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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 March 31, 2024

 

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.)

 

 

 

101 East Park Boulevard, Suite 805

Plano, Texas 75074

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 May 3, 2024 was 389,901,700 shares.

 

 

 


 

Yum China Holdings, Inc.

INDEX

 

 

Page

 

 

No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Income – Quarters Ended March 31, 2024 and 2023 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Quarters Ended March 31, 2024 and 2023 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Quarters Ended March 31, 2024 and 2023 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2024 (Unaudited) and December 31, 2023

6

 

 

 

 

Condensed Consolidated Statements of Equity – Quarters Ended March 31, 2024 and 2023 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

 

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

23

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

 

Item 4 – Controls and Procedures

39

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

40

 

 

 

 

Item 1A – Risk Factors

40

 

 

 

 

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

40

 

 

 

 

Item 5 – Other Information

40

 

 

 

 

Item 6 – Exhibits

41

 

 

 

 

Signatures

42

 

 

 


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

 

Revenues

 

3/31/2024

 

 

3/31/2023

 

Company sales

 

$

2,794

 

 

$

2,772

 

Franchise fees and income

 

 

25

 

 

 

25

 

Revenues from transactions with franchisees

 

 

107

 

 

 

93

 

Other revenues

 

 

32

 

 

 

27

 

Total revenues

 

 

2,958

 

 

 

2,917

 

Costs and Expenses, Net

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

Food and paper

 

 

896

 

 

 

835

 

Payroll and employee benefits

 

 

708

 

 

 

683

 

Occupancy and other operating expenses

 

 

697

 

 

 

691

 

Company restaurant expenses

 

 

2,301

 

 

 

2,209

 

General and administrative expenses

 

 

140

 

 

 

163

 

Franchise expenses

 

 

10

 

 

 

10

 

Expenses for transactions with franchisees

 

 

104

 

 

 

91

 

Other operating costs and expenses

 

 

29

 

 

 

24

 

Closures and impairment expenses, net

 

 

1

 

 

 

3

 

Other (income) expenses, net

 

 

(1

)

 

 

1

 

Total costs and expenses, net

 

 

2,584

 

 

 

2,501

 

Operating Profit

 

 

374

 

 

 

416

 

Interest income, net

 

 

38

 

 

 

38

 

Investment gain (loss)

 

 

8

 

 

 

(17

)

Income Before Income Taxes and Equity in
   Net Earnings (Losses) from Equity Method Investments

 

 

420

 

 

 

437

 

Income tax provision

 

 

(113

)

 

 

(125

)

Equity in net earnings (losses) from equity method investments

 

 

 

 

 

1

 

Net income – including noncontrolling interests

 

 

307

 

 

 

313

 

Net income – noncontrolling interests

 

 

20

 

 

 

24

 

Net Income – Yum China Holdings, Inc.

 

$

287

 

 

$

289

 

Weighted-average common shares outstanding (in millions):

 

 

 

 

 

 

Basic

 

 

401

 

 

 

418

 

Diluted

 

 

403

 

 

 

423

 

Basic Earnings Per Common Share

 

$

0.72

 

 

$

0.69

 

Diluted Earnings Per Common Share

 

$

0.71

 

 

$

0.68

 

 

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

 

 

 

3/31/2024

 

 

3/31/2023

 

Net income – including noncontrolling interests

 

$

307

 

 

$

313

 

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

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(81

)

 

 

14

 

Comprehensive income – including noncontrolling interests

 

 

226

 

 

 

327

 

Comprehensive income – noncontrolling interests

 

 

10

 

 

 

26

 

Comprehensive Income – Yum China Holdings, Inc.

 

$

216

 

 

$

301

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Condensed Consolidated Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Quarter Ended

 

 

3/31/2024

 

3/31/2023

 Cash Flows – Operating Activities

 

 

 

 

 

 

 

 

 Net income – including noncontrolling interests

 

$

307

 

 

 

$

313

 

 

 Depreciation and amortization

 

 

117

 

 

 

 

116

 

 Non-cash operating lease cost

 

 

101

 

 

 

 

102

 

 

 Closures and impairment expenses

 

 

1

 

 

 

 

3

 

 

 Investment (gain) loss

 

 

(8

)

 

 

 

17

 

 

 Equity in net (earnings) losses from equity method investments

 

 

 

 

 

 

(1

)

 

 Distributions of income received from equity method investments

 

 

2

 

 

 

 

4

 

 

 Deferred income taxes

 

 

 

 

 

 

7

 

 

 Share-based compensation expense

 

 

10

 

 

 

 

13

 

 

 Changes in accounts receivable

 

 

(3

)

 

 

 

5

 

 

 Changes in inventories

 

 

74

 

 

 

 

40

 

 

 Changes in prepaid expenses, other current assets and value-added tax assets

 

 

(8

)

 

 

 

12

 

 

 Changes in accounts payable and other current liabilities

 

 

(136

)

 

 

 

(93

)

 

 Changes in income taxes payable

 

 

73

 

 

 

 

75

 

 

 Changes in non-current operating lease liabilities

 

 

(100

)

 

 

 

(94

)

 

 Other, net

 

 

12

 

 

 

 

(12

)

 

 Net Cash Provided by Operating Activities

 

 

442

 

 

 

 

507

 

 

 Cash Flows – Investing Activities

 

 

 

 

 

 

 

 

 Capital spending

 

 

(189

)

 

 

 

(179

)

 

 Purchases of short-term investments, long-term bank deposits and notes

 

 

(268

)

 

 

 

(1,378

)

 

 Maturities of short-term investments, long-term bank deposits and notes

 

 

555

 

 

 

 

1,126

 

 

 Other, net

 

 

1

 

 

 

 

2

 

 

 Net Cash Provided by (Used in) Investing Activities

 

 

99

 

 

 

 

(429

)

 

 Cash Flows – Financing Activities

 

 

 

 

 

 

 

 

 Repurchase of shares of common stock

 

 

(679

)

 

 

 

(60

)

 

 Cash dividends paid on common stock

 

 

(64

)

 

 

 

(54

)

 

 Dividends paid to noncontrolling interests

 

 

(16

)

 

 

 

(15

)

 

 Contributions from noncontrolling interests

 

 

 

 

 

 

35

 

 

 Other, net

 

 

(17

)

 

 

 

(5

)

 

 Net Cash Used in Financing Activities

 

 

(776

)

 

 

 

(99

)

 

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

 

 

(10

)

 

 

 

2

 

 

 Net Decrease in Cash, Cash Equivalents and Restricted Cash

 

 

(245

)

 

 

 

(19

)

 

 Cash, Cash Equivalents, and Restricted Cash - Beginning of Period

 

 

1,128

 

 

 

 

1,130

 

 

 Cash, Cash Equivalents, and Restricted Cash - End of Period

 

$

883

 

 

 

$

1,111

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

Cash paid for income tax

 

 

38

 

 

 

39

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

Capital expenditures included in accounts payable and other current liabilities

 

 

173

 

 

 

139

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

3/31/2024

 

 

12/31/2023

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

883

 

 

$

1,128

 

Short-term investments

 

 

1,512

 

 

 

1,472

 

Accounts receivable, net

 

 

74

 

 

 

68

 

Inventories, net

 

 

345

 

 

 

424

 

Prepaid expenses and other current assets

 

 

341

 

 

 

339

 

Total Current Assets

 

 

3,155

 

 

 

3,431

 

Property, plant and equipment, net

 

 

2,292

 

 

 

2,310

 

Operating lease right-of-use assets

 

 

2,167

 

 

 

2,217

 

Goodwill

 

 

1,900

 

 

 

1,932

 

Intangible assets, net

 

 

147

 

 

 

150

 

Long-term bank deposits and notes

 

 

907

 

 

 

1,265

 

Equity investments

 

 

335

 

 

 

332

 

Deferred income tax assets

 

 

129

 

 

 

129

 

Other assets

 

 

263

 

 

 

265

 

Total Assets

 

 

11,295

 

 

 

12,031

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable and other current liabilities

 

 

1,936

 

 

 

2,164

 

Short-term borrowings

 

 

165

 

 

 

168

 

Income taxes payable

 

 

162

 

 

 

90

 

Total Current Liabilities

 

 

2,263

 

 

 

2,422

 

Non-current operating lease liabilities

 

 

1,847

 

 

 

1,899

 

Non-current finance lease liabilities

 

 

44

 

 

 

44

 

Deferred income tax liabilities

 

 

387

 

 

 

390

 

Other liabilities

 

 

166

 

 

 

157

 

Total Liabilities

 

 

4,707

 

 

 

4,912

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 million shares authorized; 394 million shares
      and
407 million shares issued at March 31, 2024 and December 31, 2023, respectively;
      
392 million shares and 407 million shares outstanding at March 31, 2024 and
      December 31, 2023, respectively.

 

 

4

 

 

 

4

 

Treasury stock

 

 

(76

)

 

 

 

Additional paid-in capital

 

 

4,159

 

 

 

4,320

 

Retained earnings

 

 

2,078

 

 

 

2,310

 

Accumulated other comprehensive loss

 

 

(300

)

 

 

(229

)

Total Yum China Holdings, Inc. Stockholders' Equity

 

 

5,865

 

 

 

6,405

 

Noncontrolling interests

 

 

710

 

 

 

701

 

Total Equity

 

 

6,575

 

 

 

7,106

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

11,295

 

 

$

12,031

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

6


Condensed Consolidated Statements of Equity (Unaudited)

Yum China Holdings, Inc.

(in US$ 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

 

 

Shares

 

 

Amount

 

 

Interests

 

 

Equity

 

 

Interest

 

Balance at December 31, 2023

 

 

407

 

 

$

4

 

 

$

4,320

 

 

$

2,310

 

 

$

(229

)

 

 

 

 

$

 

 

$

701

 

 

$

7,106

 

 

$

13

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

287

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

307

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(71

)

 

 

 

 

 

 

 

 

(10

)

 

 

(81

)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

226

 

 

 

 

Cash dividends declared
   ($
0.16 per common share)

 

 

 

 

 

 

 

 

 

 

 

(64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64

)

 

 

 

Distributions to/contributions from
  noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

Repurchase and retirement of shares

 

 

(15

)

 

 

 

 

 

(156

)

 

 

(455

)

 

 

 

 

 

(2

)

 

 

(76

)

 

 

 

 

 

(687

)

 

 

 

Exercise and vesting of share-based awards

 

 

1

 

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

Balance at March 31, 2024

 

 

394

 

 

$

4

 

 

$

4,159

 

 

$

2,078

 

 

$

(300

)

 

 

(2

)

 

$

(76

)

 

$

710

 

 

$

6,575

 

 

$

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

419

 

 

$

4

 

 

$

4,390

 

 

$

2,191

 

 

$

(103

)

 

 

 

 

$

 

 

$

666

 

 

$

7,148

 

 

$

12

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

289

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

313

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

2

 

 

 

14

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

327

 

 

 

 

Cash dividends declared
   ($
0.13 per common share)

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

Contributions from / distributions to
   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

34

 

 

 

 

Repurchase and retirement of shares

 

 

(1

)

 

 

 

 

 

(10

)

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62

)

 

 

 

Exercise and vesting of share-based awards

 

 

1

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

Balance at March 31, 2023

 

 

418

 

 

$

4

 

 

$

4,391

 

 

$

2,374

 

 

$

(91

)

 

 

 

 

$

 

 

$

726

 

 

$

7,404

 

 

$

12

 

 

*: Shares may not add due to rounding.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

7


Notes to Condensed Consolidated Financial Statements (Unaudited)

(Tabular amounts in US$ millions, except as otherwise noted)

 

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, Lavazza, Huang Ji Huang, Little Sheep 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”), a master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company and YUM, through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019, 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. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to us being in “good standing” and unless we give notice of our intent not to renew. 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 Huang Ji Huang and Little Sheep and pay no license fee related to these concepts.

 

In 1987, KFC was the first major global restaurant brand to enter China. As of March 31, 2024, there were 10,603 KFC stores in China. We maintain a controlling interest of 58%, 70%, 83%, 92% and approximately 60% in the entities that own and operate the KFCs in and around Shanghai, Beijing, Wuxi, Suzhou and Hangzhou, respectively.

The first Pizza Hut in China opened in 1990. As of March 31, 2024, there were 3,425 Pizza Hut restaurants in China.

 

In the second quarter of 2020, the Company partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world-renowned family-owned Italian coffee company, and established a joint venture (“Lavazza joint venture”), to explore and develop the Lavazza coffee concept in China. Lavazza joint venture operates both the coffee shop business and the retail business. We maintain a controlling interest of 65% equity interest in the Lavazza joint venture.

 

In 2017, the Company acquired a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an online food delivery service provider in China. This business was extended to also include a team managing the delivery services for restaurants, including restaurants in our system, with their results reported under our delivery operating segment.

As part of our strategy to drive growth from off-premise occasions, we also developed our own retail brand operations, Shaofaner, which sells packaged foods through online and offline channels. The operating results of Shaofaner are included in our e-commerce business operating segment.

The Company has two reportable segments: KFC and Pizza Hut. Our non-reportable operating segments, including the operations of Lavazza, Huang Ji Huang, Little Sheep and Taco Bell, our delivery operating segment and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate. Additional details on our segment reporting are included in Note 13.

 

The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “YUMC.” On September 10, 2020, the Company completed a secondary listing of its common stock on the Main Board of the Hong Kong Stock Exchange (“HKEX”) under the stock code “9987,” in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted to $2.2 billion. On October 24, 2022, the Company’s voluntary conversion of its secondary listing status to a primary listing status on the HKEX became effective (“Primary Conversion”) and the Company became a dual primary listed company on the NYSE and HKEX. On the same day, the Company’s shares of common stock traded on the HKEX were included in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The Company’s common stock listed on the NYSE and HKEX continue to be fully fungible.

 

 

8


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 March 31, 2024, and our results of operations, comprehensive income, statements of equity and cash flows for the quarters ended March 31, 2024 and 2023. 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 included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 29, 2024.

 

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.

 

Recently Adopted Accounting Pronouncements

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842) — Common Control Arrangements (“ASU 2023-01”). It requires all lessees, including public business entities, to amortize leasehold improvements associated with common control leases over their useful life to the common control group and account for them as a transfer of assets between entities under common control through an adjustment to equity when the lessee no longer controls the use of the underlying asset. ASU 2023-01 is effective for the Company from January 1, 2024, with early adoption permitted. We adopted this standard on January 1, 2024, and such adoption did not have a material impact on our financial statements.

 

Note 3 – Business Acquisitions and Equity Investments

 

Consolidation of Hangzhou KFC and Equity Investment in Hangzhou Catering

 

In the fourth quarter of 2021, the Company completed its investment in a 28% equity interest in Hangzhou Catering for cash consideration of $255 million. Hangzhou Catering holds a 45% equity interest in Hangzhou KFC, of which the Company previously held a 47% equity interest. Along with the investment, the Company also obtained two additional seats on the board of directors of Hangzhou KFC. Upon completion of the transaction, the Company directly and indirectly holds an approximately 60% equity interest in Hangzhou KFC and has majority representation on the board, and thus obtained control over Hangzhou KFC and started to consolidate its results from the acquisition date.

 

In addition to its equity interest in Hangzhou KFC, Hangzhou Catering operates approximately 70 Chinese dining restaurants under four time-honored brands and a food processing business. The Company applies the equity method of accounting to the 28% equity interest in Hangzhou Catering excluding the Hangzhou KFC business and recorded this investment in Equity investments based on its then fair value. The Company elected to report its share of Hangzhou Catering’s financial results with a one-quarter lag because its results are not available in time for the Company to record them in the concurrent period. The Company's equity earnings (losses) from Hangzhou Catering, net of taxes, were immaterial for both the quarters ended March 31, 2024 and 2023, and included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income. As of March 31, 2024 and December 31, 2023, the carrying amount of the Company’s equity method investment in Hangzhou Catering was $41 million and $41 million, respectively, exceeding the Company’s interest in Hangzhou Catering’s underlying net assets by $23 million and $24 million, respectively. Substantially all of this difference was attributable to its self-owned properties and impact of related deferred tax liabilities determined upon acquisition, which is being depreciated over a weighted-average remaining useful life of 20 years.

 

The purchase amount from Hangzhou Catering was immaterial for both quarters ended March 31, 2024 and 2023. The Company’s accounts payable and other current liabilities due to Hangzhou Catering were immaterial as of both March 31, 2024 and December 31, 2023.

 

9


Fujian Sunner Development Co., Ltd. (“Sunner”) Investment

 

In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange-listed company. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier. In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being one of Sunner’s significant shareholders, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the quarters ended March 31, 2024 and 2023, the Company's equity income (losses) from Sunner, net of taxes, was immaterial and was included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income.

 

The Company purchased inventories of $116 million and $119 million from Sunner for the quarters ended March 31, 2024 and 2023, respectively. The Company’s accounts payable and other current liabilities due to Sunner were $40 million and $51 million as of March 31, 2024 and December 31, 2023, respectively.

 

As of March 31, 2024 and December 31, 2023, the carrying amount of the Company’s investment in Sunner was $221 million and $225 million, respectively, exceeding the Company’s interest in Sunner’s underlying net assets by $149 million and $152 million, respectively. As of March 31, 2024 and December 31, 2023, $16 million and $16 million of these basis differences were related to finite-lived intangible assets determined upon acquisition, respectively, which are being amortized over the estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of March 31, 2024 and December 31, 2023, the market value of the Company’s investment in Sunner was $141 million and $151 million based on its quoted closing price, respectively.

 

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, a delivery aggregator in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan.

 

The Company accounts 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 of Meituan recognized, which were included in Investment gain (loss) in our Condensed Consolidated Statements of Income, is as follows:

 

 

 

Quarter Ended

 

 

 

3/31/2024

 

 

3/31/2023

 

Unrealized gain (loss) recorded on equity securities still held
   as of the end of the period

 

$

8

 

 

$

(17

)

 

 

 

Note 4 – Revenue Recognition

 

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

 

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. We primarily use our dedicated riders to deliver orders, and also use platform riders at select locations. When orders are fulfilled by our dedicated riders or platform 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 are fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature.

 

10


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.

 

Our privilege membership programs offer privilege members rights to multiple benefits, such as free delivery and discounts on certain products. For certain 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 privilege membership programs 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. The franchise agreement term is generally 10 years for KFC and Pizza Hut, generally five years for Little Sheep and three to 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

 

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

 

The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees, and then sells and delivers them to the restaurants. In addition, the Company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees. The Company also provides delivery services to franchisees. 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 such services 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. Revenue is recognized upon transfer of control over ordered items or services, generally upon delivery to the franchisees.

 

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 certain percentage of sales from substantially all of our restaurants, including franchisees. Other services provided to franchisees consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.

 

Other Revenues

Other revenues primarily include i) sales of products to customers through e-commerce channels, sales of Lavazza coffee retail products beyond Lavazza coffee shops, and sales of our seasoning products to distributors, and ii) revenues from logistics and warehousing services provided to third parties through our supply chain network. Our segment disclosures also include revenues relating to delivery services that were provided to our Company-owned restaurants and, therefore, were eliminated for consolidation purposes.

Other revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

11


 

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 in 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 tables present revenue disaggregated by types of arrangements and segments:

 

 

 

Quarter Ended 3/31/2024

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other
Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Company sales

 

$

2,193

 

 

$

587

 

 

$

14

 

 

$

 

 

$

2,794

 

 

$

 

 

$

2,794

 

 

Franchise fees and income

 

 

18

 

 

 

2

 

 

 

5

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

 

Revenues from transactions
   with franchisees

 

 

14

 

 

 

1

 

 

 

20

 

 

 

72

 

 

 

107

 

 

 

 

 

 

107

 

 

Other revenues

 

 

5

 

 

 

5

 

 

 

164

 

 

 

15

 

 

 

189

 

 

 

(157

)

 

 

32

 

 

Total revenues

 

$

2,230

 

 

$

595

 

 

$

203

 

 

$

87

 

 

$

3,115

 

 

$

(157

)

 

$

2,958

 

 

 

 

 

Quarter Ended 3/31/2023

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other
Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Company sales

 

$

2,166

 

 

$

591

 

 

$

15

 

 

$

 

 

$

2,772

 

 

$

 

 

$

2,772

 

 

Franchise fees and income

 

 

17

 

 

 

2

 

 

 

6

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

 

Revenues from transactions
   with franchisees

 

 

10

 

 

 

1

 

 

 

19

 

 

 

63

 

 

 

93

 

 

 

 

 

 

93

 

 

Other revenues

 

 

5

 

 

 

3

 

 

 

162

 

 

 

10

 

 

 

180

 

 

 

(153

)

 

 

27