Pizza Hut 2012 Annual Report Download - page 122

YUM! BRANDS, INC.-2012 Form10-K 30
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
Consolidated Financial Condition
The changes in our Goodwill, Intangible assets, net, Restricted cash, Other liabilities and deferred credits, Investments in unconsolidated affi liates and
Redeemable noncontrolling interest are primarily the result of the Little Sheep acquisition and related purchase price allocation. See Note4.
The decrease in Short-term borrowings was primarily due to the maturity of $263million of Senior Unsecured Notes in July2012.
Liquidity and Capital Resources
Operating in the QSR industry allows us to generate substantial cash fl ows
from the operations of our company stores and from our extensive franchise
operations which require a limited YUM investment.Net cash provided by
operating activities has exceeded $1billion in each of the last eleven fi scal
years, including over $2billion in both 2012 and 2011.We expect these levels
of net cash provided by operating activities to continue in the foreseeable
future.However, unforeseen downturns in our business could adversely
impact our cash fl ows from operations from the levels historically realized.
In the event our cash fl ows are negatively impacted by business downturns,
we believe we have the ability to temporarily reduce our discretionary
spending without signifi cant impact to our long-term business prospects.Our
discretionary spending includes capital spending for new restaurants,
acquisitions of restaurants from franchisees, repurchases of shares of our
Common Stock and dividends paid to our shareholders.As of December29,
2012 we had approximately $1.2billion in unused capacity under our
revolving credit facility that expires in November2017
China and YRI represented more than 70% of the Company’s segment
operating profi t in 2012 and both generate a signifi cant amount of
positive cash fl ows that we have historically used to fund our international
development.To the extent we have needed to repatriate international cash
to fund our U.S. discretionary cash spending, including share repurchases,
dividends and debt repayments, we have historically been able to do so in
a tax-effi cient manner.If we experience an unforeseen decrease in our cash
fl ows from our U.S. business or are unable to refi nance future U.S. debt
maturities we may be required to repatriate future international earnings
at tax rates higher than we have historically experienced.
We currently have investment-grade ratings from Standard & Poor’s Rating
Services (BBB) and Moody’s Investors Service (Baa3).While we do not
anticipate a downgrade in our credit rating, a downgrade would increase
the Company’s current borrowing costs and could impact the Company’s
ability to access the credit markets cost-effectively if necessary.Based on
the amount and composition of our debt at December29, 2012, which
included no borrowings outstanding under our revolving credit facility, our
interest expense would not materially increase on a full-year basis should
we receive a one-level downgrade in our ratings.
Discretionary Spending
During 2012, we invested $1,099million in capital spending, including
$655million in China, $251million in YRI, $175million in the U.S. and
$18million in India.For 2013, we estimate capital spending will be
approximately $1.1billion.
During the year ended December29, 2012 we repurchased shares for
$985million, which includes the effect of $20million in share repurchases
with trade dates prior to the 2012 fi scal year end but cash settlement
dates subsequent to the 2012 fi scal year.On November18, 2011, our
Board of Directors authorized share repurchases through May2013 of up
to $750million (excluding applicable transaction fees) of our outstanding
Common Stock, and on November16, 2012, our Board of Directors
authorized additional share repurchases through May2014 of up to
$1billion (excluding applicable transaction fees) of our outstanding Common
Stock.At December29, 2012, we had remaining capacity to repurchase
up to $953million of outstanding Common Stock (excluding applicable
transaction fees) under the 2012 authorization. Shares are repurchased
opportunistically as part of our regular capital structure decisions.
During the year ended December29, 2012, we paid cash dividends of
$544million.Additionally, on November16, 2012 our Board of Directors
approved cash dividends of $0.335 per share of Common Stock to be
distributed on February1, 2013 to shareholders of record at the close of
business on January11, 2013.The Company targets an ongoing annual
dividend payout ratio of 35% to 40% of net income.
On February1, 2012, we acquired a controlling interest in Little Sheep
Group Limited (“Little Sheep”), a casual dining concept headquartered in
Inner Mongolia, China for $540million, net of $44million cash assumed.
See Note4 for details.
Borrowing Capacity
On March22, 2012, the Company executed a fi ve-year syndicated senior
unsecured revolving credit facility (the “Credit Facility”) totaling $1.3billion
which replaced a syndicated senior unsecured revolving domestic credit
facility in the amount of $1.15billion and a syndicated revolving international
credit facility of $350million that were both set to expire in November of
2012. The Credit Facility includes 24 participating banks with commitments
ranging from $23million to $115million and expires on March31, 2017.
We believe the syndication reduces our dependency on any one bank.
Under the terms of the Credit Facility, we may borrow up to the maximum
borrowing limit, less outstanding letters of credit or banker’s acceptances,
where applicable. At December29, 2012, our unused Credit Facility totaled
$1.2billion net of outstanding letters of credit of $63million. There were no
borrowings outstanding under the Credit Facility at December29, 2012.
The interest rate for most borrowings under the Credit Facility ranges from
1.00% to 1.75% over the “London Interbank Offered Rate” (“LIBOR”).
The exact spread over LIBOR under the Credit Facility depends upon our
performance against specifi ed fi nancial criteria. Interest on any outstanding
borrowings under the Credit Facility is payable at least quarterly.
The Credit Facility is unconditionally guaranteed by our principal domestic
subsidiaries.This agreement contains fi nancial covenants relating to
maintenance of leverage and fi xed-charge coverage ratios and also contains
affi rmative and negative covenants including, among other things, limitations
on certain additional indebtedness and liens, and certain other transactions
specifi ed in the agreement.Given the Company’s strong balance sheet and
cash fl ows we were able to comply with all debt covenant requirements at
December29, 2012 with a considerable amount of cushion. Additionally,
the Credit Facility contains cross-default provisions whereby our failure to
make any payment on our indebtedness in a principal amount in excess of
$125million, or the acceleration of the maturity of any such indebtedness,
will constitute a default under such agreement.
The majority of our remaining long-term debt primarily comprises Senior
Unsecured Notes with varying maturity dates from 2014 through 2037
and interest rates ranging from 2.38% to 6.88%.The Senior Unsecured
Notes represent senior, unsecured obligations and rank equally in right
of payment with all of our existing and future unsecured unsubordinated
indebtedness.Amounts outstanding under Senior Unsecured Notes
were $2.8billion at December29, 2012. Our Senior Unsecured Notes
provide that the acceleration of the maturity of any of our indebtedness in
a principal amount in excess of $50million will constitute a default under
the Senior Unsecured Notes if such acceleration is not annulled, or such
indebtedness is not discharged, within 30 days after notice.