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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

 

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 001-37762

 

 

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

81-2421743

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

7100 Corporate Drive

Plano, Texas 75024

United States of America

 

Yum China Building

20 Tian Yao Qiao Road

Shanghai  200030

People’s Republic of China

(Address, Including Zip Code, of Principal Executive Offices)

(469) 980-2898

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

YUMC

  New York Stock Exchange

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   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

The number of shares outstanding of the registrant’s common stock as of August 3, 2020 was 377,110,951 shares.

 

 


 

Yum China Holdings, Inc.

INDEX

 

 

 

Page

 

 

No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Income – Quarters and Years to Date Ended June 30, 2020 and 2019

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Quarters and Years to Date Ended June 30, 2020 and 2019

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Years to Date Ended June 30, 2020 and 2019

5

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2020 and December 31, 2019

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

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

31

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

 

Item 4 – Controls and Procedures

50

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

52

 

 

 

 

Item 1A – Risk Factors

52

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

 

Item 6 – Exhibits

54

 

 

 

 

Signatures

55

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Condensed Consolidated Statements of Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions, except per share data)

 

 

 

Quarter Ended

 

 

Year to Date Ended

Revenues

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

Company sales

 

$

1,692

 

 

$

1,926

 

 

$

3,240

 

 

$

4,015

 

 

Franchise fees and income

 

 

37

 

 

 

36

 

 

 

72

 

 

 

75

 

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

 

 

157

 

 

 

154

 

 

 

318

 

 

 

324

 

 

Other revenues

 

 

16

 

 

 

8

 

 

 

26

 

 

 

14

 

 

Total revenues

 

 

1,902

 

 

 

2,124

 

 

 

3,656

 

 

 

4,428

 

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

556

 

 

 

607

 

 

 

1,051

 

 

 

1,245

 

 

Payroll and employee benefits

 

 

384

 

 

 

450

 

 

 

778

 

 

 

916

 

 

Occupancy and other operating expenses

 

 

521

 

 

 

586

 

 

 

1,015

 

 

 

1,185

 

 

Company restaurant expenses

 

 

1,461

 

 

 

1,643

 

 

 

2,844

 

 

 

3,346

 

 

General and administrative expenses

 

 

113

 

 

 

109

 

 

 

212

 

 

 

223

 

 

Franchise expenses

 

 

16

 

 

 

16

 

 

 

33

 

 

 

36

 

 

Expenses for transactions with

   franchisees and unconsolidated affiliates

 

 

160

 

 

 

154

 

 

 

316

 

 

 

321

 

 

Other operating costs and expenses

 

 

13

 

 

 

6

 

 

 

23

 

 

 

11

 

 

Closures and impairment expenses, net

 

 

21

 

 

 

4

 

 

 

29

 

 

 

15

 

 

Other income, net

 

 

(10

)

 

 

(12

)

 

 

(26

)

 

 

(31

)

 

Total costs and expenses, net

 

 

1,774

 

 

 

1,920

 

 

 

3,431

 

 

 

3,921

 

 

Operating Profit

 

 

128

 

 

 

204

 

 

 

225

 

 

 

507

 

 

Interest income, net

 

 

8

 

 

 

10

 

 

 

17

 

 

 

19

 

 

Investment gain

 

 

45

 

 

 

17

 

 

 

37

 

 

 

27

 

 

Income Before Income Taxes

 

 

181

 

 

 

231

 

 

 

279

 

 

 

553

 

 

Income tax provision

 

 

(45

)

 

 

(46

)

 

 

(77

)

 

 

(139

)

 

Net income – including noncontrolling interests

 

 

136

 

 

 

185

 

 

 

202

 

 

 

414

 

 

Net income – noncontrolling interests

 

 

4

 

 

 

7

 

 

 

8

 

 

 

14

 

 

Net Income – Yum China Holdings, Inc.

 

$

132

 

 

$

178

 

 

$

194

 

 

$

400

 

 

Weighted-average common shares outstanding (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

377

 

 

 

378

 

 

 

376

 

 

 

378

 

 

Diluted

 

 

388

 

 

 

389

 

 

 

387

 

 

 

389

 

 

Basic Earnings Per Common Share

 

$

0.35

 

 

$

0.47

 

 

$

0.51

 

 

$

1.06

 

 

Diluted Earnings Per Common Share

 

$

0.34

 

 

$

0.46

 

 

$

0.50

 

 

$

1.03

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

3


 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

Net income - including noncontrolling interests

 

$

136

 

 

$

185

 

 

$

202

 

 

$

414

 

 

Other comprehensive income, net of tax of nil:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

7

 

 

 

(58

)

 

 

(35

)

 

 

1

 

 

Comprehensive income - including noncontrolling interests

 

 

143

 

 

 

127

 

 

 

167

 

 

 

415

 

 

Comprehensive income - noncontrolling interests

 

 

4

 

 

 

5

 

 

 

6

 

 

 

15

 

 

Comprehensive Income - Yum China Holdings, Inc.

 

$

139

 

 

$

122

 

 

$

161

 

 

$

400

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Cash Flows – Operating Activities

 

 

 

 

 

 

 

 

 

Net income – including noncontrolling interests

 

$

202

 

 

$

414

 

 

Depreciation and amortization

 

 

214

 

 

 

217

 

 

Non-cash operating lease cost

 

 

178

 

 

 

167

 

 

Closures and impairment expenses

 

 

29

 

 

 

15

 

 

Investment gain

 

 

(37

)

 

 

(27

)

 

Equity income from investments in unconsolidated affiliates

 

 

(34

)

 

 

(37

)

 

Distributions of income received from unconsolidated affiliates

 

 

25

 

 

 

38

 

 

Deferred income taxes

 

 

6

 

 

 

6

 

 

Share-based compensation expense

 

 

17

 

 

 

15

 

 

Changes in accounts receivable

 

 

6

 

 

 

(5

)

 

Changes in inventories

 

 

35

 

 

 

(1

)

 

Changes in prepaid expenses and other current assets

 

 

17

 

 

 

 

 

Changes in accounts payable and other current liabilities

 

 

(16

)

 

 

70

 

 

Changes in income taxes payable

 

 

17

 

 

 

3

 

 

Changes in non-current operating lease liabilities

 

 

(194

)

 

 

(188

)

 

Other, net

 

 

(13

)

 

 

(30

)

 

Net Cash Provided by Operating Activities

 

 

452

 

 

 

657

 

 

Cash Flows – Investing Activities

 

 

 

 

 

 

 

 

 

Capital spending

 

 

(185

)

 

 

(212

)

 

Purchases of short-term investments

 

 

(1,093

)

 

 

(409

)

 

Purchase of long-term time deposits

 

 

(57

)

 

 

 

 

Maturities of short-term investments

 

 

662

 

 

 

248

 

 

Contribution to unconsolidated affiliates

 

 

(13

)

 

 

 

 

Acquisition of business, net of cash acquired

 

 

(177

)

 

 

 

 

Disposal of equity securities

 

 

54

 

 

 

 

 

Other, net

 

 

48

 

 

 

5

 

 

Net Cash Used in Investing Activities

 

 

(761

)

 

 

(368

)

 

Cash Flows – Financing Activities

 

 

 

 

 

 

 

 

 

Repurchase of shares of common stock

 

 

(8

)

 

 

(143

)

 

Cash dividends paid on common stock

 

 

(45

)

 

 

(91

)

 

Dividends paid to noncontrolling interests

 

 

(7

)

 

 

(25

)

 

Other, net

 

 

1

 

 

 

 

 

Net Cash Used in Financing Activities

 

 

(59

)

 

 

(259

)

 

Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash

 

 

(6

)

 

 

 

 

Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash

 

 

(374

)

 

 

30

 

 

Cash, Cash Equivalents and Restricted Cash - Beginning of Period

 

 

1,055

 

 

 

1,266

 

 

Cash, Cash Equivalents and Restricted Cash - End of Period

 

$

681

 

 

$

1,296

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

 

Cash paid for income tax

 

 

64

 

 

 

135

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payables and other current liabilities

 

 

122

 

 

 

104

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


 

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

6/30/2020

 

 

12/31/2019

 

 

 

 

(Unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

674

 

 

$

1,046

 

 

Short-term investments

 

 

1,034

 

 

 

611

 

 

Accounts receivable, net

 

 

83

 

 

 

88

 

 

Inventories, net

 

 

346

 

 

 

380

 

 

Prepaid expenses and other current assets

 

 

166

 

 

 

134

 

 

Total Current Assets

 

 

2,303

 

 

 

2,259

 

 

Property, plant and equipment, net

 

 

1,504

 

 

 

1,594

 

 

Operating lease right-of-use assets

 

 

1,886

 

 

 

1,985

 

 

Goodwill

 

 

309

 

 

 

254

 

 

Intangible assets, net

 

 

183

 

 

 

94

 

 

Deferred income taxes

 

 

99

 

 

 

95

 

 

Investments in unconsolidated affiliates

 

 

68

 

 

 

89

 

 

Other assets

 

 

611

 

 

 

580

 

 

Total Assets

 

$

6,963

 

 

$

6,950

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

1,660

 

 

$

1,691

 

 

Income taxes payable

 

 

63

 

 

 

45

 

 

Total Current Liabilities

 

 

1,723

 

 

 

1,736

 

 

Non-current operating lease liabilities

 

 

1,677

 

 

 

1,803

 

 

Non-current finance lease liabilities

 

 

24

 

 

 

26

 

 

Other liabilities

 

 

252

 

 

 

210

 

 

Total Liabilities

 

 

3,676

 

 

 

3,775

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 million shares authorized; 397 million shares and 395 million shares issued at June 30, 2020 and December 31, 2019, respectively; 377 million shares and 376 million shares outstanding at June 30, 2020 and December 31, 2019, respectively

 

 

4

 

 

 

4

 

 

Treasury stock

 

 

(728

)

 

 

(721

)

 

Additional paid-in capital

 

 

2,444

 

 

 

2,427

 

 

Retained earnings

 

 

1,565

 

 

 

1,416

 

 

Accumulated other comprehensive loss

 

 

(82

)

 

 

(49

)

 

Total Yum China Holdings, Inc. Stockholders' Equity

 

 

3,203

 

 

 

3,077

 

 

Noncontrolling interests

 

 

72

 

 

 

98

 

 

Total Equity

 

 

3,275

 

 

 

3,175

 

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

6,963

 

 

$

6,950

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


 

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Tabular amounts in US$ millions)

 

 

Note 1 – Description of Business

 

Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016.

 

The Company owns, franchises or has ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, COFFii & JOY, East Dawning and Taco Bell concepts (collectively, the “concepts”). In connection with the separation of the Company in 2016 from its former parent company, YUM! Brands, Inc. (“YUM”), Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect subsidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company, entered into a 50-year master license agreement with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew, for the exclusive right to use and sublicense the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Taiwan and Macau. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Little Sheep, COFFii & JOY and East Dawning, and pay no license fee related to these concepts.

 

The Company also owns a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider in China.

 

In addition, the Company started a new e-commerce business in 2017, offering a wide selection of products including electronics, home and kitchen accessories, fresh groceries, and other general merchandise to customers directly through the Company’s e-commerce platform.

 

On April 8, 2020, the Company completed the acquisition of a 93.3% interest in the Huang Ji Huang group (“Huang Ji Huang”), a leading Chinese-style casual dining franchise business, for cash consideration of $185 million. Huang Ji Huang became an operating segment of the Company. The acquisition was considered immaterial.

 

In the quarter ended June 30, 2020, the Company partnered with Lavazza Group, the world renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China. As the first step, a new Lavazza flagship store was opened in Shanghai, China.

 

The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, Taco Bell, Daojia, and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Additional details on our reportable operating segments are included in Note 13.

 

 

7


 

Note 2 – Basis of Presentation

 

Our preparation of the accompanying Condensed Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“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.

 

We have prepared the Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of June 30, 2020, results of our operations and comprehensive income for the quarters and years to date ended June 30, 2020 and 2019, and cash flows for the years to date ended June 30, 2020 and 2019. 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. These statements should be read in conjunction with the consolidated financial statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 27, 2020.

 

Through the acquisition of Daojia, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and is entitled to substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.

 

The results of Huang Ji Huang’s operations have been included in the Company’s Condensed Consolidated Financial Statements since its acquisition date of April 8, 2020.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. The FASB subsequently issued amendments to clarify the implementation guidance. We adopted these standards on January 1, 2020 using the modified retrospective method. The adoption of this standard resulted in a change of our provision policy primarily for accounts receivable, but such adoption did not have a material impact on our financial statements. See Note 3 for additional information related to our accounts receivable provision policy.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends the fair value measurement guidance by modifying disclosure requirements. We adopted the standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.  See Note 11 for additional disclosure on fair value measurement.

 

8


 

In August 2018, the FASB issued ASU 2018-15, IntangiblesGoodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. We adopted this standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606  (“ASU 2018-18”), which clarifies that transactions in a collaborative arrangement should be accounted for under ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) when the counterparty is a customer for a distinct good or service. The amendment also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. We adopted the standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.       

 

 

Note 3 – Revenue Recognition

 

The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from transactions with franchisees and unconsolidated affiliates.

 

Company Sales

 

Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we either used our dedicated riders or, in the past, third-party aggregators’ delivery staff. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders were fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognized revenue, excluding delivery fees, when control of the food was transferred to the third-party aggregators’ delivery staff. The payment terms with respect to those sales were short-term in nature. Starting in 2019, we use our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores.

 

We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

 

9


 

Our privilege membership programs offer privilege members rights to multiple benefits, such as free delivery and discounts on certain products. For certain KFC and Pizza Hut privilege membership programs offering a pre-defined amount of benefits that can be redeemed ratably over the membership period, revenue is ratably recognized over the period based on the elapse of time. With respect to the Pizza Hut family privilege membership program offering members a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the benefits provided based on their relative standalone selling price and revenue is recognized when food or services are delivered or the benefits expire. In determining the relative standalone selling price of the benefits, the Company considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.

 

Franchise Fees and Income

 

Franchise fees and income primarily include upfront franchise fees, such as initial fees and renewal fees, and continuing fees. We have determined that the services we provide in exchange for upfront franchise fees and continuing fees are highly interrelated with the franchise right. We recognize upfront franchise fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with ASC 606. The franchise agreement term is generally 10 years for KFC and Pizza Hut, five or 10 years for Little Sheep, and three or 10 years for Huang Ji Huang. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.

 

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

 

Revenues from transactions with franchisees and unconsolidated affiliates consist primarily of sales of food and paper products, advertising services and other services provided to franchisees and unconsolidated affiliates.

 

The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates, and then sells and delivers them to the restaurants. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees and unconsolidated affiliates. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees and unconsolidated affiliates.

 

For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on a certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to the franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.

 

10


 

Loyalty Programs

 

Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.

 

Disaggregation of Revenue

 

The following table presents revenue disaggregated by types of arrangements and segments:

 

 

 

Quarter Ended 6/30/2020

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Company sales

 

$

1,260

 

 

$

422

 

 

$

10

 

 

$

 

 

$

1,692

 

 

$

 

 

$

1,692

 

 

Franchise fees and income

 

 

32

 

 

 

1

 

 

 

4

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

 

Revenues from transactions with franchisees and unconsolidated affiliates

 

 

15

 

 

 

1

 

 

 

11

 

 

 

130

 

 

 

157

 

 

 

 

 

 

157

 

 

Other revenues

 

 

 

 

 

 

 

 

25

 

 

 

1

 

 

 

26

 

 

 

(10

)

 

 

16

 

 

Total revenues

 

$

1,307

 

 

$

424

 

 

$

50

 

 

$

131

 

 

$

1,912

 

 

$

(10

)

 

$

1,902

 

 

 

 

 

Quarter Ended 6/30/2019

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Company sales

 

$

1,410

 

 

$

507

 

 

$

9

 

 

$

 

 

$

1,926

 

 

$

 

 

$

1,926

 

 

Franchise fees and income

 

 

33

 

 

 

1

 

 

 

2

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

 

Revenues from transactions with franchisees and unconsolidated affiliates

 

 

15

 

 

 

1

 

 

 

5

 

 

 

133

 

 

 

154

 

 

 

 

 

 

154

 

 

Other revenues

 

 

 

 

 

1

 

 

 

16

 

 

 

1

 

 

 

18

 

 

 

(10

)

 

 

8

 

 

Total revenues

 

$

1,458

 

 

$

510

 

 

$

32

 

 

$

134

 

 

$

2,134

 

 

$

(10

)

 

$

2,124

 

 

11


 

 

 

 

Year to Date Ended 6/30/2020

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

Company sales

 

$

2,480

 

 

$

744

 

 

$

16

 

 

$

 

 

$

3,240

 

 

$

 

 

$

3,240

 

Franchise fees and income

 

 

65

 

 

 

2

 

 

 

5

 

 

 

 

 

 

72

 

 

 

 

 

 

72

 

Revenues from transactions with franchisees and unconsolidated affiliates

 

 

31

 

 

 

2

 

 

 

16

 

 

 

269

 

 

 

318

 

 

 

 

 

 

318

 

Other revenues

 

 

 

 

 

 

 

 

41

 

 

 

2

 

 

 

43

 

 

 

(17

)

 

 

26

 

Total revenues

 

$

2,576

 

 

$

748

 

 

$

78

 

 

$

271

 

 

$

3,673

 

 

$

(17

)

 

$

3,656

 

 

 

 

Year to Date Ended 6/30/2019

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

Company sales

 

$

2,949

 

 

$

1,048

 

 

$

18

 

 

$

 

 

$

4,015

 

 

$

 

 

$

4,015

 

Franchise fees and income

 

 

69

 

 

 

2

 

 

 

4

 

 

 

 

 

 

75

 

 

 

 

 

 

75

 

Revenues from transactions with franchisees and unconsolidated affiliates

 

 

32

 

 

 

2

 

 

 

12

 

 

 

278

 

 

 

324

 

 

 

 

 

 

324

 

Other revenues

 

 

 

 

 

1

 

 

 

30

 

 

 

2

 

 

 

33

 

 

 

(19

)

 

 

14

 

Total revenues

 

$

3,050

 

 

$

1,053

 

 

$

64

 

 

$

280

 

 

$

4,447

 

 

$

(19

)

 

$

4,428

 

 

Accounts Receivable

 

Accounts receivable consist of trade receivables and royalties from franchisees and unconsolidated affiliates, and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Condensed Consolidated Balance Sheets. Prior to the adoption of ASC 326, our provision for uncollectible receivable balances was based upon pre-defined aging criteria or upon the occurrence of other events that indicated that we may not collect the balance due. Upon adoption of ASC 326 starting from January 1, 2020, our provision of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Trade receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of June 30, 2020 and December 31, 2019, the ending balances of provision for accounts receivable were both $1 million, and amounts of accounts receivable past due were immaterial. Receivables due from unconsolidated affiliates including trade receivables and dividend receivables were $92 million and $58 million as of June 30, 2020 and December 31, 2019, respectively.

 

12


 

Costs to Obtain Contracts

 

Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to the separation in relation to initial fees or renewal fees we received from franchisees and unconsolidated affiliates, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets on the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company did not incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $9 million at both June 30, 2020 and December 31, 2019.

 

Contract Liabilities

 

Contract liabilities at June 30, 2020 and December 31, 2019 were as follows: 

 

Contract liabilities

 

6/30/2020

 

 

12/31/2019

 

- Deferred revenue related to prepaid stored-value products

 

$

100

 

 

$

86

 

- Deferred revenue related to upfront franchise fees

 

 

39

 

 

 

39

 

- Deferred revenue related to customer loyalty programs

 

 

25

 

 

 

24

 

- Deferred revenue related to privilege membership programs

 

 

21

 

 

 

16

 

- Others

 

 

3

 

 

 

3

 

Total

 

$

188

 

 

$

168

 

 

Contract liabilities primarily consist of deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise fees. Deferred revenue related to prepaid stored-value products, privilege membership programs, and customer loyalty programs is included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront franchise fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities on the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $48 million and $36 million for the quarters ended June 30, 2020 and 2019, respectively, and $63 million and $48 million for the years to date ended June 30, 2020 and 2019, respectively. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the periods presented.

 

The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for the franchise right and other related services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to franchisees and unconsolidated affiliates based on a certain percentage of sales, as those sales occur.

13


 

 

 

Note 4 – Earnings Per Common Share (“EPS”)

 

The following table summarizes the components of basic and diluted EPS (in millions, except per share data):

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

 

6/30/2019

 

 

Net Income – Yum China Holdings, Inc.

 

$

132

 

 

$

178

 

 

$

194

 

 

 

$

400

 

 

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

 

 

377

 

 

 

378

 

 

 

376

 

 

 

 

378

 

 

Effect of dilutive share-based awards(a)

 

 

6

 

 

 

8

 

 

 

7

 

 

 

 

8

 

 

Effect of dilutive warrants(b)

 

 

5

 

 

 

3

 

 

 

4

 

 

 

 

3

 

 

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

 

 

388

 

 

 

389

 

 

 

387

 

 

 

 

389

 

 

Basic Earnings Per Common Share

 

$

0.35

 

 

$

0.47

 

 

$

0.51

 

 

 

$

1.06

 

 

Diluted Earnings Per Common Share

 

$

0.34

 

 

$

0.46

 

 

$

0.50

 

 

 

$

1.03

 

 

Share-based awards excluded from the diluted EPS computation(c)

 

 

4

 

 

 

2

 

 

 

4

 

 

 

 

2

 

 

 

(a)

As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of common shares outstanding. The incremental shares arising from outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect.

 

(b)

Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors two tranches of warrants on January 9, 2017, with each tranche initially providing the right to purchase 8,200,405 shares of Yum China common stock, at an initial exercise price of $31.40 and $39.25 per share, respectively, subject to customary anti-dilution adjustments. The warrants may be exercised at any time through October 31, 2021. The incremental shares arising from outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the period exceeds the applicable exercise price of the warrants.

 

(c)

These outstanding stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) were excluded from the computation of diluted EPS because to do so would have been antidilutive for the quarters and years to date presented, or because certain PSUs are contingently issuable based on the achievement of performance and market conditions, which have not been met as of June 30, 2020.

 

14


 

 

 

Note 5 – Equity

 

Changes in Equity and Redeemable Noncontrolling Interest (in millions)

 

 

 

Yum China Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Noncontrolling

 

 

Total

 

 

Noncontrolling

 

 

 

Shares*

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss) Income

 

 

Shares*

 

 

Amount

 

 

Interests

 

 

Equity

 

 

Interest

 

Balance at March 31, 2020

 

 

396

 

 

$

4

 

 

$

2,434

 

 

$

1,433

 

 

$

(89

)

 

 

(20

)

 

$

(728

)

 

$

100

 

 

$

3,154

 

 

$

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

136

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143

 

 

 

 

Acquisition of business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

Balance at June 30, 2020

 

 

397

 

 

$

4

 

 

$

2,444

 

 

$

1,565

 

 

$

(82

)

 

 

(20

)

 

$

(728

)

 

$

72

 

 

$

3,275

 

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

394

 

 

$

4

 

 

$

2,408

 

 

$

1,060

 

 

$

39

 

 

 

(15

)

 

$

(525

)

 

$

76

 

 

$

3,062

 

 

$

1

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

185

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(58

)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

127

 

 

 

 

Cash dividends declared

   ($0.12 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

Repurchase of shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(75

)

 

 

 

 

 

 

(75

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

Balance at June 30, 2019

 

 

394

 

 

$

4

 

 

$

2,417

 

 

$

1,193

 

 

$

(17

)

 

 

(17

)

 

$

(600

)

 

$

81

 

 

$

3,078

 

 

$

1

 

15


 

 

 

 

Yum China Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Noncontrolling

 

 

Total

 

 

Noncontrolling

 

 

 

Shares*

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares*

 

 

Amount

 

 

Interests

 

 

Equity

 

 

Interest

 

Balance at December 31, 2019

 

 

395

 

 

$

4

 

 

$

2,427

 

 

$

1,416

 

 

$

(49

)

 

 

(19

)

 

$

(721

)

 

$

98

 

 

$

3,175

 

 

$

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

202

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(35

)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

167

 

 

 

 

Acquisition of business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Cash dividends declared

   ($0.12 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

 

 

 

 

Repurchase of shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

(7

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

Balance at June 30, 2020

 

 

397

 

 

$

4

 

 

$

2,444

 

 

$

1,565

 

 

$

(82

)

 

 

(20

)

 

$

(728

)

 

$

72

 

 

$

3,275

 

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

392

 

 

$

4

 

 

$

2,402

 

 

$

944

 

 

$

(17

)

 

 

(13

)

 

$

(460

)

 

$

103

 

 

$

2,976

 

 

$

1

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

414

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

415

 

 

 

 

Cash dividends declared

   ($0.24 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(34

)

 

 

 

 

Repurchase of shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(140

)

 

 

 

 

 

 

(140

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(63

)

 

 

 

 

Balance at June 30, 2019

 

 

394

 

 

$

4

 

 

$

2,417

 

 

$

1,193

 

 

$

(17

)

 

 

(17

)

 

$

(600

)

 

$

81

 

 

$

3,078

 

 

$

1

 

 

*: Shares may not add due to rounding.

 

Share Repurchase Program

 

Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program. The Company repurchased 0.2 million and 3.5 million shares of Yum China common stock at a total cost of $7 million and $140 million for the years to date ended June 30, 2020 and 2019, respectively. The total cost includes $2 million settled subsequent to June 30, 2019, for shares repurchased with trade dates on or prior to June 30, 2019. As of June 30, 2020, $692 million remained available for future share repurchases under the authorization. The Company temporarily suspended the share repurchase in the second quarter of 2020.  

16


 

 

 

Note 6 – Items Affecting Comparability of Net Income and Cash Flows

 

Impact of COVID-19 Pandemic

 

The COVID-19 pandemic has significantly impacted the Company’s operations in the quarter and year to date ended June 30, 2020. The decrease in Operating profit for the year to date ended June 30, 2020 was mainly driven by same-store sales declines and temporary store closures resulting from the COVID-19 pandemic, and offset by one-time rent concessions of $25 million from landlords and a one-time government subsidy in the form of a reduction in social security contributions of $49 million. Operating profit for the quarter and year to date ended June 30, 2020 was $128 million and $225 million, respectively, a decrease of 38% and 56% from the quarter and year to date ended June 30, 2019, respectively.

 

Restaurant-level Impairment

 

We recorded restaurant-level impairment charges of $24 million and $36 million for the quarter and year to date ended June 30, 2020, respectively, and $11 million and $25 million for the quarter and year to date ended June 30, 2019, respectively. The increase in restaurant-level impairment charges in 2020 mainly resulted from the adverse effects of the COVID-19 pandemic. See Note 11 for additional information.

 

Meituan Dianping (“Meituan”) Investment

 

In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for total consideration of approximately $74 million, when it launched its initial public offering on the Hong Kong Stock Exchange in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan for proceeds of approximately $54 million, and realized a $17 million pre-tax gain which was recognized during the holding period. The Company recorded $14 million of U.S. tax in the second quarter of 2020, including $8 million and $6 million related to gains on investment in equity securities of Meituan recognized during the second quarter of 2020 and prior periods, respectively.

 

The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.

 

A summary of pre-tax gains or losses on investment in equity securities recognized, which was included in Investment gain or loss in our Condensed Consolidated Statements of Income, is as follows:

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

 

 

6/30/2019

 

 

Unrealized gains recorded on equity securities still held as of the end of the period

 

$

42

 

 

$

17

 

 

$

38

 

 

 

 

$

27

 

 

Gains (losses) recorded on equity securities sold during the period

 

 

3

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

Gains recorded on equity securities

 

$

45

 

 

$

17

 

 

$

37

 

 

 

 

$

27

 

 

 

17


 

Transition Tax

 

The U.S. Treasury Department and Internal Revenue Service (“IRS”) released the final transition tax regulations in the first quarter of 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly. See Note 12 for additional information.

 

Partner PSU Awards

 

In February 2020, the Company’s Board of Directors approved new grants of SARs, RSUs and PSUs to employees under the Yum China Holdings, Inc. Long Term Incentive Plan (the “2016 Plan”). The awards will be earned based on their respective vesting terms, with PSUs subject to market conditions or performance conditions. A special award of PSUs (“Partner PSU Awards”) was granted to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These Partner PSU Awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee of the Board does not intend to grant similar, special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized a share-based compensation cost of $1 million and $2 million associated with the Partner PSU Awards for the quarter and year to date ended June 30, 2020, respectively.

 

 

Note 7 – Other Income, net

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

Equity income from investments in unconsolidated affiliates

 

$

14

 

 

$

14

 

 

$

34

 

 

$

37

 

 

Derecognition of indemnification assets related to Daojia(a)

 

 

(3

)

 

 

 

 

 

(3

)

 

 

 

 

Foreign exchange impact and other

 

 

(1

)

 

 

(2

)

 

 

(5

)

 

 

(6

)

 

Other income, net

 

$

10

 

 

$

12

 

 

$

26

 

 

$

31

 

 

 

(a)

In the quarter ended June 30, 2020, the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right pursuant to the purchase agreement expired. The expense was included in Other income, net, but was not allocated to any segment for performance reporting purposes.

18


 

 

 

Note 8 – Supplemental Balance Sheet Information

 

Accounts Receivable, net

 

6/30/2020

 

 

12/31/2019

 

 

Accounts receivable, gross

 

$

84

 

 

$

89

 

 

Allowance for doubtful accounts

 

 

(1

)

 

 

(1

)

 

Accounts receivable, net

 

$

83

 

 

$

88

 

 

 

Prepaid Expenses and Other Current Assets

 

6/30/2020

 

 

12/31/2019

 

 

Receivables from payment processors and aggregators

 

$

26

 

 

$

41

 

 

Prepaid rent

 

 

1

 

 

 

2

 

 

Dividends receivable from unconsolidated affiliates

 

 

51

 

 

 

8

 

 

Other prepaid expenses and current assets

 

 

88

 

 

 

83

 

 

Prepaid expenses and other current assets

 

$

166

 

 

$

134

 

 

 

Property, Plant and Equipment

 

6/30/2020

 

 

12/31/2019

 

 

Buildings and improvements

 

$

2,146

 

 

$

2,159

 

 

Finance leases, primarily buildings

 

 

30

 

 

 

30

 

 

Machinery and equipment, and construction in progress

 

 

1,254

 

 

 

1,282

 

 

Property, plant and equipment, gross

 

 

3,430

 

 

 

3,471

 

 

Accumulated depreciation

 

 

(1,926

)

 

 

(1,877

)

 

Property, plant and equipment, net

 

$

1,504

 

 

$

1,594

 

 

 

Other Assets

 

6/30/2020

 

 

12/31/2019

 

 

VAT assets

 

$

237

 

 

$

243

 

 

Land use right

 

 

129

 

 

 

133

 

 

Investment in equity securities

 

 

93

 

 

 

110

 

 

Long-term deposits

 

 

73

 

 

 

71

 

 

Investment in long-term time deposits(a)

 

 

57

 

 

 

 

 

Restricted cash

 

 

7

 

 

 

9

 

 

Costs to obtain contracts

 

 

9

 

 

 

9

 

 

Others

 

 

6

 

 

 

5

 

 

Other Assets

 

$

611

 

 

$

580

 

 

 

Accounts Payable and Other Current Liabilities

 

6/30/2020

 

 

12/31/2019

 

 

Accounts payable

 

$

566

 

 

$

623

 

 

Operating leases liabilities

 

 

401

 

 

 

382

 

 

Accrued compensation and benefits

 

 

179

 

 

 

223

 

 

Contract liabilities

 

 

155

 

 

 

135

 

 

Accrued capital expenditures

 

 

122

 

 

 

150

 

 

Accrued marketing expenses

 

 

94

 

 

 

64

 

 

Other current liabilities

 

 

143

 

 

 

114

 

 

Accounts payable and other current liabilities

 

$

1,660

 

 

$

1,691

 

 

 

Other Liabilities

 

6/30/2020

 

 

12/31/2019

 

 

Accrued income tax payable

 

$

62

 

 

$

69

 

 

Deferred income tax liabilities

 

 

101

 

 

 

67

 

 

Contract liabilities

 

 

33

 

 

 

33

 

 

Other non-current liabilities

 

 

56

 

 

 

41

 

 

Other liabilities

 

$

252

 

 

$

210

 

 

 

19


 

(a)

As of June 30, 2020, the Company had $57 million invested in long-term time deposits, bearing a fixed interest rate with original maturity of three years. The asset is restricted for use in order to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements.

 

Reconciliation of Cash, Cash equivalents, and Restricted Cash for Condensed Consolidated Statements of Cash Flows

 

 

 

6/30/2020

 

 

12/31/2019

 

 

Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets

 

$

674

 

 

$

1,046

 

 

Restricted cash included in Other assets (b)

 

 

7

 

 

 

9

 

 

Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows

 

$

681

 

 

$

1,055

 

 

 

(b)

As of June 30, 2020, the $7 million of restricted cash included in Other assets within our Condensed Consolidated Balance Sheet represents amounts deposited into an escrow account pursuant to a definitive agreement entered into in April 2020 to acquire an additional 25% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”). The Suzhou KFC acquisition was completed on August 3, 2020 and was considered immaterial. As of December 31, 2019, the $9 million of restricted cash represents amounts deposited into an escrow account pursuant to a definitive agreement entered into in August 2019 to acquire a controlling interest in the Huang Ji Huang group. The Huang Ji Huang acquisition was completed on April 8, 2020 and was considered immaterial.

 

 

Note 9 – Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill are as follows:

 

 

 

Total

Company

 

 

KFC

 

 

Pizza Hut

 

 

All Other

Segments

 

 

Balance as of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

$

645

 

 

$

235

 

 

$

19

 

 

$

391

 

 

Accumulated impairment losses(a)

 

 

(391

)

 

 

 

 

 

 

 

 

(391

)

 

Goodwill, net

 

 

254

 

 

 

235

 

 

 

19

 

 

 

 

 

Goodwill acquired(b)

 

 

59

 

 

 

 

 

 

 

 

 

59

 

 

Effect of currency translation adjustment

 

 

(4

)

 

 

(3

)

 

 

(1

)

 

 

 

 

Balance as of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

 

700

 

 

 

232

 

 

 

18

 

 

 

450

 

 

Accumulated impairment losses(a)

 

 

(391

)

 

 

 

 

 

 

 

 

(391

)

 

Goodwill, net

 

$

309

 

 

$

232

 

 

$

18

 

 

$

59

 

 

 

(a)

Accumulated impairment losses represent goodwill impairment attributable to the Little Sheep and Daojia reporting unit.

 

(b)

Goodwill acquired resulted from the acquisition of the Huang Ji Huang group. (Note 1).

 

20


 

Intangible assets, net as of June 30, 2020 and December 31, 2019 are as follows:

 

 

 

6/30/2020

 

 

12/31/2019

 

 

 

Gross Carrying

Amount(a)

 

 

Accumulated

Amortization

 

 

Accumulated Impairment Losses(b)

 

 

Net Carrying Amount

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Accumulated Impairment Losses(b)

 

 

Net Carrying Amount

 

Finite-lived intangible

   assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired franchise

   rights

 

$

147

 

 

$

(118

)

 

$

 

 

$

29

 

 

$

148

 

 

$

(113

)

 

$

 

 

$

35

 

Huang Ji Huang franchise related assets (c)

 

 

21

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

Daojia platform

 

 

16

 

 

 

(4

)

 

 

(12

)

 

 

 

 

 

16

 

 

 

(4

)

 

 

(12

)

 

 

 

Customer-related assets

 

 

12

 

 

 

(9

)

 

 

(2

)

 

 

1

 

 

 

12

 

 

 

(8

)

 

 

(2

)

 

 

2

 

Others

 

 

9

 

 

 

(4

)

 

 

 

 

 

5

 

 

 

9

 

 

 

(4

)

 

 

 

 

 

5

 

 

 

$

205

 

 

$

(135

)

 

$

(14

)

 

$

56

 

 

$

185

 

 

$

(129

)

 

$

(14

)

 

$

42

 

Indefinite-lived intangible

   assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Little Sheep trademark

 

$

51

 

 

$

 

 

$

 

 

$

51

 

 

$

52

 

 

$

 

 

$

 

 

$

52

 

Huang Ji Huang trademark (c)

 

 

76

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

127

 

 

$

 

 

$

 

 

$

127

 

 

$

52

 

 

$

 

 

$

 

 

$

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

332

 

 

$

(135

)

 

$

(14

)

 

$

183

 

 

$

237

 

 

$

(129

)

 

$

(14

)

 

$

94

 

 

(a)

Changes in gross carrying amount include effect of currency translation adjustment.

 

(b)

Accumulated impairment losses represent impairment charges on intangible assets acquired from Daojia primarily attributable to the Daojia platform.

 

(c)

Increase in gross carrying amount of finite-lived and indefinite-lived intangible assets primarily resulted from the acquisition of the Huang Ji Huang group. (Note 1).

 

Amortization expense of finite-lived intangible assets was $3 million and $4 million for the quarters ended June 30, 2020 and 2019, respectively, and $6 million and $10 million for the years to date ended June 30, 2020 and 2019, respectively. As of June 30, 2020, expected amortization expense for the unamortized definite-lived intangible assets is approximately $7 million for the remainder of 2020, $13 million in 2021, $13 million in 2022, $3 million in 2023 and $2 million in 2024.

 

 

Note 10 – Leases

 

As of June 30, 2020, we operated over 7,400 Company-owned restaurants, leasing the underlying land and/or building. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Condensed Consolidated Statements of Income. The financial impact of our accounting as a lessor was not significant.

21


 

 

Supplemental Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

6/30/2020

 

 

12/31/2019

 

 

Account Classification

Assets

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

1,886

 

 

$

1,985

 

 

Operating lease right-of-use assets

Finance lease right-of-use assets

 

 

17

 

 

 

18

 

 

Property, plant and equipment, net

Total leased assets

 

$

1,903

 

 

$

2,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

$

401

 

 

$

382

 

 

Accounts payable and other current liabilities

Finance lease liabilities

 

 

2

 

 

 

2

 

 

Accounts payable and other current liabilities

Non-current

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

1,677

 

 

 

1,803

 

 

Non-current operating lease liabilities

Finance lease liabilities

 

 

24

 

 

 

26

 

 

Non-current finance lease liabilities

Total lease liabilities

 

$

2,104

 

 

$

2,213

 

 

 

 

Summary of Lease Cost

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

Account Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

120

 

 

$

117

 

 

$

241

 

 

$

234

 

 

Occupancy and other operating expenses, G&A or Franchise expenses

Finance lease cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Amortization of leased assets

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

Occupancy and other operating expenses

   Interest on lease liabilities

 

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

 

Interest expense, net

Variable lease cost (a)

 

 

55

 

 

 

80

 

 

 

104

 

 

 

171

 

 

Occupancy and other operating expenses or Franchise expenses

Short-term lease cost

 

 

2

 

 

 

2

 

 

 

5

 

 

 

5

 

 

Occupancy and other operating expenses or G&A

Sub-lease income

 

 

(6

)

 

 

(7

)

 

 

(12

)

 

 

(14

)

 

Franchise fees and income or Other revenues

Total lease cost

 

$

172

 

 

$

194

 

 

$

340

 

 

$

398

 

 

 

 

(a)

The Company was granted $11 million and $25 million in lease concessions from landlords related to the effects of the COVID-19 pandemic for the quarter and year to date ended June 30, 2020, respectively. The lease concessions were primarily in the form of rent reduction over the period of time when the Company’s restaurant business was adversely impacted. The Company applied the interpretive guidance in a FASB staff Q&A document issued in April 2020 and elected: (1) not to evaluate whether a concession received in response to the COVID-19 pandemic is a lease modification and (2) to assume such concession was contemplated as part of the existing lease contract with no contract modification. Such concession was recognized as negative variable lease cost in the period the concession was granted.

 

Supplemental Cash Flow Information

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

233

 

 

241

 

 

Operating cash flows from finance leases

 

1

 

 

1

 

 

Financing cash flows from finance leases

 

1

 

 

1

 

 

Right-of-use assets obtained in exchange for new lease liabilities(b):

 

 

 

 

 

 

 

 

 

Operating leases

 

93

 

 

119

 

 

      Finance leases

 

 

(1

)

 

 

 

 

22


 

 

(b)

This supplemental non-cash disclosure for right-of-use (“ROU”) assets obtained in exchange for new lease liabilities also includes non-cash transactions resulting in adjustments to the lease liability or ROU asset due to modification or other reassessment events.

 

 

 

 

 

 

 

 

 

 

 

 

Lease Term and Discount Rate

 

6/30/2020

 

 

6/30/2019

 

 

 

Weighted-average remaining lease term (years)

 

 

 

 

 

 

 

 

 

 

   Operating leases

 

 

6.9

 

 

 

7.2

 

 

 

   Finance leases

 

 

11.1

 

 

 

12.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

   Operating leases

 

 

6.0

%

 

 

6.1

%

 

 

   Finance leases

 

 

5.8

%

 

 

5.7

%

 

 

 

Summary of Future Lease Payments and Lease Liabilities

 

Maturities of lease liabilities as of June 30, 2020 were as follows:

 

 

 

Amount of

Operating Leases

 

 

Amount of

Finance Leases

 

 

Total

 

Remainder of 2020

 

$

274

 

 

$

2

 

 

$

276

 

2021

 

 

457

 

 

 

4

 

 

 

461

 

2022

 

 

397

 

 

 

4

 

 

 

401

 

2023

 

 

334

 

 

 

3

 

 

 

337

 

2024

 

 

271

 

 

 

3

 

 

 

274

 

Thereafter

 

 

810

 

 

 

20

 

 

 

830

 

Total lease payment

 

 

2,543

 

 

 

36

 

 

 

2,579

 

Less: imputed undiscounted interest(c)

 

 

465

 

 

 

10

 

 

 

475

 

Present value of lease liabilities

 

$

2,078

 

 

$

26

 

 

$

2,104

 

 

(c)

As the rate implicit in the lease cannot be readily determined, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the imputed interest and present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

 

As of June 30, 2020, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $115 million. These leases will commence between the third quarter of 2020 and 2023 with lease terms of 1 year to 20 years.

 

 

Note 11 – Fair Value Measurements and Disclosures

 

The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, accounts receivable, long-term time deposits, accounts payable and lease liabilities, and the carrying values of these assets and liabilities approximate their fair value in general.

 

The Company accounts for its investment in the equity securities of Meituan at fair value, which is determined based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.

 

23


 

The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, long-term time deposits and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred during the quarters ended June 30, 2020 and 2019.

 

 

 

 

 

 

 

Fair Value Measurement or Disclosure

at June 30, 2020

 

 

 

Balance at

June 30, 2020

 

 

Level 1

 

 

 

 

Level 2

 

 

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

230

 

 

 

 

 

 

 

 

$

230

 

 

 

 

 

 

 

Money market funds

 

 

52

 

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt securities(a)

 

 

28

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

Total cash equivalents

 

 

310

 

 

 

52

 

 

 

 

 

258

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

1,034

 

 

 

 

 

 

 

 

 

1,034

 

 

 

 

 

 

 

Total short-term investments

 

 

1,034

 

 

 

 

 

 

 

 

1,034

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in equity securities

 

 

93

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term time deposits

 

 

57

 

 

 

 

 

 

 

 

 

57

 

 

 

 

 

 

 

Total

 

$

1,494

 

 

$

145

 

 

 

 

$

1,349

 

 

 

 

$

 

 

(a)

Classified as held-to-maturity investments and measured at amortized cost.

 

 

 

 

 

 

 

Fair Value Measurement or Disclosure

at December 31, 2019

 

 

 

 

Balance at

December 31, 2019

 

 

Level 1

 

 

 

 

Level 2

 

 

 

 

Level 3

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

407

 

 

 

 

 

 

 

 

$

407

 

 

 

 

 

 

 

 

Money market funds

 

 

331

 

 

 

331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents

 

 

738

 

 

 

331

 

 

 

 

 

407

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

611

 

 

 

 

 

 

 

 

 

611

 

 

 

 

 

 

 

 

Total short-term investments

 

 

611

 

 

 

 

 

 

 

 

611

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in equity securities

 

 

110

 

 

 

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,459

 

 

$

441

 

 

 

 

$

1,018

 

 

 

 

$

 

 

 

Non-Recurring Fair Value Measurements

 

In addition, certain of the Company’s restaurant-level assets (including operating lease ROU assets, property, plant and equipment), goodwill and intangible assets, are measured at fair value based on unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.

 

24


 

In determining the fair value of restaurant-level assets, the Company considered the highest and best use of the assets from market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows from operating restaurants and the price market participants would pay to sub-lease the ROU assets and acquire remaining restaurants assets, even if that use differs from the current use by the Company. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make, such as sales growth, and include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The discount rate used in the fair value calculation is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar restaurant and the related long-lived assets. In situations where the highest and best use of restaurant-level assets are represented by sub-leasing the operating lease ROU assets and acquiring remaining restaurant assets, the Company continues to use these assets in operating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts.

 

As of June 30, 2020, the fair value of restaurant-level assets, if determined to be impaired, are primarily represented by the price market participant would pay to sub-lease the operating lease ROU assets and acquire remaining restaurants assets, which reflects the highest and best use of the assets. Significant unobservable inputs used in the fair value measurement include market rental prices, which were determined with the assistance of an independent valuation specialist. The direct comparison approach is used as the valuation technique by assuming sub-lease of each of these properties in its existing state with vacant possession. By making reference to lease transactions as available in the relevant market, comparable properties in close proximity have been selected and adjustments have been made to account for the difference in factors such as location and property size.

 

The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters ended June 30, 2020 and 2019. These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-end dates.

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

Account Classification

Restaurant-level impairment(a)

 

$

21

 

 

$

7

 

 

$

30

 

 

$

19

 

 

Closure and impairment expenses, net

ROU impairment prior to the adoption of ASC 842(b)

 

 

 

 

 

 

 

 

 

 

 

82

 

 

Retained Earnings

Total

 

$

21

 

 

$

7

 

 

$

30

 

 

$

101

 

 

 

 

(a)

Restaurant-level impairment charges are recorded in Closure and impairment expenses, net and resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. We performed an additional impairment evaluation in the first quarter of 2020, considering the adverse effects of the COVID-19 pandemic as an impairment indicator. A trend of continuing operating losses for certain restaurants due to the COVID-19 pandemic resulted in higher impairment during the second quarter of 2020. We also performed an additional impairment evaluation upon adoption of ASC 842 in the first quarter of 2019. The remaining net book value of assets at fair value as of each relevant measurement date, after considering the impairment charge recorded during the quarters and years to date ended June 30, 2020 and 2019 was $49 million, $76 million, $14 million and $20 million, respectively.

 

(b)

ROU impairment prior to the adoption of ASC 842 represents an impairment charge on operating lease ROU assets arising from existing operating leases as of January 1, 2019. After netting with the related impact on deferred taxes of $19 million and the impact on noncontrolling interests of $3 million, we recorded a cumulative adjustment of $60 million to retained earnings in accordance with the transition guidance for the new lease standard. For those restaurants under operating leases with full impairment on their long-lived assets (primarily property, plant and equipment) before January 1, 2019, an additional impairment charge would have been recorded before January 1, 2019 had the operating lease ROU assets been recognized at the time of impairment.  

25


 

 

 

Note 12 – Income Taxes

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

Income tax provision

 

$

45

 

 

$

46

 

 

$

77

 

 

$

139

 

 

Effective tax rate

 

 

25.2

%

 

 

20.0

%

 

 

27.8

%

 

 

25.2

%

 

 

The higher effective tax rates for the quarter and year to date ended June 30, 2020 were primarily due to the U.S. tax related to gain recognized on investment in equity securities of Meituan during the second quarter and prior periods and, as for the quarter ended June 30, 2020, higher other residual U.S. tax. See Note 6 for additional information.

 

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which included a broad range of tax reforms. The U.S. Treasury Department and IRS released the final transition tax regulations in the first quarter of 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.

 

The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income ("GILTI") earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred, and therefore included it in estimating the annual effective tax rate.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the quarter and year to date ended June 30, 2020, the CARES Act had no material tax impact on our Condensed Consolidated Financial Statements. We continue to monitor additional guidance issued by the U.S. Treasury Department, the IRS and others.

 

We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the Chinese State Taxation Administration (“STA”) in China regarding our related party transactions for the period from 2006 to 2015. The information currently exchanged with the tax authorities focuses on our franchise arrangement with YUM. We have submitted information to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.

26


 

 

 

Note 13 –Segment Reporting

 

We have two reportable segments: KFC and Pizza Hut. Our remaining non-reportable operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, Taco Bell, Daojia, and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in aggregate.

 

 

 

 

Quarter Ended 6/30/2020

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

1,307

 

 

$

424

 

 

$

40

 

 

$

131

 

 

 

1,902

 

 

$

 

 

$

1,902

 

 

Inter-segment revenue

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

 

 

(10

)

 

 

 

 

Total

 

$

1,307

 

 

$

424

 

 

$

50

 

 

$

131

 

 

$

1,912

 

 

$

(10

)

 

$

1,902

 

 

 

 

 

Quarter Ended 6/30/2019

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

1,458

 

 

$

510

 

 

$

22

 

 

$

134

 

 

 

2,124

 

 

$

 

 

$

2,124

 

 

Inter-segment revenue

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

 

 

(10

)

 

 

 

 

Total

 

$

1,458

 

 

$

510

 

 

$

32

 

 

$

134

 

 

$

2,134

 

 

$

(10

)

 

$

2,124

 

 

 

 

 

 

Year to Date Ended 6/30/2020

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

2,576

 

 

$

748

 

 

$

61

 

 

$

271

 

 

 

3,656

 

 

$

 

 

$

3,656

 

 

Inter-segment revenue

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

17

 

 

 

(17

)

 

 

 

 

Total

 

$

2,576

 

 

$

748

 

 

$

78

 

 

$

271

 

 

$

3,673

 

 

$

(17

)

 

$

3,656

 

 

 

 

 

 

Year to Date Ended 6/30/2019

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

3,050

 

 

$

1,053

 

 

$

45

 

 

$

280

 

 

 

4,428

 

 

$

 

 

$

4,428

 

 

Inter-segment revenue

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

 

 

(19

)

 

 

 

 

Total

 

$

3,050

 

 

$

1,053

 

 

$

64

 

 

$

280

 

 

$

4,447

 

 

$

(19

)

 

$

4,428

 

 

27


 

 

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

Operating Profit (Loss)

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

KFC(b)

 

$

159

 

 

$

205

 

 

$

312

 

 

$

493

 

 

Pizza Hut

 

 

15

 

 

 

29

 

 

 

(13

)

 

 

79

 

 

All Other Segments

 

 

(2

)

 

 

(5

)

 

 

(12

)

 

 

(10

)

 

Unallocated revenues from transactions with

   franchisees and unconsolidated affiliates(c)

 

 

130

 

 

 

133

 

 

 

269

 

 

 

278

 

 

Unallocated Other revenues

 

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

 

Unallocated expenses from transactions with

   franchisees and unconsolidated affiliates(c)

 

 

(135

)

 

 

(133

)

 

 

(270

)

 

 

(276

)

 

Unallocated Other operating costs and expenses

 

 

(1

)

 

 

(1

)

 

 

(2

)

 

 

(2

)

 

Unallocated and corporate G&A expenses

 

 

(37

)

 

 

(25

)

 

 

(58

)

 

 

(58

)

 

Unallocated Other (loss) income

 

 

(2

)

 

 

 

 

 

(3

)

 

 

1

 

 

Operating Profit

 

$

128

 

 

$

204

 

 

$

225

 

 

$

507

 

 

Interest income, net(a)

 

 

8

 

 

 

10

 

 

 

17

 

 

 

19

 

 

Investment gain(a)

 

 

45

 

 

 

17

 

 

 

37

 

 

 

27

 

 

Income Before Income Taxes

 

$

181

 

 

$

231

 

 

$

279

 

 

$

553

 

 

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

Impairment Charges

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

6/30/2019

 

 

KFC(d)

 

$

12

 

 

$

4

 

 

$

16

 

 

$

12

 

 

Pizza Hut(d)

 

 

10

 

 

 

6

 

 

 

17

 

 

 

11

 

 

All Other Segments(d)

 

 

2

 

 

 

1

 

 

 

3

 

 

 

2

 

 

 

 

$

24

 

 

$

11

 

 

$

36

 

 

$

25

 

 

 

 

 

Total Assets

 

 

 

 

6/30/2020

 

 

12/31/2019

 

 

KFC(e)

 

$

3,025

 

 

$

3,160

 

 

Pizza Hut

 

 

854

 

 

 

950

 

 

All Other Segments

 

 

356

 

 

 

166

 

 

Corporate and Unallocated(f)

 

 

2,728

 

 

 

2,674

 

 

 

 

$

6,963

 

 

$

6,950

 

 

 

28


 

(a)

Amounts have not been allocated to any segment for performance reporting purposes.

(b)

Includes equity income from investments in unconsolidated affiliates of $14 million for both of the quarters ended June 30, 2020 and 2019, and $34 million and $37 million for the years to date ended June 30, 2020 and 2019, respectively.

(c)

Primarily includes revenues and associated expenses of transactions with franchisee and unconsolidated affiliates derived from the Company’s central procurement model whereby the Company centrally purchases substantially all food and paper products from suppliers and then sells and delivers to restaurants, including franchisees and unconsolidated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are deemed corporate revenues and expenses in nature.

 

(d)

Primarily includes store closure impairment charges, restaurant-level impairment charges resulting from our semi-annual impairment evaluation as well as our additional impairment evaluation performed in the first quarter of 2020 in response to adverse impact from the COVID-19 pandemic, and additional impairment evaluation performed in the first quarter of 2019 as a result of adopting ASC 842 (See Note 11).

 

(e)

Includes investments in unconsolidated affiliates.

 

(f)

Primarily includes cash and cash equivalents, short-term investments, investment in equity securities, long-term time deposits, and inventories that are centrally managed. 

 

 

Note 14 – Contingencies 

 

Indemnification of China Tax on Indirect Transfers of Assets

 

In February 2015, the STA issued Bulletin 7 on Income arising from Indirect Transfers of Assets by Non-Resident Enterprises. Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a Chinese resident enterprise, by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to Chinese enterprise income tax at a rate of 10%.

 

YUM concluded and we concurred that it is more likely than not that YUM will not be subject to this tax with respect to the pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM in connection with the separation (the “distribution”). However, there are significant uncertainties regarding what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the taxing authorities will ultimately view the distribution. As a result, YUM’s position could be challenged by Chinese tax authorities resulting in a 10% tax assessed on the difference between the fair market value and the tax basis of the separated China business. As YUM’s tax basis in the China business is minimal, the amount of such a tax could be significant.

 

Any tax liability arising from the application of Bulletin 7 to the distribution is expected to be settled in accordance with the tax matters agreement between the Company and YUM. Pursuant to the tax matters agreement, to the extent any Chinese indirect transfer tax pursuant to Bulletin 7 is imposed, such tax and related losses will be allocated between YUM and the Company in proportion to their respective share of the combined market capitalization of YUM and the Company during the 30 trading days after the separation. Such a settlement could be significant and have a material adverse effect on our results of operations and our financial condition. At the inception of the tax indemnity being provided to YUM, the fair value of the non-contingent obligation to stand ready to perform was insignificant and the liability for the contingent obligation to make payment was not probable or estimable.

 

29


 

Guarantees for Franchisees and Unconsolidated Affiliates

 

From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of June 30, 2020, guarantees on behalf of franchisees were immaterial and no guarantees were outstanding for unconsolidated affiliates.  

 

Legal Proceedings

 

The Company is subject to various lawsuits covering a variety of allegations from time to time. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Condensed Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. Matters faced by the Company from time to time include, but are not limited to, claims from landlords, employees, customers and others related to operational, contractual or employment issues.

 

 

Note 15 – Subsequent Events

 

Acquisition of Additional Interest in Unconsolidated Affiliate

 

On August 3, 2020, the Company completed the acquisition of an additional 25% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”), for cash consideration of $149 million. Upon closing of the acquisition, the Company increased its equity interest to 72%, allowing the Company to consolidate Suzhou KFC. The acquisition was considered immaterial.

 

 

30


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

References to the Company throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) are made using the first person notations of “we,” “us” or “our.” This MD&A contains forward-looking statements, including statements with respect to the ongoing transfer pricing audit, the retail tax structure reform, impacts of COVID-19, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases and dividends, and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.

 

Introduction

 

Yum China Holdings, Inc. is the largest restaurant company in China in terms of system sales, with over 9,900 restaurants as of June 30, 2020. Our growing restaurant base consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning and Taco Bell. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”), and own the intellectual property of the Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning concepts outright. We were the first major global restaurant brand to enter China in 1987 and with over 30 years of operations, we have developed deep operating experience in the China market. We have since grown to become one of China’s largest restaurant developers with locations in over 1,400 cities as of June 30, 2020. We believe that there is significant opportunity to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.

 

KFC is the leading and the largest quick-service restaurant (“QSR”) brand in China in terms of system sales. As of June 30, 2020, KFC operated over 6,700 restaurants in over 1,400 cities across China.

 

Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of system sales and number of restaurants. As of June 30, 2020, Pizza Hut operated over 2,200 restaurants in over 500 cities.

 

Overview

 

We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company’s performance. Throughout this MD&A, we discuss the following performance metrics:

 

 

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

 

 

System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise 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.

 

31


 

Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year, excluding the period during which stores are temporarily closed. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, including stores temporarily closed, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores.

 

 

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 percentage is defined as Restaurant profit divided by Company sales. Within the Company sales and Restaurant profit analysis, 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 restaurant operating costs such as inflation/deflation.

 

 

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, depreciation and amortization, and other items, including store impairment charges and Special Items. The Special Items for the year to date ended June 30, 2020 represent derecognition of indemnification assets related to Daojia and share-based compensation cost recognized for a special award of performance stock units (“Partner PSU Awards”) granted to select employees. The Special Item for the year to date ended June 30, 2019 represents impact from the Tax Cuts and Jobs Act (the “Tax Act”). The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation and amortization, and other items, including store impairment charges and Special Items. These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these adjusted measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.

 

All Note references in this MD&A refer to the Notes to the Condensed Consolidated Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except percentages and per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. References to quarters are references to the Company’s fiscal quarters.

32


 

 

Quarters and Years to Date Ended June 30, 2020 and 2019

 

Results of Operations

 

Summary

 

The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, East Dawning, Taco Bell, Daojia, COFFii & JOY and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Additional details on our reportable operating segments are included in Note 13.

 

Quarterly highlights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

System Sales(a)

 

 

Same-Store Sales(a)

 

 

Net New Units

 

 

Operating Profit

(Reported)

 

 

Operating Profit

(Ex F/X)

 

KFC

 

(6

)

 

 

(10

)

 

+9

 

 

 

(22

)

 

 

(19

)

Pizza Hut

 

(12

)

 

 

(12

)

 

 

 

 

 

(48

)

 

 

(45

)

All Other Segments(b)

NM

 

 

 

(27

)

 

NM

 

 

 

35

 

 

 

35

 

Total

 

(4

)

 

 

(11

)

 

+14

 

 

 

(38

)

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to date highlights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

System Sales(a)

 

 

Same-Store Sales(a)

 

 

Net New Units

 

 

Operating Profit

(Reported)

 

 

Operating Profit

(Ex F/X)

 

KFC

 

(10

)

 

 

(11

)

 

+9

 

 

 

(37

)

 

 

(34

)

Pizza Hut

 

(25

)

 

 

(22

)

 

 

 

 

NM

 

 

NM

 

All Other Segments(b)

 

69

 

 

 

(29

)

 

NM

 

 

 

(31

)

 

 

(33

)

Total

 

(13

)

 

 

(13

)

 

+14

 

 

 

(56

)

 

 

(54

)

 

 

NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.

 

(a)

System sales and same-store sales percentages as shown in tables exclude the impact of F/X. Effective January 1, 2018, temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed.

 

(b)

Sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty, are excluded from system sales and same-store sales.  

 

As of June 30, 2020, the Company operated over 9,900 units, predominately KFC and Pizza Hut restaurants, which are the leading and largest QSR and CDR brands, respectively, in mainland China in terms of system sales. We believe that there is significant opportunity to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.

 

33


 

Starting in late January 2020, the COVID-19 pandemic has significantly impacted the Company’s operations. The first three weeks of January were strong, but then the pandemic led to subsequent same-store sales declines of 40-50% compared to the comparable Chinese New Year holiday period in 2019. Approximately 35% of stores were closed by mid-February at the peak of the outbreak, with significant regional differences. For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. As the first quarter progressed, sales performance recovered gradually, with same-store sales down approximately 20% in late March. Second quarter operations improved since the COVID-19 outbreak. More than 99% of stores in China were open at the end of July 2020, with sales and profits trending unevenly. Sales improved sequentially in April and May but softened in June. Sales were primarily impacted by significantly reduced traffic at transportation and tourist locations, delayed and shortened school holidays and resurging regional infections.

 

As compared to the second quarter of 2019, Company sales in the second quarter of 2020 decreased 12%, or 9% excluding the impact of F/X. Company sales for the year to date ended June 30, 2020 decreased 19%, or 16% excluding the impact of F/X. The quarter and year to date decreases in Company sales, excluding the impact of F/X, were driven by same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, partially offset by net unit growth.

 

The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales declines, higher promotion costs, commodity inflation, higher store impairment charges and timing shift of government incentives received, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, realignment of cost structure to lower G&A expenses and utilities savings.

 

The year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by same-store sales declines, temporary store closures, commodity inflation and higher store impairment charges, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, and utilities savings.

34


 

The Consolidated Results of Operations for the quarters and years to date ended June 30, 2020 and 2019 are presented below:

 

 

 

Quarter Ended

 

 

% B/(W) (a)

 

Year to Date Ended

 

% B/(W) (a)

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

Ex F/X

 

6/30/2020

 

6/30/2019

 

Reported

 

Ex F/X

Company sales

 

$

1,692

 

 

$

1,926

 

 

 

(12

)

 

 

 

(9

)

 

 

$

3,240

 

 

 

$

4,015

 

 

 

 

(19

)

 

 

 

(16

)

 

Franchise fees and income

 

 

37

 

 

 

36

 

 

 

2

 

 

 

 

6

 

 

 

 

72

 

 

 

 

75

 

 

 

 

(4

)

 

 

 

(1

)

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

157

 

 

 

154

 

 

 

1

 

 

 

 

5

 

 

 

 

318

 

 

 

 

324

 

 

 

 

(2

)

 

 

 

1

 

 

Other revenues

 

 

16

 

 

 

8

 

 

 

97

 

 

 

 

106

 

 

 

 

26

 

 

 

 

14

 

 

 

 

86

 

 

 

 

94

 

 

Total revenues

 

$

1,902

 

 

$

2,124

 

 

 

(11

)

 

 

 

(7

)

 

 

$

3,656

 

 

 

$

4,428

 

 

 

 

(17

)

 

 

 

(15

)

 

Restaurant profit

 

$

231

 

 

$

283

 

 

 

(18

)

 

 

 

(15

)

 

 

$

396

 

 

 

$

669

 

 

 

 

(41

)

 

 

 

(39

)

 

Restaurant Margin %

 

 

13.7

%

 

 

14.7

%

 

 

(1.0

)

ppts.

 

 

(1.0

)

ppts.

 

 

12.2

%

 

 

 

16.7

%

 

 

 

(4.5

)

ppts.

 

 

(4.5

)

ppts.

Operating Profit

 

$

128

 

 

$

204

 

 

 

(38

)

 

 

 

(35

)

 

 

$

225

 

 

 

$

507

 

 

 

 

(56

)

 

 

 

(54

)

 

Interest income, net

 

 

8

 

 

 

10

 

 

 

(8

)

 

 

 

(5

)

 

 

 

17

 

 

 

 

19

 

 

 

 

(8

)

 

 

 

(4

)

 

Investment gain

 

 

45

 

 

 

17

 

 

NM

 

 

 

NM

 

 

 

 

37

 

 

 

 

27

 

 

 

 

40

 

 

 

 

40

 

 

Income tax provision

 

 

(45

)

 

 

(46

)

 

 

1

 

 

 

 

(1

)

 

 

 

(77

)

 

 

 

(139

)

 

 

 

44

 

 

 

 

43

 

 

Net Income – including

   noncontrolling interests

 

 

136

 

 

 

185

 

 

 

(27

)

 

 

 

(24

)

 

 

 

202

 

 

 

 

414

 

 

 

 

(51

)

 

 

 

(49

)

 

Net Income –

   noncontrolling interests

 

 

4

 

 

 

7

 

 

 

50

 

 

 

 

49

 

 

 

 

8

 

 

 

 

14

 

 

 

 

44

 

 

 

 

42

 

 

Net Income –

   Yum China Holdings, Inc.

 

$

132

 

 

$

178

 

 

 

(26

)

 

 

 

(23

)

 

 

$

194

 

 

 

$

400

 

 

 

 

(52

)

 

 

 

(50

)

 

Diluted Earnings

   Per Common Share

 

$

0.34

 

 

$

0.46

 

 

 

(26

)

 

 

 

(24

)

 

 

$

0.50

 

 

 

$

1.03

 

 

 

 

(51

)

 

 

 

(50

)

 

Effective tax rate

 

 

25.2

%

 

 

20.0

%

 

 

 

 

 

 

 

 

 

 

 

 

27.8

%

 

 

 

25.2

%

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Profit

 

$

132

 

 

$

204

 

 

 

 

 

 

 

 

 

 

 

 

$

230

 

 

 

$

507

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income -

    Yum China Holdings, Inc.

 

$

136

 

 

$

178

 

 

 

 

 

 

 

 

 

 

 

 

$

199

 

 

 

$

408

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Diluted Earnings

    Per Common Share

 

$

0.35

 

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

$

0.51

 

 

 

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Effective Tax Rate

 

 

24.6

%

 

 

20.0

%

 

 

 

 

 

 

 

 

 

 

 

 

27.3

%

 

 

 

23.8

%

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

261

 

 

$

321

 

 

 

 

 

 

 

 

 

 

 

 

$

480

 

 

 

$

749

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Represents the period-over-period change in percentage.

 

Performance Metrics

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

6/30/2019

System Sales (Decline) Growth

 

 

(8

)%

 

 

3

%

 

 

(16

)%

 

 

 

3

%

 

System Sales (Decline) Growth, excluding F/X

 

 

(4

)%

 

 

10

%

 

 

(13

)%

 

 

 

10

%

 

Same-Store Sales (Decline) Growth

 

 

(11

)%

 

 

4

%

 

 

(13

)%

 

 

 

4

%

 

 

Unit Count

 

6/30/2020

 

 

6/30/2019

 

 

% Increase

 

Company-owned

 

 

7,479

 

 

 

7,049

 

 

 

6

 

Unconsolidated affiliates

 

 

947

 

 

 

853

 

 

 

11

 

Franchisees

 

 

1,527

 

 

 

849

 

 

 

80

 

Other(a)

 

 

1

 

 

 

 

 

NM

 

 

 

 

9,954

 

 

 

8,751

 

 

 

14

 

 

 

(a)

This unit represents the first Lavazza restaurant.

35


 

Non-GAAP Measures

 

Special Items, along with the reconciliation of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures, are presented below.

 

 

 

Quarter Ended

 

 

 

 

Year to Date Ended

 

 

Detail of Special Items

 

6/30/2020

 

 

6/30/2019

 

 

 

 

6/30/2020

 

 

 

 

 

6/30/2019

 

 

Derecognition of indemnification assets related to Daojia(a)

 

$

(3

)

 

$

 

 

 

 

$

(3

)

 

 

 

 

$

 

 

Share-based compensation expense for Partner PSU Awards(b)

 

 

(1

)

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

Special Items, Operating Profit

 

 

(4

)

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

Tax Expenses on Special Items(c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact from the Tax Act(d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

Special items, net income – including noncontrolling interests

 

 

(4

)

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(8

)

 

Special items, net income – noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Items, Net income – Yum China Holdings, Inc.

 

$

(4

)

 

$

 

 

 

 

$

(5

)

 

 

 

 

$

(8

)

 

Weighted-average diluted shares outstanding (in millions)

 

 

388

 

 

 

389

 

 

 

 

 

387

 

 

 

 

 

 

389

 

 

Special Items, Diluted Earnings Per Common Share

 

$

(0.01

)

 

$

 

 

 

 

$

(0.01

)

 

 

 

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Reconciliations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Operating Profit to Adjusted Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

$

128

 

 

$

204

 

 

 

 

$

225

 

 

 

 

 

$

507

 

 

Special Items, Operating Profit

 

 

(4

)

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

Adjusted Operating Profit

 

$

132

 

 

$

204

 

 

 

 

$

230

 

 

 

 

 

$

507

 

 

Reconciliation of Net Income to Adjusted Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income - Yum China Holdings, Inc.

 

$

132

 

 

$

178

 

 

 

 

$

194

 

 

 

 

 

$

400

 

 

Special Items, Net Income – Yum China Holdings, Inc.

 

 

(4

)

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(8

)

 

Adjusted Net Income - Yum China Holdings, Inc.

 

$

136

 

 

$

178

 

 

 

 

$

199

 

 

 

 

 

$

408

 

 

Reconciliation of EPS to Adjusted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.35

 

 

$

0.47

 

 

 

 

$

0.51

 

 

 

 

 

$

1.06

 

 

Special Items, Basic Earnings Per Common Share

 

 

(0.01

)

 

 

 

 

 

 

 

(0.02

)

 

 

 

 

 

(0.02

)

 

Adjusted Basic Earnings Per Common Share

 

$

0.36

 

 

$

0.47

 

 

 

 

$

0.53

 

 

 

 

 

$

1.08

 

 

Diluted Earnings Per Common Share

 

$

0.34

 

 

$

0.46

 

 

 

 

$

0.50

 

 

 

 

 

$

1.03

 

 

Special Items, Diluted Earnings Per Common Share

 

 

(0.01

)

 

 

 

 

 

 

 

(0.01

)

 

 

 

 

 

(0.02

)

 

Adjusted Diluted Earnings Per Common Share

 

$

0.35

 

 

$

0.46

 

 

 

 

$

0.51

 

 

 

 

 

$

1.05

 

 

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate (See Note 12)

 

 

25.2

%

 

 

20.0

%

 

 

 

 

27.8

%

 

 

 

 

 

25.2

%

 

Impact on effective tax rate as a result of Special Items(c)(d)

 

 

0.6

%

 

 

%

 

 

 

 

0.5

%

 

 

 

 

 

1.4

%

 

Adjusted effective tax rate

 

 

24.6

%

 

 

20.0

%

 

 

 

 

27.3

%

 

 

 

 

 

23.8

%

 

 

 

(a)

In the quarter ended June 30, 2020, the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right pursuant to the purchase agreement expired. The expense was included in Other income, net, but was not allocated to any segment for performance reporting purposes.

 

(b)

In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant

36


 

similar, special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized share-based compensation cost of $1 million and $2 million associated with the Partner PSU Awards for the quarter and year to date ended June 30, 2020, respectively.

 

(c)

The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate.

 

(d)

We completed the evaluation of the impact on our transition tax computation based on the final regulations released by the U.S. Treasury Department and the IRS which became effective in the first quarter of 2019, and recorded an additional amount of $8 million for the transition tax accordingly.

 

Adjusted EBITDA

 

Net income, along with the reconciliation to Adjusted EBITDA, is presented below.

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

Reconciliation of Net Income to Adjusted EBITDA

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

6/30/2019

 

 

Net Income — Yum China Holdings, Inc.

 

$

132

 

 

$

178

 

 

$

194

 

 

 

$

400

 

 

Net Income — noncontrolling interests

 

 

4

 

 

 

7

 

 

 

8

 

 

 

 

14

 

 

Income tax provision

 

 

45

 

 

 

46

 

 

 

77

 

 

 

 

139

 

 

Interest income, net

 

 

(8

)

 

 

(10

)

 

 

(17

)

 

 

 

(19

)

 

Investment gain

 

 

(45

)

 

 

(17

)

 

 

(37

)

 

 

 

(27

)

 

Operating Profit

 

 

128

 

 

 

204

 

 

 

225

 

 

 

 

507

 

 

Special Items, Operating Profit

 

 

4

 

 

 

 

 

 

5

 

 

 

 

 

 

Adjusted Operating Profit

 

 

132

 

 

 

204

 

 

 

230

 

 

 

 

507

 

 

Depreciation and amortization

 

 

105

 

 

 

106

 

 

 

214

 

 

 

 

217

 

 

Store impairment charges

 

 

24

 

 

 

11

 

 

 

36

 

 

 

 

25

 

 

Adjusted EBITDA

 

$

261

 

 

$

321

 

 

$

480

 

 

 

$

749

 

 

 

37


 

Segment Results

 

KFC

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

Ex F/X

 

6/30/2020

 

6/30/2019

 

Reported

 

Ex F/X

 

Company sales

 

$

1,260

 

 

$

1,410

 

 

 

(11

)

 

 

 

(7

)

 

 

$

2,480

 

 

 

$

2,949

 

 

 

 

(16

)

 

 

 

(13

)

 

 

Franchise fees and income

 

 

32

 

 

 

33

 

 

 

(5

)

 

 

 

(2

)

 

 

 

65

 

 

 

 

69

 

 

 

 

(7

)

 

 

 

(3

)

 

 

Revenues from transactions

    with franchisees and

    unconsolidated affiliates

 

 

15

 

 

 

15

 

 

 

1

 

 

 

 

5

 

 

 

 

31

 

 

 

 

32

 

 

 

 

(1

)

 

 

 

2

 

 

 

Total revenues

 

$

1,307

 

 

$

1,458

 

 

 

(10

)

 

 

 

(7

)

 

 

$

2,576

 

 

 

$

3,050

 

 

 

 

(16

)

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant profit

 

$

183

 

 

$

225

 

 

 

(19

)

 

 

 

(16

)

 

 

$

349

 

 

 

$

534

 

 

 

 

(35

)

 

 

 

(32

)

 

 

Restaurant margin %

 

 

14.6

%

 

 

16.1

%

 

 

(1.5

)

ppts.

 

 

(1.5

)

ppts.

 

 

14.1

%

 

 

 

18.1

%

 

 

 

(4.0

)

ppts.

 

 

(4.0

)

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

42

 

 

$

49

 

 

 

15

 

 

 

 

12

 

 

 

$

88

 

 

 

$

98

 

 

 

 

10

 

 

 

 

7

 

 

 

Franchise expenses

 

$

16

 

 

$

16

 

 

 

8

 

 

 

 

5

 

 

 

$

32

 

 

 

$

35

 

 

 

 

11

 

 

 

 

7

 

 

 

Expenses for transactions

    with franchisees and

    unconsolidated affiliates

 

$

15

 

 

$

15

 

 

 

 

 

 

 

(4

)

 

 

$

31

 

 

 

$

32

 

 

 

 

1

 

 

 

 

(2

)

 

 

Closures and impairment

    expenses, net

 

$

10

 

 

$

 

 

NM

 

 

 

NM

 

 

 

$

11

 

 

 

$

7

 

 

 

 

(64

)

 

 

 

(73

)

 

 

Other income, net

 

$

(12

)

 

$

(12

)

 

 

8

 

 

 

 

12

 

 

 

$

(29

)

 

 

$

(30

)

 

 

 

 

 

 

 

3

 

 

 

Operating Profit

 

$

159

 

 

$

205

 

 

 

(22

)

 

 

 

(19

)

 

 

$

312

 

 

 

$

493

 

 

 

 

(37

)

 

 

 

(34

)

 

 

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

 

6/30/2019

 

 

System Sales (Decline) Growth

 

 

(9

)%

 

 

4

%

 

 

(14

)%

 

 

 

5

%

 

System Sales (Decline) Growth, excluding F/X

 

 

(6

)%

 

 

12

%

 

 

(10

)%

 

 

 

12

%

 

Same-Store Sales (Decline) Growth

 

 

(10

)%

 

 

5

%

 

 

(11

)%

 

 

 

5

%

 

 

Unit Count

 

6/30/2020

 

 

6/30/2019

 

 

% Increase

 

Company-owned

 

 

5,231

 

 

 

4,811

 

 

 

9

 

Unconsolidated affiliates

 

 

947

 

 

 

853

 

 

 

11

 

Franchisees

 

 

571

 

 

 

515

 

 

 

11

 

 

 

 

6,749

 

 

 

6,179

 

 

 

9

 

 

38


 

Company Sales and Restaurant Profit

 

The changes in Company sales and Restaurant profit were as follows:

 

 

 

Quarter Ended

 

Income (Expense)

 

6/30/2019

 

 

 

 

Store 

Portfolio 

Actions

 

 

Other

 

 

F/X

 

 

6/30/2020

 

Company sales

 

$

1,410

 

 

 

 

$

56

 

 

$

(158

)

 

$

(48

)

 

$

1,260

 

Cost of sales

 

 

(450

)

 

 

 

 

(19

)

 

 

34

 

 

 

16

 

 

 

(419

)

Cost of labor

 

 

(311

)

 

 

 

 

(13

)

 

 

42

 

 

 

11

 

 

 

(271

)

Occupancy and other

   operating expenses

 

 

(424

)

 

 

 

 

(22

)

 

 

44

 

 

 

15

 

 

 

(387

)

Restaurant profit

 

$

225

 

 

 

 

$

2

 

 

$

(38

)

 

$

(6

)

 

$

183

 

 

 

 

 

Year to Date Ended

 

 

Income (Expense)

 

6/30/2019

 

 

Store

Portfolio

Actions

 

 

Other

 

 

F/X

 

 

6/30/2020

 

 

Company sales

 

$

2,949

 

 

$

(54

)

 

$

(327

)

 

$

(88

)

 

$

2,480

 

 

Cost of sales

 

 

(926

)

 

 

12

 

 

 

74

 

 

 

29

 

 

 

(811

)

 

Cost of labor

 

 

(631

)

 

 

(15

)

 

 

68

 

 

 

20

 

 

 

(558

)

 

Occupancy and other

   operating expenses

 

 

(858

)

 

 

(24

)

 

 

93

 

 

 

27

 

 

 

(762

)

 

Restaurant profit

 

$

534

 

 

$

(81

)

 

$

(92

)

 

$

(12

)

 

$

349

 

 

 

The decrease in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by the same-store sales decline due to the impact of the COVID-19 pandemic, higher promotion costs and commodity inflation of 2%, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, and utilities savings.

 

The year to date decrease in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by the same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, higher promotion costs and commodity inflation of 2%, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, and utilities savings.

 

Franchise Fees and Income

 

The decrease in Franchise fees and income for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline of restaurants operated by unconsolidated affiliates and franchisees due to the impact of the COVID-19 pandemic, partially offset by the net unit growth.

 

The year to date decrease in Franchise fees and income, excluding the impact of F/X, was primarily driven by same-store sales decline and temporary closure of restaurants operated by unconsolidated affiliates and franchisees due to the impact of the COVID-19 pandemic, partially offset by the net unit growth.

 

G&A Expenses

 

The quarter and year to date decrease in G&A expenses, excluding the impact of F/X, was primarily driven by one-time reductions in social security contributions, realignment of cost structure and higher government incentives received, partially offset by merit increase.

 

39


 

Operating Profit

 

The quarter and year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and higher store impairment charges, partially offset by lower G&A expenses.

 

Pizza Hut

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

Ex F/X

 

6/30/2020

 

6/30/2019

 

Reported

 

Ex F/X

 

Company sales

 

$

422

 

 

$

507

 

 

 

(17

)

 

 

 

(13

)

 

 

$

744

 

 

 

$

1,048

 

 

 

 

(29

)

 

 

 

(26

)

 

 

Franchise fees and income

 

 

1

 

 

 

1

 

 

 

28

 

 

 

 

33

 

 

 

 

2

 

 

 

 

2

 

 

 

 

14

 

 

 

 

18

 

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

1

 

 

 

1

 

 

 

12

 

 

 

 

17

 

 

 

 

2

 

 

 

 

2

 

 

 

 

8

 

 

 

 

11

 

 

 

Other revenues

 

 

 

 

 

1

 

 

 

(32

)

 

 

 

(30

)

 

 

 

 

 

 

 

1

 

 

 

 

(25

)

 

 

 

(23

)

 

 

Total revenues

 

$

424

 

 

$

510

 

 

 

(17

)

 

 

 

(13

)

 

 

$

748

 

 

 

$

1,053

 

 

 

 

(29

)

 

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant profit

 

$

47

 

 

$

58

 

 

 

(18

)

 

 

 

(14

)

 

 

$

48

 

 

 

$

135

 

 

 

 

(64

)

 

 

 

(63

)

 

 

Restaurant margin %

 

 

11.2

%

 

 

11.3

%

 

 

(0.1

)

ppts.

 

 

(0.1

)

ppts.

 

 

6.4

%

 

 

 

12.9

%

 

 

 

(6.5

)

ppts.

 

 

(6.5

)

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

23

 

 

$

27

 

 

 

13

 

 

 

 

10

 

 

 

$

47

 

 

 

$

51

 

 

 

 

8

 

 

 

 

5

 

 

 

Franchise expenses

 

$

 

 

$

 

 

 

(8

)

 

 

 

(12

)

 

 

$

1

 

 

 

$

1

 

 

 

 

(3

)

 

 

 

(6

)

 

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

$

1

 

 

$

1

 

 

 

(16

)

 

 

 

(21

)

 

 

$

2

 

 

 

$

2

 

 

 

 

(20

)

 

 

 

(24

)

 

 

Closures and impairment

   expenses, net

 

$

10

 

 

$

3

 

 

NM

 

 

 

NM

 

 

 

$

15

 

 

 

$

6

 

 

 

NM

 

 

 

NM

 

 

 

Operating Profit (Loss)

 

$

15

 

 

$

29

 

 

 

(48

)

 

 

 

(45

)

 

 

$

(13

)

 

 

$

79

 

 

 

NM

 

 

 

NM

 

 

 

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

6/30/2019

System Sales Decline

 

 

(16

)%

 

 

(3

)%

 

 

(28

)%

 

 

 

(3

)%

 

System Sales (Decline) Growth, excluding F/X

 

 

(12

)%

 

 

4

%

 

 

(25

)%

 

 

 

3

%

 

Same-Store Sales (Decline) Growth

 

 

(12

)%

 

 

1

%

 

 

(22

)%

 

 

 

1

%

 

 

Unit Count

 

6/30/2020

 

 

6/30/2019

 

 

% Increase (Decrease)

 

Company-owned

 

 

2,150

 

 

 

2,178

 

 

 

(1

)

Franchisees

 

 

108

 

 

 

74

 

 

 

46

 

 

 

 

2,258

 

 

 

2,252

 

 

 

 

 

40


 

Company Sales and Restaurant Profit

 

The changes in Company sales and Restaurant profit were as follows:

 

 

 

Quarter Ended

 

Income (Expense)

 

6/30/2019

 

 

Store 

Portfolio 

Actions

 

 

Other

 

 

F/X

 

 

6/30/2020

 

Company sales

 

$

507

 

 

$

(8

)

 

$

(60

)

 

$

(17

)

 

$

422

 

Cost of sales

 

 

(155

)

 

 

2

 

 

 

13

 

 

 

6

 

 

 

(134

)

Cost of labor

 

 

(137

)

 

 

3

 

 

 

20

 

 

 

3

 

 

 

(111

)

Occupancy and other

   operating expenses

 

 

(157

)

 

 

4

 

 

 

18

 

 

 

5

 

 

 

(130

)

Restaurant profit

 

$

58

 

 

$

1

 

 

$

(9

)

 

$

(3

)

 

$

47

 

 

 

 

Year to Date Ended

 

 

Income (Expense)

 

6/30/2019

 

 

Store

Portfolio

Actions

 

 

Other

 

 

F/X

 

 

6/30/2020

 

 

Company sales

 

$

1,048

 

 

$

(76

)

 

$

(201

)

 

$

(27

)

 

$

744

 

 

Cost of sales

 

 

(314

)

 

 

22

 

 

 

47

 

 

 

9

 

 

 

(236

)

 

Cost of labor

 

 

(280

)

 

 

14

 

 

 

44

 

 

 

7

 

 

 

(215

)

 

Occupancy and other

    operating expenses

 

 

(319

)

 

 

14

 

 

 

51

 

 

 

9

 

 

 

(245

)

 

Restaurant profit

 

$

135

 

 

$

(26

)

 

$

(59

)

 

$

(2

)

 

$

48

 

 

 

The decrease in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline due to the impact of the COVID-19 pandemic, commodity inflation of 5% and higher promotion costs, partially offset by one-time reductions in social security contributions, labor efficiency, lease concessions, and savings in utilities and other restaurant operating costs.

 

The year to date decrease in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, and commodity inflation of 4%, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, and utility savings.

 

G&A Expenses

 

The quarter and year to date decrease in G&A expenses, excluding the impact of F/X, was primarily driven by one-time reductions in social security contributions and the realignment of cost structure.

 

Operating Profit (Loss)

 

The quarter to date decrease in Operating profit and year to date Operating loss, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit mainly due to the impact of the COVID-19 pandemic and higher store impairment charges, partially offset by lower G&A expenses.

41


 

All Other Segments

 

All Other Segments reflects the results of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, Taco Bell, Daojia and our e-commerce business.

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

 

 

Ex F/X

 

 

 

6/30/2020

 

6/30/2019

 

Reported

 

 

 

Ex F/X

 

 

 

Company sales

 

$

10

 

 

$

9

 

 

 

5

 

 

 

 

9

 

 

 

$

16

 

 

 

$

18

 

 

 

 

(13

)

 

 

 

(10

)

 

 

Franchise fees and income

 

 

4

 

 

 

2

 

 

NM

 

 

 

NM

 

 

 

 

5

 

 

 

 

4

 

 

 

 

27

 

 

 

 

32

 

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

11

 

 

 

5

 

 

NM

 

 

 

NM

 

 

 

 

16

 

 

 

 

12

 

 

 

 

22

 

 

 

 

27

 

 

 

Other revenues

 

 

25

 

 

 

16

 

 

 

55

 

 

 

 

60

 

 

 

 

41

 

 

 

 

30

 

 

 

 

37

 

 

 

 

42

 

 

 

Total revenues

 

$

50

 

 

$

32

 

 

 

53

 

 

 

 

59

 

 

 

$

78

 

 

 

$

64

 

 

 

 

20

 

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant profit

 

$

 

 

$

 

 

NM

 

 

 

NM

 

 

 

$

(3

)

 

 

$

(1

)

 

 

 

(72

)

 

 

 

(64

)

 

 

Restaurant margin %

 

 

2.5

%

 

 

(9.9

)%

 

 

12.4

 

ppts.

 

 

12.4

 

ppts.

 

 

(15.5

)%

 

 

 

(7.8

)%

 

 

 

(7.7

)

ppts.

 

 

(7.7

)

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

11

 

 

$

8

 

 

 

(47

)

 

 

 

(53

)

 

 

$

19

 

 

 

$

16

 

 

 

 

(19

)

 

 

 

(23

)

 

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

$

9

 

 

$

5

 

 

 

(98

)

 

 

 

NM

 

 

 

$

13

 

 

 

$

11

 

 

 

 

(14

)

 

 

 

(18

)

 

 

Other operating costs

   and expenses

 

$

21

 

 

$

14

 

 

 

(51

)

 

 

 

(56

)

 

 

$

36

 

 

 

$

26

 

 

 

 

(41

)

 

 

 

(46

)

 

 

Closures and impairment

   expenses, net

 

$

1

 

 

$

1

 

 

 

(22

)

 

 

 

(26

)

 

 

$

3

 

 

 

$

2

 

 

 

 

(53

)

 

 

 

(59

)

 

 

Operating Loss

 

$

(2

)

 

$

(5

)

 

 

35

 

 

 

 

35

 

 

 

$

(12

)

 

 

$

(10

)

 

 

 

(31

)

 

 

 

(33

)

 

 

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

6/30/2020

 

 

 

6/30/2019

 

 

Same-Store Sales Decline

 

 

(27

)%

 

 

(7

)%

 

 

(29

)%

 

 

 

(12

)%

 

 

 

Total Revenues

 

The quarter and year to date increase in Total revenues, excluding the impact of F/X, was primarily driven by the consolidation of Huang Ji Huang and the increase in demand of online orders of certain product categories (mainly fresh grocery products) from our e-commerce business, partially offset by the same-store sales decline due to the impact of the COVID-19 pandemic.

42


 

G&A Expenses

 

The quarter and year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by the consolidation of Huang Ji Huang.

 

Operating Loss

 

The decrease in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by the improvement in Restaurant profit and operating profit generated by Huang Ji Huang.

 

The year to date increase in Operating loss, excluding the impact of F/X, was primarily driven by the increase in Restaurant loss and higher store impairment charges, partially offset by the operating profit generated by Huang Ji Huang.

 

Corporate and Unallocated

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

 

Ex F/X

 

 

6/30/2020

 

 

6/30/2019

 

 

Reported

 

 

Ex F/X

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

$

130

 

 

$

133

 

 

 

(3

)

 

 

1

 

 

$

269

 

 

$

278

 

 

 

(3

)

 

 

 

 

Other revenue

 

 

1

 

 

 

1

 

 

 

17

 

 

 

22

 

 

 

2

 

 

 

2

 

 

 

(6

)

 

 

(2

)

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

 

135

 

 

 

133

 

 

 

(1

)

 

 

(5

)

 

 

270

 

 

 

276

 

 

 

3

 

 

 

(1

)

 

Other operating costs and expenses

 

 

1

 

 

 

1

 

 

 

37

 

 

 

35

 

 

 

2

 

 

 

2

 

 

 

17

 

 

 

14

 

 

Corporate G&A expenses

 

 

37

 

 

 

25

 

 

 

(47

)

 

 

(51

)

 

 

58

 

 

 

58

 

 

 

1

 

 

 

(2

)

 

Other unallocated (loss) income

 

 

(2

)

 

 

 

 

NM

 

 

NM

 

 

 

(3)

 

 

 

1

 

 

NM

 

 

NM

 

 

Interest income, net

 

 

8

 

 

 

10

 

 

 

(8

)

 

 

(5

)

 

 

17

 

 

 

19

 

 

 

(8

)

 

 

(4

)

 

Investment gain

 

 

45

 

 

 

17

 

 

NM

 

 

NM

 

 

 

37

 

 

 

27

 

 

 

40

 

 

 

40

 

 

Income tax provision (See Note 12)

 

 

(45

)

 

 

(46

)

 

 

1

 

 

 

(1)

 

 

 

(77

)

 

 

(139

)

 

 

44

 

 

 

43

 

 

Effective tax rate (See Note 12)

 

 

25.2

%

 

 

20.0

%

 

 

(5.2)

%

 

 

(5.2)

%

 

 

27.8

%

 

 

25.2

%

 

 

(2.6)

%

 

 

(2.6)

%

 

 

 

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

 

Revenues from transactions with franchisees and unconsolidated affiliates primarily include revenues derived from the Company’s central procurement model whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees and unconsolidated affiliates. The quarter and year to date change excluding the impact of F/X, was in line with the change in system sales of related franchisees and unconsolidated affiliates.

 

G&A Expenses

 

The same government incentives received in the second quarter of 2019 were received in the first quarter of 2020. Excluding the impact from timing shift of government incentives received and the impact of F/X, corporate G&A expenses decreased in the second quarter of 2020 mainly due to the realignment of cost structure.

 

The year to date increase in Corporate G&A expenses, excluding the impact of F/X, was primarily driven by merit increase, partially offset by one-time reductions in social security contributions and the realignment of cost structure.

 


43


 

Investment Gain

 

The Investment gain relates to our investment in equity securities of Meituan Dianping (“Meituan”). See Note 6.

Income Tax Provision

 

Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%, withholding tax on repatriation of earnings outside of China and U.S. corporate income tax, if any. The higher effective tax rates for the quarter and year to date ended June 30, 2020 were primarily due to the U.S. tax related to gain recognized on investment in equity securities of Meituan during the second quarter and prior periods and, as for the quarter ended June 30, 2020, higher other residual U.S. tax. See Note 6 for additional information.

 

Significant Known Events, Trends or Uncertainties Expected to Impact Future Results

 

Impact of COVID-19 Pandemic

 

Starting in late January 2020, the COVID-19 pandemic has significantly impacted the Company’s operations. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. More than 99% of stores in China were open at the end of July 2020, with sales and profits trending unevenly. Sales were primarily impacted by significantly reduced traffic at transportation and tourist locations, delayed and shortened school holidays and resurging regional infections. These factors and the lingering effect of COVID-19 continued to impact operations in July.

 

Management cannot ascertain the extent to which our operations will continue to be impacted by the COVID-19 pandemic, which depends largely on future developments that are highly uncertain and cannot be accurately predicted, including the possible reemergence and further spread of COVID-19 and the actions by government authorities to contain or treat its impact, the economic recovery within China and globally, the impact on consumer behavior and other related factors. The Company expects that COVID-19 will have a material adverse impact on the Company’s results of operations, cash flows and financial condition for the full year 2020. For further information on the risks associated with the COVID-19 pandemic, see “Item 1A. Risk Factors.”

 

Tax Examination on Transfer Pricing

 

We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information currently exchanged with the tax authorities focuses on our franchise arrangement with YUM. We have submitted information to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.

 

PRC Value-Added Tax (“VAT”)

 

Effective May 1, 2016, a 6% output VAT replaced the 5% business tax (“BT”) previously applied to certain restaurant sales. Input VAT would be creditable to the aforementioned 6% output VAT. The latest VAT rates imposed on our purchase of materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services,

44


 

mainly including construction, transportation and leasing. However, the impact on our operating results is not expected to be significant.

 

Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as an input VAT credit asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, on the Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any input VAT credit asset for recoverability, giving consideration to the indefinite life of the input VAT credit assets as well as its forecasted operating results and capital spending, which inherently includes significant assumptions that are subject to change.  

 

As of June 30, 2020, an input VAT credit asset of $237 million and payable of $6 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year from June 30, 2020. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year.

 

We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter.

 

Foreign Currency Exchange Rate

 

The reporting currency of the Company is the US$. Most of the revenues, costs, assets and liabilities of the Company are denominated in Chinese Renminbi (“RMB”). Any significant change in the exchange rate between US$ and RMB may materially affect the Company’s business, results of operations, cash flows and financial condition, depending on the weakening or strengthening of RMB against the US$. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for a further discussion.

 

Consolidated Cash Flows

 

Our cash flows for the years to date ended June 30, 2020 and 2019 were as follows:

 

Net cash provided by operating activities was $452 million in 2020 as compared to $657 million in 2019. The decrease was primarily driven by the net income decrease.

 

Net cash used in investing activities was $761 million in 2020 as compared to $368 million in 2019. The increase is mainly due to cash consideration paid for the acquisition of Huang Ji Huang, and the net impact on cash flow resulting from purchases and maturities of short-term investments and long-term time deposits, partially offset by cash proceeds from the partial disposal of our investment in equity securities of Meituan.

 

45


 

Net cash used in financing activities was $59 million in 2020 as compared to $259 million in 2019. The decrease was primarily driven by a decrease in the number of shares repurchased due to the temporary suspension of our share repurchase program and a decrease in the amount of dividends paid due to the temporary suspension of dividends through the end of the third quarter of 2020.

 

Liquidity and Capital Resources

 

Historically we have funded our operations through cash generated from the operation of our Company-owned stores and from our franchise operations and dividend payments from our unconsolidated affiliates.

 

Our ability to fund our future operations and capital needs will depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and to make capital expenditures, distributions to our stockholders and share repurchases as well as any acquisition or investment we may make. As a result of the COVID-19 pandemic, we have taken, and continue to take, certain actions to provide additional liquidity and flexibility, which include temporarily suspending our share repurchase program and, through the end of the third quarter of 2020, dividends, partial disposal of our investment in Meituan equity securities, as well as increasing our credit facilities. We believe that our future cash from operations, together with our access to funds on hand and capital markets, will provide adequate resources to fund these uses of cash and that our existing cash, net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months.  

 

If our cash flows from operations are less than we require, we may need to access the capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:

 

 

our financial performance;

 

 

our credit ratings;

 

 

the liquidity of the overall capital markets; and

 

 

the state of the Chinese, U.S. and global economies as well as relations between the Chinese and U.S. governments.

 

There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all.

 

Generally our income is subject to the Chinese statutory tax rate of 25%. However, to the extent our cash flows from operations exceed our China cash requirements, the excess cash may be subject to an additional 10% withholding tax levied by the Chinese tax authority, subject to any reduction or exemption set forth in relevant tax treaties or tax arrangements.

 

Share Repurchases and Dividends

 

Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. During the years to date ended June 30, 2020 and 2019, the Company repurchased $7 million or 0.2 million shares and $140 million or 3.5 million shares of common stock, respectively, under the repurchase program.  

 

For the quarter ended June 30, 2019, the Company paid cash dividends of approximately $45 million to stockholders through a quarterly dividend payment of $0.12 per share.

 

46


 

Due to the unprecedented effects of the COVID-19 pandemic and associated economic uncertainty, the Company temporarily suspended its share repurchases and, through the end of the third quarter of 2020, dividend payments.

 

Our ability to declare and pay any dividends on our stock may be restricted by earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the Board of Directors, as an enterprise incorporated in China, each of our Chinese subsidiaries may allocate a portion of its after-tax profits based on Chinese accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Borrowing Capacity

 

As of June 30, 2020, the Company had credit facilities of RMB3,713 million (approximately $526 million), comprised of onshore credit facilities of RMB2,300 million (approximately $326 million) in aggregate and offshore credit facilities of $200 million in aggregate.

 

The credit facilities had remaining terms ranging from less than one year to three years as of June 30, 2020. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China, Loan Prime Rate (“LPR”) published by the National Interbank Funding Centre of the PRC or London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Administration. Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facilities contain covenants limiting, among other things, certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sublimits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As of June 30, 2020, we had outstanding bank guarantees of RMB 89 million (approximately $13 million) to secure our lease payment to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the same amount, while there were no borrowings outstanding as of June 30, 2020.

 

Off-Balance Sheet Arrangements

 

See the Guarantees section of Note 14 for discussion of our off-balance sheet arrangements.

 

New Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

See Note 2 for details of recently adopted accounting pronouncements.

 

New Accounting Pronouncements Not Yet Adopted

 

47


 

In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company from January 1, 2021, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

 

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which clarifies the interaction for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company from January 1, 2021, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

 

 

Cautionary Note Regarding Forward-Looking Statements

 

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan,” “could,” “target,” “predict,” “likely,” “should,” “forecast,” “outlook,” “model,” “continue,” “ongoing” or other similar terminology. Forward-looking statements are based on our expectations, estimates, assumptions or projections concerning future results or events as of the date of the filing of this Form 10-Q. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those statements. We cannot assure you that any of our assumptions are correct or any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the following:

 

 

Risks related to our business and industry, such as (a) food safety and food-borne illness concerns, (b) significant failure to maintain effective quality control systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, including the COVID-19 pandemic, (e) the fact that we derive substantially all of our revenue from our operations in China, (f) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals and the potential cannibalization of existing sales by aggressive development, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to COFFii & JOY may not be successful, (u) challenges and risks related to our e-commerce business, (v) the anticipated benefits of the acquisition of Daojia may not be realized in a timely manner or at all, (w) the Chinese government may determine that the VIE structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (x)

48


 

 

our inability or failure to recognize, respond to and effectively manage the impact of social media, (y) litigation and failure to comply with anti-bribery or anti-corruption laws, (z) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities (including with respect to the transfer pricing audit) and imposition of new taxes, (aa) changes in consumer discretionary spending and general economic conditions, (bb) competition in the retail food industry, (cc) loss or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (dd) our inability to adequately protect the intellectual property we own or have the right to use, (ee) YUM’s failure to protect its intellectual property, (ff) seasonality and certain major events in China, (gg) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (hh) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (ii) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (jj) unforeseeable business interruptions, (kk) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC, (ll) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (mm) our investment in technology and innovation may not generate the expected level of returns, and (nn) our strategic investments or acquisitions may be unsuccessful;

 

 

Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, (c) changes in trade relations between the United States and China, including the imposition of new or higher taxes on goods imported from the United States, (d) fluctuation in the value of the Chinese Renminbi, (e) limitations on our ability to utilize our cash balances effectively due to governmental control of currency conversion and payments of foreign currency, (f) changes in laws and regulations, (g) reliance on distributions by our operating subsidiaries in China to fund offshore cash requirements, (h) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (i) uncertainty regarding indirect transfers of equity interests and enhanced scrutiny by Chinese tax authorities, (j) difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us, (k) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (l) risk in relation to unexpected land acquisitions, building closures or demolitions, (m) potential fines for failure to comply with law, (n) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion and (o) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions;

 

 

Risks related to the separation and related transactions, such as (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement and there being no assurance that the indemnity provided by YUM with respect to certain liabilities in connection with the separation will be sufficient to insure us against the full amount of such liabilities, (d) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement and (e) potential liabilities due to fraudulent transfer considerations.

 

49


 

In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and this Form 10-Q) for additional information regarding factors that could affect our financial and other results. You should not place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Form 10-Q. We are not undertaking to update any of these statements, except as required by law.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Rate Risk

 

Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. While substantially all of our supply purchases are denominated in RMB, from time to time, we enter into agreements at predetermined exchange rates with third parties to purchase certain amount of goods and services sourced overseas and make payments in the corresponding local currencies when practical, to minimize the related foreign currency exposure with immaterial impact on our financial statements.  

 

As substantially all of the Company’s assets are located in China, the Company is exposed to movements in the RMB foreign currency exchange rate. For the quarter ended June 30, 2020, the Company’s Operating profit would have decreased by approximately $13 million if the RMB weakened 10% relative to the US$. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices.

 

Commodity Price Risk

 

We are subject to volatility in food costs as a result of market risks associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors.

 

Investment Risk

 

In September 2018, we invested $74 million in Meituan’s ordinary shares. The Company sold 4.2 million of its ordinary shares of Meituan in the second quarter of 2020 for proceeds of approximately $54 million. The equity investment is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 6 for further discussion on our investment in Meituan.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

50


 

Changes in Internal Control Over Financial Reporting

 

There were no changes with respect to the Company’s internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

51


 

PART II – Other Information

 

Item 1.

 

Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.

 

Item 1A.

Risk Factors

 

We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 27, 2020.

 

Health concerns arising from outbreaks of viruses or other illnesses may have a material adverse effect on our business. We expect that the COVID-19 pandemic will have a material adverse impact on the Company’s results of operations, cash flows and financial condition for the full year 2020, and it could also have material adverse impacts for an extended period of time thereafter.

 

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as the novel coronavirus (COVID-19), avian flu or African swine flu. Outbreaks of contagious illness occur from time to time around the world, including in China where virtually all of our restaurants are located. The occurrence of such an outbreak or other adverse public health developments could materially disrupt our business and operations, including if government authorities impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Furthermore, the risk of contracting viruses or other illnesses that may be transmitted through human contact could cause employees or guests to avoid gathering in public places or interacting with other people, which could materially and adversely affect restaurant guest traffic or our ability to adequately staff restaurants. An outbreak could also cause disruption in our supply chain and adversely impact our ability to ensure supplies to the stores and to provide safety measures to protect our employees and customers, which could materially and adversely affect our continuous operations. Our operating costs may also increase in view of the additional protective supplies and sanitation procedures that may be required to operate our business during an outbreak. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of effected countries. Any of the foregoing would severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition.

52


 

For example, the COVID-19 pandemic has adversely affected our results of operations, cash flows and financial condition for the quarter and year to date ended June 30, 2020, and it is expected to have continuing adverse effects for full year 2020. At the peak of the COVID-19 outbreak in China, we closed approximately 35% of our restaurants. For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. During the second quarter of 2020, sales and profits were trending unevenly. Sales were primarily impacted by significantly reduced traffic at transportation and tourist locations, delayed and shortened school holidays and resurging regional infections. It remains difficult to predict the full impact of the COVID-19 pandemic on the broader economy and how consumer behavior may change, and whether such change is temporary or permanent. Social distancing, telecommunicating and reductions in travel may become the new normal. These conditions could fundamentally impact the way we work and the services we provide, and could have continuing adverse effects on our results of operations, cash flows and financial condition beyond 2020. The extent to which our operations continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the possible reemergence and further spread of COVID-19 and the actions by the government authorities to contain the pandemic or treat its impact, among other things. Insurance may be unavailable to cover any losses we incur as a result of the pandemic. The COVID-19 pandemic also may have the effect of heightening other risks disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, such as, but not limited to, those related to supply chain management, labor shortage and cost, cybersecurity threats, as well as consumer perceptions of our brands.

 

Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may affect our business. Our operations could also be disrupted if any of our employees or employees of our business partners were suspected of having a contagious illness or susceptible to becoming infected with a contagious illness, since this could require us or our business partners to screen and/or quarantine some or all of such employees or disinfect our restaurant facilities.

 

With respect to the avian flu, public concern over an outbreak may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. This would likely result in lower revenues and profits. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact our profit margins and revenues.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Our Board of Directors authorized an aggregate of $1.4 billion for our share repurchase program, including its most recent increase in authorization on October 31, 2018. The authorizations do not have an expiration date. As a result of the COVID-19 pandemic impact, we have taken, and are continuing to take, certain actions to provide additional liquidity and flexibility, which include temporarily suspending our share repurchase program.

 

No shares were repurchased during the quarter ended June 30, 2020.

 

 

53


 

Item 6.

Exhibits

 

Exhibit

Number

 

Description of Exhibits

 

 

 

  3.1

 

Amended and Restated Certificate of Incorporation of Yum China Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016).

 

 

 

  3.2

 

Amended and Restated Bylaws of Yum China Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016).

 

 

 

  31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

  31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

  32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

  32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

101.INS

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document *

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document  *

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document  *

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document  *

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document  *

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document  *

 

 

 

104

 

Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document  *

 

*

Filed or furnished herewith.

54


 

SIGNATURES

 

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Yum China Holdings, Inc.

 

(Registrant)

 

Date:

 

August 6, 2020

/s/  Xueling Lu

 

 

 

Controller and Principal Accounting Officer

 

 

 

 

 

 

55

yumc-ex311_13.htm

 

Exhibit 31.1

CERTIFICATION

I, Joey Wat, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Yum China Holdings, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 6, 2020

/s/ Joey Wat

 

Joey Wat

Chief Executive Officer

 

 

yumc-ex312_12.htm

 

Exhibit 31.2

CERTIFICATION

I, Andy Yeung, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Yum China Holdings, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 6, 2020

/s/ Andy Yeung

 

Andy Yeung

Chief Financial Officer

 

 

yumc-ex321_7.htm

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Yum China Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Joey Wat, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 6, 2020

/s/ Joey Wat

 

Joey Wat

Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Yum China Holdings, Inc. and will be retained by Yum China Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

yumc-ex322_6.htm

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Yum China Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Andy Yeung, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 6, 2020

/s/ Andy Yeung

 

Andy Yeung

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Yum China Holdings, Inc. and will be retained by Yum China Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.