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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 September 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

9987

The Stock Exchange of Hong Kong Limited

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 November 2, 2020 was 419,344,415 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 September 30, 2020 and 2019 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Quarters and Years to Date Ended September 30, 2020 and 2019 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Years to Date Ended September 30, 2020 and 2019 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2020 (Unaudited) and December 31, 2019

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

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

32

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

 

Item 4 – Controls and Procedures

54

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

55

 

 

 

 

Item 1A – Risk Factors

55

 

 

 

 

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

61

 

 

 

 

Item 6 – Exhibits

62

 

 

 

 

Signatures

63

 

 

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

 

9/30/2020

 

 

9/30/2019

 

 

9/30/2020

 

 

9/30/2019

 

 

Company sales

 

$

2,118

 

 

$

2,097

 

 

$

5,358

 

 

$

6,112

 

 

Franchise fees and income

 

 

40

 

 

 

38

 

 

 

112

 

 

 

113

 

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

 

 

170

 

 

 

172

 

 

 

488

 

 

 

496

 

 

Other revenues

 

 

20

 

 

 

12

 

 

 

46

 

 

 

26

 

 

Total revenues

 

 

2,348

 

 

 

2,319

 

 

 

6,004

 

 

 

6,747

 

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

660

 

 

 

651

 

 

 

1,711

 

 

 

1,896

 

 

Payroll and employee benefits

 

 

458

 

 

 

455

 

 

 

1,236

 

 

 

1,371

 

 

Occupancy and other operating expenses

 

 

606

 

 

 

619

 

 

 

1,621

 

 

 

1,804

 

 

Company restaurant expenses

 

 

1,724

 

 

 

1,725

 

 

 

4,568

 

 

 

5,071

 

 

General and administrative expenses

 

 

127

 

 

 

117

 

 

 

339

 

 

 

340

 

 

Franchise expenses

 

 

17

 

 

 

19

 

 

 

50

 

 

 

55

 

 

Expenses for transactions with

   franchisees and unconsolidated affiliates

 

 

164

 

 

 

167

 

 

 

480

 

 

 

488

 

 

Other operating costs and expenses

 

 

15

 

 

 

9

 

 

 

38

 

 

 

20

 

 

Closures and impairment expenses, net

 

 

1

 

 

 

(1

)

 

 

30

 

 

 

14

 

 

Other income, net

 

 

(256

)

 

 

(17

)

 

 

(282

)

 

 

(48

)

 

Total costs and expenses, net

 

 

1,792

 

 

 

2,019

 

 

 

5,223

 

 

 

5,940

 

 

Operating Profit

 

 

556

 

 

 

300

 

 

 

781

 

 

 

807

 

 

Interest income, net

 

 

11

 

 

 

10

 

 

 

28

 

 

 

29

 

 

Investment gain

 

 

38

 

 

 

12

 

 

 

75

 

 

 

39

 

 

Income Before Income Taxes

 

 

605

 

 

 

322

 

 

 

884

 

 

 

875

 

 

Income tax provision

 

 

(155

)

 

 

(87

)

 

 

(232

)

 

 

(226

)

 

Net income – including noncontrolling interests

 

 

450

 

 

 

235

 

 

 

652

 

 

 

649

 

 

Net income – noncontrolling interests

 

 

11

 

 

 

12

 

 

 

19

 

 

 

26

 

 

Net Income – Yum China Holdings, Inc.

 

$

439

 

 

$

223

 

 

$

633

 

 

$

623

 

 

Weighted-average common shares outstanding (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

387

 

 

 

377

 

 

 

380

 

 

 

378

 

 

Diluted

 

 

400

 

 

 

388

 

 

 

391

 

 

 

389

 

 

Basic Earnings Per Common Share

 

$

1.13

 

 

$

0.59

 

 

$

1.67

 

 

$

1.65

 

 

Diluted Earnings Per Common Share

 

$

1.10

 

 

$

0.58

 

 

$

1.62

 

 

$

1.60

 

 

 

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

 

 

9/30/2020

 

 

9/30/2019

 

 

9/30/2020

 

 

9/30/2019

Net income - including noncontrolling interests

 

$

450

 

 

$

235

 

 

$

652

 

 

$

649

 

 

Other comprehensive income (loss), net of tax of nil:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

123

 

 

 

(96

)

 

 

88

 

 

 

(95

)

 

Comprehensive income - including noncontrolling interests

 

 

573

 

 

 

139

 

 

 

740

 

 

 

554

 

 

Comprehensive income - noncontrolling interests

 

 

17

 

 

 

8

 

 

 

23

 

 

 

23

 

 

Comprehensive Income - Yum China Holdings, Inc.

 

$

556

 

 

$

131

 

 

$

717

 

 

$

531

 

 

 

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

 

 

 

 

9/30/2020

 

 

9/30/2019

 

 

Cash Flows – Operating Activities

 

 

 

 

 

 

 

 

 

Net income – including noncontrolling interests

 

$

652

 

 

$

649

 

 

Depreciation and amortization

 

 

327

 

 

 

322

 

 

Non-cash operating lease cost

 

 

270

 

 

 

251

 

 

Closures and impairment expenses

 

 

30

 

 

 

14

 

 

Gain from re-measurement of equity interest upon acquisition

 

 

(239

)

 

 

 

 

Investment gain

 

 

(75

)

 

 

(39

)

 

Equity income from investments in unconsolidated affiliates

 

 

(51

)

 

 

(56

)

 

Distributions of income received from unconsolidated affiliates

 

 

25

 

 

 

50

 

 

Deferred income taxes

 

 

73

 

 

 

12

 

 

Share-based compensation expense

 

 

27

 

 

 

21

 

 

Changes in accounts receivable

 

 

(19

)

 

 

(2

)

 

Changes in inventories

 

 

52

 

 

 

(22

)

 

Changes in prepaid expenses and other current assets

 

 

31

 

 

 

7

 

 

Changes in accounts payable and other current liabilities

 

 

56

 

 

 

118

 

 

Changes in income taxes payable

 

 

62

 

 

 

32

 

 

Changes in non-current operating lease liabilities

 

 

(292

)

 

 

(280

)

 

Other, net

 

 

(30

)

 

 

(32

)

 

Net Cash Provided by Operating Activities

 

 

899

 

 

 

1,045

 

 

Cash Flows – Investing Activities

 

 

 

 

 

 

 

 

 

Capital spending

 

 

(284

)

 

 

(310

)

 

Purchases of short-term investments

 

 

(2,859

)

 

 

(619

)

 

Purchase of long-term time deposits

 

 

(57

)

 

 

 

 

Maturities of short-term investments

 

 

1,066

 

 

 

366

 

 

Contribution to unconsolidated affiliates

 

 

(17

)

 

 

 

 

Acquisition of business, net of cash acquired

 

 

(288

)

 

 

 

 

Disposal of equity securities

 

 

54

 

 

 

 

 

Other, net

 

 

52

 

 

 

10

 

 

Net Cash Used in Investing Activities

 

 

(2,333

)

 

 

(553

)

 

Cash Flows – Financing Activities

 

 

 

 

 

 

 

 

 

Common stock issuance proceeds, net of issuance costs

 

 

2,203

 

 

 

 

 

Repurchase of shares of common stock

 

 

(8

)

 

 

(207

)

 

Cash dividends paid on common stock

 

 

(45

)

 

 

(136

)

 

Dividends paid to noncontrolling interests

 

 

(7

)

 

 

(25

)

 

Other, net

 

 

1

 

 

 

 

 

Net Cash  Provided by (Used in) Financing Activities

 

 

2,144

 

 

 

(368

)

 

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

 

 

17

 

 

 

(26

)

 

Net Increase in Cash, Cash Equivalents and Restricted Cash

 

 

727

 

 

 

98

 

 

Cash, Cash Equivalents and Restricted Cash - Beginning of Period

 

 

1,055

 

 

 

1,266

 

 

Cash, Cash Equivalents and Restricted Cash - End of Period

 

$

1,782

 

 

$

1,364

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

 

Cash paid for income tax

 

 

105

 

 

 

185

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payables and other current liabilities

 

 

148

 

 

 

112

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


 

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

9/30/2020

 

 

12/31/2019

 

 

 

 

(Unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,782

 

 

$

1,046

 

 

Short-term investments

 

 

2,424

 

 

 

611

 

 

Accounts receivable, net

 

 

86

 

 

 

88

 

 

Inventories, net

 

 

346

 

 

 

380

 

 

Prepaid expenses and other current assets

 

 

162

 

 

 

134

 

 

Total Current Assets

 

 

4,800

 

 

 

2,259

 

 

Property, plant and equipment, net

 

 

1,642

 

 

 

1,594

 

 

Operating lease right-of-use assets

 

 

2,034

 

 

 

1,985

 

 

Goodwill

 

 

800

 

 

 

254

 

 

Intangible assets, net

 

 

246

 

 

 

94

 

 

Deferred income taxes

 

 

102

 

 

 

95

 

 

Investments in unconsolidated affiliates

 

 

71

 

 

 

89

 

 

Other assets

 

 

691

 

 

 

580

 

 

Total Assets

 

$

10,386

 

 

$

6,950

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

1,893

 

 

$

1,691

 

 

Income taxes payable

 

 

114

 

 

 

45

 

 

Total Current Liabilities

 

 

2,007

 

 

 

1,736

 

 

Non-current operating lease liabilities

 

 

1,797

 

 

 

1,803

 

 

Non-current finance lease liabilities

 

 

25

 

 

 

26

 

 

Other liabilities

 

 

350

 

 

 

210

 

 

Total Liabilities

 

 

4,179

 

 

 

3,775

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 million shares authorized; 439 million shares and 395 million shares issued at September 30, 2020 and December 31, 2019, respectively; 419 million shares and 376 million shares outstanding at September 30, 2020 and December 31, 2019, respectively

 

 

4

 

 

 

4

 

 

Treasury stock

 

 

(728

)

 

 

(721

)

 

Additional paid-in capital

 

 

4,647

 

 

 

2,427

 

 

Retained earnings

 

 

2,004

 

 

 

1,416

 

 

Accumulated other comprehensive income (loss)

 

 

35

 

 

 

(49

)

 

Total Yum China Holdings, Inc. Stockholders' Equity

 

 

5,962

 

 

 

3,077

 

 

Noncontrolling interests

 

 

233

 

 

 

98

 

 

Total Equity

 

 

6,195

 

 

 

3,175

 

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

10,386

 

 

$

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, Huang Ji Huang, COFFii & JOY, East Dawning, Taco Bell and Lavazza 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, Macau and Taiwan. 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, Huang Ji Huang, 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 an 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. Following the acquisition, we established a Chinese dining business unit comprising our three Chinese dining brands, namely Little Sheep, Huang Ji Huang and East Dawning.

 

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.

 

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 $