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EX-15 - EXHIBIT 15 - YUM BRANDS INCyum-3192016xex15.htm
EX-31.1 - EXHIBIT 31.1 - YUM BRANDS INCyum-3192016xex311.htm
EX-10.2.2 - EXHIBIT 10.2.2 - YUM BRANDS INCyum-3192016xex1022.htm
EX-32.1 - EXHIBIT 32.1 - YUM BRANDS INCyum-3192016xex321.htm
EX-32.2 - EXHIBIT 32.2 - YUM BRANDS INCyum-3192016xex322.htm
EX-31.2 - EXHIBIT 31.2 - YUM BRANDS INCyum-3192016xex312.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________

FORM 10-Q

(Mark One)
[Ÿ]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934 for the quarterly period ended March 19, 2016
 
 
 
OR
 
 
 
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to _________________
 
 Commission file number 1-13163
________________________
YUM! BRANDS, INC.
(Exact name of registrant as specified in its charter)

 
North Carolina
 
13-3951308
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
1441 Gardiner Lane, Louisville, Kentucky
 
40213
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
Registrant’s telephone number, including area code:  (502) 874-8300

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ü] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer:  [ü] Accelerated filer:  [  ] Non-accelerated filer:  [  ] Smaller reporting company:  [  ]

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

 The number of shares outstanding of the Registrant’s Common Stock as of April 20, 2016 was 407,440,778 shares.
 




YUM! BRANDS, INC.

INDEX
 
 
 
Page
 
 
No.
Part I.
Financial Information
 
 
 
 
 
Item 1 - Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Income - Quarters ended
March 19, 2016 and March 21, 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income - Quarters ended
March 19, 2016 and March 21, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows – Quarters ended
March 19, 2016 and March 21, 2015
 
 
 
 
Condensed Consolidated Balance Sheets – March 19, 2016 and December 26, 2015
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2 - Management’s Discussion and Analysis of Financial Condition
              and Results of Operations
 
 
 
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
Item 4 – Controls and Procedures
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
Part II.
Other Information and Signatures
 
 
 
 
 
Item 1 – Legal Proceedings
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 6 – Exhibits
 
 
 
 
Signatures


2



PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions, except per share data)
 
 
 
 
Quarter ended
Revenues
3/19/2016
 
3/21/2015
Company sales
$
2,165


$
2,179

Franchise and license fees and income
454


443

Total revenues
2,619


2,622

Costs and Expenses, Net
 
 
 
Company restaurant expenses
 
 
 
Food and paper
649

 
688

Payroll and employee benefits
486

 
493

Occupancy and other operating expenses
597

 
616

Company restaurant expenses
1,732


1,797

General and administrative expenses
286


295

Franchise and license expenses
48


34

Closures and impairment (income) expenses
3


3

Refranchising (gain) loss
(7
)

(10
)
Other (income) expense
(7
)

(3
)
Total costs and expenses, net
2,055


2,116

Operating Profit
564


506

Interest expense, net
37


34

Income Before Income Taxes
527


472

Income tax provision
132


111

Net income – including noncontrolling interests
395


361

Net income (loss) – noncontrolling interests
4


(1
)
Net Income – YUM! Brands, Inc.
$
391


$
362

 
 
 
 
Basic Earnings Per Common Share
$
0.94


$
0.83

 
 
 
 
Diluted Earnings Per Common Share
$
0.93


$
0.81

 
 
 
 
Dividends Declared Per Common Share
$
0.46

 
$

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 


3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
 
(in millions)
 
 
 
 
 
Quarter ended
 
 
3/19/2016
 
3/21/2015
 
 
 
 
 
 
Net Income - including noncontrolling interests
$
395

 
$
361

 
Other comprehensive income (loss), net of tax
 
 
 
 
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature
 
 
 
 
Adjustments and gains (losses) arising during the period
(71
)
 
(91
)
 
 
(71
)
 
(91
)
 
Tax (expense) benefit
3

 
2

 
 
(68
)
 
(89
)
 
Changes in pension and post-retirement benefits
 
 
 
 
Unrealized gains (losses) arising during the period
1

 

 
Reclassification of (gains) losses into Net Income
3

 
11

 
 
4

 
11

 
Tax (expense) benefit
(1
)
 
(4
)
 
 
3

 
7

 
Changes in derivative instruments
 
 
 
 
Unrealized gains (losses) arising during the period
(5
)
 
13

 
Reclassification of (gains) losses into Net Income
10

 
(13
)
 
 
5

 

 
Tax (expense) benefit
(1
)
 

 
 
4

 

 
Other comprehensive income (loss), net of tax
(61
)
 
(82
)
 
Comprehensive Income - including noncontrolling interests
334

 
279

 
Comprehensive Income (loss) - noncontrolling interests
4


(2
)
 
Comprehensive Income - YUM! Brands, Inc.
$
330

 
$
281

 
 
 
 
 
 
  See accompanying Notes to Condensed Consolidated Financial Statements.


4



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
Quarter ended
 
3/19/2016
 
3/21/2015
Cash Flows – Operating Activities
 
 
 
Net Income – including noncontrolling interests
$
395

 
$
361

Depreciation and amortization
136

 
139

Closures and impairment (income) expenses
3


3

Refranchising (gain) loss
(7
)

(10
)
Contributions to defined benefit pension plans
(2
)
 
(76
)
Deferred income taxes
(25
)
 
(29
)
Equity income from investments in unconsolidated affiliates
(16
)
 
(9
)
Excess tax benefits from share-based compensation
(11
)
 
(19
)
Share-based compensation expense
13

 
15

Changes in accounts and notes receivable
33

 
3

Changes in inventories
17

 
21

Changes in prepaid expenses and other current assets

 
(27
)
Changes in accounts payable and other current liabilities
66

 
113

Changes in income taxes payable
95

 
51

Other, net
(38
)
 
(20
)
Net Cash Provided by Operating Activities
659

 
516

 
 
 
 
Cash Flows – Investing Activities
 
 
 
Capital spending
(160
)
 
(227
)
Changes in short-term investments, net
(51
)
 
(24
)
Proceeds from refranchising of restaurants
9

 
22

Other, net
1

 
33

Net Cash Used in Investing Activities
(201
)
 
(196
)
 
 
 
 
Cash Flows – Financing Activities
 
 
 
Repayments of long-term debt
(2
)
 
(3
)
Short-term borrowings by original maturity
 
 
 
More than three months - proceeds
1,400

 

More than three months - payments

 

Three months or less, net

 

Revolving credit facilities, three months or less, net
(524
)
 
53

Repurchase shares of Common Stock
(925
)
 
(124
)
Excess tax benefits from share-based compensation
11

 
19

Employee stock option proceeds
1

 
10

Dividends paid on Common Stock
(192
)
 
(178
)
Other, net
(12
)
 
(23
)
Net Cash Used in Financing Activities
(243
)
 
(246
)
Effect of Exchange Rates on Cash and Cash Equivalents
(18
)
 
23

Net Increase in Cash and Cash Equivalents
197

 
97

Cash and Cash Equivalents - Beginning of Period
737

 
578

Cash and Cash Equivalents - End of Period
$
934

 
$
675

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 


5



CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
(Unaudited)
 
 
 
3/19/2016
 
12/26/2015
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
934


$
737

Accounts and notes receivable, net
418

 
377

Inventories
210

 
229

Prepaid expenses and other current assets
279

 
241

Advertising cooperative assets, restricted
122

 
103

Total Current Assets
1,963

 
1,687

 
 
 
 
Property, plant and equipment, net
4,111


4,189

Goodwill
644

 
656

Intangible assets, net
265

 
271

Investments in unconsolidated affiliates
36

 
61

Other assets
500

 
521

Deferred income taxes
702

 
676

Total Assets
$
8,221

 
$
8,061

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable and other current liabilities
$
2,055

 
$
1,985

Income taxes payable
150

 
77

Short-term borrowings
2,321

 
922

Advertising cooperative liabilities
122

 
103

Total Current Liabilities
4,648

 
3,087

 
 
 
 
Long-term debt
2,510

 
3,041

Other liabilities and deferred credits
846

 
958

Total Liabilities
8,004

 
7,086

 
 
 
 
Redeemable noncontrolling interest
7

 
6

 
 
 
 
Shareholders’ Equity
 
 
 
Common Stock, no par value, 750 shares authorized; 407 and 420 shares issued in 2016 and 2015, respectively
2

 

Retained earnings
454

 
1,150

Accumulated other comprehensive income (loss)
(300
)

(239
)
Total Shareholders’ Equity – YUM! Brands, Inc.
156

 
911

Noncontrolling interests
54

 
58

Total Shareholders’ Equity
210

 
969

Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity
$
8,221

 
$
8,061

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 

6



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in millions, except per share data)

Note 1 - Financial Statement Presentation

We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements.  Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 (“2015 Form 10-K”).  

YUM! Brands, Inc. and Subsidiaries (collectively referred to herein as “YUM” or the “Company”) comprise primarily the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”).  References to YUM throughout these Notes to our Financial Statements are made using the first person notations of “we,” “us” or “our.”

YUM currently consists of four reporting segments:  

YUM China (“China” or “China Division”) which includes all operations in mainland China
The KFC Division which includes all operations of the KFC concept outside of China Division
The Pizza Hut Division which includes all operations of the Pizza Hut concept outside of China Division
The Taco Bell Division which includes all operations of the Taco Bell concept

Effective January, 2016 our India business was segmented by brand, integrated into the global KFC, Pizza Hut and Taco Bell Divisions, and is no longer a separate operating segment. While our consolidated results were not impacted, we have restated our historical segment information for consistent presentation. Integrating India into our Brand Divisions increased Total revenues for the KFC, Pizza Hut and Taco Bell Divisions by $20 million, $1 million and $1 million, respectively, and decreased Operating Profit by $3 million, less than $1 million and $1 million, respectively, for the quarter ended March 21, 2015.

In October, 2015 we announced our intent to separate YUM’s China business from YUM into an independent, publicly-traded company by the end of 2016. This transaction, which is expected to be a tax-free spin-off of our China business, will create two powerful, independent, focused growth companies with distinct strategies, financial profiles and investment characteristics.

Completion of the spin-off will be subject to certain conditions, including, among others, receiving final approval from the YUM Board of Directors, receipt of various regulatory approvals, receipt of an opinion of counsel with respect to certain tax matters, the effectiveness of filings related to public listing and applicable securities laws, and other terms and conditions as may be determined by the Board of Directors.

YUM’s fiscal year ends on the last Saturday in December.  The first three quarters of each fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks. Our subsidiaries operate on similar fiscal calendars except that China, India and certain other international subsidiaries operate on a monthly calendar with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter.  The current fiscal year of 2016 will have a 53rd week for YUM and our subsidiaries that do not operate on a monthly calendar, which will be included in our fourth quarter results. Our international subsidiaries that operate on a monthly calendar, including China, are not impacted by the addition of a 53rd week. Our international subsidiaries within our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting.

Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2015 Form 10-K, our financial position as of March 19, 2016, and the results of our operations, comprehensive income and cash flows for the quarters ended March 19, 2016 and March 21, 2015. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year.


7



Our significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

In April, 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 amended the then-current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 was effective for the Company beginning with the quarter ended March 19, 2016. The adoption of this standard required restatement of our consolidated balance sheet as of December 26, 2015. As a result, Other assets and Long-term debt each decreased by $13 million and Prepaid expenses and other current assets and Short-term borrowings each decreased by $1 million versus amounts previously reported.

We have reclassified certain items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 19, 2016. These reclassifications had no effect on previously reported Net Income - YUM! Brands, Inc.



Note 2 - Earnings Per Common Share (“EPS”)
 
 
Quarter ended
 
 
2016
 
2015
Net Income – YUM! Brands, Inc.
 
$
391

 
$
362

 
 
 
 
 
Weighted-average common shares outstanding (for basic calculation)
 
416


438

Effect of dilutive share-based employee compensation
 
6

 
8

Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
 
422


446

Basic EPS
 
$
0.94

 
$
0.83

Diluted EPS
 
$
0.93

 
$
0.81

Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)
 
4.5

 
6.7


(a)
These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.


Note 3 - Shareholders’ Equity

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 19, 2016 and March 21, 2015 as indicated below.  All amounts exclude applicable transaction fees.

 
 
 
Shares Repurchased (thousands)
 
Dollar Value of Shares Repurchased
 
Remaining Dollar Value of Shares that may be Repurchased
 
 
Authorization Date
 
2016
 
2015
 
2016
 
2015
 
2016
 
 
November 2013
 

 
 
1,779

 
 
$

 
 
$
133

 
 
$

 
 
 
November 2014
 

 
 
217

 
 

 
 
17

 
 

 
 
 
December 2015
 
13,275

 
 

 
 
925

 
 

 
 
8

 
 
 
Total
 
13,275

 
 
1,996

 
 
$
925

 
 
$
150

(a) 
 
$
8

 
 
 
 
 
 
 
(a)
Includes the effect of $26 million in share repurchases (0.3 million shares) with trade dates prior to March 21, 2015 but cash settlement dates subsequent to March 21, 2015.


8



On March 4, 2016 our Board of Directors authorized additional share repurchases through December 2016 of up to $500 million (excluding applicable transaction fees) of our outstanding Common Stock.

Changes in accumulated other comprehensive income (loss) ("OCI") are presented below.
 
 
Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature
 
Pension and Post-Retirement Benefits
 
Derivative Instruments
 
Total
Balance at December 26, 2015, net of tax
 
$
(109
)
 
$
(113
)
 
$
(17
)
 
$
(239
)
 
 
 
 
 
 
 
 
 
Gains (losses) arising during the year classified into accumulated OCI, net of tax
 
(68
)
 
1

 
(6
)
 
(73
)
 
 
 
 
 
 
 
 
 
(Gains) losses reclassified from accumulated OCI, net of tax
 

 
2

 
10

 
12

 
 
 
 
 
 
 
 
 
OCI, net of tax
 
(68
)
 
3

 
4

 
(61
)
 
 
 
 
 
 
 
 
 
Balance at March 19, 2016, net of tax
$
(177
)
 
$
(110
)
 
$
(13
)
 
$
(300
)


Note 4 - Items Affecting Comparability of Net Income and Cash Flows

Refranchising (Gain) Loss

The Refranchising (gain) loss by reportable segment is presented below. We do not allocate such gains and losses to our segments for performance reporting purposes.
 
 
Quarter ended
 
 
2016
 
2015
China
 
$
(3
)
 
$
(2
)
KFC Division
 
(1
)
 
(3
)
Pizza Hut Division
 
(2
)
 
1

Taco Bell Division
 
(1
)
 
(6
)
Worldwide
 
$
(7
)
 
$
(10
)

KFC U.S. Acceleration Agreement

During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we anticipate investing approximately $125 million from 2015 through 2017 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges of $9 million and $2 million for the quarters ended March 19, 2016 and March 21, 2015, respectively, for these investments. We recorded pre-tax $72 million of such charges in the year ended December 26, 2015 and we currently expect a total pre-tax charge of approximately $30 million in 2016 for these investments. These charges are not being allocated to the KFC Division segment operating results.

In addition to the investments above we have agreed to fund incremental system advertising dollars. We currently expect to fund approximately $20 million of such advertising in 2016 and $30 million in 2017. During the quarter ended March 19, 2016, we

9



expensed $4 million in incremental system advertising expense. No incremental advertising expense was recorded in the quarter ended March 21, 2015. These amounts are being recorded in the KFC Division segment operating results.

Costs Associated with the Planned Spin-off of the China Business and YUM Recapitalization

In connection with our planned separation of the YUM China business into an independent, publicly-traded company and the related recapitalization of YUM, we incurred $9 million of costs in the quarter ended March 19, 2016, which were recorded in General and administrative ("G&A") expenses. Cumulative project costs since the announcement of the planned separation total $18 million and we currently expect to incur additional cash costs of approximately $30 million to complete the spin-off transaction. These costs are not being allocated to any of our segment operating results.


Note 5 - Other (Income) Expense
 
Quarter ended
 
2016
 
2015
Equity (income) loss from investments in unconsolidated affiliates
$
(16
)
 
$
(9
)
Foreign exchange net (gain) loss and other
9

 
6

Other (income) expense
$
(7
)
 
$
(3
)


Note 6 - Supplemental Balance Sheet Information

Accounts and Notes Receivable, net

The Company’s receivables are primarily generated as a result of ongoing business relationships with our franchisees and licensees as a result of royalty and lease agreements.  Trade receivables consisting of royalties from franchisees and licensees are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable on our Condensed Consolidated Balance Sheets.  
 
3/19/2016
 
12/26/2015
Accounts and notes receivable, gross
$
438

 
$
393

Allowance for doubtful accounts
(20
)
 
(16
)
Accounts and notes receivable, net
$
418

 
$
377


Property, Plant and Equipment, net
 
3/19/2016
 
12/26/2015
Property, plant and equipment, gross
$
7,793

 
$
7,832

Accumulated depreciation and amortization
(3,682
)
 
(3,643
)
Property, plant and equipment, net
$
4,111

 
$
4,189


Assets held for sale at March 19, 2016 and December 26, 2015 total $27 million and $28 million, respectively, and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

Noncontrolling Interests

Noncontrolling interests represent the ownership interests of minority shareholders of the entities that operate KFC restaurants in Beijing and Shanghai, China.  The redeemable noncontrolling interest comprises the 7% ownership interest in Little Sheep that continues to be held by the Little Sheep founding shareholders, and is classified outside of permanent equity on our Condensed Consolidated Balance Sheets due to redemption rights held by the founding Little Sheep shareholders. A reconciliation of the beginning and ending carrying amount of the equity attributable to noncontrolling interests is as follows:


10



 
Noncontrolling Interests
 
Redeemable Noncontrolling Interest
Balance at December 26, 2015
$
58

 
$
6

Net Income (loss) – noncontrolling interests
4



Dividends declared
(7
)
 

Currency translation adjustments and other
(1
)
 
1

Balance at March 19, 2016
$
54

 
$
7


Note 7 - Income Taxes
 
Quarter ended
 
2016
 
2015
Income tax provision
$
132


$
111

Effective tax rate
25.0
%
 
23.4
%

Our effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the majority of our income being earned outside the U.S. where tax rates are generally lower than the U.S. rate.

Our first quarter effective tax rate was higher than the prior year primarily due to the increased cost of repatriating current year foreign earnings.

Note 8 - Reportable Operating Segments

We identify our operating segments based on management responsibility. As described in Note 1, effective January 1, 2016 our India business was segmented by brand and integrated into the global KFC, Pizza Hut and Taco Bell Divisions. Segment information for previous periods has been restated to reflect this reporting change. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:
 
Quarter ended
Revenues
2016
 
2015
China
$
1,303

 
$
1,256

KFC Division
625

 
662

Pizza Hut Division
265

 
272

Taco Bell Division
426


432

 
$
2,619


$
2,622

 
Quarter ended
Operating Profit
2016
 
2015
China(a)
$
256


$
190

KFC Division
160


166

Pizza Hut Division
87


81

Taco Bell Division
119


114

Unallocated and Corporate General and administrative expenses(b)
(57
)
 
(46
)
Unallocated Other income (expense)
(8
)
 
(9
)
Unallocated Refranchising gain (loss)(c)
7


10

Operating Profit
$
564


$
506

Interest expense, net
(37
)

(34
)
Income Before Income Taxes
$
527


$
472


(a)
Includes equity income from investments in unconsolidated affiliates of $16 million and $9 million for the quarters ended March 19, 2016 and March 21, 2015, respectively.


11



(b)
Primarily Corporate G&A expenses for the quarters ended March 19, 2016 and March 21, 2015. Amounts also include costs associated with the KFC U.S. Acceleration Agreement of $9 million and $2 million for the quarters ended March 19, 2016 and March 21, 2015, respectively, and $9 million related to the planned spin-off of the China business for the quarter ended March 19, 2016. See Note 4.

(c)
See the Refranchising (Gain) Loss section of Note 4.


Note 9 - Pension Benefits

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees.  The most significant of these plans, the YUM Retirement Plan, is funded. We fund our other U.S. plans as benefits are paid.  The YUM Retirement Plan and our most significant non-qualified plan in the U.S. are closed to new salaried participants.  
  
The components of net periodic benefit cost associated with our significant U.S. pension plans are as follows:

 
Quarter ended
 
2016
 
2015
Service cost
$
4

 
$
4

Interest cost
13

 
13

Expected return on plan assets
(15
)
 
(14
)
Amortization of net loss
1

 
10

Amortization of prior service cost
1

 

Net periodic benefit cost
$
4

 
$
13

 
 
 
 


Note 10 - Fair Value Measurements

As of March 19, 2016 the carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair values of notes receivable net of allowances and lease guarantees less subsequent amortization approximates their carrying values. The Company’s debt obligations, excluding capital leases, were estimated to have a fair value of $4.6 billion (Level 2), compared to their carrying value of $4.7 billion. We estimated the fair value of debt using market quotes and calculations based on market rates.

The Company has interest rate swaps accounted for as fair value hedges, foreign currency forwards and swaps accounted for as cash flow hedges and other investments, all of which are required to be measured at fair value on a recurring basis. Interest rate swaps are used to reduce our exposure to interest rate risk for a portion of our fixed-rate debt, and foreign currency forwards and swaps are used to reduce our exposure to cash flow volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The fair values of these swaps, forwards and other investments were not material as of March 19, 2016. In addition, certain of the Company's assets such as property, plant and equipment, goodwill and intangible assets, are measured at fair value on a non-recurring basis if determined to be impaired. During the quarter ended March 19, 2016, there were no significant assets or liabilities subject to non-recurring fair value measurements.



12



Note 11 - Guarantees, Commitments and Contingencies

Lease Guarantees

As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company restaurants and guaranteeing certain other leases, we are frequently contingently liable on lease agreements.  These leases have varying terms, the latest of which expires in 2065.  As of March 19, 2016, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessees was approximately $575 million.  The present value of these potential payments discounted at our pre-tax cost of debt at March 19, 2016 was approximately $475 million.  Our franchisees are the primary lessees under the vast majority of these leases.  We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases.  We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases.  Accordingly, the liability recorded for our probable exposure under such leases as of March 19, 2016 was not material.

Other Franchise Guarantees

We have provided guarantees of $21 million on behalf of franchisees for several financing programs related to specific initiatives.  The total loans outstanding under these financing programs were $62 million as of March 19, 2016.

Legal Proceedings

We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable.

The Company and Taco Bell were named as defendants in a number of putative class action suits filed in 2007, 2008, 2009 and 2010 alleging violations of California labor laws including unpaid overtime, failure to timely pay wages on termination, failure to pay accrued vacation wages, failure to pay minimum wage, denial of meal and rest breaks, improper wage statements, unpaid business expenses, wrongful termination, discrimination, conversion and unfair or unlawful business practices in violation of California Business & Professions Code §17200. Some plaintiffs also sought penalties for alleged violations of California’s Labor Code under California’s Private Attorneys General Act (“PAGA”) as well as statutory “waiting time” penalties and alleged violations of California’s Unfair Business Practices Act. Plaintiffs sought to represent a California state-wide class of hourly employees.

These matters were consolidated, and the consolidated case is styled In Re Taco Bell Wage and Hour Actions. The In Re Taco Bell Wage and Hour Actions plaintiffs filed a consolidated complaint in June 2009, and in March 2010 the court approved the parties’ stipulation to dismiss the Company from the action, leaving Taco Bell as the sole defendant. Plaintiffs filed their motion for class certification on the vacation and final pay claims in December 2010, and on September 26, 2011 the court issued its order denying the certification of the vacation and final pay claims. Plaintiffs then sought to certify four separate meal and rest break classes. On January 2, 2013, the court rejected three of the proposed classes but granted certification with respect to the late meal break class. The parties thereafter agreed on a list of putative class members, and the class notice and opt out forms were mailed on January 21, 2014.

Per order of the court, plaintiffs filed a second amended complaint to clarify the class claims. Plaintiffs also filed a motion for partial summary judgment. Taco Bell filed motions to strike and to dismiss, as well as a motion to alter or amend the second amended complaint. On August 29, 2014, the court denied plaintiffs’ motion for partial summary judgment. On that same date, the court granted Taco Bell’s motion to dismiss all but one of the PAGA claims. On October 29, 2014, plaintiffs filed a motion to amend the operative complaint and a motion to amend the class certification order. On December 16, 2014, the court partially granted both motions, rejecting plaintiffs’ proposed on-duty meal period class but certifying a limited rest break class and certifying an underpaid meal premium class, and allowing the plaintiffs to amend the complaint to reflect those certifications. On December 30, 2014, plaintiffs filed the third amended complaint. On February 26, 2015, the court denied a motion by Taco Bell to dismiss or strike the underpaid meal premium class.

Beginning on February 22, 2016, the late meal period class claim, the limited rest break class claim, the underpaid meal premium class claim, and the associated statutory “waiting time” penalty claim were tried to a jury. On March 9, 2016, the jury returned verdicts in favor of Taco Bell on the late meal period claim, the limited rest break claim, and the statutory “waiting time” penalty claim. The jury found for the plaintiffs on the underpaid meal premium class claim, awarding approximately $0.5 million. A bench trial was subsequently conducted with respect to the PAGA claims and plaintiffs’ Business & Professions Code §17200 claim. On April 8, 2016, the court returned a verdict in favor of Taco Bell on the PAGA claims and the §17200 claim. In a separate ruling issued the same day, the court also ruled that plaintiffs were entitled to prejudgment interest on the underpaid meal premium

13



class claim, awarding approximately $0.3 million. Taco Bell denies liability as to the underpaid meal premium class claim and intends to file a post-trial motion to overturn the verdict. We have provided for a reasonable estimate of the possible loss relating to this lawsuit. However, in view of the inherent uncertainties of litigation, there can be no assurance that this lawsuit will not result in losses in excess of those currently provided for in our Condensed Consolidated Financial Statements.

On May 16, 2013, a putative class action styled Bernardina Rodriguez v. Taco Bell Corp. was filed in California Superior Court. The plaintiff sought to represent a class of current and former California hourly restaurant employees alleging various violations of California labor laws including failure to provide meal and rest periods, failure to pay hourly wages, failure to provide accurate written wage statements, failure to timely pay all final wages, and unfair or unlawful business practices in violation of California Business & Professions Code §17200. This case appears to be duplicative of the In Re Taco Bell Wage and Hour Actions case described above. Taco Bell removed the case to federal court and, on June 25, 2013, plaintiff filed a first amended complaint to include a claim seeking penalties for alleged violations of California’s Labor Code under California’s Private Attorneys General Act. Taco Bell’s motion to dismiss or stay the action in light of the In Re Taco Bell Wage and Hour Actions case was denied on October 30, 2013. In April 2014 the parties stipulated to address the sufficiency of plaintiff’s legal theory as to her discount meal break claim before conducting full discovery. A hearing on the parties’ cross-summary judgment motions was held on October 22, 2014, and on October 23, 2014, the court granted Taco Bell’s motion for summary judgment on the discount meal break claim and denied plaintiff’s motion. Trial was set for mid-April 2016. Plaintiff ceased to actively pursue this matter and failed to timely file the required pre-trial statement. Subsequently, plaintiff filed a request to dismiss with prejudice all of her remaining claims, which the court approved on March 2, 2016. Plaintiff then filed a notice of appeal concerning the court’s summary judgment ruling. The Ninth Circuit has not yet set a briefing schedule.

Taco Bell denies liability and intends to vigorously defend against all claims in this lawsuit. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.

We are engaged in various other legal proceedings and have certain unresolved claims pending, the ultimate liability for which, if any, cannot be determined at this time. However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Condensed Consolidated Financial Statements.

14



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

Introduction and Overview

Yum! Brands, Inc. (“YUM” or the “Company”) operates, franchises or licenses a worldwide system of nearly 43,000 restaurants in more than 130 countries and territories, primarily through the concepts of KFC, Pizza Hut and Taco Bell. These three concepts are the global leaders in the chicken, pizza and Mexican-style food categories, respectively. Of the nearly 43,000 restaurants, 21% are operated by the Company and 79% are operated by franchisees, licensees or unconsolidated affiliates.

YUM currently consists of four reporting segments:

YUM China (“China” or “China Division”) which includes all operations in mainland China
The KFC Division which includes all operations of the KFC concept outside of China Division
The Pizza Hut Division which includes all operations of the Pizza Hut concept outside of China Division
The Taco Bell Division which includes all operations of the Taco Bell concept

Effective January, 2016 our India business was segmented by brand, integrated into the global KFC, Pizza Hut and Taco Bell Divisions, and is no longer a separate operating segment. While our consolidated results were not impacted, we have restated our historical segment information for consistent presentation.

In October, 2015 we announced our intent to separate YUM’s China business from YUM into an independent, publicly-traded company by the end of 2016. This transaction, which is expected to be a tax-free spin-off of our China business, will create two powerful, independent, focused growth companies with distinct strategies, financial profiles and investment characteristics. The new China entity will become a licensee of YUM in mainland China, with exclusive rights to the KFC, Pizza Hut and Taco Bell concepts. Upon completion of the planned spin-off, YUM will become more of a "pure play" franchisor with more stable earnings, higher profit margins, lower capital requirements and stronger cash flow conversion. Consistent with this strategy YUM is targeting 96% franchisee ownership of its restaurants by the end of 2017.

We have also announced our intention to return substantial capital to shareholders prior to this planned spin-off, the majority of which will be funded by incremental borrowings. With this recapitalization, the Company is transitioning to a non-investment grade credit rating with a balance sheet more consistent with highly-levered peer restaurant franchise companies. Moreover, this will allow for an ongoing return-of-capital framework that will seek to optimize the Company's long-term growth rate on a per-share basis.

Completion of the spin-off will be subject to certain conditions, including receiving final approval from the YUM Board of Directors, receipt of various regulatory approvals, receipt of an opinion of counsel with respect to certain tax matters, the effectiveness of filings related to public listing and applicable securities laws, and other terms and conditions as may be determined by the Board of Directors. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.

This Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Cautionary Note Regarding Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 (“2015 Form 10-K”). References to YUM throughout this discussion are made in first person notations of “we,” “us” or “our.”

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's performance. Throughout this MD&A, we commonly discuss the following performance metrics:

The Company provides certain percentage changes excluding the impact of foreign currency translation (“FX” or “Forex”).  These amounts are derived by translating current year results at prior year average exchange rates.  We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

System sales growth includes the results of all restaurants regardless of ownership, including company-owned, franchise, unconsolidated affiliate and license restaurants that operate our Concepts, except for non-company-owned restaurants for which we do not receive a sales-based royalty.  Sales of franchise, unconsolidated affiliate and license restaurants typically generate ongoing franchise and license fees for the Company (typically at a rate of 4% to 6% of sales).  Franchise, unconsolidated affiliate and license restaurant sales are not included in Company sales on the Condensed Consolidated

15



Statements of Income; however, the franchise and license fees 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 revenue drivers, Company and franchise same-store sales as well as net unit growth.

Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the YUM system one year or more.

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. Within the Company Sales and Restaurant Profit analyses, Store Portfolio Actions represent the net impact of new unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in costs such as inflation/deflation.

Operating Margin is Operating Profit divided by Total revenues.

Core Operating Profit growth and Core Operating margin growth exclude the impact of foreign currency translation and Special Items.

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") throughout this MD&A, the Company provides non-GAAP measurements which present operating results on a basis before items that we have deemed Special. The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results.  This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of earnings before Special Items provides additional information to investors to facilitate the comparison of past and present operations, excluding those items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

All Note references herein refer to the accompanying 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.


16



2016 Growth Model

As communicated in December, 2015 (see specific guidance at www.yum.com/investors/financial-information/guidance) we expected Core Operating Profit growth of 10% in 2016, which includes the impact of 2016 having a 53rd week. While we expect to spin off our China business prior to the end of 2016, this target assumes our China business will remain part of YUM through the end of 2016.

Results of Operations

Summary  

For the quarter ended March 19, 2016 diluted EPS, excluding Special Items, increased 19% to $0.95 per share.

Quarter highlights:

 
Change
 
System Sales
%(a)
Same-Store Sales %
Units %
Core Operating Profit %
Core Operating Margin (ppts)
China Division
+11
+6
+5
+42
+4.6
KFC Division
+5
+1
+2
+4
+0.3
Pizza Hut Division
+4
+3
+1
+9
+2.6
Taco Bell Division
+3
+1
+3
+4
+1.5
Worldwide
+5
+2
+2
+21
+2.9

(a)
System Sales percentages as shown in table exclude the impact of foreign currency translation.

Additionally:

Foreign currency translation negatively impacted our reported first quarter Operating Profit by $28 million, which included $13 million from our China Division.

Our first quarter effective tax rate, excluding Special Items, increased to 25.0% from 23.3%.

In the first quarter of 2016 China Division same-store sales grew 6%, which included 12% same-store sales growth for KFC due to a successful Chinese New Year promotion. This sales growth, along with strong store-level productivity and commodity deflation, more than offset weakness at Pizza Hut Casual Dining and resulted in first quarter 2016 Core Operating Profit growth of 42% for our China Division. See the Division discussions within this Results of Operations section of this MD&A for details on our Divisions’ first quarter results.

Given YUM’s outperformance relative to expectations in the first quarter, we are raising our full year 2016 Core Operating Profit growth expectations from 10% to 12%. This takes into account the strong first quarter produced by KFC China, weakness at Pizza Hut Casual Dining in China, the expected benefit from an upcoming change in China's retail tax structure (see the "Significant Known Events, Trends or Uncertainties Expected to Impact Future Results" section of this MD&A), and our brand divisions continuing to produce results consistent with our initial 2016 targets. While we are raising our Operating Profit expectations for YUM, we are maintaining our expectations for China’s same-store sales growth of 2%-3% for the full year.


17



Worldwide

The Consolidated Results of Operations for the quarters ended March 19, 2016 and March 21, 2015 are presented below:
 
Quarter ended
 
2016
 
2015
 
% B/(W)
Company sales
$
2,165

 
$
2,179

 
(1
)
 
Franchise and license fees and income
454

 
443

 
3

 
Total revenues
$
2,619

 
$
2,622

 

 
 
 
 
 
 
 
 
Restaurant profit
$
433


$
382

 
13

 
Restaurant margin %
20.0
%
 
17.5
%
 
2.5

ppts.
 
 
 
 
 
 
 
General and administrative ("G&A") expenses
$
286

 
$
295

 
3

 
Franchise and license expenses
48


34

 
(36
)
 
Closures and impairment (income) expenses
3


3

 
3

 
Refranchising (gain) loss
(7
)

(10
)
 
(33
)
 
Other (income) expense
(7
)

(3
)
 
NM

 
Operating Profit
$
564


$
506

 
12

 
Operating margin %
21.5
%
 
19.3
%
 
2.2

ppts.
 
 
 
 
 
 
 
Interest expense, net
$
37

 
$
34

 
(9
)
 
Income tax provision
132


111

 
(19
)
 
Effective Tax Rate
25.0
%

23.4
%
 
(1.6
)
ppts.
 
 
 
 
 
 
 
Net Income – including noncontrolling interests
$
395


$
361

 
9

 
Net Income (loss) – noncontrolling interests
4


(1
)
 
NM

 
Net Income – YUM! Brands, Inc.
$
391


$
362

 
8

 
 
 
 
 
 
 
 
Diluted earnings per share (a)
$
0.93


$
0.81

 
14

 
Diluted earnings per share before Special Items (a)
$
0.95

 
$
0.80

 
19

 

(a)
See Note 2 for the number of shares used in this calculation.
 
Quarter ended
 
 
 
 
 
2016
 
2015
 
 
 
System Sales Growth, reported
1
%
 
%
 
 
 
System Sales Growth, excluding FX
5
%
 
4
%
 
 
 
 
 
 
 
 
 
 
Unit Count
3/19/2016

 
3/21/2015

 
% Increase (Decrease)
Franchise & License
32,987

 
32,153

 
3
 
Company-owned
8,935

 
8,768

 
2
 
Unconsolidated Affiliates
803

 
770

 
4
 
 
42,725

 
41,691

 
2
 


18



Special Items

Special Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.

 
 
Quarter ended
Detail of Special Items
 
2016
 
2015
Costs associated with the planned spin-off of the China business and YUM recapitalization (See Note 4)
 
$
(9
)
 
$

Costs associated with KFC U.S. Acceleration Agreement (See Note 4)
 
(9
)
 
(2
)
Refranchising initiatives(a)
 
3

 
7

Total Special Items Income (Expense)
 
(15
)
 
5

Tax Benefit (Expense) on Special Items(b)
 
4

 
(2
)
Special Items Income (Expense), net of tax
 
$
(11
)
 
$
3

Average diluted shares outstanding
 
422


446

Special Items diluted EPS
 
$
(0.02
)
 
$
0.01

 
 
 
 
 
Reconciliation of Operating Profit Before Special Items to Reported Operating Profit
 
 
 
 
Operating Profit before Special Items
 
$
579

 
$
501

Special Items Income (Expense)
 
(15
)
 
5

Reported Operating Profit
 
$
564


$
506

 
 
 
 
 
Reconciliation of EPS Before Special Items to Reported EPS
 
 
 
 
Diluted EPS before Special Items
 
$
0.95

 
$
0.80

Special Items EPS
 
(0.02
)
 
0.01

Reported EPS
 
$
0.93


$
0.81

 
 
 
 
 
Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate
 
 
 
 
Effective Tax Rate before Special Items
 
25.0
%
 
23.3
%
Impact on Tax Rate as a result of Special Items(b)
 
%
 
0.1
%
Reported Effective Tax Rate
 
25.0
%

23.4
%

(a)
We have historically recorded refranchising gains and losses in the U.S. as Special Items due to the scope of our refranchising program and the volatility in associated gains and losses. Beginning in 2016, we are also including all international refranchising gains and losses, excluding China, in Special Items. The inclusion in Special Items of these additional international refranchising gains and losses is the result of the anticipated size and volatility of refranchising initiatives outside the U.S. that will take place in connection with our previously announced plans to increase franchise ownership of our global restaurants to 96% by the end of 2017. International refranchising gains and losses in the first quarter of 2015 were not significant and have not been reclassified into Special Items. During the quarters ended March 19, 2016 and March 21, 2015 we recorded refranchising gains of $3 million and $7 million, respectively, that have been reflected as Special Items.

(b)
The tax benefit (expense) was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.


19



China Division

The China Division has 7,205 units, predominately KFC and Pizza Hut Casual Dining restaurants which are the leading quick service and casual dining restaurant brands, respectively, in mainland China. Given our strong competitive position, a growing economy and a population of approximately 1.4 billion in mainland China, the Company has rapidly added KFC and Pizza Hut Casual Dining restaurants and accelerated the development of Pizza Hut Home Service (home delivery). Our 2016 targets for the China Division include same-store sales growth of 2%-3%, at least 425 net new units and Operating Profit growth of 10%, excluding the impact of foreign currency translation. Given our performance relative to expectations in the first quarter, combined with an expected positive benefit from a change in China’s retail tax structure, we now believe 2016 operating profit growth will be greater than originally expected.
 
 
Quarter ended
 
 
 
 
 
 
% B/(W)
 
 
2016
 
2015
 
Reported
 
Ex FX
Company sales
 
$
1,278

 
$
1,235

 
3

 
 
9

 
Franchise and license fees and income
 
25

 
21

 
19

 
 
25

 
Total revenues
 
$
1,303

 
$
1,256

 
4

 
 
9

 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
286

 
$
233

 
23

 
 
29

 
Restaurant margin %
 
22.4
%
 
18.9
%
 
3.5

ppts.
 
3.4

ppts.
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
66

 
$
68

 
3

 
 
(2
)
 
Operating Profit
 
$
256

 
$
190

 
35

 
 
42

 
Operating margin %
 
19.7
%
 
15.1
%
 
4.6

ppts.
 
4.6

ppts.
 
 
Quarter ended
 
 
 
2016
 
2015
 
System Sales Growth, reported
 
6
%
 
(9
)%
 
System Sales Growth, excluding FX
 
11
%
 
(6
)%
 
Same-Store Sales Growth %
 
6
%
 
(12
)%
 
 
 
 
 
 
 
% Increase (Decrease)
 
Unit Count
 
3/19/2016
 
3/21/2015
 
 
Company-owned
 
5,779

 
5,521

 
5
 
 
Unconsolidated Affiliates
 
803

 
770

 
4
 
 
Franchise & License
 
623

 
555

 
12
 
 
 
 
7,205

 
6,846

 
5
 
 

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
Quarter ended
Income / (Expense)
2015
 
Store Portfolio Actions
 
Other
 
FX
 
2016
Company sales
$
1,235

 
$
48

 
$
60

 
$
(65
)
 
$
1,278

Cost of sales
(392
)
 
(12
)
 
(1
)
 
20

 
(385
)
Cost of labor
(244
)
 
(10
)
 
(4
)
 
13

 
(245
)
Occupancy and other
(366
)
 
(13
)
 
(2
)
 
19

 
(362
)
Company restaurant expenses
$
(1,002
)
 
$
(35
)
 
$
(7
)
 
$
52

 
$
(992
)
Restaurant profit
$
233

 
$
13

 
$
53

 
$
(13
)
 
$
286

 
 
 
 
 
 
 
 
 
 

20



The increase in Company sales and Restaurant profit associated with store portfolio actions was driven by net new unit growth, partially offset by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 4%, productivity initiatives and 2% commodity deflation, partially offset by 8% wage rate inflation.

Franchise and License Fees and Income

The increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by franchise and license same-store sales growth of 13%, refranchising and net new unit growth.

G&A Expenses

The increase in G&A expenses, excluding the impact of foreign currency translation, was driven by higher compensation costs due to wage inflation and increased headcount.

Operating Profit

The increase in Operating Profit, excluding the impact of foreign currency translation, was driven by the impact of same-store sales growth, net new unit growth and lower restaurant operating costs. Additionally, leap year added an extra day in 2016 resulting in incremental Operating Profit of $6 million.

KFC Division

The KFC Division has 14,941 units, approximately 70% of which are located outside the U.S. The KFC Division has experienced significant unit growth in emerging markets, which comprised approximately 40% of both the Division’s units and profits, respectively, as of the end of 2015. Additionally, 90% of the KFC Division units were operated by franchisees and licensees as of the end of 2015. Our 2016 targets for the KFC Division include same-store sales growth of 3%, at least 475 net new international units and Operating Profit growth of 11%, excluding the impact of foreign currency translation and including the impact of a 53rd week.
 
 
Quarter ended
 
 
 
 
 
 
% B/(W)
 
 
2016
 
2015
 
Reported
 
Ex FX
Company sales
 
$
430

 
$
464

 
(7
)
 
 
2

 
Franchise and license fees and income
 
195

 
198

 
(1
)
 
 
6

 
Total revenues
 
$
625

 
$
662

 
(5
)
 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
64

 
$
67

 
(4
)
 
 
5

 
Restaurant margin %
 
14.9
%
 
14.5
%
 
0.4

ppts.
 
0.3

ppts.
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
76

 
$
82

 
6

 
 

 
Operating Profit
 
$
160

 
$
166

 
(4
)
 
 
4

 
Operating margin %
 
25.5
%
 
25.0
%
 
0.5

ppts.
 
0.3

ppts.
 
 
Quarter ended
 
 
 
2016
 
2015
 
System Sales Growth, reported
 
(2
)%
 
1
%
 
System Sales Growth, excluding FX
 
5
 %
 
8
%
 
Same-Store Sales Growth %
 
1
 %
 
4
%
 
 
 
 
 
 
 
% Increase (Decrease)
 
Unit Count
 
3/19/2016

 
3/21/2015

 
 
Franchise & License
 
13,437

 
13,058

 
3
 
 
Company-owned
 
1,504

 
1,526

 
(1
)
 
 
 
14,941

 
14,584

 
2
 
 

21




Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
Quarter ended
Income / (Expense)
2015
 
Store Portfolio Actions
 
Other
 
FX
 
2016
Company sales
$
464

 
$
8

 
$
2

 
$
(44
)
 
$
430

Cost of sales
(161
)
 
(3
)
 
3

 
16

 
(145
)
Cost of labor
(107
)
 
(2
)
 
(4
)
 
10

 
(103
)
Occupancy and other
(129
)
 
(1
)
 

 
12

 
(118
)
Company restaurant expenses
$
(397
)
 
$
(6
)
 
$
(1
)
 
$
38

 
$
(366
)
Restaurant profit
$
67

 
$
2

 
$
1

 
$
(6
)
 
$
64

 
 
 
 
 
 
 
 
 
 
The increase in Company sales and Restaurant profit associated with store portfolio actions was driven by net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 1% and lower commodity costs, partially offset by wage rate inflation.

Franchise and License Fees and Income

The increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by net new unit growth, refranchising, and franchise and license same-store sales growth of 1%.

G&A Expenses

G&A expenses, excluding the impact of foreign currency translation, were even with the prior year, as higher international headcount and incentive compensation costs were offset by lower U.S. pension costs.

Operating Profit

The increase in Operating Profit, excluding the impact of foreign currency translation, was driven by net new unit and same-store sales growth, partially offset by higher advertising contributions associated with the KFC U.S. Acceleration Agreement. Excluding the impact of these higher advertising contributions and foreign currency translation, Operating Profit grew 7%.

Pizza Hut Division

The Pizza Hut Division has 14,142 units, approximately 55% of which are located in the U.S. The Pizza Hut Division operates as one brand that uses multiple distribution channels including delivery, dine-in and express (e.g. airports). Emerging markets comprised approximately 20% of both units and profits for the Division as of the end of 2015. Additionally, 95% of the Pizza Hut Division units were operated by franchisees and licensees as of the end of 2015. Our 2016 targets for the Pizza Hut Division include same-store sales growth of 3%, at least 325 net new international units and Operating Profit growth of 7%, excluding the impact of foreign currency translation and including the impact of a 53rd week.


22



 
 
Quarter ended
 
 
 
 
 
 
% B/(W)
 
 
2016
 
2015
 
Reported
 
Ex FX
Company sales
 
$
132

 
$
144

 
(8
)
 
 
(6
)
 
Franchise and license fees and income
 
133

 
128

 
3

 
 
6

 
Total revenues
 
$
265

 
$
272

 
(3
)
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
15

 
$
17

 
(11
)
 
 
(12
)
 
Restaurant margin %
 
11.1
%
 
11.6
%
 
(0.5
)
ppts.
 
(0.8
)
ppts.
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
50

 
$
57

 
14

 
 
10

 
Operating Profit
 
$
87

 
$
81

 
7

 
 
9

 
Operating margin %
 
32.9
%
 
29.8
%
 
3.1

ppts.
 
2.6

ppts.
 
 
Quarter ended
 
 
 
2016
 
2015
 
System Sales Growth, reported
 
1
%
 
(1
)%
 
System Sales Growth, excluding FX
 
4
%
 
2
 %
 
Same-Store Sales Growth %
 
3
%
 
 %
 
 
 
 
 
 
 
% Increase (Decrease)
 
Unit Count
 
3/19/2016

 
3/21/2015

 
 
Franchise & License
 
13,393

 
13,236

 
1
 
 
Company-owned
 
749

 
790

 
(5
)
 
 
 
14,142

 
14,026

 
1
 
 

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
Quarter ended
Income / (Expense)
2015
 
Store Portfolio Actions
 
Other
 
FX
 
2016
Company sales
$
144

 
$
(13
)
 
$
4

 
$
(3
)
 
$
132

Cost of sales
(40
)
 
4

 
(1
)
 
1

 
(36
)
Cost of labor
(44
)
 
4

 
(2
)
 
1

 
(41
)
Occupancy and other
(43
)
 
4

 
(2
)
 
1

 
(40
)
Company restaurant expenses
$
(127
)
 
$
12

 
$
(5
)
 
$
3

 
$
(117
)
Restaurant profit
$
17

 
$
(1
)
 
$
(1
)
 
$

 
$
15

 
 
 
 
 
 
 
 
 
 
The decrease in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were wage rate inflation and higher self-insurance costs, offset by company same-store sales growth of 4%.

Franchise and License Fees and Income

The increase in Franchise and license fees and income, excluding the impact of foreign currency translation, was driven by franchise and license same-store sales growth of 3% and refranchising.


23



G&A Expenses

The decrease in G&A expenses, excluding the impact of foreign currency translation, was driven by lapping prior year litigation costs and lower U.S. pension costs.

Operating Profit

The increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth and lower G&A expenses, partially offset by higher restaurant operating costs.

Taco Bell Division

The Taco Bell Division has 6,437 units, the vast majority of which are in the U.S. The Company owns 15% of the Taco Bell units in the U.S., where the brand has historically achieved high restaurant margins and returns. Our 2016 targets for the Taco Bell Division include same-store sales growth of 3%, at least 225 net new units and Operating Profit growth of 9%, including the impact of a 53rd week.

 
 
Quarter ended
 
 
 
 
 
 
% B/(W)
 
 
2016
 
2015
 
Reported
 
Ex FX
Company sales
 
$
325

 
$
336

 
(3
)
 
 
(3
)
 
Franchise and license fees and income
 
101

 
96

 
6

 
 
6

 
Total revenues
 
$
426

 
$
432

 
(1
)
 
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant profit
 
$
68

 
$
65

 
4

 
 
4

 
Restaurant margin %
 
21.0
%
 
19.5
%
 
1.5

ppts.
 
1.5

ppts.
 
 
 
 
 
 
 
 
 
 
 
G&A expenses
 
$
46

 
$
44

 
(6
)
 
 
(7
)
 
Operating Profit
 
$
119

 
$
114

 
4

 
 
4

 
Operating margin %
 
28.0
%
 
26.5
%
 
1.5

ppts.
 
1.5

ppts.
 
 
Quarter ended
 
 
 
2016
 
2015
 
System Sales Growth, reported
 
3
%
 
9
%
 
System Sales Growth, excluding FX
 
3
%
 
9
%
 
Same-Store Sales Growth %
 
1
%
 
6
%
 
 
 
 
 
 
 
% Increase (Decrease)
 
Unit Count
 
3/19/2016

 
3/21/2015

 
 
Franchise & License
 
5,534

 
5,304

 
4
 
 
Company-owned
 
903

 
931

 
(3
)
 
 
 
6,437

 
6,235

 
3
 
 



24



Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:
 
Quarter ended
Income / (Expense)
2015
 
Store Portfolio Actions
 
Other
 
2016
Company sales
$
336

 
$
(10
)
 
$
(1
)
 
$
325

Cost of sales
(95
)
 
3

 
9

 
(83
)
Cost of labor
(98
)
 
3

 
(2
)
 
(97
)
Occupancy and other
(78
)
 
3

 
(2
)
 
(77
)
Company restaurant expense
$
(271
)
 
$
9

 
$
5

 
$
(257
)
Restaurant profit
$
65

 
$
(1
)
 
$
4

 
$
68

 
 
 
 
 
 
 
 
The decrease in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising, partially offset by net new unit growth. Significant other factors impacting Restaurant profit were lower commodity costs and the favorable impact of pricing, partially offset by transaction declines and labor inflation. Company same-store sales were even for the quarter.

Franchise and License Fees and Income

The increase in Franchise and license fees and income was driven by net new unit growth, refranchising, and franchise and license same-store sales growth of 1%.

G&A Expenses

The increase in G&A expenses, excluding the impact of foreign currency translation, was driven by higher legal fees and higher salaries and benefits, partially offset by lower U.S. pension costs.

Operating Profit

The increase in Operating Profit was driven by net new unit and same-store sales growth, partially offset by higher G&A expenses.


Corporate & Unallocated
 
 
Quarter ended
(Expense) / Income
 
2016
 
2015
 
% B/(W)
Corporate G&A expenses
 
$
(48
)
 
$
(44
)
 
(10
)
 
Unallocated Franchise and License expenses
 
(9
)
 
(2
)
 
NM

 
Unallocated Refranchising gain (loss) (See Note 4)
 
7

 
10

 
(33
)
 
Other unallocated
 
(8
)
 
(9
)
 
17

 
Interest expense, net
 
(37
)
 
(34
)
 
(9
)
 
Income tax provision (See Note 7)
 
(132
)
 
(111
)
 
(19
)
 
Effective tax rate (See Note 7)
 
25.0
%
 
23.4
%
 
(1.6
)