | | (540 | ) | | (1,083 | ) | | (93 | ) | | | | (50 | ) | | |
Other (income) expense | 4 |
| | 7 |
| | 10 |
| | NM |
| | | | NM |
| | |
Operating Profit | $ | 1,930 |
| | $ | 2,296 |
| | $ | 2,761 |
|
| (16 | ) | | | | (17 | ) | | |
| | | | | | | | | | | | | |
Investment (income) expense, net | 67 |
| | (9 | ) | | (5 | ) | | NM |
| | | | 88 |
| | |
Other pension (income) expense | 4 |
| | 14 |
| | 47 |
| | 71 |
| | | | 70 |
| | |
Interest expense, net | 486 |
| | 452 |
| | 445 |
|
| (8 | ) | | | | (1 | ) | | |
Income tax provision | 79 |
| | 297 |
| | 934 |
|
| 74 |
| | | | 68 |
| | |
Net Income | $ | 1,294 |
| | $ | 1,542 |
| | $ | 1,340 |
|
| (16 | ) | | | | 15 |
| | |
| | | | | | | | | | | | | |
Diluted EPS(a) | $ | 4.14 |
| | $ | 4.69 |
| | $ | 3.77 |
|
| (12 | ) | | | | 24 |
| | |
Effective tax rate | 5.7 | % | | 16.2 | % | | 41.1 | % |
| 10.5 |
| | ppts. | | 24.9 |
| | ppts. |
| |
(a) | See Note 3 for the number of shares used in this calculation. |
Performance Metrics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % Increase (Decrease) |
Unit Count | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Franchise | 54,371 | | | 52,373 | | | 49,255 | | | 4 | | | 6 | |
Company-owned | 990 | | | 1,051 | | | 1,098 | | | (6) | | | (4) | |
Total | 55,361 | | | 53,424 | | | 50,353 | | | 4 | | | 6 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Same-Store Sales Growth (Decline) % | | 4 | | | 10 | | | (6) | |
System Sales Growth (Decline) %, reported | | 2 | | | 16 | | | (4) | |
System Sales Growth (Decline) %, excluding FX | | 6 | | | 13 | | | (4) | |
System Sales Growth (Decline) %, excluding FX and 53rd week | | N/A | | N/A | | (3) | |
Our system sales breakdown by Company and franchise sales was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year |
| | 2022 | | 2021 | | 2020 |
Consolidated | | | | | | |
Company sales(a) | | $ | 2,072 | | | $ | 2,106 | | | $ | 1,810 | |
Franchise sales | | 57,211 | | | 56,082 | | | 48,549 | |
System sales | | 59,283 | | | 58,188 | | | 50,359 | |
Foreign Currency Impact on System sales(b) | | (2,653) | | | 1,277 | | | N/A |
System sales, excluding FX | | $ | 61,936 | | | $ | 56,911 | | | $ | 50,359 | |
| | | | | | |
| | | | | | |
| | | | | | |
KFC Division | | | | | | |
Company sales(a) | | $ | 491 | | | $ | 596 | | | $ | 506 | |
Franchise sales | | 30,625 | | | 30,769 | | | 25,783 | |
System sales | | 31,116 | | | 31,365 | | | 26,289 | |
Foreign Currency Impact on System sales(b) | | (2,102) | | | 1,000 | | | N/A |
System sales, excluding FX | | $ | 33,218 | | | $ | 30,365 | | | $ | 26,289 | |
| | | | | | |
| | | | | | |
| | | | | | |
Taco Bell Division | | | | | | |
Company sales(a) | | $ | 1,002 | | | $ | 944 | | | $ | 882 | |
Franchise sales | | 13,651 | | | 12,336 | | | 10,863 | |
System sales | | 14,653 | | | 13,280 | | | 11,745 | |
Foreign Currency Impact on System sales(b) | | (52) | | | 17 | | | N/A |
System sales, excluding FX | | $ | 14,705 | | | $ | 13,263 | | | $ | 11,745 | |
| | | | | | |
| | | | | | |
| | | | | | |
Pizza Hut Division | | | | | | |
Company sales(a) | | $ | 21 | | | $ | 46 | | | $ | 76 | |
Franchise sales | | 12,832 | | | 12,909 | | | 11,879 | |
System sales | | 12,853 | | | 12,955 | | | 11,955 | |
Foreign Currency Impact on System sales(b) | | (499) | | | 260 | | | N/A |
System sales, excluding FX | | $ | 13,352 | | | $ | 12,695 | | | $ | 11,955 | |
| | | | | | |
| | | | | | |
| | | | | | |
Habit Burger Grill Division(c) | | | | | | |
Company sales(a) | | $ | 558 | | | $ | 520 | | | $ | 346 | |
Franchise sales | | 103 | | | 68 | | | 24 | |
System sales | | 661 | | | 588 | | | 370 | |
Foreign Currency Impact on System sales(b) | | — | | | — | | | N/A |
System sales, excluding FX | | $ | 661 | | | $ | 588 | | | $ | 370 | |
| | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | % Increase (Decrease) |
Unit Count | 2019 | | 2018 | | 2017 | | 2019 | | 2018(a) |
Franchise | 49,257 |
| | 47,268 |
| | 43,603 |
| | 4 | | 8 |
|
Company-owned | 913 |
| | 856 |
| | 1,481 |
| | 7 | | (42 | ) |
Total | 50,170 |
| | 48,124 |
| | 45,084 |
| | 4 | | 7 |
|
(a)Company sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income.
| |
(a) | 2018 unit growth includes units added as a result of our fourth quarter 2018 strategic alliance with Telepizza. |
(b)The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales prior to adjustment for the prior year FX impact.
(c)System sales for the Habit Burger Grill Division is shown since our March 18, 2020 acquisition date.
| | | | | | | | | | | | | | | | | | | | |
Non-GAAP Items | | | | | | |
| | | | | | |
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below. |
| | | | | | |
| | 2022 | | 2021 | | 2020 |
Core Operating Profit Growth % | | 6 | | | 18 | | | (8) | |
Core Operating Profit Growth %, excluding 53rd week | | N/A | | N/A | | (7) | |
Diluted EPS Growth %, excluding Special Items | | 1 | | | 23 | | | 2 | |
Effective Tax Rate excluding Special Items | | 20.8 | % | | 21.4 | % | | 15.9 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Company restaurant profit | | $ | 327 | | | $ | 381 | | | $ | 304 | |
Company restaurant margin % | | 15.8 | % | | 18.1 | % | | 16.8 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Year |
Detail of Special Items | | 2022 | | 2021 | | 2020 |
Refranchising gain (loss)(a) | | $ | 6 | | | $ | 3 | | | $ | 8 | |
Operating profit impact from decision to exit Russia(b) | | 44 | | | — | | | — | |
Charges associated with resource optimization (See Note 5) | | (11) | | | (9) | | | (36) | |
Impairment of Habit Burger Grill goodwill (See Note 5) | | — | | | — | | | (144) | |
Unlocking Opportunity Initiative contribution (See Note 5) | | — | | | — | | | (50) | |
COVID-19 relief contribution (See Note 5) | | — | | | — | | | (25) | |
Other Special Items Income (Expense) | | (1) | | | (3) | | | (20) | |
Special Items Income (Expense) - Operating Profit | | 38 | | | (9) | | | (267) | |
Charges associated with resource optimization - Other pension (expense) income (see Note 5) | | — | | | 1 | | | (2) | |
Interest expense, net (See Note 5) | | (28) | | | (34) | | | (34) | |
Special Items Income (Expense) before Income Taxes | | 10 | | | (42) | | | (303) | |
Tax (Expense) Benefit on Special Items(c) | | (3) | | | 17 | | | 65 | |
Tax Benefit - Intra-entity transfers and valuations of intellectual property(d) | | 82 | | | 251 | | | 28 | |
Tax (Expense) - Income tax impacts from decision to exit Russia(e) | | (72) | | | — | | | — | |
Special Items Income (Expense), net of tax | | $ | 17 | | | $ | 226 | | | $ | (210) | |
Average diluted shares outstanding | | 290 | | | 302 | | | 307 | |
Special Items diluted EPS | | $ | 0.06 | | | $ | 0.75 | | | $ | (0.68) | |
| | | | | | |
|
| | | | | | |
| | 2019 | | 2018 | | 2017 |
Same-Store Sales Growth % | | 3 | | 2 | | 2 |
(a)Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018. As such, refranchising gains and losses recorded as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018.
|
| | | | | | | | | |
Non-GAAP Items | | | | | | |
| | | | | | |
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below. |
| | | | | | |
| | 2019 | | 2018 | | 2017 |
System Sales Growth %, reported | | 7 |
| | 5 |
| | 4 |
|
System Sales Growth %, excluding FX | | 9 |
| | 5 |
| | 4 |
|
System Sales Growth %, excluding FX and 53rd week | | 8 |
| | N/A |
| | 5 |
|
Core Operating Profit Growth % | | 12 |
| | Even |
| | 7 |
|
Core Operating Profit Growth %, excluding 53rd week | | 11 |
| | N/A |
| | 9 |
|
Diluted EPS Growth %, excluding Special Items | | 12 |
| | 7 |
| | 20 |
|
Effective Tax Rate excluding Special Items | | 19.8 | % | | 20.4 | % | | 18.8 | % |
|
| | | | | | | | | | | | |
| | Year |
Detail of Special Items | | 2019 | | 2018 | | 2017 |
Refranchising gain (loss)(a) | | $ | 12 |
| | $ | 540 |
| | $ | 1,083 |
|
YUM's Strategic Transformation Initiatives (See Note 4) | | — |
| | (8 | ) | | (23 | ) |
Costs associated with Pizza Hut U.S. Transformation Agreement (See Note 4) | | (13 | ) | | (6 | ) | | (31 | ) |
Costs associated with KFC U.S. Acceleration Agreement (See Note 4) | | — |
| | (2 | ) | | (17 | ) |
Non-cash credits (charges) associated with share-based compensation (See Note 4) | | — |
| | 3 |
| | (18 | ) |
Other Special Items Income (Expense)(b) | | (10 | ) | | 3 |
| | 7 |
|
Special Items Income (Expense) - Operating Profit | | (11 | ) | | 530 |
| | 1,001 |
|
Special Items - Other Pension Income (Expense) (See Note 4) | | — |
| | — |
| | (23 | ) |
Interest expense, net(b) | | (2 | ) | | — |
| | — |
|
Special Items Income (Expense) before Income Taxes | | (13 | ) | | 530 |
| | 978 |
|
Tax Expense on Special Items(c) | | (30 | ) | | (96 | ) | | (256 | ) |
Tax Benefit - Intercompany transfer of intellectual property(d) | | 226 |
| | — |
| | — |
|
Tax Benefit (Expense) - U.S. Tax Act(e) | | — |
| | 66 |
| | (434 | ) |
Special Items Income, net of tax | | $ | 183 |
| | $ | 500 |
| | $ | 288 |
|
Average diluted shares outstanding | | 313 |
| | 329 |
| | 355 |
|
Special Items diluted EPS | | $ | 0.59 |
| | $ | 1.52 |
| | $ | 0.81 |
|
| | | | | | |
|
| | | | | | | | | | | | |
| | | | | | |
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week | | | | | | |
| | | | | | |
Consolidated | | | | | | |
GAAP Operating Profit | | $ | 1,930 |
| | $ | 2,296 |
| | $ | 2,761 |
|
Special Items Income (Expense) - Operating Profit | | (11 | ) | | 530 |
| | 1,001 |
|
Foreign Currency Impact on Divisional Operating Profit(f) | | (46 | ) | | 1 |
| | N/A |
|
Core Operating Profit | | 1,987 |
| | 1,765 |
| | 1,760 |
|
Impact of 53rd Week | | 24 |
| | N/A |
| | N/A |
|
Core Operating Profit, excluding 53rd Week | | $ | 1,963 |
| | $ | 1,765 |
| | $ | 1,760 |
|
| | | | | | |
KFC Division | | | | | | |
GAAP Operating Profit | | $ | 1,052 |
| | $ | 959 |
| | $ | 981 |
|
Foreign Currency Impact on Divisional Operating Profit(f) | | (39 | ) | | — |
| | N/A |
|
Core Operating Profit | | 1,091 |
| | 959 |
| | 981 |
|
Impact of 53rd Week | | 8 |
| | N/A |
| | N/A |
|
Core Operating Profit, excluding 53rd Week | | $ | 1,083 |
| | $ | 959 |
| | $ | 981 |
|
| | | | | | |
Pizza Hut Division | | | | | | |
GAAP Operating Profit | | $ | 369 |
| | $ | 348 |
| | $ | 341 |
|
Foreign Currency Impact on Divisional Operating Profit(f) | | (7 | ) | | 1 |
| | N/A |
|
Core Operating Profit | | 376 |
| | 347 |
| | 341 |
|
Impact of 53rd Week | | 3 |
| | N/A |
| | N/A |
|
Core Operating Profit, excluding 53rd Week | | $ | 373 |
| | $ | 347 |
| | $ | 341 |
|
| | | | | | |
Taco Bell Division | | | | | | |
GAAP Operating Profit | | $ | 683 |
| | $ | 633 |
| | $ | 619 |
|
Foreign Currency Impact on Divisional Operating Profit(f) | | — |
| | — |
| | N/A |
|
Core Operating Profit | | 683 |
| | 633 |
| | 619 |
|
Impact of 53rd Week | | 13 |
| | N/A |
| | N/A |
|
Core Operating Profit, excluding 53rd Week | | $ | 670 |
| | $ | 633 |
| | $ | 619 |
|
| | | | | | |
| | | | | | |
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items | | | | | | |
Diluted EPS | | $ | 4.14 |
| | $ | 4.69 |
| | $ | 3.77 |
|
Special Items Diluted EPS | | 0.59 |
| | 1.52 |
| | 0.81 |
|
Diluted EPS excluding Special Items | | $ | 3.55 |
| | $ | 3.17 |
| | $ | 2.96 |
|
| | | | | | |
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items | | | | | | |
GAAP Effective Tax Rate | | 5.7 | % | | 16.2 | % | | 41.1 | % |
Impact on Tax Rate as a result of Special Items(c)(d)(e) | | (14.1 | )% | | (4.2 | )% | | 22.3 | % |
Effective Tax Rate excluding Special Items | | 19.8 | % | | 20.4 | % | | 18.8 | % |
| | | | | | |
|
| | | | | | | | | | | | |
| | | | | | |
Reconciliation of GAAP Company sales to System sales, System sales, excluding FX and System sales, excluding FX and 53rd week | | | | | | |
| | | | | | |
Consolidated | | | | | | |
GAAP Company sales(g) | | $ | 1,546 |
| | $ | 2,000 |
| | $ | 3,572 |
|
Franchise sales | | 51,038 |
| | 47,237 |
| | 43,122 |
|
System sales | | 52,584 |
| | 49,237 |
| | 46,694 |
|
Foreign Currency Impact on System sales(h) | | (1,169 | ) | | 186 |
| | N/A |
|
System sales, excluding FX | | 53,753 |
| | 49,051 |
| | 46,694 |
|
Impact of 53rd week | | 454 |
| | N/A |
| | N/A |
|
System sales, excluding FX and 53rd Week | | $ | 53,299 |
| | $ | 49,051 |
| | $ | 46,694 |
|
| | | | | | |
KFC Division | | | | | | |
GAAP Company sales(g) | | $ | 571 |
| | $ | 894 |
| | $ | 1,928 |
|
Franchise sales | | 27,329 |
| | 25,345 |
| | 22,587 |
|
System sales | | 27,900 |
| | 26,239 |
| | 24,515 |
|
Foreign Currency Impact on System sales(h) | | (898 | ) | | 142 |
| | N/A |
|
System sales, excluding FX | | 28,798 |
| | 26,097 |
| | 24,515 |
|
Impact of 53rd week | | 167 |
| | N/A |
| | N/A |
|
System sales, excluding FX and 53rd Week | | $ | 28,631 |
| | $ | 26,097 |
| | $ | 24,515 |
|
| | | | | | |
Pizza Hut Division | | | | | | |
GAAP Company sales(g) | | $ | 54 |
| | $ | 69 |
| | $ | 285 |
|
Franchise sales | | 12,846 |
| | 12,143 |
| | 11,749 |
|
System sales | | 12,900 |
| | 12,212 |
| | 12,034 |
|
Foreign Currency Impact on System sales(h) | | (259 | ) | | 47 |
| | N/A |
|
System sales, excluding FX | | 13,159 |
| | 12,165 |
| | 12,034 |
|
Impact of 53rd week | | 103 |
| | N/A |
| | N/A |
|
System sales, excluding FX and 53rd Week | | $ | 13,056 |
| | $ | 12,165 |
| | $ | 12,034 |
|
| | | | | | |
Taco Bell Division | | | | | | |
GAAP Company sales(g) | | $ | 921 |
| | $ | 1,037 |
| | $ | 1,359 |
|
Franchise sales | | 10,863 |
| | 9,749 |
| | 8,786 |
|
System sales | | 11,784 |
| | 10,786 |
| | 10,145 |
|
Foreign Currency Impact on System sales(h) | | (12 | ) | | (3 | ) | | N/A |
|
System sales, excluding FX | | 11,796 |
| | 10,789 |
| | 10,145 |
|
Impact of 53rd week | | 184 |
| | N/A |
| | N/A |
|
System sales, excluding FX and 53rd Week | | $ | 11,612 |
| | $ | 10,789 |
| | $ | 10,145 |
|
| | | | | | |
| |
(a) | We have reflected as Special Items those refranchising gains and losses that were recorded in connection with or prior to our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018. As such, refranchising gains and losses recorded during 2019 as Special Items primarily include gains or losses associated with sales of underlying real estate associated with stores that were franchised as of December 31, 2018 or true-ups to refranchising gains and losses recorded prior to December 31, 2018. |
During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we recorded net refranchising gains of $12$6 million, $540$3 million and $1,083$8 million, respectively, that have been reflected as Special Items.
| |
(b) | In the second quarter of 2019 we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration |
associatedAdditionally, during the years ended December 31, 2022, 2021 and 2020, we recorded net refranchising gains of $21 million, $32 million and $26 million, respectively, that have not been reflected as Special Items. These gains relate to refranchising of restaurants that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity.
(b)In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia. We also suspended all operations of our 70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our 2013 acquisitionmaster franchisee. Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts. During the second quarter, we completed the transfer of ownership of the KFC Turkey and Pizza Hut Turkey businesses. Consistent withRussia business to a local operator who has initiated the process of re-branding locations to a non-YUM concept. In October 2022, we announced that we entered into a sale and purchase agreement to transfer ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of KFC franchised restaurants, to Smart Service Ltd., a business operated by one of our existing KFC franchisees in Russia. Under the agreement, the buyer will be responsible for re-branding locations to a non-YUM concept and retaining the Company’s employees in Russia. Completion of the transaction is subject to regulatory and governmental approvals, as well as other conditions. Following the completion of the transaction, we will have ceased our corporate presence in Russia.
Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for Pizza Hut, prior adjustments to the recorded contingent considerationdate of transfer, and KFC, for the entirety of the year ended December 31, 2022, within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we reclassed such resulting net profits from the Division segment results in which they were earned to Unallocated Other income. Additionally, we have incurred certain expenses related to the transfer of the businesses and other one-time costs related to our exit from Russia which we have recorded within Corporate and unallocated G&A and Unallocated Franchise and property expenses. Also recorded in Unallocated Other income were foreign exchange gains attributable to fluctuations in the value of the Russian ruble. The resulting net Operating Profit from these items of $44 million for the year ended December 31, 2022 has been reflected this as a Special Item.Item as the amount is not indicative of our ongoing results.
| |
(c) | Tax Expense on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items. Additionally, we increased our Income tax provision by $34 million in the fourth quarter of 2019 to record a reserve against and by $19 million in the second quarter of 2018 to correct an error related to the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item. |
(c)Tax (Expense) Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items. Additionally, during the year ended December 31, 2021, we also recorded as a Special Item an $8 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.
| |
(d) | During the year ended December 31, 2019 we completed intercompany transfers of certain intellectual property rights. As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom, we received a step-up in tax basis to current fair value under applicable tax law. To the extent this step-up in basis will be amortizable against future taxable income, we recognized a one-time deferred tax benefit of $226 million as a Special Item in the year ended December 31, 2019. See Note 17 for further discussion. |
(d)In December of 2019, we completed intra-entity transfers of certain intellectual property (“IP”) rights. As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom (“UK”), we received a step-up in tax basis to current fair value under applicable UK law, and to the extent this step-up in tax basis was amortizable against future taxable income, we recognized deferred tax assets. The associated deferred tax benefit was originally recognized as a Special Item in 2019.
| |
(e) | In 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") that was reported as a Special Item. We also recorded a Special Items tax benefit of $31 million in 2018 related to 2018 U.S. foreign tax credits that became realizable directly as a result of the impact of deemed repatriation tax expense associated with the Tax Act. We recognized $434 million in our 2017 Income tax provision that was reported as a Special Item as a result of the December 22, 2017 enactment of the Tax Act. |
On July 22, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%. As a result, we remeasured the related deferred tax assets originally recorded as described above and recognized an additional $25 million deferred tax benefit as a Special Item in the year ended December 31, 2020. Additionally, we recognized a related deferred tax benefit of $3 million as a result of an increase in the step-up in the tax basis as described above as a Special Item in the year ended December 31, 2020.
| |
(f) | The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit Growth percentages, the Core Operating Profit for the current year should be compared to the prior year Operating Profit, prior to adjustment for the prior year FX impact. |
On June 10, 2021, the UK Finance Act 2021 was enacted resulting in an increase in the UK corporate income tax rate from 19% to 25%. As a result, we remeasured the related deferred tax assets originally recorded as described above and recognized an additional $64 million deferred tax benefit as a Special Item in the year ended December 31, 2021.
| |
(g) | Company sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income. |
In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland (the “KC Europe Reorganization”). Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC IP rights from subsidiaries in the UK to subsidiaries in Switzerland. With the transfer of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a net, one-time benefit of $152 million as a Special Item in the year ended December 31, 2021.
| |
(h) | The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales prior to adjustment for the prior year FX impact. |
In December 2021, we continued our KFC Europe Reorganization and completed intra-entity transfers of additional European KFC IP rights from subsidiaries in the U.S. to subsidiaries in Switzerland. With the transfers of these additional
rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a net one-time tax benefit of $35 million as a Special Item in the year ended December 31, 2021.
In the quarter ended June 30, 2022, as a result of our decision to exit the Russia market, we recorded tax expense associated with the remeasurement of and establishment of a valuation allowance on a portion of the aforementioned deferred tax assets associated with the amortizable tax basis associated with the KFC IP rights held in Switzerland (see Note e). In the quarter ended December 31, 2022, we performed an annual valuation under Swiss laws of these Swiss IP rights, incorporating current assumptions around the expected future cash flows attributable to the IP. This valuation supported an increase to tax basis of Swiss IP rights associated with parts of our business that will continue to use these IP rights due to expected royalty growth assumptions in those parts of the business that largely offset the loss of the Russia royalty income associated with such IP rights. Based on this valuation as well as future forecasting of taxable income, we remeasured and reassessed the need for a valuation allowance on the deferred tax assets associated with the Swiss IP. As a result, we recorded a net tax benefit of $82 million as a Special Item in the quarter ended December 31, 2022.
(e)Our decision to exit the Russia market in the quarter ended June 30, 2022, resulted in a reduction in the tax basis of KFC IP rights held in Switzerland due to the expected loss of the Russia royalty income associated with such rights going forward. As a result, we remeasured and reassessed the need for a valuation allowance on the associated deferred tax assets. In addition, we reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the existing basis difference will now reverse by way of sale. Primarily as a result of these items, we recorded a net tax expense of $72 million in the year ended December 31, 2022, that was reflected as a Special Item.
| | | | | | | | | | | | | | | | | | | | |
Reconciliation of GAAP Operating Profit to Core Operating Profit | | Year |
| | 2022 | | 2021 | | 2020 |
Consolidated | | | | | | |
GAAP Operating Profit | | $ | 2,187 | | | $ | 2,139 | | | $ | 1,503 | |
Special Items Income (Expense) - Operating Profit | | 38 | | | (9) | | | (267) | |
Foreign Currency Impact on Divisional Operating Profit(a) | | (118) | | | 54 | | | N/A |
Core Operating Profit | | $ | 2,267 | | | $ | 2,094 | | | $ | 1,770 | |
| | | | | | |
| | | | | | |
| | | | | | |
KFC Division | | | | | | |
GAAP Operating Profit | | $ | 1,198 | | | $ | 1,230 | | | $ | 922 | |
Foreign Currency Impact on Divisional Operating Profit(a) | | (98) | | | 45 | | | N/A |
Core Operating Profit | | $ | 1,296 | | | $ | 1,185 | | | $ | 922 | |
| | | | | | |
| | | | | | |
| | | | | | |
Taco Bell Division | | | | | | |
GAAP Operating Profit | | $ | 850 | | | $ | 758 | | | $ | 696 | |
Foreign Currency Impact on Divisional Operating Profit(a) | | (2) | | | 1 | | | N/A |
Core Operating Profit | | $ | 852 | | | $ | 757 | | | $ | 696 | |
| | | | | | |
| | | | | | |
| | | | | | |
Pizza Hut Division | | | | | | |
GAAP Operating Profit | | $ | 387 | | | $ | 387 | | | $ | 335 | |
Foreign Currency Impact on Divisional Operating Profit(a) | | (18) | | | 8 | | | N/A |
Core Operating Profit | | $ | 405 | | | $ | 379 | | | $ | 335 | |
| | | | | | |
Habit Burger Grill Division | | | | | | |
GAAP Operating Profit (Loss) | | $ | (24) | | | $ | 2 | | | $ | (22) | |
Foreign Currency Impact on Divisional Operating Profit(a) | | — | | | — | | | N/A |
Core Operating Profit (Loss) | | $ | (24) | | | $ | 2 | | | $ | (22) | |
| | | | | | |
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items | | | | | | |
Diluted EPS | | $ | 4.57 | | | $ | 5.21 | | | $ | 2.94 | |
Special Items Diluted EPS | | 0.06 | | | 0.75 | | | (0.68) | |
Diluted EPS excluding Special Items | | $ | 4.51 | | | $ | 4.46 | | | $ | 3.62 | |
| | | | | | |
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items | | | | | | |
GAAP Effective Tax Rate | | 20.3 | % | | 5.9 | % | | 11.4 | % |
Impact on Tax Rate as a result of Special Items | | (0.5) | % | | (15.5) | % | | (4.5) | % |
Effective Tax Rate excluding Special Items | | 20.8 | % | | 21.4 | % | | 15.9 | % |
| | | | | | |
(a)The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit growth percentages, the Core Operating Profit for the current year should be compared to the prior year GAAP Operating Profit adjusted only for any prior year Special Items Income (Expense).
Reconciliation of GAAP Operating Profit to Company Restaurant Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | KFC Division | | Taco Bell Division | | Pizza Hut Division | | Habit Burger Grill Division | | Corporate and Unallocated | | Consolidated |
GAAP Operating Profit (Loss) | | $ | 1,198 | | | $ | 850 | | | $ | 387 | | | $ | (24) | | | $ | (224) | | | $ | 2,187 | |
Less: | | | | | | | | | | | | |
Franchise and property revenues | | 1,645 | | | 837 | | | 607 | | | 7 | | | — | | | 3,096 | |
Franchise contributions for advertising and other services | | 698 | | | 598 | | | 376 | | | 2 | | | — | | | 1,674 | |
Add: | | | | | | | | | | | | |
General and administrative expenses | | 390 | | | 191 | | | 211 | | | 51 | | | 297 | | | 1,140 | |
Franchise and property expenses | | 69 | | | 33 | | | 13 | | | 2 | | | 6 | | | 123 | |
Franchise advertising and other services expense | | 684 | | | 599 | | | 382 | | | 2 | | | — | | | 1,667 | |
Refranchising (gain) loss | | — | | | — | | | — | | | — | | | (27) | | | (27) | |
Other (income) expense | | 67 | | | (2) | | | (10) | | | 4 | | | (52) | | | 7 | |
Company restaurant profit | | $ | 65 | | | $ | 236 | | | $ | — | | | $ | 26 | | | — | | | $ | 327 | |
Company sales | | $ | 491 | | | $ | 1,002 | | | $ | 21 | | | $ | 558 | | | — | | | $ | 2,072 | |
Company restaurant margin % | | 13.2 | % | | 23.6 | % | | (2.2) | % | | 4.7 | % | | N/A | | 15.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | KFC Division | | Taco Bell Division | | Pizza Hut Division | | Habit Burger Grill Division | | Corporate and Unallocated | | Consolidated |
GAAP Operating Profit (Loss) | | $ | 1,230 | | | $ | 758 | | | $ | 387 | | | $ | 2 | | | $ | (238) | | | $ | 2,139 | |
Less: | | | | | | | | | | | | |
Franchise and property revenues | | 1,557 | | | 742 | | | 597 | | | 4 | | | — | | | 2,900 | |
Franchise contributions for advertising and other services | | 640 | | | 552 | | | 385 | | | 1 | | | — | | | 1,578 | |
Add: | | | | | | | | | | | | |
General and administrative expenses | | 377 | | | 174 | | | 201 | | | 48 | | | 260 | | | 1,060 | |
Franchise and property expenses | | 74 | | | 33 | | | 11 | | | — | | | (1) | | | 117 | |
Franchise advertising and other services expense | | 627 | | | 553 | | | 395 | | | 1 | | | — | | | 1,576 | |
Refranchising (gain) loss | | — | | | — | | | — | | | — | | | (35) | | | (35) | |
Other (income) expense | | (5) | | | 1 | | | (9) | | | 1 | | | 14 | | | 2 | |
Company restaurant profit | | $ | 106 | | | $ | 225 | | | $ | 3 | | | $ | 47 | | | $ | — | | | $ | 381 | |
Company sales | | $ | 596 | | | $ | 944 | | | $ | 46 | | | $ | 520 | | | $ | — | | | $ | 2,106 | |
Company restaurant margin % | | 17.7 | % | | 23.9 | % | | 6.8 | % | | 9.0 | % | | N/A | | 18.1 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | KFC Division | | Taco Bell Division | | Pizza Hut Division | | Habit Burger Grill Division | | Corporate and Unallocated | | Consolidated |
GAAP Operating Profit (Loss) | | $ | 922 | | | $ | 696 | | | $ | 335 | | | $ | (22) | | | $ | (428) | | | $ | 1,503 | |
Less: | | | | | | | | | | | | |
Franchise and property revenues | | 1,295 | | | 662 | | | 552 | | | 1 | | | — | | | 2,510 | |
Franchise contributions for advertising and other services | | 471 | | | 487 | | | 374 | | | — | | | — | | | 1,332 | |
Add: | | | | | | | | | | | | |
General and administrative expenses | | 346 | | | 158 | | | 215 | | | 33 | | | 312 | | | 1,064 | |
Franchise and property expenses | | 91 | | | 33 | | | 17 | | | — | | | 4 | | | 145 | |
Franchise advertising and other services expense | | 465 | | | 484 | | | 365 | | | — | | | — | | | 1,314 | |
Refranchising (gain) loss | | — | | | — | | | — | | | — | | | (34) | | | (34) | |
Other (income) expense | | 9 | | | 3 | | | (3) | | | (1) | | | 146 | | | 154 | |
Company restaurant profit | | $ | 67 | | | $ | 225 | | | $ | 3 | | | $ | 9 | | | $ | — | | | $ | 304 | |
Company sales | | $ | 506 | | | $ | 882 | | | $ | 76 | | | $ | 346 | | | $ | — | | | $ | 1,810 | |
Company restaurant margin % | | 13.2 | % | | 25.5 | % | | 5.1 | % | | 2.6 | % | | N/A | | 16.8 | % |
| | | | | | | | | | | | |
Items Impacting Reported Results and/or ExpectedReasonably Likely to Impact Future Results
The following items impacted reported results in 20192022 and/or 20182021 and/or are expectedreasonably likely to impact future results. See also the Detail of Special Items section of this M&DAMD&A for other items similarly impacting results.
Extra Week in 2019
Russia Invasion of Ukraine
Fiscal 2019 included
In the first quarter of 2022, as a 53rd week forresult of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia. We also suspended all operations of our U.S.70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our master franchisee. Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts. During the second quarter, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator who has initiated the process of re-branding locations to a non-YUM concept. In October 2022, we announced that we entered into a sale and purchase agreement to transfer ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of KFC franchised restaurants, to Smart Service Ltd., a business operated by one of our existing KFC franchisees in Russia. Under the agreement, the buyer will be responsible for re-branding locations to a non-YUM concept and retaining the Company’s employees in Russia. Completion of the transaction is subject to regulatory and governmental approvals, as well as other conditions agreed to by the parties. Following the completion of the transaction, we will have ceased our corporate presence in Russia.
As of the beginning of the second quarter of 2022, we elected to remove all Russia units from our unit count and their associated sales from our total system sales. We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut units counts, respectively. This negatively impacted YUM and KFC Division year-over-year unit growth by two and four percentage points, respectively at December 31, 2022. This also negatively impacted our system sales growth excluding foreign currency for YUM and KFC Division by two and three percentage points, respectively, during the year ended December 31, 2022. Russia units were removed from our same-store sales calculations as of the beginning of the second quarter.
Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for Pizza Hut, prior to the date of transfer, and KFC, for the entirety of the year ended December 31, 2022, within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we reclassed such resulting net profits from the Division segment results in which they were earned to Unallocated Other income and reflected such net profits as a Special Item. Additionally, we have incurred certain international subsidiaries that operate on a period calendar. See Note 2 for additional detailsexpenses related to the transfer of the businesses and other costs related to our fiscal calendar.exit from Russia which we have recorded within Corporate and unallocated. The following table summarizes the estimated impactresulting net Operating
Profit of the 53rdweek on Revenues and Operating Profit$44 million for the year ended December 31, 2019. The 53rd week in 2019 favorably impacted Diluted EPS by $0.05 per share.
|
| | | | | | | | | | | | | | | |
| KFC Division | | Pizza Hut Division | | Taco Bell Division | | Total |
Revenues | | | | | | | |
Company sales | $ | 8 |
| | $ | 1 |
| | $ | 15 |
| | $ | 24 |
|
Franchise and property revenues | 9 |
| | 5 |
| | 10 |
| | 24 |
|
Franchise contributions for advertising and other services | 5 |
| | 5 |
| | 8 |
| | 18 |
|
Total revenues | $ | 22 |
| | $ | 11 |
| | $ | 33 |
| | $ | 66 |
|
| | | | | | | |
Operating Profit | | | | | | | |
Franchise and property revenues | $ | 9 |
| | $ | 5 |
| | $ | 10 |
| | $ | 24 |
|
Franchise contributions for advertising and other services | 5 |
| | 5 |
| | 8 |
| | 18 |
|
Restaurant profit | 1 |
| | — |
| | 5 |
| | 6 |
|
Franchise and property expenses | — |
| | (1 | ) | | — |
| | (1 | ) |
Franchise for advertising and other services expenses | (5 | ) | | (5 | ) | | (8 | ) | | (18 | ) |
G&A expenses | (2 | ) | | (1 | ) | | (2 | ) | | (5 | ) |
Operating Profit | $ | 8 |
| | $ | 3 |
| | $ | 13 |
| | $ | 24 |
|
Impact of Coronavirus Outbreak
Since2022 has been reflected as a Special Item as the beginning of 2020, the novel coronavirus outbreak in mainland China has significantly impacted the operationsamount is not indicative of our largest master franchisee, Yum China, who pays us a continuing fee ofongoing results.
Historically, our Russian business has constituted approximately 3% on system sales of our Concepts in mainland China. These continuing fees represented approximately 20%total Operating Profit and 2% of the KFC Division and 16% of the PH Division operating profits inour total system sales. During the year ended December 31, 2019. Through2022, our Core Operating Profits in Russia declined versus the dateprior year, negatively impacting YUM and KFC Division Core Operating Profit growth by two and four percentage points, respectively. Our Core Operating Profit growth in the first and second quarters of 2023 will also be negatively impacted as we lap the 2022 Russia results that remained in Core Operating Profit. We expect YUM and KFC Division Core Operating Profit growth to be negatively impacted by approximately one and two percentage points, respectively, in both the first and second quarters of 2023 due to this lap.
Impact of Foreign Currency Translation on Operating Profit
Changes in foreign currency exchange rates negatively impacted the translation of our foreign currency denominated Divisional Operating Profit by $118 million for the year ended December 31, 2022. This included a negative impact to our KFC Division Operating Profit of $98 million for the year ended December 31, 2022. For 2023, we currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $30 to $40 million, primarily in the first half of the filingyear.
COVID-19
In late 2019, a novel strain of this Form 10-K, Yum China hascoronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. As a result of COVID-19, governmental authorities around the world implemented measures to reduce the spread of COVID-19. These measures have included, and in some instances continue to include, restrictions on travel outside the home and limitations on business and other activities as well as encouraging social distancing. As a result of COVID-19, we and our franchisees experienced widespreadsignificant store closures and significant sales declines as a resultinstances of the coronavirus. Additionally, other nearby franchisees, such as those in Hong Kongreduced store-level operations, including reduced operating hours and Taiwan, have experienced significant sales declines as well. While our Concepts outside of China have not experienced the same levels of same-store sales declines or store closures to date that Yum China has experienced, there can be no assurance that the impacts of the coronavirus will not have a material, adversedining-room closures. The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities to reduce the spread of COVID-19, as well as our reliance on dine-in sales in the market.
Throughout 2022, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in China. Excluding China, our YUM same-store sales growth was 7% and our franchisees’ results on a more widespread basis. KFC Division same-store sales growth was 9% for the year ended December 31, 2022.
The coronavirusCOVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company’s 2023 results.
Investment in Devyani
In 2020, results with any certainty. However, aswe received an approximate 5% minority interest in Devyani International Limited (“Devyani”), an entity that owns our KFC India and Pizza Hut India master franchisee rights. The minority interest was received in lieu of cash proceeds upon the refranchising of approximately 60 KFC restaurants in India. At the time of the daterefranchisings, the fair value of this filing we expect our results for the quarter ending March 31, 2020minority interest was estimated to be significantly impacted with potential continuing, adverse impacts beyond March 31, 2020.
Pizza Hut U.S. Franchisee Issues
Duringapproximately $31 million. On August 16, 2021, Devyani executed an initial public offering and subsequently the year ended December 31, 2019 the Pizza Hut Division recorded $22 million in bad debt expense primarily associatedfair value of this investment became readily determinable. As a result, concurrent with the nearly $600initial public offering we began recording changes in fair value in Investment (income) expense, net in our Consolidated Statements of Income and recognized pre-tax investment income of $11 million in continuing and initial fees earned$87 million, in 2019 from franchisees. This represented an increase of $12 million versus the bad debt provision within the Division for the year ended December 31, 2018. The increased bad debt was largely attributable to a small number of U.S. franchisees who are facing financial challenges due to unit-level economics that have been pressured by wage increases and recent U.S. same-store sales declines of 1% in 2019, including a decline of 4% in the fourth quarter of 2019. Additionally, certain Pizza Hut U.S. franchisees are burdened by high debt service levels.
We continue to believe that the move of the Pizza Hut U.S. system to a more delivery-focused and modern estate will optimize our ability to grow the Pizza Hut U.S. system going forward. However, we could see impacts to our near-term results as we work through transitions of the estate and of certain franchise stores to new franchisees. These impacts could include expense related to further bad debts and payments we may be required to make with regard to franchisee lease obligations for which we remain secondarily liable. Additionally, Pizza Hut U.S. system sales could be negatively impacted by decreased system advertising spend due to lower franchisee contributions and closures of underperforming units, including certain units that are largely dine-in focused. Given the fluid nature of issues surrounding our Pizza Hut U.S. franchisees, in particular surrounding our largest Pizza Hut U.S. franchisee who owns approximately 1,225 units or 17% of the Pizza Hut U.S. system as of December 31, 2019, the potential impact to the Company’s 2020 results is difficult to forecast.
Refranchising Initiatives
During the years ended December 31, 2019, 20182022 and 2017, we recorded net refranchising gains of $37 million, $540 million and $1,083 million,2021, respectively. We have reflected those refranchising gains and losses that were recorded in connection with or prior to our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018 as Special Items. In
2019 net refranchising gains reflected as Special Items included $12 million associated with sales of underlying real estate associated with stores that were franchised as of December 31, 2018 or true-ups to refranchising gains and losses recorded prior to December 31, 2018. All net refranchising gains recorded in 2018 and 2017 were reflected as Special Items.
Additionally, during the year ended December 31, 2019 we recorded net refranchising gains of $25 million that have not been reflected as Special Items. These net gains relate to the refranchising of restaurants in 2019 that were not part of and arose subsequent to our aforementioned plans to achieve 98% franchise ownership.
Investment in Grubhub
For the years ended December 31, 2019 and 2018 we recognized pre-tax expense of $77 million and pre-tax income of $14 million, respectively, related to changes in fair value in our investment in Grubhub, Inc. ("Grubhub"). See Note 4 for further discussion of our investment in Grubhub.
Telepizza Strategic Alliance
On December 30, 2018, the Company consummated a strategic alliance with Telepizza Group S.A. (“Telepizza”), the largest non U.S.-based pizza delivery company in the world, to be the master franchisee of Pizza Hut in Latin America and portions of Europe. The key terms of the alliance are set forth below:
In Spain and Portugal Telepizza will continue operating the Telepizza brand and will oversee franchisees operating Pizza Hut branded restaurants
In Latin America (excluding Brazil), the Caribbean and Switzerland, Telepizza will progressively convert its existing restaurants to the Pizza Hut brand and oversee franchisees operating Pizza Hut branded restaurants
Telepizza will manage supply chain logistics for the entire master franchise territory and will become an authorized supplier of Pizza Hut branded restaurants
Across the regions covered by the master franchise agreement, Telepizza will target opening at least 1,300 new units over the next ten years and 2,550 units in total over 20 years
As a result of the alliance we added approximately 1,300 Telepizza units to our Pizza Hut Division unit count on December 30, 2018. In total approximately 2,300 Pizza Hut and Telepizza units are subject to the master franchise agreement as of December 31, 2019.
Based upon our ongoing and active maintenance of the Pizza Hut intellectual property as well as Telepizza’s active involvement in supply chain management and their role as a master franchisee, both parties are exposed to significant risks and rewards depending on the commercial success of the alliance. As a result, the alliance has been identified as a collaborative arrangement and upon consummation of the alliance no amounts were recorded in our Consolidated Financial Statements (other than insignificant success fees that were paid to third-party advisors). Subsequent to consummation of the deal, for all Pizza Hut restaurants that are part of the alliance, we are receiving a continuing fee of 3.5% of restaurant sales. Likewise, for most Telepizza restaurants that are part of the alliance we are receiving an alliance fee of 3.5% of restaurant sales. These fees are being recorded as Franchise and property revenues within our Consolidated Statement of Income when the related sales occur, consistent with our recognition of continuing fees for all other restaurants subject to our franchise agreements. These fees are reduced by a sales-based credit that decreases over time and, potentially, certain incentive payments if development or conversion targets are met. Previously, the existing Pizza Hut restaurants that are now subject to the master franchise agreement with Telepizza generally paid a continuing fee of 6% of restaurant sales consistent with our standard International franchise agreement terms. The impact to Operating Profit for the year ended December 31, 2019 as a result of the strategic alliance was not significant. System Sales growth in 2019, excluding foreign currency and 53rd week, was approximately 1 and 5 percentage points higher for Worldwide and the Pizza Hut Division, respectively as a result of the strategic alliance. Additionally, net new unit growth in 2018 was approximately 3 and 8 percentage points higher for Worldwide and the Pizza Hut Division, respectively, as a result of the strategic alliance.
KFC United Kingdom ("UK") Supply Availability Issues
On February 14, 2018, we and our franchisees transitioned to a new distributor for the products supplied to our approximately 900 KFCs in the United Kingdom and Ireland (those restaurants accounted for approximately 3% of YUM’s global system sales in the year ended December 31, 2018). In connection with this transition, certain of the restaurants experienced supply availability issues which resulted in store closures or stores operating under a limited menu. Beginning mid-May 2018, all restaurants opened for business, offering their full menus, with advertising beginning at the end of May. On a full-year basis in 2018, we estimated the negative impact to Core Operating Profit growth was 2 percentage points for KFC Division and 1 percentage point for YUM,
respectively, and the negative impact to same-store sales growth was 50 basis points for KFC Division and 25 basis points for YUM, respectively, as a result of these supply availability issues.
KFC Division
The KFC Division has 24,10427,760 units, 83%86% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of the end of 2019.2022.
| | | | | | | | | | % B/(W) | | % B/(W) | | % B/(W) | | % B/(W) |
| | | | | | | | 2019 | | 2018 | | 2022 | | 2021 |
| | 2019 | | 2018 | | 2017 | | Reported | | Ex FX | | Ex FX and 53rd Week in 2019 | | Reported | | Ex FX | | 2022 | | 2021 | | 2020 | | Reported | | Ex FX | | | Reported | | Ex FX | | |
System Sales | | $ | 27,900 |
| | $ | 26,239 |
| | $ | 24,515 |
| | 6 |
| | 10 |
| | 9 |
| | 7 |
| | 6 |
| | System Sales | | $ | 31,116 | | | $ | 31,365 | | | $ | 26,289 | | | (1) | | | | 6 | | | | | 19 | | | | 16 | | | | |
Same-Store Sales Growth % | | | | | | | | 4 |
| | N/A |
| | N/A | | 2 |
| | N/A |
| | |
Same-Store Sales Growth (Decline) % | | Same-Store Sales Growth (Decline) % | | 4 | % | | 11 | % | | (9) | % | | N/A | | N/A | | | | N/A | | N/A | | |
| | | | | | | | | | | | | | | | | | | | | |
Company sales | | $ | 571 |
| | $ | 894 |
| | $ | 1,928 |
| | (36 | ) | | (33 | ) | | (34 | ) | | (54 | ) | | (53 | ) | | Company sales | | $ | 491 | | | $ | 596 | | | $ | 506 | | | (18) | | | (11) | | | | | 18 | | | 12 | | | |
Franchise and property revenues | | 1,390 |
| | 1,294 |
| | 1,182 |
| | 7 |
| | 11 |
| | 10 |
| | 10 |
| | 9 |
| | Franchise and property revenues | | 1,645 | | | 1,557 | | | 1,295 | | | 6 | | | 12 | | | | | 20 | | | 17 | | | |
Franchise contributions for advertising and other services | | 530 |
| | 456 |
| | — |
| | 16 |
| | 21 |
| | 20 |
| | N/A | | N/A | | Franchise contributions for advertising and other services | | 698 | | | 640 | | | 471 | | | 9 | | | 16 | | | | | 36 | | | 30 | | | |
Total revenues | | $ | 2,491 |
| | $ | 2,644 |
| | $ | 3,110 |
| | (6 | ) | | (2 | ) | | (3 | ) | | (15 | ) | | (15 | ) | | Total revenues | | $ | 2,834 | | | $ | 2,793 | | | $ | 2,272 | | | 1 | | | 8 | | | | | 23 | | | 18 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restaurant profit | | $ | 87 |
| | $ | 119 |
| | $ | 289 |
| | (26 | ) | | (23 | ) | | (24 | ) | | (59 | ) | | (58 | ) | | |
Restaurant margin % | | 15.3 | % | | 13.3 | % | | 15.0 | % | | 2.0 |
| ppts. | | 2.0 |
| ppts. | | 2.0 |
| ppts. | | (1.7) |
| ppts. | | (1.5) |
| ppts. | |
Company restaurant profit | | Company restaurant profit | | $ | 65 | | | $ | 106 | | | $ | 67 | | | (39) | | | (33) | | | | | 58 | | | 48 | | | |
Company restaurant margin % | | Company restaurant margin % | | 13.2 | % | | 17.7 | % | | 13.2 | % | | (4.5) | | ppts. | | (4.4) | | ppts. | | | 4.5 | | ppts. | | 4.3 | | ppts. | | |
| | | | | | | | | | | | | | | | | | | | | |
G&A expenses | | $ | 346 |
| | $ | 350 |
| | $ | 370 |
| | 1 |
| | (1 | ) | | (1 | ) | | 5 |
| | 5 |
| | G&A expenses | | $ | 390 | | | $ | 377 | | | $ | 346 | | | (3) | | | (6) | | | | | (9) | | | (7) | | | |
Franchise and property expenses | | 89 |
| | 107 |
| | 117 |
| | 17 |
| | 13 |
| | 13 |
| | 8 |
| | 9 |
| | Franchise and property expenses | | 69 | | | 74 | | | 91 | | | 7 | | | (3) | | | | | 18 | | | 20 | | | |
Franchise advertising and other services expense | | 520 |
| | 452 |
| | — |
| | (15 | ) | | (20 | ) | | (19 | ) | | N/A | | N/A | | Franchise advertising and other services expense | | 684 | | | 627 | | | 465 | | | (9) | | | (15) | | | | | (35) | | | (29) | | | |
Operating Profit | | $ | 1,052 |
| | $ | 959 |
| | $ | 981 |
| | 10 |
| | 14 |
| | 13 |
| | (2 | ) | | (2 | ) | | Operating Profit | | $ | 1,198 | | | $ | 1,230 | | | $ | 922 | | | (3) | | | 5 | | | | | 33 | | | 29 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Franchise | | 27,541 | | | 26,643 | | | 24,710 | | | 3 | | | 8 | |
Company-owned | | 219 | | | 291 | | | 290 | | | (25) | | | — | |
Total | | 27,760 | | | 26,934 | | | 25,000 | | | 3 | | | 8 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
Franchise | | 23,759 |
| | 22,297 |
| | 20,819 |
| | 7 | | 7 |
|
Company-owned | | 345 |
| | 324 |
| | 668 |
| | 6 | | (51 | ) |
Total | | 24,104 |
| | 22,621 |
| | 21,487 |
| | 7 | | 5 |
|
Company sales and RestaurantCompany restaurant margin percentage%
In 2019,2022, the decrease in Company sales, excluding the impacts of foreign currency translation, and 53rd week, was primarily driven by refranchisingthe suspension of operations of our 70 company-owned KFC restaurants in Russia, partially offset by companyCompany same-store sales growth of 5%, including lapping1%. As discussed in the prior year impactIntroduction and Overview section of supply interruptionsthis MD&A, all units in Russia, both Company and franchised, were removed from our KFC UK business.same-store sales calculations beginning April 1, 2022.
The 2019 increaseIn 2022, the decrease in RestaurantCompany restaurant margin percentage was driven by same-store sales growth, including lapping the prior year impact of supply interruptions in our KFC UK business,commodity and refranchising.wage inflation.
Franchise and property revenues
In 2019,2022, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, and 53rd week, was driven by international net new unit growth, franchise same-store sales growth of 4%, including lapping and unit growth.
As discussed in the prior year impactIntroduction and Overview section of supply interruptionsthis MD&A, all units in Russia, both Company and franchised, were removed from our KFC UK business, and refranchising.same-store sales calculations beginning April 1, 2022.
G&A
In 2019,2022, the increase in G&A, excluding the impacts of foreign currency translation, and 53rd week, was driven by higher headcount and salaries and higher travel related costs, partially offset by lower expenses related to our deferred andannual incentive compensation programs, partially offset by the positive impact of YUM's Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising.program.
Operating Profit
In 2019,2022, the increase in Operating Profit, excluding the impacts of foreign currency translation, and 53rd week, was driven by net new unit growth, same-store sales growth and lappingunit growth, partially offset by the prior yearnegative impact of supply interruptions4 percentage points on year-over-year operating profit growth as a result of lower profits in our KFC UK business.Russia, higher restaurant operating costs, and higher G&A.
Taco Bell Division
The Taco Bell Division has 8,218 units, 88% of which are in the U.S. The Company owned 6% of the Taco Bell units in the U.S. as of the end of 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % B/(W) | | % B/(W) |
| | | | | | | | 2022 | | 2021 |
| | 2022 | | 2021 | | 2020 | | Reported | | Ex FX | | | | Reported | | Ex FX | | |
System Sales | | $ | 14,653 | | | $ | 13,280 | | | $ | 11,745 | | | 10 | | | | 11 | | | | | | | 13 | | | | 13 | | | | | |
Same-Store Sales Growth (Decline) % | | 8 | % | | 11 | % | | (1) | % | | N/A | | | N/A | | | | | | N/A | | | N/A | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Company sales | | $ | 1,002 | | | $ | 944 | | | $ | 882 | | | 6 | | | | 6 | | | | | | | 7 | | | | 7 | | | | | |
Franchise and property revenues | | 837 | | | 742 | | | 662 | | | 13 | | | | 13 | | | | | | | 12 | | | | 12 | | | | | |
Franchise contributions for advertising and other services | | 598 | | | 552 | | | 487 | | | 8 | | | | 8 | | | | | | | 14 | | | | 14 | | | | | |
Total revenues | | $ | 2,437 | | | $ | 2,238 | | | $ | 2,031 | | | 9 | | | | 9 | | | | | | | 10 | | | | 10 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Company restaurant profit | | $ | 236 | | | $ | 225 | | | $ | 225 | | | 5 | | | | 5 | | | | | | | — | | | | — | | | | | |
Company restaurant margin % | | 23.6 | % | | 23.9 | % | | 25.5 | % | | (0.3) | | ppts. | | (0.3) | | ppts. | | | | | (1.6) | ppts. | | (1.6) | ppts. | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
G&A expenses | | $ | 191 | | | $ | 174 | | | $ | 158 | | | (9) | | | | (10) | | | | | | | (11) | | | | (10) | | | | | |
Franchise and property expenses | | 33 | | | 33 | | | 33 | | | 1 | | | | — | | | | | | | (3) | | | | (3) | | | | | |
Franchise advertising and other services expense | | 599 | | | 553 | | | 484 | | | (8) | | | | (8) | | | | | | | (14) | | | | (14) | | | | | |
Operating Profit | | $ | 850 | | | $ | 758 | | | $ | 696 | | | 12 | | | | 12 | | | | | | | 9 | | | | 9 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Franchise | | 7,754 | | | 7,329 | | | 6,952 | | | 6 | | | 5 | |
Company-owned | | 464 | | | 462 | | | 475 | | | — | | | (3) | |
Total | | 8,218 | | | 7,791 | | | 7,427 | | | 5 | | | 5 | |
Company sales and Company restaurant margin %
In 2022, the increase in Company sales was driven by same-store sales growth of 8% and unit growth partially offset by refranchising.
In 2022, the decrease in Company restaurant margin percentage was driven by commodity and wage inflation partially offset by same-store sales growth.
Franchise and property revenues
In 2022, the increase in Franchise and property revenues was driven by franchise same-store sales growth of 8% and unit growth.
G&A
In 2022, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher travel related costs partially offset by lower charitable contributions.
Operating Profit
In 2022, the increase in Operating Profit was driven by same-store sales growth and unit growth partially offset by higher restaurant operating costs and higher G&A.
Pizza Hut Division
The Pizza Hut Division has 18,70319,034 units, 61%66% of which are located outside the U.S. Over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2022. The Pizza Hut Division uses multiple distribution channels including delivery, dine-in and express (e.g. airports) and includes units operating under both the Pizza Hut and Telepizza brands. Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2019.
| | | | | | | | | | % B/(W) | | % B/(W) | | % B/(W) | | % B/(W) |
| | | | | | | | 2019 | | 2018 | | 2022 | | 2021 |
| | 2019 | | 2018 | | 2017 | | Reported | | Ex FX | | Ex FX and 53rd Week in 2019 | | Reported | | Ex FX | | 2022 | | 2021 | | 2020 | | Reported | | Ex FX | | | Reported | | Ex FX | | |
System Sales | | $ | 12,900 |
| | $ | 12,212 |
| | $ | 12,034 |
| | 6 |
| | 8 |
| | 7 |
| | 1 |
| | 1 |
| | System Sales | | $ | 12,853 | | | $ | 12,955 | | | $ | 11,955 | | | (1) | | | | 3 | | | | | 8 | | | | 6 | | | | |
Same-Store Sales Growth (Decline) % | | | | | | | | Even | | N/A |
| | N/A | | Even | | N/A |
| | Same-Store Sales Growth (Decline) % | | Even | | 7 | % | | (6) | % | | N/A | | N/A | | | | N/A | | N/A | | |
| | | | | | | | | | | | | | | | | | | | | |
Company sales | | $ | 54 |
| | $ | 69 |
| | $ | 285 |
| | (23 | ) | | (21 | ) | | (21 | ) | | (76 | ) | | (76 | ) | | Company sales | | $ | 21 | | | $ | 46 | | | $ | 76 | | | (55) | | | (55) | | | | | (40) | | | (42) | | | |
Franchise and property revenues | | 597 |
| | 598 |
| | 608 |
| | Even | | 1 |
| | 1 |
| | (2 | ) | | (2 | ) | | Franchise and property revenues | | 607 | | | 597 | | | 552 | | | 2 | | | 5 | | | | | 8 | | | 6 | | | |
Franchise contributions for advertising and other services | | 376 |
| | 321 |
| | — |
| | 17 |
| | 18 |
| | 16 |
| | N/A | | N/A | | Franchise contributions for advertising and other services | | 376 | | | 385 | | | 374 | | | (2) | | | (1) | | | | | 3 | | | 2 | | | |
Total revenues | | $ | 1,027 |
| | $ | 988 |
| | $ | 893 |
| | 4 |
| | 5 |
| | 4 |
| | 11 |
| | 10 |
| | Total revenues | | $ | 1,004 | | | $ | 1,028 | | | $ | 1,002 | | | (2) | | | — | | | | | 3 | | | 1 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restaurant profit | | $ | 3 |
| | $ | — |
| | $ | 14 |
| | NM | | NM | | NM | | NM | | NM | | |
Restaurant margin % | | 4.2 | % | | (0.1 | )% | | 5.3 | % | | 4.3 |
| ppts. | | 4.2 |
| ppts. | | 4.1 |
| ppts. | | (5.4) |
| ppts. | | (5.3) |
| ppts. | |
Company restaurant profit | | Company restaurant profit | | $ | — | | | $ | 3 | | | $ | 3 | | | NM | | NM | | | | (19) | | | (24) | | | |
Company restaurant margin % | | Company restaurant margin % | | (2.2) | % | | 6.8 | % | | 5.1 | % | | (9.0) | | ppts. | | (9.0) | | ppts. | | | 1.7 | | ppts. | | 1.5 | | ppts. | | |
| | | | | | | | | | | | | | | | | | | | | |
G&A expenses | | $ | 202 |
| | $ | 197 |
| | $ | 211 |
| | (2 | ) | | (3 | ) | | (2 | ) | | 7 |
| | 7 |
| | G&A expenses | | $ | 211 | | | $ | 201 | | | $ | 215 | | | (5) | | | (7) | | | | | 6 | | | 7 | | | |
Franchise and property expenses | | 39 |
| | 45 |
| | 68 |
| | 12 |
| | 11 |
| | 13 |
| | 35 |
| | 36 |
| | Franchise and property expenses | | 13 | | | 11 | | | 17 | | | (23) | | | (25) | | | | | 37 | | | 38 | | | |
Franchise advertising and other services expense | | 367 |
| | 328 |
| | — |
| | (12 | ) | | (12 | ) | | (11 | ) | | N/A | | N/A | | Franchise advertising and other services expense | | 382 | | | 395 | | | 365 | | | 3 | | | 2 | | | | | (8) | | | (7) | | | |
Operating Profit | | $ | 369 |
| | $ | 348 |
| | $ | 341 |
| | 6 |
| | 8 |
| | 7 |
| | 2 |
| | 2 |
| | Operating Profit | | $ | 387 | | | $ | 387 | | | $ | 335 | | | Even | | 4 | | | | | 16 | | | 13 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Franchise | | 19,013 | | | 18,359 | | | 17,559 | | | 4 | | | 5 | |
Company-owned | | 21 | | | 22 | | | 80 | | | (5) | | | (73) | |
Total | | 19,034 | | | 18,381 | | | 17,639 | | | 4 | | | 4 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2019 | | 2018 | | 2017 | | 2019 | | 2018(a) |
Franchise | | 18,603 |
| | 18,369 |
| | 16,588 |
| | 1 | | 11 |
|
Company-owned | | 100 |
| | 62 |
| | 160 |
| | 61 | | (61 | ) |
Total | | 18,703 |
| | 18,431 |
| | 16,748 |
| | 1 | | 10 |
|
(a) 2018 unit growth includes units added as a result of our fourth quarter 2018 strategic alliance with Telepizza.
Company sales
In 2019,2022, the decrease in Company sales, excluding the impacts of foreign currency translation, and 53rd week, was driven by refranchising. Company same-store sales growth was 2%.the refranchising of stores in the United Kingdom.
Franchise and property revenues
In 2019,2022, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, and 53rd week, was driven by net new unit growth. Franchise same-store sales were flat.growth and the recognition of franchise fees related to unexercised development rights arising from a master franchise agreement.
G&A
In 2019,2022, the increase in G&A, excluding the impacts of foreign currency translation, and 53rd week, was driven by higher headcount and salaries and higher travel related expenses, partially offset by lower professional fees and lower expenses related to our deferredannual incentive compensation program,programs.
partially offset the positive impact of YUM’s Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising.
Operating Profit
In 2019,2022, the increase in Operating Profit, excluding the impacts of foreign currency translation, and 53rd week, was driven by lapping advertising costs in the prior year associated with the Pizza Hut Transformation Agreement (See Note 4), higher profit associated with providing incremental technology-related services, net new unit growth and refranchising, partially offset by higher provisions for past due receivables and higher G&A.growth.
Taco BellHabit Burger Grill Division
The Taco BellHabit Burger Grill Division has 7,363349 units, 92%the vast majority of which are in the U.S. The Company-owned 7%Company owned 85% of the Taco BellHabit Burger Grill units in the U.S. as of the end of 2019.December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % B/(W) | | % B/(W) |
| | | | | | | | 2022 | | 2021 |
| | 2022 | | 2021 | | 2020 | | Reported | | Ex FX | | Reported | | Ex FX |
System Sales | | $ | 661 | | | $ | 588 | | | $ | 370 | | | 12 | | | 12 | | | 59 | | | 59 | |
Same-Store Sales Growth (Decline) % | | (1) | % | | 16 | % | | N/A | | N/A | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | | |
Total revenues | | $ | 567 | | | $ | 525 | | | $ | 347 | | | 8 | | | 8 | | | 51 | | | 51 | |
Operating Profit (Loss) | | $ | (24) | | | $ | 2 | | | $ | (22) | | | NM | | NM | | 111 | | | 111 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % B/(W) | | % B/(W) |
| | | | | | | | 2019 | | 2018 |
| | 2019 | | 2018 | | 2017 | | Reported | | Ex FX | | Ex FX and 53rd Week in 2019 | | Reported | | Ex FX |
System Sales | | $ | 11,784 |
| | $ | 10,786 |
| | $ | 10,145 |
| | 9 |
| | | 9 |
| | | 8 |
| | | 6 |
| | | 6 |
| |
Same-Store Sales Growth % | | | | | | | | 5 |
| | | N/A |
| | | N/A | | | 4 |
| | | N/A |
| |
Company sales | | $ | 921 |
| | $ | 1,037 |
| | $ | 1,359 |
| | (11 | ) | | | (11 | ) | | | (13 | ) | | | (24 | ) | | | (24 | ) | |
Franchise and property revenues | | 673 |
| | 590 |
| | 521 |
| | 14 |
| | | 14 |
| | | 12 |
| | | 13 |
| | | 13 |
| |
Franchise contributions for advertising and other services | | 485 |
| | 429 |
| | — |
| | 13 |
| | | 13 |
| | | 11 |
| | | N/A | | | N/A | |
Total revenues | | $ | 2,079 |
| | $ | 2,056 |
| | $ | 1,880 |
| | 1 |
| | | 1 |
| | | — |
| | | 9 |
| | | 9 |
| |
| | | | | | | | | | | | | | | | | | | | | |
Restaurant profit | | $ | 221 |
| | $ | 244 |
| | $ | 305 |
| | (9 | ) | | | (9 | ) | | | (11 | ) | | | (20 | ) | | | (20 | ) | |
Restaurant margin % | | 24.0 | % | | 23.5 | % | | 22.4 | % | | 0.5 |
| ppts. | | 0.5 |
| ppts. | | 0.4 |
| ppts. | | 1.1 |
| ppts. | | 1.1 |
| ppts. |
| | | | | | | | | | | | | | | | | | | | | |
G&A expenses | | $ | 181 |
| | $ | 177 |
| | $ | 188 |
| | (2 | ) | | | (3 | ) | | | (2 | ) | | | 6 |
| | | 6 |
| |
Franchise and property expenses | | 38 |
| | 28 |
| | 22 |
| | (33 | ) | | | (33 | ) | | | (32 | ) | | | (31 | ) | | | (31 | ) | |
Franchise advertising and other services expense | | 481 |
| | 428 |
| | — |
| | (12 | ) | | | (12 | ) | | | (11 | ) | | | N/A | | | N/A | |
Operating Profit | | $ | 683 |
| | $ | 633 |
| | $ | 619 |
| | 8 |
| | | 8 |
| | | 6 |
| | | 2 |
| | | 2 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Franchise | | 63 | | | 42 | | | 34 | | | 50 | | | 24 | |
Company-owned | | 286 | | | 276 | | | 253 | | | 4 | | | 9 | |
Total | | 349 | | | 318 | | | 287 | | | 10 | | | 11 | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | % Increase (Decrease) |
Unit Count | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
Franchise | | 6,895 |
| | 6,602 |
| | 6,196 |
| | 4 | | | 7 |
|
Company-owned | | 468 |
| | 470 |
| | 653 |
| | — | | | (28 | ) |
Total | | 7,363 |
| | 7,072 |
|
| 6,849 |
| | 4 | | | 3 |
|
Company sales and Restaurant margin percentage
In 2019, the decrease in Company Sales, excluding the impact of 53rd week, was driven by refranchising partially offset by company same-store sales growth of 4% and net new unit growth.
In 2019, the increase in restaurant margin percentage was driven by same-store sales growth partially offset by higher labor and commodity costs.
Franchise and property revenues
In 2019, the increase in Franchise and property revenues, excluding the impact of 53rd week, was driven by franchise same-store sales growth of 5%, refranchising and net new unit growth.
G&A
In 2019, the increase in G&A, excluding the impact of 53rd week, was driven by higher expenses related to our deferred and incentive compensation programs and the unfavorable impact of lapping prior year forfeitures related to share based compensation awards, partially offset by the positive impact of YUM’s Strategic Transformation Initiatives.
Operating Profit
In 2019, the increase in Operating Profit, excluding the impacts of foreign currency translation and 53rd week, was driven by same-store sales growth and net new unit growth, partially offset by refranchising and higher restaurant operating costs.
Corporate & Unallocated
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % B/(W) |
(Expense)/Income | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
Corporate and unallocated G&A | | $ | (297) | | | $ | (260) | | | $ | (312) | | | (14) | | | | 17 | | |
Unallocated Franchise and property expenses | | (6) | | | 1 | | | (4) | | | NM | | | 115 | | |
Unallocated Refranchising gain (loss) (See Note 5) | | 27 | | | 35 | | | 34 | | | (22) | | | | 2 | | |
Unallocated Other income (expense) | | 52 | | | (14) | | | (146) | | | NM | | | NM | |
Investment income (expense), net (See Note 5) | | 11 | | | 86 | | | 74 | | | (88) | | | | 16 | | |
Other pension income (expense) (See Note 15) | | (9) | | | (7) | | | (14) | | | (26) | | | | 48 | | |
Interest expense, net | | (527) | | | (544) | | | (543) | | | 3 | | | | — | | |
Income tax provision (See Note 18) | | (337) | | | (99) | | | (116) | | | (242) | | | | 15 | | |
Effective tax rate (See Note 18) | | 20.3 | % | | 5.9 | % | | 11.4 | % | | (14.4) | | ppts. | | 5.5 | | ppts. |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % B/(W) |
(Expense)/Income | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
Corporate and unallocated G&A | | $ | (188 | ) | | $ | (171 | ) | | $ | (230 | ) | | (10 | ) | | | 26 |
| |
Unallocated restaurant costs | | — |
| | 3 |
| | 10 |
| | (95 | ) | | | (69 | ) | |
Unallocated Franchise and property revenues | | — |
| | — |
| | (5 | ) | | NM |
| | | NM |
| |
Unallocated Franchise and property expenses | | (14 | ) | | (8 | ) | | (30 | ) | | (72 | ) | | | 73 |
| |
Refranchising gain (loss) (See Note 4) | | 37 |
| | 540 |
| | 1,083 |
| | (93 | ) | | | (50 | ) | |
Unallocated Other income (expense) (See Note 4) | | (9 | ) | | (8 | ) | | (8 | ) | | NM |
| | | NM |
| |
Investment income (expense), net (See Note 4) | | (67 | ) | | 9 |
| | 5 |
| | NM |
| | | 88 |
| |
Other pension income (expense) (See Note 14) | | (4 | ) | | (14 | ) | | (47 | ) | | 71 |
| | | 70 |
| |
Interest expense, net | | (486 | ) | | (452 | ) | | (445 | ) | | (8 | ) | | | (1 | ) | |
Income tax provision (See Note 17) | | (79 | ) | | (297 | ) | | (934 | ) | | 74 |
| | | 68 |
| |
Effective tax rate (See Note 17) | | 5.7 | % | | 16.2 | % | | 41.1 | % | | 10.5 |
| ppts. | | 24.9 |
| ppts. |
Corporate and unallocated G&A
In 2019,2022, the increase in Corporate and unallocatedUnallocated G&A expenses was driven by higher headcount and salaries including personnel associated with our 2021 investments in digital and technology companies and expenses related to the divestiture of our deferred and incentive compensation programs and higher professional fees related to strategic projects, the largest of which was related to global tax reforms,Russia businesses, partially offset by lapping costs associated with YUM’s Strategic Transformation Initiatives (See Note 4) andlower current year G&A reductionsexpenses due to the impact of YUM’s Strategic Transformation Initiatives.our annual incentive compensation programs.
Unallocated restaurant costsOther income (expense)
Unallocated restaurant costs representsOther income (expense) for the cessationyear ended December 31, 2022, includes Russia net operating profits of depreciation on held for sale assets that were not allocated to the Division segments.
Unallocated Franchise$44 million reclassed from KFC and property expenses
Unallocated Franchise and property expenses reflect charges related to the Pizza Hut U.S. Transformation Agreement and/or the KFC U.S. Acceleration Agreement. SeeDivision Other income due to our decision to exit Russia (see Note 4.19).
Interest expense, net
The increasedecrease in Interest expense, net for 20192022 was primarily driven by increased outstanding$12 million of previously unamortized debt issuance costs written-off in the prior year due to the refinancing of our Credit Agreement and $6 million lower expense in the current year relating to the call premium and previously unamortized debt issuance costs written-off associated with the redemption of the 2025 Notes as compared to the call premium and previously unamortized debt issuance costs written-off associated with the redemption of the 2026 Notes (as discussed in our 2021 Form 10-K) in the prior year. The impact on Interest expense, net of higher borrowings was offset by a lower weighted-average interest rate on those borrowings. See Note 10.
Consolidated Cash Flows
Net cash provided by operating activities was $1,315$1,427 million in 2019 compared to $1,1762022 versus $1,706 million in 2018.2021. The increasedecrease was largely driven by an increase in Operating profit before Special Items and lowerincentive compensation payments, partially offset bytiming of spending on advertising and an increase in interestincome tax payments.
Net cash used in investing activities was $88$202 million in 2019 compared to net cash provided by investing activities of $3132022 versus $173 million in 2018.2021. The change was primarily driven by lower refranchisinghigher current year capital spending and lapping proceeds in the currentfrom our prior year sale of certain mutual fund investments, partially offset by the lapping of our prior year investment in Grubhub common stock and the acquisition of QuikOrder, LLC, an online ordering software and service provider for the restaurant industry ("QuikOrder") (See Note 9).Dragontail Systems Limited.
Net cash used in financing activities was $938$1,323 million in 2019 compared to $2,6202022 versus $1,767 million in 2018.2021. The decreasechange was primarily driven by lower share repurchases and higher current year net borrowings in 2019.borrowings.
Consolidated Financial Condition
Our Consolidated Balance Sheet was impacted by the adoption of Topic 842 (See Note 2) and deferred tax assets recorded related to the intercompany transfers of certain intellectual property rights (See Note 17).
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated by operations and availability under our revolving facilities. As of December 31, 2019, we had Cash and cash equivalents of $605 million. Cash and cash equivalents increased from $292 million at December 31, 2018 due to the issuance of $800 million aggregate principal amount of YUM Senior Unsecured Notes in September 2019. We have historically generated substantial cash flows from the operations of our Company-owned stores and from our extensive franchise operations, which require a limited YUM investment.investment, and from the operations of our Company-owned stores. Our annual operating cash flows have historically been in excess of $1 billion. Decreases$1.3 billion in operating cash flows fromeach of the operation of fewer Company-owned stores due to refranchising in recentpast four years have been offset, and are expectedwe expect that to continue to be offset,the case in 2023. It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive dividend, with savings generated from decreased capital investment and G&A requiredany remaining excess then returned to support company operations.shareholders through share repurchases. To the extent operating cash flows plus other sources of cash such as refranchising proceeds do not cover our anticipated cash needs, we maintain a $1$1.25 billion Revolving Facility under our existing Credit Agreement that was undrawn(see Note 11) which had $279 million outstanding as of year end 2019.December 31, 2022. We believe that our existingongoing cash from operations, cash on hand, cash from operationswhich was approximately $375 million at December 31, 2022, and availability under our Revolving Facility will be sufficient to fund our operations, anticipated capital expenditures and debt repayment obligationscash requirements over the next twelve months.
From 2017 through 2019, we returned a cumulative $6.5 billion to shareholders through share repurchases andOur material cash dividends. We funded these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our ~5.0x EBITDA leverage. Fromrequirements include the fourth quarter of 2016 to the end of 2018, we generated total gross refranchising proceeds of $2.8 billion in connection with our initiative to increase franchise ownership to 98%. Going forward, we anticipate refranchising proceeds to be much more limited and any shareholder returns we choose to make to be funded through cash flows from operations and leverage maintenance.
On January 6, 2020, we announced our definitive agreement pursuant to which the Company will acquire all of the issued and outstanding common shares of The Habit Restaurants, Inc. (“Habit”) for $14 per share in cash or a total of approximately $375 million. The transaction is subject to approval by Habit’s stockholdersfollowing contractual and other customary closing conditions. The transaction is expected to be completed by the end of the first-quarter of 2020.obligations.
Additionally, if the transaction is consummated, Habit will make payment to certain of its former shareholders pursuant to an existing Tax Receivable Agreement in the aggregate amount of approximately $53 million. The amount of this payment in excess of Habit’s cash necessary at closing for normal working capital purposes, in addition to customary transaction fees and expenses, will be liabilities funded by the Company.
We intend to fund all amounts for the acquisition of Habit using cash on hand and available borrowing capacity under our Revolving Facility.
Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM. Our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur and Company sales are paid in cash or by credit card (which is quickly converted into cash). Substantial amounts of cash received have historically been either returned to shareholders or invested in new restaurant assets which are non-current in nature. As part of our working capital strategy, we negotiate favorable credit terms with vendors and, as a result, our on-hand inventory turns faster than the related short-term liabilities. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations.
Debt InstrumentsObligations and Interest Payments
As of December 31, 2019,2022, approximately 92%94%, including the impact of interest rate swaps, of our $10.6$11.6 billion of total debt outstanding, excluding the Revolving Facility balance, finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.7%4.4%. We are managingended 2022 with a consolidated net leverage ratio of 5.0x EBITDA. We continually reassess our optimal leverage ratio to maximize shareholder returns. We target a capital structure which is levered in-line with our target of ~5.0x EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years.We have credit ratings of BB (Standard & Poor's)Poor’s)/Ba2 (Moody's)(Moody’s) with a balance sheet consistent with highly-levered peer restaurant franchise companies.
The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of December 31, 2019.2022.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | 2030 | | 2037 | | 2043 | | Total |
Securitization Notes | | $ | 29 |
| | $ | 29 |
| | $ | 29 |
| | $ | 1,281 |
| | $ | 16 |
| | $ | 16 |
| | $ | 921 |
| | $ | 6 |
| | $ | 571 |
| | | | | | | | $ | 2,898 |
|
Credit Agreement | | 51 |
| | 76 |
| | 395 |
| | 20 |
| | 20 |
| | 1,836 |
| | | | | | | | | | | | | | 2,398 |
|
Subsidiary Senior Unsecured Notes | | | | | | | | | | 1,050 |
| | | | 1,050 |
| | 750 |
| | | | | | | | | | 2,850 |
|
YUM Senior Unsecured Notes | | 350 |
| | 350 |
| | | | 325 |
| | | | | | | | | | | | 800 |
| | 325 |
| | 275 |
| | 2,425 |
|
Total | | $ | 430 |
| | $ | 455 |
| | $ | 424 |
| | $ | 1,626 |
| | $ | 1,086 |
| | $ | 1,852 |
| | $ | 1,971 |
| | $ | 756 |
| | $ | 571 |
| | $ | 800 |
| | $ | 325 |
| | $ | 275 |
| | $ | 10,571 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | 2029 | | 2030 | | 2031 | | 2032 | | 2037 | | 2043 | | Total |
Securitization Notes | | $ | 39 | | | $ | 39 | | | $ | 39 | | | $ | 944 | | | $ | 875 | | | $ | 582 | | | $ | 565 | | | $ | 7 | | | $ | 682 | | | | | | | | | $ | 3,772 | |
Credit Agreement | | 34 | | | 48 | | | 53 | | | 662 | | | 15 | | | 1,398 | | | | | | | | | | | | | | | 2,210 | |
Revolving Facility | | | | | | | | 279 | | | | | | | | | | | | | | | | | | | 279 | |
Subsidiary Senior Unsecured Notes | | | | | | | | | | 750 | | | | | | | | | | | | | | | | | 750 | |
YUM Senior Unsecured Notes | | 325 | | | | | | | | | | | | | | | 800 | | | 1,050 | | | $ | 2,100 | | | $ | 325 | | | $ | 275 | | | 4,875 | |
Total | | $ | 398 | | | $ | 87 | | | $ | 92 | | | $ | 1,885 | | | $ | 1,640 | | | $ | 1,980 | | | $ | 565 | | | $ | 807 | | | $ | 1,732 | | | $ | 2,100 | | | $ | 325 | | | $ | 275 | | | $ | 11,886 | |
Securitization Notes
include four senior secured notes issued by Taco Bell Funding, LLC (the “Issuer”) totaling $2.9
Interest payments on the outstanding long-term debt in the table above total approximately $3.6 billion, with fixedapproximately $500 million due within the next twelve months on the outstanding amounts on a nominal basis. The estimated interest rates ranging from 4.318% to 4.970%. The Securitization Notes are secured by substantially all of the assets of the Issuer and the Issuer’s special purpose, wholly-owned subsidiaries (collectively with the Issuer, the "Securitization Entities"), and include a lien on all existing and future U.S. Taco Bell franchise and license agreements and the royalties payable thereunder, existing and future U.S. Taco Bell intellectual property, certain transaction accounts and a pledge of the equity interests in asset-owning Securitization Entities. The Securitization Notes contain cross-default provisions whereby the failure to pay principal on any outstanding Securitization Notes will constitute an event of default under any other Securitization Notes.
Credit Agreement includes senior secured credit facilities consisting of a $463 million Term Loan A facility (the “Term Loan A Facility"), a $1.9 billion Term Loan B facility (the “Term Loan B Facility”) and a $1.0 billion revolving facility (the “Revolving Facility”) issued by KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, each of which is a wholly-owned subsidiary of the Company, as co-borrowers (the "Borrowers"). Our Revolving Facility was undrawn as of December 31, 2019. The interest rates applicablepayments related to the Credit Agreement range from 1.25% to 1.75% plusvariable rate portion of our debt, net of our interest rate swaps, are based on current LIBOR or from 0.25% to 0.75% plus the Base Rate, at the Borrowers’ election, based upon the total net leverage ratio of the Borrowers and the Specified Guarantors (as defined in the Credit Agreement). Our Term Loan A Facility and Term Loan B Facility contain cross-default provisions whereby the failure to pay principal of or otherwise perform any agreement or condition under indebtedness of certain subsidiaries with a principal amount in excess of $100 million will constitute an event of default under the Credit Agreement.interest rates.
Subsidiary Senior Unsecured Notes include three senior unsecured notes issued by the Borrowers totaling $2.9 billion with fixed interest rates ranging from 4.75% to 5.25%. Our Subsidiary Senior Unsecured Notes contain cross-default provisions whereby
the acceleration of the maturity of the indebtedness of certain subsidiaries with a principal amount in excess of $100 million or the failure to pay principal of such indebtedness will constitute an event of default under the Subsidiary Senior Unsecured Notes.
YUM Senior Unsecured Notes include six senior unsecured notes issued by Yum! Brands, Inc. totaling $2.4 billion with fixed interest rates ranging from 3.75% to 6.88% including $800 million aggregate principal amount of 4.75% notes due January 15, 2030 that we issued on September 11, 2019. See Note 10 for additional details. Our YUM Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of any of our indebtedness or the failure to pay principal of such indebtedness will constitute an event of default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.
See Note 1011 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured NotesNotes.
.
Operating and Finance Leases
Contractual
Payments required under our operating and finance leases total $1,131 million, of which $126 million is payable within the next 12 months. These amounts are on a nominal basis and include payments related to lease renewal options we are reasonably certain to exercise. These leases relate primarily to approximately 650 Company-owned restaurants and approximately 250 leased restaurants for which we sublease land, building or both to our franchisees. See Note 12.
Capital Expenditures
We remain committed to maintaining our asset light, franchisor model that includes at least a 98% franchise mix. Our allocation strategy for capital expenditures includes:
•Run-rate capital expenditures consisting of company restaurant repairs, maintenance and remodels, support of our digital and technology initiatives and project-specific capital expenditures,
•Targeted new company unit development to spur additional growth that is largely funded through refranchising a comparable number of existing company units, and
•Strategic investments that create incremental value for shareholders and franchisees.
In 2023, we expect that company store investments will exceed refranchising proceeds by $55 to $65 million, primarily driven by our strategy to accelerate growth of Habit Burger Grill company units and continued investments in Taco Bell company restaurants. This will result in net capital expendituresof approximately $275 million, reflecting up to $315 million of gross capital expenditures and $40 million of refranchising proceeds.
Purchase Obligations
Our purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancellable without penalty. Our purchase obligations relate primarily to marketing, information technology and supply agreements. We have purchase obligations of approximately $425 million at December 31, 2022, with approximately $225 million due within the next 12 months.
In addition to our contractual and other obligations, we seek to pay a competitive dividend and payments asreturn excess cash to shareholders through share repurchases. As discussed in Note 20, we are also subject to claims and contingencies related to certain tax and legal matters that may require future cash outlays.
Dividends and Share Repurchases
In February 2023, our Board of Directors declared a dividend of $0.605 per share of Common Stock, a 6% increase from the quarterly dividend of $0.57 per share of Common Stock paid in 2022. This quarterly dividend will be distributed March 10, 2023 to shareholders of record at the close of business on February 22, 2023, and will total approximately $170 million.
In September 2022, our Board of Directors authorized share repurchases of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock through June 30, 2024. This authorization took effect during the fourth quarter of 2022 upon the exhaustion of a prior authorization approved in May 2021. As of December 31, 2019 included:
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Long-term debt obligations(a) | | $ | 13,911 |
| | $ | 895 |
| | $ | 1,804 |
| | $ | 3,505 |
| | $ | 7,707 |
|
Finance leases(b) | | 110 |
| | 11 |
| | 20 |
| | 17 |
| | 62 |
|
Operating leases(b) | | 987 |
| | 105 |
| | 192 |
| | 159 |
| | 531 |
|
Purchase obligations(c) | | 297 |
| | 159 |
| | 124 |
| | 13 |
| | 1 |
|
Benefit plans and other(d) | | 290 |
| | 155 |
| | 32 |
| | 30 |
| | 73 |
|
Total contractual obligations | | $ | 15,595 |
| | $ | 1,325 |
| | $ | 2,172 |
| | $ | 3,724 |
| | $ | 8,374 |
|
| |
(a) | Amounts include maturities of debt outstanding as of December 31, 2019 and expected interest payments on those outstanding amounts on a nominal basis. The estimated interest payments related to the variable rate portion of our debt is based on current LIBOR interest rates. See Note 10. |
| |
(b) | These obligations, which are shown on a nominal basis and represent the non-cancellable term of the lease, relate primarily to approximately 600 Company-owned restaurants and 400 units that we sublease land, building or both to our franchisees. See Note 11. |
| |
(c) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancellable without penalty. Purchase obligations relate primarily to marketing, information technology and supply agreements. |
| |
(d) | Includes actuarially-determined timing of payments from our most significant unfunded pension plan as well as scheduled payments from our deferred compensation plan and other unfunded benefit plans where payment dates are determinable. This table excludes $40 million of future benefit payments for deferred compensation and other unfunded benefit plans to be paid upon separation of employee's service or retirement from the company, as we cannot reasonably estimate the dates of these future cash payments. Other amounts include a cash tax obligation related to an income tax audit expected to conclude in 2020 and anticipated investments related to the Pizza Hut U.S. Transformation Agreement (See Note 4). |
We sponsor noncontributory defined benefit pension plans covering certain salaried and hourly employees,2022, we have remaining capacity to repurchase up to $1.75 billion of Common Stock under the most significant of which are in the U.S. and UK. The most significant of the U.S. plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from our other significant U.S. plan are paid bySeptember 2022 authorization. This authorization does not obligate the Company as incurred (see footnote (d) above). Our funding policy for the Plan is to contribute annually amounts that will at least equal the minimum amounts required to comply with the Pension Protection Actacquire any specific number of 2006. However, additional voluntary contributions are made from time-to-time to improve the Plan’s funded status. At December 31, 2019 the Plan wasshares.
Contingencies
As discussed in a net underfunded position of $44 million. The UK pension plans were in a net overfunded position of $82 million at our 2019 measurement date.
We do not anticipate making any significant contributions to the Plan in 2020. Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumptions. Future changes
in investment performance and corporate bond rates could impact our funded status and the timing and amounts of required contributions in 2020 and beyond.
Our post-retirement health care plan in the U.S. is not required to be funded in advance, but is pay as you go. We made post-retirement benefit payments of $5 million in 2019 and no future funding amounts are included in the contractual obligations table. See Note 14.
We have excluded from the contractual obligations table payments we may make for exposures for which we are self-insured, including workers’ compensation, employment practices liability, general liability, automobile liability, product liability and property losses (collectively “property and casualty losses”) and employee healthcare and long-term disability claims. The majority of our recorded liability for self-insured property and casualty losses and employee healthcare and long-term disability claims represents estimated reserves for incurred claims that have yet to be filed or settled.
We have not included in the contractual obligations table $56 million of liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time20, as a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, in August 2022, we received a Revenue Agent’s Report (“RAR”) from the IRS asserting an underpayment of tax examinations, and givenof $2.1 billion plus $418 million in penalties for the status2014 fiscal year. Additionally, interest on the underpayment is estimated to be approximately $780 million through December 31, 2022. The proposed underpayment relates primarily to a series of the examinations,reorganizations we cannot reliably estimate the period of any cash settlementundertook during that year in connection with the respective taxing authorities. business realignment of our corporate and management reporting structure along brand lines. The IRS asserts that these transactions resulted in taxable distributions of approximately $6.0 billion.
AsWe disagree with the IRS’s position as asserted in the RAR and intend to contest that position vigorously. In September 2022, we filed a Protest with the IRS Examination Division disputing on multiple grounds the proposed underpayment of tax and penalties. We are awaiting the IRS Examination Division’s Rebuttal to our Protest. When that Rebuttal is filed, we intend to pursue independent review by the IRS Office of Appeals.
Also, as discussed further in Note 19,20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement (“DOE”) in India imposing a penalty on Yum! Restaurants India Private Limited (“YRIPL”) of approximately Indian Rupee 11 billion, or approximately $156$135 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. In November 2022, YRIPL was notified that several optionsan administrative tribunal bench had been constituted to hear an appeal by DOE of certain findings of the January 2020 order, including claims that certain charges had been wrongly dropped and that an insufficient amount of penalty had been imposed. A hearing has been scheduled with the administrative tribunal on March 14, 2023. The stay order remains in effect, and the next hearing in the Delhi High Court is scheduled for appeal exist.May 16, 2023. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable and thus have not recorded any reserve at December 31, 2019. It is possible that we could be required to post a deposit for some or all portion of the penalty amount as we pursue appeal options. We have not included any potential deposit amount in the contractual obligations table as we cannot reliably estimate the timing or amount of any such deposit that may be required.
Off-Balance Sheet Arrangements
See the Lease Guarantees section of Note 1920 for discussion of our off-balance sheet arrangements.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued a standard that requires measurement and recognition of expected versus incurred credit losses for financial assets held. The standard is effective for the Company prospectively in our first quarter of fiscal 2020 and any impact upon adoption will be reflected through a cumulative-effect adjustment to Accumulated deficit as of the beginning of 2020. We do not anticipate the impact of adopting this standard will be material to our Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results of operations and financial condition and cash flows in future years. A description of what we consider to be our most significant critical accounting policies follows.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets of restaurants we intend to continue operating as Company restaurants (primarily PP&E, right-of-use operating lease assets and allocated intangible assets subject to amortization) annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We evaluate recoverability based on the restaurant’s forecasted undiscounted cash flows, which incorporate our best estimate of sales growth and margin improvement based upon our plans for the unit and actual results at comparable restaurants. For restaurant assets that are deemed to not be recoverable, we write-down the impaired restaurant to its estimated fair value. Key assumptions in the determination of fair value are the future after-tax cash flows of the restaurant, which are reduced by future royalties a franchisee would pay, and a discount rate. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the determination of a purchase price for the
restaurant. Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions.
In each of the years ended December 31, 2022 and 2021 our primary indicator of potential impairment for our restaurant assets was two consecutive years of operating losses. For the year ended December 31, 2020, as a result of the impacts of the COVID-19 pandemic this indicator was expanded to include restaurants that were open less than two years with cumulative operating losses for the last year or cumulative operating losses since the store open date if open less than one year.
We perform an impairment evaluation at a restaurant group level when it is more likely than not that we will refranchise restaurants as a group. Expected net sales proceeds are generally based on actual bids from the buyer, if available, or anticipated bids given the discounted projected after-tax cash flows for the group of restaurants. Historically, these anticipated bids have been reasonably accurate estimations of the proceeds ultimately received. The after-tax cash flows used in determining the anticipated bids incorporate reasonable assumptions we believe a franchisee would make such as sales growth and margin improvement as well as expectations as to the useful lives of the restaurant assets. These after-tax cash flows also include a deduction for the anticipated, future royalties we would receive under a franchise agreement with terms substantially at market entered into simultaneously with the refranchising transaction.
The discount rate used in the fair value calculations is our estimate of the required rate of return that a franchisee would expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
We evaluate indefinite-lived intangible assets for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset. Our most significant indefinite-lived intangible asset is our Habit Burger Grill brand asset with a book value of $96 million at December 31, 2022. As of our fourth quarter 2022 annual impairment testing date, the fair values of all of our indefinite-lived intangible assets were in excess of their respective carrying values and no impairment was recorded.
Impairment of Goodwill
We evaluate goodwill for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our business units (which are aligned based on geography) in our KFC, Taco Bell, Pizza Hut and Taco BellHabit Burger Grill Divisions. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from franchise royalties and Company-owned restaurant operations, if any.
Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting unit.
Future cash flows are based on growth expectations relative to recent historical performance and incorporate sales growth (from net new units or same-salessame-store sales growth) and margin improvement (for those reporting units which include Company-owned restaurant operations) assumptions that we believe a third-party buyer would assume when determining a purchase price for the reporting unit. Any margin improvement assumptions that factor into the discounted cash flows are highly correlated with sales growth as cash flow growth can be achieved through various interrelated strategies such as product pricing and restaurant productivity initiatives. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
The fair values of all our reporting units with goodwill balances were substantially in excess of their respective carrying values as of the 2019our fourth quarter 2022 goodwill testing date. As it relates to our Habit Burger Grill reporting unit, which includes a goodwill balance of $66 million as of the end of 2022, the assumptions that are most impactful to our fair value estimate include future average unit volumes (“AUVs”) and restaurant unit counts. As of the beginning of the fourth quarter of 2022, the date of our annual impairment assessment, Habit’s forecasted results for these key assumptions have improved from those relied upon in our March 31, 2020 interim impairment test (see Note 5), including actual unit closures following the onset of the COVID-19 pandemic being lower and AUVs recovering to pre—COVID levels faster than assumed in that interim impairment test.
When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit
that will be retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which include a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transaction. Appropriate adjustments are made to the fair value determinations if such franchise agreement is determined to not be at prevailing market rates. When determining whether such franchise agreement is at prevailing market rates our primary consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world. The Company believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.
The discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee is reduced by future royalties the franchisee will pay the Company. The Company thus considers the fair value of future royalties to be received under the franchise agreement as fair value retained in its determination of the goodwill to be written off when refranchising. Others may consider the fair value of these future royalties as fair value disposed of and thus would conclude that a larger percentage of a reporting unit’s fair value is disposed of in a refranchising transaction.
During 2019,2022, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was less than $1approximately $5 million.
See Note 2 for a further discussion of our policies regarding goodwill.
Pension Plans
Certain of our employees are covered under defined benefit pension plans. Our two most significant plans are in the U.S. and combined had a projected benefit obligation (“PBO”) of $1,015$755 million and a fair value of plan assets of $886$664 million at December 31, 2019.
2022.
The PBO reflects the actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBOs are highly sensitive to changes in discount rates. For our U.S. plans, we measured our PBOs using a discount rate of 3.50%5.60% at December 31, 2019.2022. The primary basis for this discount rate determination is a model that consists of a hypothetical portfolio of ten or more corporate debt instruments rated Aa or higher by Moody’s or Standard & Poor's ("Poor’s (“S&P"&P”) with cash flows that mirror our expected benefit payment cash flows under the plans. We exclude from the model those corporate debt instruments flagged by Moody’s or S&P for a potential downgrade (if the potential downgrade would result in a rating below Aa by both Moody'sMoody’s and S&P) and bonds with yields that were two standard deviations or more above the mean. In considering possible bond portfolios, the model allows the bond cash flows for a particular year to exceed the expected benefit payment cash flows for that year. Such excesses are assumed to be reinvested at appropriate one-year forward rates and used to meet the benefit payment cash flows in a future year. The weighted-average yield of this hypothetical portfolio was used to arrive at an appropriate discount rate. We also ensure that changes in the discount rate as compared to the prior year are consistent with the overall change in prevailing market rates and make adjustments as necessary. A 50 basis-point increase in this discount rate would have decreased these U.S. plans’ PBOs by approximately $64$41 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased our U.S. plans’ PBOs by approximately $71$46 million at our measurement date.
The net periodic benefit cost we will record in 20202023 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date. We expect net periodic benefit cost plus expected pension settlement chargesincome for our U.S. plans to increase approximately $10of $4 million in 2020.2023 compared to $9 million of periodic benefit cost in 2022, which represents an improvement of $13 million year-over-year. A 50 basis-point change in our discount rate assumption at our 20192022 measurement date would impact our 20202023 U.S. net periodic benefit cost by approximately $6 million. The impacts of changes in net periodic benefit costs are reflected primarily in Other pension (income) expense.
Our estimated long-term rate of return on U.S. plan assets is based upon the weighted-average of historical and expected future returns for each asset category. Our expected long-term rate of return on U.S. plan assets, for purposes of determining 20202023 pension expense, at December 31, 20192022, was 5.50%6.25%, net of administrative and investment fees paid from plan assets. We believe this rate is appropriate given the composition of our plan assets and historical market returns thereon. A 100 basis point change in our expected long-term rate of return on plan assets assumption would impact our 20202023 U.S. net periodic benefit cost by approximately $8 million. Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 5.50%6.25% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million.
A decreaseAn increase in discount rates over timeactuarial loss due to changes in plan assets, primarily due to 2022 asset returns, has largely contributed to an unrecognized pre-tax actuarial net loss of $118$70 million included in AOCIAccumulated other comprehensive income for these U.S. plans at December 31, 2019.2022. We will recognize approximately $14$1 million of such lossgain in net periodic benefit cost in 20202023 versus $1$11 million of loss recognized in 2019. See Note 14.2022.
Income Taxes
At December 31, 2019,2022, we had valuation allowances of approximately $787$458 million to reduce our $1,517$1,558 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to temporary differences in profitable U.S. federal, state and foreign jurisdictions and net operating losses in certain foreign jurisdictions, the majority of which do not expire. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions, as well as carryforward periods, and restrictions on usage.usage and prudent and feasible tax planning strategies. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans. Thus, recorded valuation allowances may be subject to material future changes.
As a matter of course, we are regularly audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income tax provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2019,2022, we had $188$128 million of unrecognized tax benefits, $8$82 million of which are temporary in nature and, if recognized, would not impact the effective tax rate.rate if recognized. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.
TheRepatriation of earnings generated after December 31, 2017, Tax Cutswill generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, Jobs Act included a mandatory deemed repatriation tax on accumulatedtherefore, exempt from U.S. federal tax. Undistributed foreign earnings ofmay still be subject to certain state and foreign subsidiaries,income and as a result, previouslywithholding taxes upon repatriation. Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings for which nooutside the U.S. deferred tax liability had been provided have now been subject to U.S. tax. Our cash currently held overseas is primarily limited to that necessary to fund working capital requirements. Thus, we have not provided taxes, including any U.S. federal and state income, foreign income, or foreign withholding taxes on the majority of our foreignunremitted earnings. In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, including U.S. statewe would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions. We believe any such taxes would be immaterial.
Ransomware Attack
On January 18, 2023, the Company announced a ransomware attack that impacted certain Information Technology (“IT”) systems. Promptly upon the detection of the incident, the Company initiated response protocols and an investigation, engaged the services of industry-leading cybersecurity and forensics professionals and notified Federal law enforcement. This incident resulted in the closure of fewer than 300 restaurants in one market for one day, and certain of the Company’s IT systems and data were affected. In addition, although data was taken from our network, there is no evidence that customer databases were accessed.
We have incurred, and may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter. We remain subject to risks and uncertainties as a result of the incident, including as a result of the data that was taken from the Company’s network as noted above. While the Company’s response to this incident is ongoing, at this time we do not believe they are indefinitely reinvested. See Note 17 forsuch impact of the incident will ultimately have a further discussionmaterial adverse effect on our business, results of our Income taxes.operations or financial condition.
|
| | | | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices and the value of our equity investment in Grubhub.prices. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of financial and commodity derivative instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for trading purposes, and we have processes in place to monitor and control their use.
Interest Rate Risk
We have a market risk exposure to changes in interest rates, principally in the U.S. Our outstanding total debt, excluding the Revolving Facility balance, finance leases and debt issuance costs and discounts, of $10.6$11.6 billion includes 77%81% fixed-rate debt and 23%19% variable-rate debt. We have attempted to minimize the interest rate risk from variable-rate debt through the use of interest rate swaps that, as of December 31, 2019,2022, result in a fixed interest rate on $1.55$1.5 billion of our variable ratevariable-rate debt. As a result, approximately 92%94% of our $10.6this $11.6 billion of outstanding debt at December 31, 20192022, is effectively fixed-rate debt. See Note 1011 for details on these issuances and repaymentsour outstanding debt and Note 1213 for details related to interest rate swaps.
As of bothAt December 31, 2019 and December 31, 20182022, a hypothetical 100 basis-point increase in short-term interest rates would result, over the following twelve-month period after consideration of the aforementioned interest rate swaps and excluding the Revolving Facility balance, in an increase of approximately $9$7 million in Interest expense, net within our Consolidated Statement of Income. These estimated amounts are based upon the current level of variable-rate debt that has not been swapped to fixed and assume no changes in the volume or composition of that debt and exclude any impact from interest income related to cash and cash equivalents.
The fair value of our cumulative fixed-rate debt of $8.2$8.5 billion as of December 31, 2019,2022, would decrease approximately $450$455 million as a result of the same hypothetical 100 basis-point increase. At December 31, 2019,2022, a hypothetical 100 basis-point decrease in short-term interest rates would decrease the asset associated with the fair value of our interest rate swaps by approximately $66$30 million. Fair value was determined based on the present value of expected future cash flows considering the risks involved and using discount rates appropriate for the durations.
Foreign Currency Exchange Rate Risk
Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations and the fair value of our foreign currency denominated financial instruments. Historically, we have chosen not to hedge foreign currency risks related to our foreign currency denominated earnings and cash flows through the use of financial instruments. In addition, we attempt to minimize the exposure related to foreign currency denominated financial instruments by purchasing goods and services from third parties in local currencies when practical. Consequently, foreign currency denominated financial instruments consist primarily of intercompany receivables and payables. At times, we utilize forward contracts and cross-currency swaps to reduce our exposure related to these intercompany receivables and payables. The notional amount and maturity dates of these contracts match those of the underlying receivables or payables such that our foreign currency exchange risk related to these instruments is minimized.
The Company’s foreign currency net asset exposure (defined as foreign currency assets less foreign currency liabilities) totaled approximately $1.2$1.1 billion as of December 31, 2019.2022. Operating in international markets exposes the Company to movements in foreign currency exchange rates. The Company’s primary exposures result from our operations in Asia-Pacific, Europe and the Americas. For the fiscal year ended December 31, 20192022, Operating Profit would have decreased approximately $130$150 million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar. This estimated reduction assumes no changes in sales volumes, local currency sales or input prices.
Commodity Price Risk
We are subject to volatility in food costs at our Company-operated restaurants as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors.
Equity Investment Risk
YUM holds 2,820,464approximately 53 million shares of GrubhubDevyani International Limited (“Devyani”) common stock (See Note 4)5). As of December 31, 2019,2022, the NYSENational Stock Exchange of India Limited composite closing sales price of GrubhubDevyani was $48.64.Indian Rupee 180.75. A hypothetical 10% decline in the price of these shares would result in a $14$12 million decrease in the fair value of these investments,this investment, which would be reflected as a charge in Investment (income) expense, net within our Consolidated Statements of Income. The effects of changes in market prices for equity securities are unpredictable, which could cause significant fluctuations in our quarterly and annual results.
|
| | | | |
Item 8. | Financial Statements and Supplementary Data. |
INDEX TO FINANCIAL INFORMATION
|
| | | | |
| Page Reference | |
Consolidated Financial Statements | | |
| | |
Report of Independent Registered Public Accounting Firm | | |
| | |
Consolidated Statements of Income | | |
| | |
Consolidated Statements of Comprehensive Income | | |
| | |
Consolidated Statements of Cash Flows | | |
| | |
Consolidated Balance Sheets | | |
| | |
Consolidated Statements of Shareholders’ Deficit | | |
| | |
Notes to Consolidated Financial Statements | | |
Financial Statement Schedules
No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the above-listed financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Yum! Brands, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Yum! Brands, Inc. and Subsidiariessubsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of income, comprehensive income, cash flows and shareholders’ deficit for each of the fiscal years in the three-year period ended December 31, 2019,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20192022 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Changes in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal year 2019 due to the adoption of Topic 842,
Leases, and for revenue from contracts with customers in fiscal year 2018 due to the adoption of Topic 606, Revenue from Contracts with Customers.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting in the accompanying Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Evaluation of unrecognized tax benefits
As discussed in Note 1718 to the consolidated financial statements, the Company has recorded unrecognized tax benefits, excluding associated interest, of $188$128 million. Tax laws are complex and often subject to different interpretations by tax payers and the respective taxingtax authorities.
We identified the evaluation of the Company’s unrecognized tax benefits as a critical audit matter. Subjective and complex auditor judgment was required to evaluate tax law and regulations, court rulings and audit settlements in variousthe related taxing jurisdictions to assessdetermine the population of significant uncertain tax positions identified by the Company arising from tax planning strategies.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls over the Company’s process offor identification of uncertain tax positions, includingpositions. This included controls related to (1) identifyidentifying tax planning strategies that create significant uncertain tax positions, (2) evaluateevaluating interpretations of tax laws and court rulings, and (3) assessassessing which tax positions may not be sustained upon examination by a taxing authority. We involved tax professionals with specialized skills and knowledge who assisted in:
•Obtaining an understanding of the Company’s implementation of tax planning strategies;
•Identifying new tax positions created by tax planning strategies and comparing the results to the Company’s identification of uncertain tax positions;
•Evaluating the Company’s interpretation of tax laws and court rulings by developing an independent assessment; and
•Performing an independent assessment to identify tax positions that may not be sustained upon examination by the respective taxing authority and comparing the results to the Company’s assessment.
Evaluation of intercompany transfer of certain intellectual property rights
As discussed in Note 17 to the consolidated financial statements, the Company completed an intercompany restructuring and transfer of certain intellectual property rights primarily to subsidiaries in the United States and United Kingdom (UK). The Company recorded a deferred tax asset of $586 million for the step-up in the tax basis to current fair value of the intellectual property rights transferred to the UK and determined the portion that is amortizable under the applicable tax law. A valuation allowance of $366 million was established for the portion of the deferred tax asset that is not expected to be realized, resulting in a net deferred tax asset of $221 million, which is expected to be amortized and recovered over a 20-year period.
We identified the evaluation of the intercompany transfer of certain intellectual property rights as a critical audit matter. Specifically, subjective and complex auditor judgment was required to evaluate management’s interpretation of UK tax law and regulations in determining the step-up in tax basis of the intellectual property rights and the portion that is amortizable under UK tax law.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s evaluation of the intercompany transfer, including controls related to evaluating UK tax laws and regulations, measurement of the tax basis resulting from the intercompany transfer and determining the amortizable portion. We involved tax professionals with specialized skills and knowledge who assisted in:
Evaluating the Company’s interpretation of UK tax laws and regulations applicable to the intercompany transfer; and
Assessing the Company’s measurement of the tax basis of the intellectual property rights transferred to the UK, including the portion of the tax basis that is amortizable under UK tax law.
/s/ KPMG LLP
We have served as the Company’s auditor since 1997.
Louisville, Kentucky
February 19, 202024, 2023
|
| | | | | | | | | | | | |
Consolidated Statements of Income |
Yum! Brands, Inc. and Subsidiaries |
Fiscal years ended December 31, 2019, 2018 and 2017 |
(in millions, except per share data) |
| | 2019 | | 2018 | | 2017 |
Revenues | | | | | | |
Company sales | | $ | 1,546 |
| | $ | 2,000 |
| | $ | 3,572 |
|
Franchise and property revenues | | 2,660 |
| | 2,482 |
| | 2,306 |
|
Franchise contributions for advertising and other services | | 1,391 |
| | 1,206 |
| | — |
|
Total revenues | | 5,597 |
| | 5,688 |
| | 5,878 |
|
Costs and Expenses, Net | | | | | | |
Company restaurant expenses | | 1,235 |
| | 1,634 |
| | 2,954 |
|
General and administrative expenses | | 917 |
| | 895 |
| | 999 |
|
Franchise and property expenses | | 180 |
| | 188 |
| | 237 |
|
Franchise advertising and other services expense | | 1,368 |
| | 1,208 |
| | — |
|
Refranchising (gain) loss | | (37 | ) | | (540 | ) | | (1,083 | ) |
Other (income) expense | | 4 |
| | 7 |
| | 10 |
|
Total costs and expenses, net | | 3,667 |
| | 3,392 |
| | 3,117 |
|
| | | | | | |
Operating Profit | | 1,930 |
| | 2,296 |
| | 2,761 |
|
| | | | | | |
Investment (income) expense, net | | 67 |
| | (9 | ) | | (5 | ) |
Other pension (income) expense | | 4 |
| | 14 |
| | 47 |
|
Interest expense, net | | 486 |
| | 452 |
| | 445 |
|
Income before income taxes | | 1,373 |
| | 1,839 |
| | 2,274 |
|
Income tax provision | | 79 |
| | 297 |
| | 934 |
|
Net Income | | $ | 1,294 |
| | $ | 1,542 |
| | $ | 1,340 |
|
| | | | | | |
Basic Earnings Per Common Share | | $ | 4.23 |
| | $ | 4.80 |
| | $ | 3.86 |
|
| | | | | | |
Diluted Earnings Per Common Share | | $ | 4.14 |
| | $ | 4.69 |
| | $ | 3.77 |
|
| | | | | | |
Dividends Declared Per Common Share | | $ | 1.68 |
| | $ | 1.44 |
| | $ | 0.90 |
|
| | | | | | |
See accompanying Notes to Consolidated Financial Statements. | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Income |
Yum! Brands, Inc. and Subsidiaries |
Fiscal years ended December 31, 2022, 2021 and 2020 |
(in millions, except per share data) |
| | 2022 | | 2021 | | 2020 |
Revenues | | | | | | |
Company sales | | $ | 2,072 | | | $ | 2,106 | | | $ | 1,810 | |
Franchise and property revenues | | 3,096 | | | 2,900 | | | 2,510 | |
Franchise contributions for advertising and other services | | 1,674 | | | 1,578 | | | 1,332 | |
Total revenues | | 6,842 | | | 6,584 | | | 5,652 | |
Costs and Expenses, Net | | | | | | |
Company restaurant expenses | | 1,745 | | | 1,725 | | | 1,506 | |
General and administrative expenses | | 1,140 | | | 1,060 | | | 1,064 | |
Franchise and property expenses | | 123 | | | 117 | | | 145 | |
Franchise advertising and other services expense | | 1,667 | | | 1,576 | | | 1,314 | |
Refranchising (gain) loss | | (27) | | | (35) | | | (34) | |
Other (income) expense | | 7 | | | 2 | | | 154 | |
Total costs and expenses, net | | 4,655 | | | 4,445 | | | 4,149 | |
| | | | | | |
Operating Profit | | 2,187 | | | 2,139 | | | 1,503 | |
Investment (income) expense, net | | (11) | | | (86) | | | (74) | |
Other pension (income) expense | | 9 | | | 7 | | | 14 | |
Interest expense, net | | 527 | | | 544 | | | 543 | |
Income before income taxes | | 1,662 | | | 1,674 | | | 1,020 | |
Income tax provision | | 337 | | | 99 | | | 116 | |
Net Income | | $ | 1,325 | | | $ | 1,575 | | | $ | 904 | |
| | | | | | |
Basic Earnings Per Common Share | | $ | 4.63 | | | $ | 5.30 | | | $ | 2.99 | |
| | | | | | |
Diluted Earnings Per Common Share | | $ | 4.57 | | | $ | 5.21 | | | $ | 2.94 | |
| | | | | | |
Dividends Declared Per Common Share | | $ | 2.28 | | | $ | 2.00 | | | $ | 1.88 | |
| | | | | | |
See accompanying Notes to Consolidated Financial Statements. | | | | | | |
|
| | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income |
Yum! Brands, Inc. and Subsidiaries | | | | | | |
Fiscal years ended December 31, 2019, 2018 and 2017 |
(in millions) | | | | | | |
| | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Net Income | | $ | 1,294 |
| | $ | 1,542 |
| | $ | 1,340 |
|
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 year | | 28 |
| | (94 | ) | | 115 |
|
Reclassifications of adjustments and (gains) losses into Net Income | | — |
| | (4 | ) | | 55 |
|
| | 28 |
| | (98 | ) | | 170 |
|
Tax (expense) benefit | | (4 | ) | | 6 |
| | (8 | ) |
| | 24 |
| | (92 | ) | | 162 |
|
| | | | | | |
Changes in pension and post-retirement benefits | | | | | | |
Unrealized gains (losses) arising during the year | | (39 | ) | | 32 |
| | (17 | ) |
Reclassification of (gains) losses into Net Income | | 10 |
| | 22 |
| | 52 |
|
| | (29 | ) | | 54 |
| | 35 |
|
Tax (expense) benefit | | 7 |
| | (13 | ) | | (14 | ) |
| | (22 | ) | | 41 |
| | 21 |
|
| | | | | | |
Changes in derivative instruments | | | | | | |
Unrealized gains (losses) arising during the year | | (51 | ) | | 19 |
| | (52 | ) |
Reclassification of (gains) losses into Net Income | | (25 | ) | | (39 | ) | | 58 |
|
| | (76 | ) | | (20 | ) | | 6 |
|
Tax (expense) benefit | | 20 |
| | 6 |
| | (2 | ) |
| | (56 | ) | | (14 | ) | | 4 |
|
| | | | | | |
Other comprehensive income (loss), net of tax | | (54 | ) | | (65 | ) | | 187 |
|
Comprehensive Income | | $ | 1,240 |
| | $ | 1,477 |
| | $ | 1,527 |
|
| | | | | | |
See accompanying Notes to Consolidated Financial Statements. |