EXHIBIT 99.2
YUM! BRANDS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On October 31, 2016, YUM! Brands, Inc. (“YUM” or the “Company”) completed the previously announced distribution of all of the outstanding shares of common stock of Yum China Holdings, Inc. (“Yum China”) to YUM’s shareholders (the “Distribution”) as of the October 19, 2016 record date.
The following unaudited pro forma condensed consolidated statement of income for the year to date ended September 3, 2016 and unaudited pro forma consolidated statements of income for each of the years ended December 26, 2015, December 27, 2014 and December 28, 2013 are presented as if the Distribution had occurred on December 30, 2012. The following unaudited pro forma condensed consolidated balance sheet as of September 3, 2016 is presented as if the Distribution and related events had occurred on September 3, 2016.
The statements have been derived from historical financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), are presented based on information currently available, are intended for informational purposes only, and do not purport to represent YUM’s financial position and results of operations had the Distribution and related events occurred on the dates indicated, or to project YUM’s financial performance for any future period. Beginning in the fourth quarter of 2016, the historical financial results attributable to YUM’s China business for the periods prior to the Distribution will be reflected in YUM’s consolidated financial statements as discontinued operations.
The unaudited pro forma consolidated financial statements and the accompanying notes should be read in conjunction with (i) the audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in YUM’s Form 10-K for the years ended December 26, 2015, December 27, 2014 and December 28, 2013 and (ii) the unaudited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in YUM’s Form 10-Q for the quarter ended September 3, 2016.
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| | | | | | | | | | | | | | | | |
| UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME |
| YUM! BRANDS, INC. |
| FOR THE YEAR TO DATE ENDED SEPTEMBER 3, 2016 |
| (in millions, except per share data) |
| | | | | Pro Forma Adjustments | | |
| | | Historical(a) | | Separation of China Division(b) | | Other | | Pro Forma |
| Revenues | | | | | | | | |
| Company sales | | $ | 7,560 |
| | $ | (4,684 | ) | | $ | — |
| | $ | 2,876 |
|
| Franchise fees and income | | 1,383 |
| | (90 | ) | | 172 |
| (c) | 1,465 |
|
| Total revenues | | 8,943 |
| | (4,774 | ) | | 172 |
| | 4,341 |
|
| Costs and Expenses, Net | | | | | | | | |
| Company restaurants | | | | | | | | |
| Food and paper | | 2,230 |
| | (1,361 | ) | | — |
| | 869 |
|
| Payroll and employee benefits | | 1,727 |
| | (963 | ) | | — |
| | 764 |
|
| Occupancy and other operating expenses | | 2,192 |
| | (1,420 | ) | | — |
| | 772 |
|
| Company restaurant expenses | | 6,149 |
| | (3,744 | ) | | — |
| | 2,405 |
|
| General and administrative expenses | | 1,028 |
| | (270 | ) | | (18 | ) | (c) (d) | 740 |
|
| Franchise and license expenses | | 145 |
| | (15 | ) | | — |
| | 130 |
|
| Closures and impairment (income) expenses | | 47 |
| | (36 | ) | | — |
| | 11 |
|
| Refranchising (gain) loss | | (85 | ) | | — |
| | 8 |
| (f) | (77 | ) |
| Other (income) expense | | (50 | ) | | 42 |
| | 2 |
| (g) | (6 | ) |
| Total costs and expenses, net | | 7,234 |
| | (4,023 | ) | | (8 | ) | | 3,203 |
|
| | | | | | | | | |
| Operating Profit | | 1,709 |
| | (751 | ) | | 180 |
| | 1,138 |
|
| | | | | | | | | |
| Interest expense, net | | 164 |
| | N/A |
| | 7 |
| (g) | 171 |
|
| | | | | | | | | |
| Income Before Income Taxes | | 1,545 |
| | N/A |
| | 173 |
| | 967 |
|
| | | | | | | | | |
| Income tax provision | | 183 |
| | N/A |
| | 82 |
| (h) | 265 |
|
| Net Income – including noncontrolling interests | | 1,362 |
| | N/A |
| | 91 |
| | 702 |
|
| Net Income - noncontrolling interests | | 10 |
| | N/A |
| | (10 | ) | (g) | — |
|
| Net Income - YUM! Brands, Inc. | | $ | 1,352 |
| | N/A |
| | $ | 101 |
| | $ | 702 |
|
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic | | $ | 3.33 |
| | | | | | $ | 1.73 |
|
| Diluted | | $ | 3.28 |
| | | | | | $ | 1.70 |
|
| | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | |
| Basic | | 406 |
| | | | | | 406 |
|
| Diluted | | 412 |
| | | | | | 412 |
|
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| UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME |
| YUM! BRANDS, INC. |
| FOR THE YEAR ENDED DECEMBER 26, 2015 |
| (in millions, except per share data) |
| | | | | Pro Forma Adjustments | | |
| | | Historical(a) | | Separation of China Division(b) | | Other | | Pro Forma |
| Revenues | | | | | | | | |
| Company sales | | $ | 11,145 |
| | $ | (6,789 | ) | | $ | — |
| | $ | 4,356 |
|
| Franchise fees and income | | 1,960 |
| | (120 | ) | | 244 |
| (c) | 2,084 |
|
| Total revenues | | 13,105 |
| | (6,909 | ) | | 244 |
| | 6,440 |
|
| Costs and Expenses, Net | | | | | | | | |
| Company restaurants | | | | | | | | |
| Food and paper | | 3,507 |
| | (2,159 | ) | | — |
| | 1,348 |
|
| Payroll and employee benefits | | 2,517 |
| | (1,386 | ) | | — |
| | 1,131 |
|
| Occupancy and other operating expenses | | 3,335 |
| | (2,167 | ) | | — |
| | 1,168 |
|
| Company restaurant expenses | | 9,359 |
| | (5,712 | ) | | — |
| | 3,647 |
|
| General and administrative expenses | | 1,504 |
| | (397 | ) | | 7 |
| (c) (d) | 1,114 |
|
| Franchise and license expenses | | 242 |
| | (20 | ) | | — |
| | 222 |
|
| Closures and impairment (income) expenses | | 79 |
| | (64 | ) | | — |
| | 15 |
|
| Refranchising (gain) loss | | 10 |
| | — |
| | 13 |
| (f) | 23 |
|
| Other (income) expense | | (10 | ) | | 41 |
| | (15 | ) | (g) | 16 |
|
| Total costs and expenses, net | | 11,184 |
| | (6,152 | ) | | 5 |
| | 5,037 |
|
| | | | | | | | | |
| Operating Profit | | 1,921 |
| | (757 | ) | | 239 |
| | 1,403 |
|
| | | | | | | | | |
| Interest expense, net | | 134 |
| | N/A |
| | 8 |
| (g) | 142 |
|
| | | | | | | | | |
| Income Before Income Taxes | | 1,787 |
| | N/A |
| | 231 |
| | 1,261 |
|
| | | | | | | | | |
| Income tax provision | | 489 |
| | N/A |
| | (164 | ) | (h) | 325 |
|
| Net Income – including noncontrolling interests | | 1,298 |
| | N/A |
| | 395 |
| | 936 |
|
| Net Income - noncontrolling interests | | 5 |
| | N/A |
| | (5 | ) | (g) | — |
|
| Net Income - YUM! Brands, Inc. | | $ | 1,293 |
| | N/A |
| | $ | 400 |
| | $ | 936 |
|
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic | | $ | 2.97 |
| | | | | | $ | 2.15 |
|
| Diluted | | $ | 2.92 |
| | | | | | $ | 2.11 |
|
| | | | | | | | | |
| Weighted-average common shares outstanding | | | | | | | | |
| Basic | | 436 |
| | | | | | 436 |
|
| Diluted | | 443 |
| | | | | | 443 |
|
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| UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME |
| YUM! BRANDS, INC. |
| FOR THE YEAR ENDED DECEMBER 27, 2014 |
| (in millions, except per share data) |
| | | | | Pro Forma Adjustments | | |
| | | Historical(a) | | Separation of China Division(b) | | Other | | Pro Forma |
| Revenues | | | | | | | | |
| Company sales | | $ | 11,324 |
| | $ | (6,821 | ) | | $ | — |
| | $ | 4,503 |
|
| Franchise fees and income | | 1,955 |
| | (113 | ) | | 242 |
| (c) | 2,084 |
|
| Total revenues | | 13,279 |
| | (6,934 | ) | | 242 |
| | 6,587 |
|
| Costs and Expenses, Net | | | | | | | | |
| Company restaurants | | | | | | | | |
| Food and paper | | 3,678 |
| | (2,207 | ) | | — |
| | 1,471 |
|
| Payroll and employee benefits | | 2,579 |
| | (1,407 | ) | | — |
| | 1,172 |
|
| Occupancy and other operating expenses | | 3,425 |
| | (2,198 | ) | | — |
| | 1,227 |
|
| Company restaurant expenses | | 9,682 |
| | (5,812 | ) | | — |
| | 3,870 |
|
| General and administrative expenses | | 1,419 |
| | (391 | ) | | 16 |
| (c) | 1,044 |
|
| Franchise and license expenses | | 160 |
| | (16 | ) | | - |
| | 144 |
|
| Closures and impairment (income) expenses | | 535 |
| | (54 | ) | | (463 | ) | (e) | 18 |
|
| Refranchising (gain) loss | | (33 | ) | | — |
| | 17 |
| (f) | (16 | ) |
| Other (income) expense | | (41 | ) | | 52 |
| | 1 |
| (g) | 12 |
|
| Total costs and expenses, net | | 11,722 |
| | (6,221 | ) | | (429 | ) | | 5,072 |
|
| | | | | | | | | |
| Operating Profit | | 1,557 |
| | (713 | ) | | 671 |
| | 1,515 |
|
| | | | | | | | | |
| Interest expense, net | | 130 |
| | N/A |
| | 14 |
| (g) | 144 |
|
| | | | | | | | | |
| Income Before Income Taxes | | 1,427 |
| | N/A |
| | 657 |
| | 1,371 |
|
| | | | | | | | | |
| Income tax provision | | 406 |
| | N/A |
| | (39 | ) | (e) (h) | 367 |
|
| Net Income – including noncontrolling interests | | 1,021 |
| | N/A |
| | 696 |
| | 1,004 |
|
| Net Income (loss) - noncontrolling interests | | (30 | ) | | N/A |
| | 30 |
| (e) (g) | — |
|
| Net Income - YUM! Brands, Inc. | | $ | 1,051 |
| | N/A |
| | $ | 666 |
| | $ | 1,004 |
|
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic | | $ | 2.37 |
| | | | | | $ | 2.26 |
|
| Diluted | | $ | 2.32 |
| | | | | | $ | 2.22 |
|
| | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | |
| Basic | | 444 |
| | | | | | 444 |
|
| Diluted | | 453 |
| | | | | | 453 |
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| UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME |
| YUM! BRANDS, INC. |
| FOR THE YEAR ENDED DECEMBER 28, 2013 |
| (in millions, except per share data) |
| | | | | Pro Forma Adjustments | | |
| | | Historical(a) | | Separation of China Division(b) | | Other | | Pro Forma |
| Revenues | | | | | | | | |
| Company sales | | $ | 11,184 |
| | $ | (6,800 | ) | | $ | — |
| | $ | 4,384 |
|
| Franchise fees and income | | 1,900 |
| | (105 | ) | | 238 |
| (c) | 2,033 |
|
| Total revenues | | 13,084 |
| | (6,905 | ) | | 238 |
| | 6,417 |
|
| Costs and Expenses, Net | | | | | | | | |
| Company restaurants | | | | | | | | |
| Food and paper | | 3,669 |
| | (2,258 | ) | | — |
| | 1,411 |
|
| Payroll and employee benefits | | 2,499 |
| | (1,360 | ) | | — |
| | 1,139 |
|
| Occupancy and other operating expenses | | 3,333 |
| | (2,132 | ) | | — |
| | 1,201 |
|
| Company restaurant expenses | | 9,501 |
| | (5,750 | ) | | — |
| | 3,751 |
|
| General and administrative expenses | | 1,412 |
| | (357 | ) | | 15 |
| (c) | 1,070 |
|
| Franchise and license expenses | | 158 |
| | (13 | ) | | — |
| | 145 |
|
| Closures and impairment (income) expenses | | 331 |
| | (30 | ) | | (295 | ) | (e) | 6 |
|
| Refranchising (gain) loss | | (100 | ) | | — |
| | 5 |
| (f) | (95 | ) |
| Other (income) expense | | (16 | ) | | 22 |
| | 3 |
| (g) | 9 |
|
| Total costs and expenses, net | | 11,286 |
| | (6,128 | ) | | (272 | ) | | 4,886 |
|
| | | | | | | | | |
| Operating Profit | | 1,798 |
| | (777 | ) | | 510 |
| | 1,531 |
|
| | | | | | | | | |
| Interest expense, net | | 247 |
| | N/A |
| | 5 |
| (g) | 252 |
|
| | | | | | | | | |
| Income Before Income Taxes | | 1,551 |
| | N/A |
| | 505 |
| | 1,279 |
|
| | | | | | | | | |
| Income tax provision | | 487 |
| | N/A |
| | (137 | ) | (e) (h) | 350 |
|
| Net Income – including noncontrolling interests | | 1,064 |
| | N/A |
| | 642 |
| | 929 |
|
| Net Income (loss) - noncontrolling interests | | (27 | ) | | N/A |
| | 27 |
| (e) (g) | — |
|
| Net Income- YUM! Brands, Inc. | | $ | 1,091 |
| | N/A |
| | $ | 615 |
| | $ | 929 |
|
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic | | $ | 2.41 |
| | | | | | $ | 2.05 |
|
| Diluted | | $ | 2.36 |
| | | | | | $ | 2.01 |
|
| | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | |
| Basic | | 452 |
| | | | | | 452 |
|
| Diluted | | 461 |
| | | | | | 461 |
|
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| UNAUDITED PRO FORMA CONDENSED CONSOLIATED BALANCE SHEET |
| YUM! BRANDS, INC. |
| AS OF SEPTEMBER 3, 2016 |
| (in millions) |
| | | | | | | |
| | | Historical(a) | | Separation of China Division(i) | | Pro Forma |
| ASSETS | | | | | | |
| | | | | | | |
| Cash and cash equivalents | | $ | 2,885 |
| | $ | (750 | ) | | $ | 2,135 |
|
| Accounts and notes receivable, net | | 440 |
| | (109 | ) | | 331 |
|
| Inventories | | 255 |
| | (218 | ) | | 37 |
|
| Prepaid expenses and other current assets | | 287 |
| | (49 | ) | | 238 |
|
| Advertising cooperative assets, restricted | | 136 |
| | — |
| | 136 |
|
| Total Current Assets | | 4,003 |
| | (1,126 | ) | | 2,877 |
|
| | | | | | | |
| Property, plant and equipment, net | | 4,010 |
| | (1,707 | ) | | 2,303 |
|
| Goodwill | | 635 |
| | (82 | ) | | 553 |
|
| Intangible assets, net | | 258 |
| | (96 | ) | | 162 |
|
| Investments in unconsolidated affiliates | | 64 |
| | (64 | ) | | — |
|
| Other assets | | 562 |
| | (217 | ) | | 345 |
|
| Deferred income taxes | | 900 |
| | (152 | ) | | 748 |
|
| Total Assets | | $ | 10,432 |
| | $ | (3,444 | ) | | $ | 6,988 |
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| LIABILITIES AND EQUITY | |
|
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|
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|
|
| | | | | | | |
| Accounts payable and other current liabilities | | $ | 2,058 |
| | $ | (997 | ) | | $ | 1,061 |
|
| Income taxes payable | | 57 |
| | (42 | ) | | 15 |
|
| Short-term borrowings | | 48 |
| | (1 | ) | | 47 |
|
| Advertising cooperative liabilities | | 136 |
| | — |
| | 136 |
|
| Total Current Liabilities | | 2,299 |
| | (1,040 | ) | | 1,259 |
|
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|
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|
|
| Long-term debt | | 9,119 |
| | (29 | ) | | 9,090 |
|
| Other liabilities and deferred credits | | 844 |
| | (210 | ) | | 634 |
|
| Total Liabilities | | 12,262 |
| | (1,279 | ) | | 10,983 |
|
| | | | | | | |
| Shareholders’ Equity (Deficit) | | | | | | |
| Common Stock, no par value | | — |
| | — |
| | — |
|
| Retained earnings (Accumulated deficit) | | (1,572 | ) | | (2,026 | ) | | (3,598 | ) |
| Accumulated other comprehensive income (loss) | | (324 | ) | | (73 | ) | | (397 | ) |
| Total Shareholders' Equity (Deficit) – YUM! Brands, Inc. | | (1,896 | ) | | (2,099 | ) | | (3,995 | ) |
| Noncontrolling interests | | 66 |
| | (66 | ) | | — |
|
| Total Shareholder's Equity (Deficit) | | (1,830 | ) | | (2,165 | ) | | (3,995 | ) |
| Total Liabilities and Shareholders' Equity (Deficit) | | $ | 10,432 |
| | $ | (3,444 | ) | | $ | 6,988 |
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NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation
YUM’s historical consolidated financial statements have been adjusted in the pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the Distribution, (2) factually supportable and (3) with respect to the pro forma consolidated statements of income, expected to have a continuing impact on YUM’s consolidated results following the Distribution.
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 Yum China 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.
Note 2 - Pro forma adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma consolidated financial statements:
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| (a) | Reflects YUM’s historical GAAP financial statements and does not reflect any adjustments related to the Distribution. |
| |
| (b) | Reflects the revenues and expenses representing the historical operating profit of the China Division as reported by YUM. These amounts, net of their related tax impact, will be included in discontinued operations in YUM's financial statements subsequent to the Distribution. |
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| (c) | Per the terms of the master license agreement, Yum China will pay a license fee to YUM equal to 3% of net sales from the operations of KFC, Pizza Hut and Taco Bell subsequent to the Distribution. This adjustment reflects the impact of the license fee income from Yum China of $172 million, $244 million, $242 million and $238 million for the year to date ended September 3, 2016 and for the years ended December 26, 2015, December 27, 2014 and December 28, 2013, respectively. The license fee is subject to VAT and miscellaneous surcharges which are recorded in General and administrative expenses. |
| |
| (d) | Includes the removal of separation costs incurred by YUM in connection with the Distribution of $29 million and $9 million recorded in General and administrative expenses for the year to date ended September 3, 2016 and year ended December 26, 2015, respectively. These costs primarily related to legal, tax, accounting and other professional services and were not allocated to YUM’s China Division for performance reporting purposes. These amounts, net of their related tax impact, will be included in discontinued operations in YUM's financial statements subsequent to the Distribution. |
We expect to incur additional cash separation costs of approximately $25 million in the fourth quarter ending December 31, 2016 in connection with the Distribution. Additionally, we expect to incur a non-cash of approximately $30 million related to certain share-based awards that will be modified in connection with the Distribution in the fourth quarter ending December 31, 2016. Consistent with the historical separation costs incurred in connection with the Distribution these costs will be included in discontinued operations in YUM's financial statements.
| |
| (e) | Reflects historical non-cash impairment charges of $463 million and $295 million and the resulting net losses allocated to noncontrolling interests of $26 million and $19 million for the years ended December 27, 2014 and December 28, 2013, respectively, related to Yum China’s Little Sheep business which were not allocated to YUM’s China Division for performance reporting purposes. These amounts, net of their related tax impact, will be included in discontinued operations in YUM's financial statements subsequent to the Distribution. |
| |
| (f) | Reflects historical refranchising gains, net related to Yum China which were not allocated to YUM’s China Division for performance reporting purposes. These amounts, net of their related tax impact, will be included in discontinued operations in YUM's financial statements subsequent to the Distribution. |
| |
| (g) | Reflects the removal of historical Corporate and Unallocated items related to Yum China which were not allocated to YUM’s China Division for performance reporting purposes. These amounts, net of their related tax impact, will be included in discontinued operations in YUM's financial statements subsequent to the Distribution. |
| |
| (h) | Reflects the tax effects attributable to the historical operating results of YUM’s China Division and the amounts described by (c), (d), (e), (f) and (g) above based upon the impact of the nature, as well as the jurisdiction, of the respective individual components. Although not reflected in these unaudited pro forma consolidated statements of income, the effective tax rate after the separation could be significantly different depending on YUM's repatriation decisions after the Distribution. |
| |
| (i) | Reflects the assets and liabilities attributable to YUM’s China operations and was derived from YUM’s historical GAAP balance sheet included in YUM’s Form 10-Q as of September 3, 2016. |
