NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in millions, except per share data)
Note 1 - Financial Statement Presentation
We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“2018 Form 10-K”).
YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchises or operates a system of over 49,000 quick service restaurants in more than 145 countries and territories. At September 30, 2019, 98% of these restaurants were owned and operated by franchisees. The Company’s KFC, Pizza Hut and Taco Bell brands (collectively the “Concepts”) are global leaders of the chicken, pizza and Mexican-style food categories.
As of September 30, 2019, YUM consisted of three operating segments:
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•
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The KFC Division which includes our worldwide operations of the KFC concept
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•
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The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
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•
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The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
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YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. Our U.S. subsidiaries and certain international subsidiaries operate on a weekly periodic calendar where the first three quarters of each fiscal year consists of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks. For our subsidiaries that operate on this weekly periodic calendar, 2019 will include a 53rd week. Our remaining international subsidiaries operate on a monthly calendar similar to that on which YUM operates.
Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2018 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year.
Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.
We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 30, 2019. These reclassifications had no effect on previously reported Net Income.
Note 2 - Lease Accounting
Starting in February 2016 and continuing into 2019, the Financial Accounting Standards Board ("FASB") issued standards on the recognition and measurement of leases ("Topic 842"). We adopted these standards beginning with the quarter ended March 31, 2019, using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of 2019 and have not recast the comparative periods presented in the Condensed Consolidated Financial Statements. The standards provide a number of optional practical expedients and policy elections in transition. We elected the ‘package of practical expedients’ under which we did not reassess under the standards our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements. Refer to Note 5 for information regarding the adjustments recorded to our Condensed Consolidated Balance Sheet as of the beginning of the quarter ended March 31, 2019 to reflect the adoption of Topic 842. Below is information about the nature of our leases, accounting policies and assumptions subsequent to adopting Topic 842 and other required disclosures.
In certain instances, we lease or sublease certain restaurants to franchisees. Our lessor and sublease portfolio primarily consists of stores that have been leased to franchisees subsequent to refranchising transactions. Our most significant leases with lease and non-lease components are leases with our franchisees that include both the right to use a restaurant as well as a license of the intellectual property associated with our Concepts’ brands. For these leases, which are primarily classified as operating leases, we account for the lease and non-lease components separately. Revenues from rental agreements with franchisees are presented within Franchise and property revenues in our Condensed Consolidated Statements of Income and related expenses (e.g. depreciation and rent expense) are presented within Franchise and property expenses. The impact of adopting Topic 842 on the accounting for our lessor and sublease portfolio was not significant.
We lease land, buildings or both for certain of our restaurants and restaurant support centers worldwide. Rental expense for leased restaurants is presented in our Condensed Consolidated Statements of Income as Company restaurant expenses and rental expense for restaurant support centers is presented as General and administrative expenses. The length of our lease terms, which vary by country and often include renewal options, are an important factor in determining the appropriate accounting for leases including the initial classification of the lease as finance (referred to as “capital” leases prior to the adoption of Topic 842) or operating as well as the timing of recognition of rent expense over the duration of the lease. We include renewal option periods in determining the term of our leases when failure to renew the lease would impose a penalty on the Company in such an amount that a renewal appears to be reasonably certain at the commencement of the lease. The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements that might be impaired if we choose not to continue the use of the leased property. Our leasing activity for other assets, including equipment, is not significant.
Prior to the adoption of Topic 842 (“Legacy GAAP”) liabilities for future rental payments under operating leases were not recognized on the balance sheet of the Company except when recognizing a liability was necessary to reflect the impact of recognizing rent expense on a straight-line basis. Upon the adoption of Topic 842, right-of-use assets and liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. Such assets and liabilities have historically always been recorded for finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Subsequent amortization of the right-of-use asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. For finance leases, the right-of-use asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. As most of our leases do not provide an implicit discount rate, we use our incremental secured borrowing rate based on the information available at commencement date, including the lease term and currency, in determining the present value of lease payments for both operating and finance leases. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Right-of-use assets are assessed for impairment in accordance with our long-lived asset impairment policy, which is performed annually or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We reassess lease classification and remeasure right-of-use assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with Topic 842. The difference between operating lease rental expense recognized in our Condensed Consolidated Statements of Income and cash payments for operating leases is recognized within Other, net within Net Cash Provided by Operating Activities in our Condensed Consolidated Statements of Cash Flows.
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The components of lease expense were as follows:
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Quarter Ended
9/30/2019
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Year to date 9/30/2019
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Operating lease cost
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$
|
18
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|
|
$
|
55
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|
Finance lease cost
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Amortization of right-of-use assets
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—
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|
2
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|
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Interest on lease liabilities
|
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1
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|
|
2
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Total finance lease cost
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1
|
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4
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Sublease income
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(16
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)
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(50
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)
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Supplemental cash flow information related to leases was as follows:
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Year to date
9/30/2019
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Cash paid for amounts included in the measurement of lease liabilities
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Operating cash flows from operating leases
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$
|
73
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|
|
Operating cash flows from finance leases
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2
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|
Financing cash flows from finance leases
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3
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|
|
Right-of-use assets obtained in exchange for lease obligations
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|
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Operating leases
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67
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Finance leases
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|
8
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|
Supplemental balance sheet information related to leases was as follows:
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|
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|
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|
|
9/30/2019
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Condensed Consolidated Balance Sheet
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Assets
|
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|
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Operating lease right-of-use assets
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|
$
|
657
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|
Other assets
|
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Finance lease right-of-use assets
|
|
36
|
|
|
Property, plant and equipment, net
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Total right-of-use assets(a)
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$
|
693
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|
|
|
|
|
|
|
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Liabilities
|
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|
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Current
|
|
|
|
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Operating
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$
|
69
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Accounts payable and other current liabilities
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Finance
|
|
7
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|
Short-term borrowings
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Non-current
|
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|
|
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Operating
|
|
653
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Other liabilities and deferred credits
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Finance
|
|
62
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|
Long-term debt
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Total lease liabilities(a)
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$
|
791
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|
|
|
|
|
|
|
|
Weighted-average Remaining Lease Term (in years)
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|
|
|
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Operating leases
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12.8
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|
|
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|
Finance leases
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12.6
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|
|
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|
|
|
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Weighted-average Discount Rate
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|
|
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Operating leases
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5.5
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%
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Finance leases
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|
6.1
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%
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|
|
|
|
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(a)
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U.S. operating lease right-of-use assets and liabilities totaled $298 million and $352 million, respectively, as of September 30, 2019 and primarily related to Taco Bell U.S.
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Future minimum lease payments as of September 30, 2019, including rental payments for lease renewal options we are reasonably certain to exercise were as follows:
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Commitments
|
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|
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Finance
|
|
Operating
|
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Less than 1 year
|
|
$
|
10
|
|
|
$
|
110
|
|
|
1-2 years
|
|
9
|
|
|
101
|
|
|
2-3 years
|
|
9
|
|
|
92
|
|
|
3-4 years
|
|
8
|
|
|
83
|
|
|
4-5 years
|
|
7
|
|
|
79
|
|
|
Thereafter
|
|
54
|
|
|
548
|
|
|
Total lease payments
|
|
97
|
|
|
1,013
|
|
|
Less imputed interest
|
|
(28
|
)
|
|
(291
|
)
|
|
Total lease liabilities
|
|
$
|
69
|
|
|
$
|
722
|
|
Future minimum lease payments under the non-cancellable term of leases as of December 31, 2018 as required to be disclosed under Legacy GAAP were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
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|
|
Capital
|
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Operating
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|
2019
|
|
$
|
10
|
|
|
$
|
103
|
|
|
2020
|
|
10
|
|
|
89
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|
|
2021
|
|
9
|
|
|
78
|
|
|
2022
|
|
8
|
|
|
71
|
|
|
2023
|
|
8
|
|
|
61
|
|
|
Thereafter
|
|
58
|
|
|
384
|
|
|
Total lease payments
|
|
$
|
103
|
|
|
$
|
786
|
|
Note 3 - Earnings Per Common Share (“EPS”)
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|
|
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|
|
|
|
|
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|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net Income
|
|
$
|
255
|
|
|
$
|
454
|
|
|
$
|
806
|
|
|
$
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (for basic calculation)
|
|
306
|
|
|
318
|
|
|
307
|
|
|
325
|
|
|
Effect of dilutive share-based employee compensation
|
|
7
|
|
|
7
|
|
|
7
|
|
|
7
|
|
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
|
|
313
|
|
|
325
|
|
|
314
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.83
|
|
|
$
|
1.43
|
|
|
$
|
2.63
|
|
|
$
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
0.81
|
|
|
$
|
1.40
|
|
|
$
|
2.57
|
|
|
$
|
3.64
|
|
|
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)
|
|
0.1
|
|
|
2.2
|
|
|
1.9
|
|
|
1.9
|
|
|
|
|
|
(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 4 - Shareholders’ Deficit
Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended September 30, 2019 and 2018 as indicated below. All amounts exclude applicable transaction fees.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased (thousands)
|
|
Dollar Value of Shares Repurchased
|
|
Remaining Dollar Value of Shares that may be Repurchased
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2017 Authorization
|
|
—
|
|
|
|
18,240
|
|
|
|
$
|
—
|
|
|
|
$
|
1,500
|
|
|
|
$
|
—
|
|
|
|
|
|
August 2018 Authorization
|
|
4,541
|
|
|
|
2,244
|
|
|
|
476
|
|
|
|
198
|
|
|
|
630
|
|
|
|
|
|
Total
|
|
4,541
|
|
(a)
|
|
20,484
|
|
(b)
|
|
$
|
476
|
|
(a)
|
|
$
|
1,698
|
|
(b)
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes the effect of $9 million in share repurchases (0.09 million shares) with trade dates on, or prior to, September 30, 2019, but cash settlement dates subsequent to September 30, 2019 and excludes the effect of $5 million in share repurchases (0.05 million shares) with trade dates on, or prior to, December 31, 2018, but cash settlement dates subsequent to December 31, 2018.
|
|
|
|
|
(b)
|
Includes the effect of $14 million in share repurchases (0.2 million shares) with trade dates prior to September 30, 2018, but cash settlement dates subsequent to September 30, 2018.
|
Changes in Accumulated other comprehensive loss ("AOCI") 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 June 30, 2019, net of tax
|
|
$
|
(240
|
)
|
|
$
|
(78
|
)
|
|
$
|
(62
|
)
|
|
$
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OCI, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the period classified into AOCI, net of tax
|
|
(37
|
)
|
|
—
|
|
|
(2
|
)
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified from AOCI, net of tax
|
|
—
|
|
|
2
|
|
|
(11
|
)
|
|
(9
|
)
|
|
|
|
(37
|
)
|
|
2
|
|
|
(13
|
)
|
|
(48
|
)
|
|
Balance at September 30, 2019, net of tax
|
|
$
|
(277
|
)
|
|
$
|
(76
|
)
|
|
$
|
(75
|
)
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018, net of tax
|
|
$
|
(245
|
)
|
|
$
|
(82
|
)
|
|
$
|
(7
|
)
|
|
$
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OCI, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the period classified into AOCI, net of tax
|
|
(32
|
)
|
|
—
|
|
|
(46
|
)
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified from AOCI, net of tax
|
|
—
|
|
|
6
|
|
|
(22
|
)
|
|
(16
|
)
|
|
|
|
(32
|
)
|
|
6
|
|
|
(68
|
)
|
|
(94
|
)
|
|
Balance at September 30, 2019, net of tax
|
|
$
|
(277
|
)
|
|
$
|
(76
|
)
|
|
$
|
(75
|
)
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
Note 5 - Items Affecting Comparability of Net Income, Financial Position and Cash Flows
Refranchising (Gain) Loss
The Refranchising (gain) loss by our Divisional reportable segments is presented below. Given the size and volatility of refranchising initiatives, our chief operating decision maker ("CODM") does not consider the impact of Refranchising (gain) loss when assessing Divisional segment performance. As such, we do not allocate such gains and losses to our Divisional segments for performance reporting purposes.
During the quarter and year to date ended September 30, 2019, we sold certain restaurant assets associated with existing franchise restaurants to the franchisee. Additionally, during the quarter and year to date ended September 30, 2019, we refranchised 2 restaurants and 8 restaurants, respectively. Pre-tax proceeds related to these sales totaled $30 million and $55 million for the quarter and year to date ended September 30, 2019, respectively. During the quarter and year to date ended September 30, 2018, we refranchised 134 restaurants and 329 restaurants, respectively, and received $193 million and $445 million, respectively, in pre-tax proceeds.
A summary of Refranchising (gain) loss is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
KFC Division
|
|
$
|
(7
|
)
|
|
$
|
(29
|
)
|
|
$
|
(13
|
)
|
|
$
|
(128
|
)
|
|
Pizza Hut Division
|
|
—
|
|
|
3
|
|
|
—
|
|
|
14
|
|
|
Taco Bell Division
|
|
(1
|
)
|
|
(74
|
)
|
|
(5
|
)
|
|
(171
|
)
|
|
Worldwide
|
|
$
|
(8
|
)
|
|
$
|
(100
|
)
|
|
$
|
(18
|
)
|
|
$
|
(285
|
)
|
Pizza Hut U.S. Transformation Agreement
In May 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million from 2017 to 2020 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. As of September 30, 2019, we have invested $86 million since the inception of the agreement.
We have invested $5 million and $18 million in the quarter and year to date ended September 30, 2019, respectively, and $5 million and $16 million in the quarter and year to date ended September 30, 2018, respectively, related to the Transformation Agreement. These amounts primarily consisted of capital investments and franchisee incentive payments that were capitalized. Also included are operating investments of $2 million and $1 million in the quarters ended September 30, 2019 and 2018, respectively, and $5 million and $3 million in the years to date ended September 30, 2019 and 2018, respectively.
Due to their unique and long-term brand-building nature as well as their non-recurring impact on Pizza Hut’s Division results, the financial impact of operating investments that are part of the Transformation Agreement are not being considered by our CODM when assessing segment performance. As such, these operating investments are not being allocated to the Pizza Hut Division operating segment results for performance reporting purposes.
Depreciation on capital investments made as part of the Transformation Agreement is being allocated to Pizza Hut segment results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. For the same reasons, the amortization related to capitalized franchisee incentive payments is being allocated to Pizza Hut Division operating segment results.
In addition to the investments above, we funded $37.5 million of incremental system advertising from the second half of 2017 through 2018, including $4 million and $9 million we incurred during the quarter and year to date ended September 30, 2018, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the Pizza Hut Division segment operating results.
KFC U.S. Acceleration Agreement
During 2015, we reached an agreement with our KFC U.S. franchisees that gave us control of brand marketing execution as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we are investing approximately $130 million from 2015 through 2019 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We invested $1 million and $2 million in the quarters ended September 30, 2019 and 2018, respectively, and $3 million and $5 million in the years to date ended September 30, 2019 and 2018, respectively. We have invested approximately $125 million since the inception of the agreement.
In addition to the investments above, we funded $60 million of incremental system advertising from 2015 through 2018, including $2 million and $7 million incurred during the quarter and year to date ended September 30, 2018, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the KFC Division segment operating results.
Turkey Acquisition Contingent Consideration
During 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 associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses. Consistent with prior adjustments to the recorded contingent consideration, our CODM does not consider this charge when assessing segment performance due to the nature of these costs. As such, these costs are not being allocated to any of our segment operating results for performance reporting purposes.
Investment in Grubhub, Inc. ("Grubhub")
On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub, the leading online and mobile takeout food-ordering company in the U.S., which is intended to provide dedicated support for the KFC and Taco Bell branded online delivery channels in the U.S. through Grubhub’s online ordering platform, logistics and last-mile support for delivery orders, as well as point-of-sale integration to streamline operations. Concurrently with the master services agreement, one of our subsidiaries entered into an investment agreement with Grubhub to invest $200 million in exchange for approximately 2.8 million shares of Grubhub common stock, subject to customary closing conditions. In April 2018, all necessary regulatory approvals were obtained and the purchase of Grubhub shares was consummated. Shares acquired as part of this purchase are restricted from being transferred until the earlier of the two-year anniversary of closing the investment agreement or 30 days following the termination of our master services agreement with Grubhub. In the quarter and year to date ended September 30, 2019 we recognized pre-tax expense of $60 million and $56 million, respectively, related to the mark-to-market of these shares, which includes current year depreciation in the market price of Grubhub common stock. In the quarter and year to date ended September 30, 2018, we recognized pre-tax income of $94 million and $185 million, respectively, which included the appreciation in the market price of Grubhub common stock since entering into the agreement. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Condensed Consolidated Statements of Income.
Impact of Adopting New Lease Standards
As discussed in Note 2, we adopted Topic 842 beginning with the quarter ended March 31, 2019, using a modified retrospective method. Topic 842 was applied to all leases existing at, or entered into after, the beginning of 2019. As a result of adopting Topic 842, the following adjustments were made to the Condensed Consolidated Balance Sheet as of the beginning of the quarter ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
|
As Reported 12/31/2018
|
|
Adjustments
|
|
Balances with Adoption of Topic 842 1/1/2019
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
292
|
|
|
$
|
—
|
|
|
$
|
292
|
|
|
Accounts and notes receivable, net
|
561
|
|
|
—
|
|
|
561
|
|
|
Prepaid expenses and other current assets
|
354
|
|
|
(10
|
)
|
|
344
|
|
|
Total Current Assets
|
1,207
|
|
|
(10
|
)
|
|
1,197
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
1,237
|
|
|
—
|
|
|
1,237
|
|
|
Goodwill
|
525
|
|
|
—
|
|
|
525
|
|
|
Intangible assets, net
|
242
|
|
|
—
|
|
|
242
|
|
|
Other assets
|
724
|
|
|
689
|
|
|
1,413
|
|
|
Deferred income taxes
|
195
|
|
|
—
|
|
|
195
|
|
|
Total Assets
|
$
|
4,130
|
|
|
$
|
679
|
|
|
$
|
4,809
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
$
|
911
|
|
|
$
|
76
|
|
|
$
|
987
|
|
|
Income taxes payable
|
69
|
|
|
—
|
|
|
69
|
|
|
Short-term borrowings
|
321
|
|
|
—
|
|
|
321
|
|
|
Total Current Liabilities
|
1,301
|
|
|
76
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
9,751
|
|
|
—
|
|
|
9,751
|
|
|
Other liabilities and deferred credits
|
1,004
|
|
|
605
|
|
|
1,609
|
|
|
Total Liabilities
|
12,056
|
|
|
681
|
|
|
12,737
|
|
|
|
|
|
|
|
|
|
Shareholders’ Deficit
|
|
|
|
|
|
|
Accumulated deficit
|
(7,592
|
)
|
|
(2
|
)
|
|
(7,594
|
)
|
|
Accumulated other comprehensive loss
|
(334
|
)
|
|
—
|
|
|
(334
|
)
|
|
Total Shareholders’ Deficit
|
(7,926
|
)
|
|
(2
|
)
|
|
(7,928
|
)
|
|
Total Liabilities and Shareholders’ Deficit
|
$
|
4,130
|
|
|
$
|
679
|
|
|
$
|
4,809
|
|
We recorded lease liabilities within Accounts payable and other current liabilities and Other liabilities and deferred credits of $83 million and $661 million, respectively, related to the present value of the remaining operating lease payments. These adjustments were partially offset by reductions to Accounts payable and other current liabilities and Other liabilities and deferred credits of $7 million and $56 million, respectively, primarily related to the write offs of liabilities previously recorded to reflect the impact of recognizing rent expense on a straight-line basis when lease payments were escalating under Legacy GAAP. Additionally, lease liabilities recognized upon adoption were offset by the write-off of prepaid rent of $11 million that was recorded under Legacy GAAP resulting in a decrease within Prepaid expenses and other current assets and Other assets of $10 million and $1 million, respectively.
We recorded a corresponding right-of-use asset within Other Assets of $690 million. This right-of-use asset reflected a $2 million impairment charge that would have been recorded before adoption of Topic 842 had the right-of-use asset been recognized under Legacy GAAP. A related increase was recorded in Accumulated deficit.
Note 6 - Other (Income) Expense
Other (income) expense primarily includes net foreign exchange (gains) losses and store closure and impairment expenses. The year to date ended September 30, 2019 also includes settlement of contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses (See Note 5).
Note 7 - Supplemental Balance Sheet Information
Accounts and Notes Receivable, net
The Company’s receivables are primarily generated as a result of ongoing business relationships with our franchisees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable, net in our Condensed Consolidated Balance Sheets. Accounts and notes receivable, net also includes receivables generated from advertising cooperatives that we consolidate.
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2019
|
|
12/31/2018
|
|
Accounts and notes receivable, gross
|
$
|
584
|
|
|
$
|
592
|
|
|
Allowance for doubtful accounts
|
(57
|
)
|
|
(31
|
)
|
|
Accounts and notes receivable, net
|
$
|
527
|
|
|
$
|
561
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2019
|
|
12/31/2018
|
|
Property, plant and equipment, gross
|
$
|
2,279
|
|
|
$
|
2,353
|
|
|
Accumulated depreciation and amortization
|
(1,128
|
)
|
|
(1,116
|
)
|
|
Property, plant and equipment, net
|
$
|
1,151
|
|
|
$
|
1,237
|
|
Assets held-for-sale totaled $24 million as of both September 30, 2019 and December 31, 2018 and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2019
|
|
12/31/2018
|
|
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets
|
$
|
691
|
|
|
$
|
292
|
|
|
Restricted cash included in Prepaid expenses and other current assets(a)
|
120
|
|
|
151
|
|
|
Restricted cash and restricted cash equivalents included in Other assets(b)
|
25
|
|
|
31
|
|
|
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows
|
$
|
836
|
|
|
$
|
474
|
|
|
|
|
|
(a)
|
Restricted cash within Prepaid expenses and other current assets reflects Taco Bell Securitization interest reserves and the cash related to advertising cooperatives that we consolidate that can only be used to settle obligations of the respective cooperatives.
|
|
|
|
|
(b)
|
Primarily trust accounts related to our self-insurance program.
|
Note 8 - Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income tax provision
|
$
|
45
|
|
|
$
|
80
|
|
|
$
|
170
|
|
|
$
|
192
|
|
|
Effective tax rate
|
15.1
|
%
|
|
15.1
|
%
|
|
17.4
|
%
|
|
13.7
|
%
|
Our 2019 third quarter and year to date effective tax rates were lower than the US federal statutory tax rate of 21% primarily due to the favorable impact of excess tax benefits on share based compensation and the favorable resolution of a prior-year uncertain tax position of $20 million related to a dispute concerning the income tax rate to be applied to our 2018 income in a foreign market. These favorable impacts were partially offset by the unfavorable impact of the global intangible low-tax income provisions of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
Our third quarter effective tax rate was flat versus prior year. Factors positively impacting the rate were the aforementioned favorable resolution of a prior-year uncertain tax position and higher excess tax benefits on share based compensation than those recognized in the prior year. These items were offset by the unfavorable impact of the global intangible low-tax income provisions of the Tax Act in the current year, the unfavorable impact of lapping a prior year decrease to the provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Act, and lapping the favorable impact attributable to prior year refranchising transactions.
Our year to date effective tax rate was higher than prior year primarily due to the unfavorable impacts of the global intangible low-taxed income provisions of the Tax Act in the current year, lapping a prior year decrease to the provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Act, and lapping the favorable impact related to prior year refranchising transactions. These items were partially offset by higher excess tax benefits on share based compensation than those recognized in the prior year, the aforementioned favorable resolution of a prior-year uncertain tax position in the current year and lapping $19 million in expense recorded in the prior year to correct an error associated with the tax recorded on a prior year divestiture.
Note 9 - Revenue Recognition
Disaggregation of Total Revenues
The following tables disaggregate revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 9/30/2019
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
17
|
|
|
$
|
5
|
|
|
$
|
216
|
|
|
$
|
238
|
|
|
Franchise revenues
|
|
40
|
|
|
63
|
|
|
142
|
|
|
245
|
|
|
Property revenues
|
|
5
|
|
|
2
|
|
|
10
|
|
|
17
|
|
|
Franchise contributions for advertising and other services
|
|
2
|
|
|
71
|
|
|
114
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
57
|
|
|
16
|
|
|
—
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
118
|
|
|
8
|
|
|
—
|
|
|
126
|
|
|
Franchise revenues
|
|
226
|
|
|
61
|
|
|
6
|
|
|
293
|
|
|
Property revenues
|
|
16
|
|
|
1
|
|
|
—
|
|
|
17
|
|
|
Franchise contributions for advertising and other services
|
|
128
|
|
|
14
|
|
|
1
|
|
|
143
|
|
|
|
|
$
|
609
|
|
|
$
|
241
|
|
|
$
|
489
|
|
|
$
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 9/30/2018
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
17
|
|
|
$
|
6
|
|
|
$
|
265
|
|
|
$
|
288
|
|
|
Franchise revenues
|
|
41
|
|
|
65
|
|
|
131
|
|
|
237
|
|
|
Property revenues
|
|
5
|
|
|
1
|
|
|
5
|
|
|
11
|
|
|
Franchise contributions for advertising and other services
|
|
3
|
|
|
62
|
|
|
105
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
52
|
|
|
16
|
|
|
—
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
204
|
|
|
7
|
|
|
—
|
|
|
211
|
|
|
Franchise revenues
|
|
204
|
|
|
60
|
|
|
6
|
|
|
270
|
|
|
Property revenues
|
|
18
|
|
|
1
|
|
|
—
|
|
|
19
|
|
|
Franchise contributions for advertising and other services
|
|
105
|
|
|
11
|
|
|
1
|
|
|
117
|
|
|
|
|
$
|
649
|
|
|
$
|
229
|
|
|
$
|
513
|
|
|
$
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date ended 9/30/2019
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
51
|
|
|
$
|
15
|
|
|
$
|
624
|
|
|
$
|
690
|
|
|
Franchise revenues
|
|
119
|
|
|
197
|
|
|
410
|
|
|
726
|
|
|
Property revenues
|
|
16
|
|
|
5
|
|
|
31
|
|
|
52
|
|
|
Franchise contributions for advertising and other services
|
|
7
|
|
|
223
|
|
|
327
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
165
|
|
|
46
|
|
|
—
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
344
|
|
|
20
|
|
|
2
|
|
|
366
|
|
|
Franchise revenues
|
|
649
|
|
|
181
|
|
|
19
|
|
|
849
|
|
|
Property revenues
|
|
50
|
|
|
2
|
|
|
—
|
|
|
52
|
|
|
Franchise contributions for advertising and other services
|
|
358
|
|
|
41
|
|
|
1
|
|
|
400
|
|
|
|
|
$
|
1,759
|
|
|
$
|
730
|
|
|
1,414
|
|
|
$
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date ended 9/30/2018
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
50
|
|
|
$
|
31
|
|
|
$
|
759
|
|
|
840
|
|
|
Franchise revenues
|
|
119
|
|
|
197
|
|
|
371
|
|
|
687
|
|
|
Property revenues
|
|
16
|
|
|
3
|
|
|
16
|
|
|
35
|
|
|
Franchise contributions for advertising and other services
|
|
7
|
|
|
187
|
|
|
293
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
155
|
|
|
47
|
|
|
—
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
657
|
|
|
24
|
|
|
2
|
|
|
683
|
|
|
Franchise revenues
|
|
592
|
|
|
183
|
|
|
17
|
|
|
792
|
|
|
Property revenues
|
|
55
|
|
|
2
|
|
|
—
|
|
|
57
|
|
|
Franchise contributions for advertising and other services
|
|
307
|
|
|
39
|
|
|
1
|
|
|
347
|
|
|
|
|
$
|
1,958
|
|
|
$
|
713
|
|
|
$
|
1,459
|
|
|
$
|
4,130
|
|
Contract Liabilities
Our contract liabilities are comprised of unamortized upfront fees received from franchisees. A summary of significant changes to the contract liability balance during 2019 is presented below.
|
|
|
|
|
|
|
|
|
|
|
Deferred Franchise Fees
|
|
Balance at December 31, 2018
|
|
$
|
414
|
|
|
Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period
|
|
(47
|
)
|
|
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period
|
|
51
|
|
|
Balance at September 30, 2019
|
|
$
|
418
|
|
We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows:
|
|
|
|
|
|
|
|
|
Less than 1 year
|
$
|
61
|
|
|
|
1 - 2 years
|
58
|
|
|
|
2 - 3 years
|
53
|
|
|
|
3 - 4 years
|
48
|
|
|
|
4 - 5 years
|
44
|
|
|
|
Thereafter
|
154
|
|
|
|
Total
|
$
|
418
|
|
|
Note 10 - Reportable Operating Segments
We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
Revenues
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
KFC Division
|
$
|
609
|
|
|
$
|
649
|
|
|
$
|
1,759
|
|
|
$
|
1,958
|
|
|
Pizza Hut Division
|
241
|
|
|
229
|
|
|
730
|
|
|
713
|
|
|
Taco Bell Division
|
489
|
|
|
513
|
|
|
1,414
|
|
|
1,459
|
|
|
|
$
|
1,339
|
|
|
$
|
1,391
|
|
|
$
|
3,903
|
|
|
$
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
Operating Profit
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
KFC Division
|
$
|
270
|
|
|
$
|
248
|
|
|
$
|
767
|
|
|
$
|
704
|
|
|
Pizza Hut Division
|
86
|
|
|
88
|
|
|
279
|
|
|
257
|
|
|
Taco Bell Division
|
161
|
|
|
161
|
|
|
458
|
|
|
442
|
|
|
Corporate and unallocated G&A expenses
|
(41
|
)
|
|
(38
|
)
|
|
(122
|
)
|
|
(122
|
)
|
|
Unallocated Company restaurant expenses
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
Unallocated Franchise and property expenses(a)
|
(2
|
)
|
|
(2
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
Unallocated Refranchising gain (loss) (See Note 5)
|
8
|
|
|
100
|
|
|
18
|
|
|
285
|
|
|
Unallocated Other income (expense)(b)
|
(2
|
)
|
|
(5
|
)
|
|
(11
|
)
|
|
(9
|
)
|
|
Operating Profit
|
$
|
480
|
|
|
$
|
553
|
|
|
$
|
1,384
|
|
|
$
|
1,555
|
|
|
Investment income (expense), net (See Note 5)
|
(59
|
)
|
|
96
|
|
|
(50
|
)
|
|
185
|
|
|
Other pension income (expense) (See Note 11)
|
(1
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
(10
|
)
|
|
Interest expense, net
|
(120
|
)
|
|
(111
|
)
|
|
(354
|
)
|
|
(330
|
)
|
|
Income before income taxes
|
$
|
300
|
|
|
$
|
534
|
|
|
$
|
976
|
|
|
$
|
1,400
|
|
|
|
|
|
(a)
|
Represents costs associated with the KFC U.S. Acceleration Agreement and Pizza Hut U.S. Transformation Agreement. See Note 5.
|
|
|
|
|
(b)
|
Includes settlement of contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses that we recorded in the second quarter of 2019. See Note 5.
|
Note 11 - Pension Benefits
We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the "Plan"), is funded. We fund our other U.S. plans as benefits are paid. The Plan and our most significant non-qualified plan in the U.S. are closed to new salaried participants.
The components of net periodic benefit cost associated with our significant U.S. pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
Interest cost
|
10
|
|
|
9
|
|
|
30
|
|
|
27
|
|
|
Expected return on plan assets
|
(11
|
)
|
|
(10
|
)
|
|
(33
|
)
|
|
(31
|
)
|
|
Amortization of net loss
|
—
|
|
|
4
|
|
|
1
|
|
|
11
|
|
|
Amortization of prior service cost
|
2
|
|
|
1
|
|
|
4
|
|
|
4
|
|
|
Net periodic benefit cost
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
Additional loss recognized due to settlements(a)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Special termination benefits
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
(a)
|
Loss is a result of settlement transactions which exceeded the sum of annual service and interest costs for the applicable plan. These losses were recorded in Other pension (income) expense.
|
Note 12 - Short-term Borrowings and Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
9/30/2019
|
|
12/31/2018
|
|
|
Current maturities of long-term debt
|
|
$
|
84
|
|
|
$
|
331
|
|
|
Other
|
|
10
|
|
|
—
|
|
|
|
|
94
|
|
|
331
|
|
|
Less current portion of debt issuance costs and discounts
|
|
(10
|
)
|
|
(10
|
)
|
|
Short-term borrowings
|
|
$
|
84
|
|
|
$
|
321
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
|
|
|
|
Securitization Notes
|
|
$
|
2,906
|
|
|
$
|
2,928
|
|
|
Subsidiary Senior Unsecured Notes
|
|
2,850
|
|
|
2,850
|
|
|
Term Loan A Facility
|
|
469
|
|
|
488
|
|
|
Term Loan B Facility
|
|
1,940
|
|
|
1,955
|
|
|
YUM Senior Unsecured Notes
|
|
2,425
|
|
|
1,875
|
|
|
Finance lease obligations
|
|
69
|
|
|
71
|
|
|
|
|
$
|
10,659
|
|
|
$
|
10,167
|
|
|
Less debt issuance costs and discounts
|
|
(84
|
)
|
|
(85
|
)
|
|
Less current maturities of long-term debt
|
|
(84
|
)
|
|
(331
|
)
|
|
Long-term debt
|
|
$
|
10,491
|
|
|
$
|
9,751
|
|
YUM Senior Unsecured Note Issuance
On September 11, 2019, YUM! Brands, Inc. issued $800 million aggregate principal amount of 4.75% YUM Senior Unsecured Notes due January 15, 2030 (the “2030 Notes”). The net proceeds from the issuance were used to repay in full $250 million aggregate principal amount of YUM Senior Unsecured Notes that matured in September 2019, to repay the then outstanding borrowings under our $1 billion revolving facility and for general corporate purposes. Interest on the 2030 Notes is payable semi-annually in arrears on January 15 and July 15 of each year. The indenture governing the 2030 Notes contains covenants and events of default that are customary for debt securities of this type, including 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. During the quarter ended September 30, 2019 the Company incurred debt issuance costs of $10 million in connection with the issuance of the 2030 Notes. These issuance costs are recorded as a reduction in Long-term debt on our Condensed Consolidated Balance Sheet.
Details of our short-term borrowings and long-term debt as of December 31, 2018 can be found within our 2018 Form 10-K. Cash paid for interest during the years to date ended September 30, 2019 and 2018 was $324 million and $300 million, respectively.
Note 13 - Derivative Instruments
We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Swaps
We have entered into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments. At both September 30, 2019 and December 31, 2018, our interest rate swaps expiring in July 2021 had notional amounts of $1.55 billion and our interest rate swaps expiring in March 2025 had notional amounts of $1.5 billion. These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of September 30, 2019 or December 31, 2018.
Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Through September 30, 2019, the swaps were highly effective cash flow hedges.
Foreign Currency Contracts
We have entered into foreign currency forward and swap contracts with the objective of reducing our exposure to earnings volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying intercompany receivables or payables. Our foreign currency contracts are designated cash flow hedges as the future cash flows of the contracts are expected to offset changes in intercompany receivables and payables due to foreign currency exchange rate fluctuations.
Gains or losses on the foreign currency contracts are reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Through September 30, 2019, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.
As of September 30, 2019 and December 31, 2018, foreign currency contracts outstanding related to intercompany receivables and payables had total notional amounts of $26 million and $456 million, respectively. During the quarter ended September 30, 2019 we terminated foreign currency contracts with notional amounts of $430 million and settled the related intercompany receivable and payable. As a result of this termination and settlement, we reclassified $4 million of unrealized loss from AOCI to Interest expense, net in our Condensed Consolidated Statements of Income. We received $3 million in cash from the counterparty upon termination, which represented the fair value of the contracts at the time of termination. Our remaining foreign currency forward contracts all have durations that expire in 2019.
As a result of the use of interest rate swaps and foreign currency contracts, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with major financial institutions carefully selected based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At September 30, 2019, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.
Gains and losses on derivative instruments designated as cash flow hedges recognized in OCI and reclassifications from AOCI into Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
Gains/(Losses) Recognized in OCI
|
|
(Gains)/Losses Reclassified from AOCI into Net Income
|
|
Gains/(Losses) Recognized in OCI
|
|
(Gains)/Losses Reclassified from AOCI into Net Income
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(18
|
)
|
|
$
|
12
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(88
|
)
|
|
$
|
28
|
|
|
$
|
(14
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
13
|
|
|
4
|
|
|
(8
|
)
|
|
(4
|
)
|
|
23
|
|
|
15
|
|
|
(12
|
)
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit/(expense)
|
3
|
|
|
(3
|
)
|
|
1
|
|
|
1
|
|
|
19
|
|
|
(8
|
)
|
|
4
|
|
|
3
|
|
As of September 30, 2019, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $7 million, based on current LIBOR interest rates.
See Note 14 for the fair value of our derivative assets and liabilities.
Note 14 - Fair Value Disclosures
As of September 30, 2019, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair value of notes receivable net of allowances and lease guarantees less subsequent amortization approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2019
|
|
12/31/2018
|
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
|
|
|
|
|
|
|
|
|
Securitization Notes(a)
|
$
|
2,906
|
|
|
|
$
|
3,071
|
|
|
|
$
|
2,928
|
|
|
|
$
|
2,967
|
|
|
|
Subsidiary Senior Unsecured Notes(b)
|
2,850
|
|
|
|
3,032
|
|
|
|
2,850
|
|
|
|
2,733
|
|
|
|
Term Loan A Facility(b)
|
469
|
|
|
|
474
|
|
|
|
488
|
|
|
|
479
|
|
|
|
Term Loan B Facility(b)
|
1,940
|
|
|
|
1,949
|
|
|
|
1,955
|
|
|
|
1,915
|
|
|
|
YUM Senior Unsecured Notes(b)
|
2,425
|
|
|
|
2,550
|
|
|
|
1,875
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
(a)
|
We estimated the fair value of the Securitization Notes by obtaining broker quotes from two separate brokerage firms that are knowledgeable about the Company’s Securitization Notes and, at times, trade these notes. The markets in which the Securitization Notes trade are not considered active markets.
|
|
|
|
|
(b)
|
We estimated the fair value of the YUM and Subsidiary Senior Unsecured Notes, Term Loan A Facility, and Term Loan B Facility using market quotes and calculations based on market rates.
|
Recurring Fair Value Measurements
The Company has interest rate swaps, foreign currency contracts, an investment in Grubhub common stock and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 13 for discussion regarding derivative instruments and Note 5 for discussion regarding our investment in Grubhub common stock). The following table presents fair
values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Condensed Consolidated Balance Sheet
|
|
Level
|
|
9/30/2019
|
|
12/31/2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Prepaid expenses and other current assets
|
|
2
|
|
|
$
|
7
|
|
|
$
|
21
|
|
|
Foreign Currency Contracts
|
|
Prepaid expenses and other current assets
|
|
2
|
|
|
1
|
|
|
5
|
|
|
Interest Rate Swaps
|
|
Other assets
|
|
2
|
|
|
2
|
|
|
29
|
|
|
Investment in Grubhub Common Stock
|
|
Other assets
|
|
1
|
|
|
158
|
|
|
214
|
|
|
Other Investments
|
|
Other assets
|
|
1
|
|
|
33
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other liabilities and deferred credits
|
|
2
|
|
|
86
|
|
|
23
|
|
|
Foreign Currency Contracts
|
|
Other liabilities and deferred credits
|
|
2
|
|
|
—
|
|
|
24
|
|
The fair value of the Company’s foreign currency contracts and interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based on observable inputs. The fair value of the investment in Grubhub common stock was determined primarily based on closing market prices for the shares. The other investments include investments in mutual funds, which are used to offset fluctuations for a portion of our deferred compensation liabilities. The other investments' fair value is determined based on the closing market prices of the respective mutual funds as of September 30, 2019 and December 31, 2018.
Note 15 - 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-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of September 30, 2019, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $475 million. The present value of these potential payments discounted at our pre-tax cost of debt at September 30, 2019, was approximately $400 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 agreement in the event of non-payment under the lease. 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 September 30, 2019 was not material.
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.
We are currently engaged in various 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.