yumc-8k_20170208.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 7, 2017

 

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

001-37762

 

81-2421743

(State or other jurisdiction of

incorporation or organization)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

7100 Corporate Drive

Plano, Texas 75024

United States of America

 

16/F Two Grand Gateway

3 Hongqiao Road

Shanghai 200030

People’s Republic of China

(Address, including zip code, of principal executive offices)

 

(888) 298-6986

(Registrant's telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


 


 

Item 2.02.

Results of Operations and Financial Condition.

 

On February 7, 2017, Yum China Holdings, Inc. issued a press release announcing its unaudited results for the full year and fourth quarter ended December 31, 2016. A copy of the press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K.

 

 

Item 9.01.

Financial Statements and Exhibits.

 

(d)    Exhibits.

 

The following exhibits are furnished with this report:

 

Exhibit No.

 

Exhibit Description

 

 

 

99.1

 

Press Release of Yum China Holdings, Inc. issued February 7, 2017.

 

 


 

SIGNATURES

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

 

 

 

YUM CHINA HOLDINGS, INC.

 

 

 

 

 

By:

 

/s/ Shella Ng

 

 

 

 

Name:

 

Shella Ng

 

 

 

 

Title:

 

Chief Legal Officer and Corporate Secretary

Date: February 7, 2017

 

 

 

 

 

 

 

 


 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit Description

 

 

 

99.1

 

Press Release of Yum China Holdings, Inc. issued February 7, 2017.

 

 

yumc-ex991_7.htm

Exhibit 99.1

Yum China Reports Full Year Operating Profit of US$640 million, up 31% year-over-year

Led by Margin Expansion and New Unit Openings;

Board Authorizes Share Repurchase Program

Shanghai, China (February 8, 2017) – Yum China Holdings, Inc. (the “Company” or “Yum China”) (NYSE: YUMC) today reported unaudited results for the full year and fourth quarter ended December 31, 2016. Reported GAAP results include Special Items, which are excluded from non-GAAP measures.  Special Items are not allocated to any segment and therefore only impact reported results of Yum China.  See Reconciliation of Reported Results to Non-GAAP Measures within this release. 

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock.

Full-Year Highlights

 

Total system sales grew 5%, including growth of 6% at KFC and 3% at Pizza Hut Casual Dining, excluding foreign currency translation (“F/X”).

 

Opened 575 new restaurants for the full year, or 5% net growth, surpassing 7,500 restaurants in China.

 

Same-store sales were flat, with an increase of 3% at KFC, offset by a decline of 7% at Pizza Hut Casual Dining.

 

Total restaurant margin increased 2.7 percentage points to 15.3%, primarily aided by the impact of retail tax structure reform implemented on May 1, 2016.

 

Reported operating profit grew 31%, primarily aided by the impact of retail tax structure reform. Foreign currency translation negatively impacted operating profit by $36 million. Excluding F/X and Special Items, operating profit grew 37%.

Fourth-Quarter Highlights

 

Total system sales grew 4%, including growth of 4% at KFC and 6% at Pizza Hut Casual Dining, excluding F/X.

 

Opened 302 new restaurants during the quarter.

 

Same-store sales were flat, with an increase of 1% at KFC, offset by a decline of 3% at Pizza Hut Casual Dining.

 

Foreign currency translation negatively impacted operating profit by $5 million.

Key Financial Results

 

 

 

 

Fourth Quarter

 

 

 

Full Year

 

 

 

(in US$ million, except

 

 

 

 

 

 

 

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

 

for per share data and percentages)

 

2016

 

 

2015

 

 

Reported

 

 

Ex F/X

 

 

 

2016

 

 

2015

 

 

Reported

 

 

Ex F/X

 

 

 

Reported Operating Profit

 

$

58

 

 

$

5

 

 

 

922

%

 

 

1,010

%

 

 

$

640

 

 

$

488

 

 

 

31

%

 

 

38

%

 

 

Operating Profit Before Special Items1

 

$

75

 

 

$

20

 

 

 

265

%

 

 

288

%

 

 

$

655

 

 

$

503

 

 

 

30

%

 

 

37

%

 

 

Diluted EPS

 

$

0.23

 

 

$

(0.08

)

 

NM

 

 

NM

 

 

 

$

1.36

 

 

$

0.89

 

 

 

53

%

 

 

62

%

 

 

Diluted EPS Before Special Items1

 

$

0.17

 

 

$

(0.05

)

 

NM

 

 

NM

 

 

 

$

1.28

 

 

$

0.92

 

 

 

39

%

 

 

48

%

 

 

1 See Reconciliation of Reported Results to Non-GAAP Measures included in the accompanying tables of this release for further details.

Note:  All comparisons are versus the same period a year ago.  

Consistent with prior years, Yum China’s fiscal fourth quarter includes September, October, November and December results.

Yum China Holdings, Inc.. •  Shanghai, China •  Website http://ir.yumchina.com


 

 

CEO Comments

“This was a momentous year for Yum China. We successfully became an independent, publicly traded company while simultaneously improving our business performance and investing for future growth.  At year end 2016 with over 7,500 restaurants nationwide, we extended our market-leading position in China” said Micky Pant, CEO.

“For our shareholders, we exceeded our 2016 financial targets* in operating profit, restaurant margin and adjusted EBITDA. We continue to focus on our long-term growth formula: new unit development, same-store sales growth, and continued restaurant margin improvement. Right now, our top priority is consistently delivering positive same-store sales growth.  During 2016, we continued to build a foundation for long-term growth with emphasis on product innovation, investments in refurbishing our restaurants, and focus on digital engagement with our customers.  

2016 was a ground breaking year for Yum China in Digital and Delivery. Our loyalty programs have over 80 million members between KFC and Pizza Hut and are ranked #1 in the restaurant industry worldwide in terms of number of members.  Total delivery sales reached approximately US$700 million, and in 2016, we were #1 among restaurant operators in terms of online sales in China.  Cashless payment accounted for about 30% of our company sales.

Yum China has a long and successful track record of doing business in China, and 2017 marks the 30th anniversary of the launch of KFC in China. While we have achieved a lot in the past three decades, our growth plans give us confidence that we are well-positioned to drive strong operating performance and generate high returns for our shareholders over the long run. We believe the majority of our restaurants in China are yet to be built.”

New-Unit Development and Asset Upgrades

We believe development opportunities across China will provide us with new restaurant growth for all of our brands.  Increasing urban population, continued development of city clusters and new transportation hubs provide growth opportunities for our nationwide development team.

 

Opened 575 new restaurants for the year and 302 for the fourth quarter, driven by development of the KFC brand.

 

96 of the new restaurants were opened in 56 new cities.  

 

Remodeled 791 restaurants, focused on KFC. Over 75% of Yum China’s current store portfolio has been remodeled or built in the past five years.

 

Opened first Taco Bell restaurant in Shanghai, China.

 

 

 

 

 

New Units

 

 

 

Restaurant Count

 

 

 

 

 

 

Fourth

Quarter

 

 

Full Year

 

 

 

Full Year

 

 

% Change1

 

 

 

Yum China

 

 

 

302

 

 

 

575

 

 

 

 

7,562

 

 

 

5

%

 

 

KFC

 

 

 

179

 

 

 

323

 

 

 

 

5,224

 

 

 

4

%

 

 

Pizza Hut Casual Dining

 

 

 

87

 

 

 

178

 

 

 

 

1,714

 

 

 

9

%

 

 

Pizza Hut Home Service, Little Sheep, East Dawning

   and Taco Bell

 

 

 

36

 

 

 

74

 

 

 

 

624

 

 

 

4

%

 

 

1 Represents year-over-year change

* As detailed in our October 2016 investor conference.

 

2


 

 

Digital and Delivery Annual Update

Digital and delivery provide us with new growth opportunities.  We are aggressively embracing leading technologies such as location-based service and mobile payment. Our delivery business has continued to grow with our own network and with the help of aggregators.  

 

Members in the loyalty programs increased to over 60 million for KFC and over 20 million for Pizza Hut Casual Dining at year end.

 

Mobile payments reached about 17% of company sales in 2016, with over $2 billion in company sales paid using cashless payment methods.

 

Delivery represented about 10% of company sales for 2016.

Restaurant Margin

 

For the year, Yum China restaurant margin increased 2.7 percentage points to 15.3%, primarily aided by the impact of retail tax structure reform.  This is reflected primarily in lower food and paper cost.  Wage inflation of 8% partially offset these effects.

 

For the quarter, Yum China restaurant margin increased 3.0 percentage points to 11.0%, primarily aided by the impact of retail tax structure reform.  Wage inflation companywide and commodity inflation at KFC partially offset these effects.

 

 

 

 

Fourth Quarter

 

 

 

Full Year

 

 

 

 

 

2016

 

 

2015

 

 

% ppts

change

 

 

 

2016

 

 

2015

 

 

% ppts

change

 

 

 

Yum China

 

 

11.0

%

 

 

8.0

%

 

 

3.0

 

 

 

 

15.3

%

 

 

12.6

%

 

 

2.7

 

 

 

KFC

 

 

11.7

%

 

 

9.5

%

 

 

2.2

 

 

 

 

16.3

%

 

 

13.3

%

 

 

3.0

 

 

 

Pizza Hut Casual Dining

 

 

10.4

%

 

 

5.6

%

 

 

4.8

 

 

 

 

14.0

%

 

 

12.3

%

 

 

1.7

 

 

 

Diluted Share Count

Pursuant to the strategic investment agreement between Yum China, Primavera Capital Group (“Primavera”), and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (“Ant Financial”), collectively referred to as strategic investors, Yum China issued approximately 19 million shares of common stock to Primavera and Ant Financial on November 1, 2016. The reported full year 2016 diluted share count of 369 million is based on the weighted average number of days for the period that the shares or dilutive equity awards were outstanding, and includes only two months of impact from the shares issued to our two strategic investors on November 1, 2016 and public company stock compensation programs. On a pro forma basis, assuming all shares and dilutive equity awards were issued and outstanding on January 1, 2016, the total diluted share count would be 395 million.  This would have reduced diluted EPS to $1.27 from $1.36.

 

 

(in US$ million, except for per share data)

 

Reported

 

 

Pro Forma

Adjustments

 

 

Pro Forma

 

 

 

Net Income – Yum China

 

$

502

 

 

 

 

 

$

502

 

 

 

Weighted average diluted shares outstanding

 

 

369,143,838

 

 

 

26,208,256

 

 

 

395,352,094

 

 

 

Diluted Earnings Per Share

 

$

1.36

 

 

 

 

 

$

1.27

 

 

 

Share Repurchase Program

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock. These shares may be repurchased from time to time in the open market, through privately negotiated transactions or other programs, subject to market conditions and other factors. 

 

3


 

Conference Call

Yum China Holdings, Inc. will host a conference call to review the Company's financial performance and strategies at 7:00 p.m. US Eastern Time on Tuesday, February 7, 2017 (8:00 a.m. Beijing/HK time on February 8, 2017).  A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com

 

US:

 

+1-845-675-0437 or +1-866-519-4004

Hong Kong:

 

+852-3018-6771 or 800-906-601

Mainland China:

 

400-6208-038 or 800-8190-121

International:

 

+65-6713-5090

Passcode:

 

Yum China 2016

A replay of the conference call may be accessed by phone at the following numbers until February 15, 2017:

 

US:

 

+1-855-452-5696 or +1-646-254-3697

Hong Kong:

 

+852-3051 2780 or 800-963-117

International:

 

+61-2-8199-0299

Passcode:

 

52095978

 

The webcast and the playback can be accessed via the internet by visiting the Yum China Holdings, Inc. website, http://ir.yumchina.com

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “will,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future business plans and earnings and performance of Yum China, anticipated effects of population and macroeconomic trends, and statements regarding the capital structure of Yum China. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, our ability to control costs and expenses, including tax costs, as well as changes in political, economic and regulatory conditions in China. 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 “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in the Information Statement included in our Registration Statement on Form 10) for additional detail about factors that could affect our financial and other results.

4


 

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China's leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, which opened its first restaurant in China at the end of 2016. Yum China also owns the Little Sheep and East Dawning concepts outright. Yum China is well positioned for growth thanks to its strong competitive position, integration of its brands into Chinese popular culture and consumers' daily lives, expanding geographic footprint in China and existing operational expertise. It has a strong capital position, no external debt and expects to continue growing its system sales and profit by adding new restaurants and through growing same-store sales. Yum China had more than 7,500 restaurants and more than 420,000 employees in over 1,100 cities at 2016 year end. A new generation of younger consumers who are digitally sophisticated and brand driven are fueling growth in consumption in China. The ongoing growth of the middle class and urban population in China is expected to create the world's largest market for restaurant brands, with Yum China poised to be the market leader.

 

Analysts are invited to contact:

 

 

Christie Ju, Vice President – Finance, Investor Relations, at +86 21 2407 8090

 

 

Michelle Shen, Director – Finance, Investor Relations, at +86 21 2407 8260

Members of the media are invited to contact:

 

 

Forest Liu, Director, Public Affairs, at +86 21 2407 7505

 

5


 

Yum China Holdings, Inc.

Consolidated and Combined Summary of Results

(amounts in US$ million, except for number of shares and per share amounts)

(unaudited)

 

 

 

Quarter ended

 

 

% Change

 

Year ended

 

 

% Change

 

 

12/31/16

 

 

12/31/15

 

 

B/(W)

 

12/31/16

 

 

12/31/15

 

 

B/(W)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company sales

 

$

1,938

 

 

$

2,011

 

 

 

(4

)

 

 

$

6,622

 

 

$

6,789

 

 

 

(2

)

 

Franchise fees and income

 

 

40

 

 

 

37

 

 

 

8

 

 

 

 

130

 

 

 

120

 

 

 

8

 

 

Total revenues

 

 

1,978

 

 

 

2,048

 

 

 

(3

)

 

 

 

6,752

 

 

 

6,909

 

 

 

(2

)

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

558

 

 

 

641

 

 

 

13

 

 

 

 

1,919

 

 

 

2,159

 

 

 

11

 

 

Payroll and employee benefits

 

 

469

 

 

 

453

 

 

 

(3

)

 

 

 

1,432

 

 

 

1,386

 

 

 

(3

)

 

Occupancy and other operating expenses

 

 

697

 

 

 

754

 

 

 

8

 

 

 

 

2,259

 

 

 

2,386

 

 

 

5

 

 

Company restaurant expenses

 

 

1,724

 

 

 

1,848

 

 

 

7

 

 

 

 

5,610

 

 

 

5,931

 

 

 

5

 

 

General and administrative expenses

 

 

153

 

 

 

137

 

 

 

(12

)

 

 

 

424

 

 

 

395

 

 

 

(7

)

 

Franchise expenses

 

 

20

 

 

 

21

 

 

 

3

 

 

 

 

71

 

 

 

70

 

 

 

(1

)

 

Closures and impairment expenses, net

 

 

42

 

 

 

42

 

 

 

 

 

 

 

78

 

 

 

64

 

 

 

(22

)

 

Refranchising gain, net

 

 

(7

)

 

 

(6

)

 

 

 

 

 

 

(15

)

 

 

(13

)

 

 

9

 

 

Other (income) expense, net

 

 

(12

)

 

 

1

 

 

NM

 

 

 

 

(56

)

 

 

(26

)

 

 

113

 

 

Total costs and expenses, net

 

 

1,920

 

 

 

2,043

 

 

 

6

 

 

 

 

6,112

 

 

 

6,421

 

 

 

5

 

 

Operating Profit

 

 

58

 

 

 

5

 

 

 

922

 

 

 

 

640

 

 

 

488

 

 

 

31

 

 

Interest income, net

 

 

4

 

 

 

4

 

 

 

19

 

 

 

 

11

 

 

 

8

 

 

 

50

 

 

Changes in fair value of financial instruments

 

 

21

 

 

 

 

 

NM

 

 

 

 

21

 

 

 

 

 

NM

 

 

Income Before Income Taxes

 

 

83

 

 

 

9

 

 

 

830

 

 

 

 

672

 

 

 

496

 

 

 

36

 

 

Income tax benefit (provision)

 

 

7

 

 

 

(38

)

 

NM

 

 

 

 

(158

)

 

 

(168

)

 

 

6

 

 

Net income (loss) – including noncontrolling interests

 

 

90

 

 

 

(29

)

 

NM

 

 

 

 

514

 

 

 

328

 

 

 

57

 

 

Net income – noncontrolling interests

 

 

2

 

 

 

 

 

NM

 

 

 

 

12

 

 

 

5

 

 

 

154

 

 

Net Income (Loss) – Yum China Holdings, Inc.

 

$

88

 

 

$

(29

)

 

NM

 

 

 

$

502

 

 

$

323

 

 

 

55

 

 

Effective tax rate

 

 

(8.4

)%

 

 

437.4

%

 

NM

 

 

 

 

23.5

%

 

 

33.9

%

 

 

10.4

 

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share

 

$

0.23

 

 

$

(0.08

)

 

NM

 

 

 

$

1.36

 

 

$

0.89

 

 

 

54

 

 

Weighted average shares outstanding

 

 

375,718,539

 

 

 

363,758,219

 

 

NM

 

 

 

 

367,744,992

 

 

 

363,758,219

 

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share

 

$

0.23

 

 

$

(0.08

)

 

NM

 

 

 

$

1.36

 

 

$

0.89

 

 

 

53

 

 

Weighted average shares outstanding

 

 

379,915,075

 

 

 

363,758,219

 

 

NM

 

 

 

 

369,143,838

 

 

 

363,758,219

 

 

NM

 

 

 

Percentages may not recompute due to rounding.

6


 

Yum China Holdings, Inc.

KFC Operating Results

(amounts in US$ million)

(unaudited)

 

 

 

Quarter ended

 

 

% Change

 

Year ended

 

 

% Change

 

 

12/31/16

 

 

12/31/15

 

 

B/(W)

 

12/31/16

 

 

12/31/15

 

 

B/(W)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company sales

 

$

1,334

 

 

$

1,395

 

 

 

(4

)

 

 

$

4,572

 

 

$

4,652

 

 

 

(2

)

 

Franchise fees and income

 

 

37

 

 

 

35

 

 

 

6

 

 

 

 

124

 

 

 

116

 

 

 

7

 

 

Total revenues

 

 

1,371

 

 

 

1,430

 

 

 

(4

)

 

 

 

4,696

 

 

 

4,768

 

 

 

(2

)

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

401

 

 

 

454

 

 

 

12

 

 

 

 

1,368

 

 

 

1,512

 

 

 

10

 

 

Payroll and employee benefits

 

 

308

 

 

 

298

 

 

 

(3

)

 

 

 

933

 

 

 

903

 

 

 

(3

)

 

Occupancy and other operating expenses

 

 

469

 

 

 

509

 

 

 

8

 

 

 

 

1,525

 

 

 

1,617

 

 

 

6

 

 

Company restaurant expenses

 

 

1,178

 

 

 

1,261

 

 

 

7

 

 

 

 

3,826

 

 

 

4,032

 

 

 

5

 

 

General and administrative expenses

 

 

60

 

 

 

54

 

 

 

(11

)

 

 

 

161

 

 

 

150

 

 

 

(7

)

 

Franchise expenses

 

 

18

 

 

 

21

 

 

 

14

 

 

 

 

68

 

 

 

70

 

 

 

2

 

 

Closures and impairment expenses, net

 

 

16

 

 

 

33

 

 

 

51

 

 

 

 

41

 

 

 

50

 

 

 

18

 

 

Other income, net

 

 

(7

)

 

 

(7

)

 

 

(1

)

 

 

 

(45

)

 

 

(33

)

 

 

37

 

 

Total costs and expenses, net

 

 

1,265

 

 

 

1,362

 

 

 

7

 

 

 

 

4,051

 

 

 

4,269

 

 

 

5

 

 

Operating Profit

 

$

106

 

 

$

68

 

 

 

60

 

 

 

$

645

 

 

$

499

 

 

 

29

 

 

Company sales

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

Food and paper

 

 

30.1

 

 

 

32.5

 

 

 

2.4

 

ppts.

 

 

29.9

 

 

 

32.5

 

 

 

2.6

 

ppts.

Payroll and employee benefits

 

 

23.1

 

 

 

21.3

 

 

 

(1.8

)

ppts.

 

 

20.4

 

 

 

19.4

 

 

 

(1.0

)

ppts.

Occupancy and other operating expenses

 

 

35.1

 

 

 

36.7

 

 

 

1.6

 

ppts.

 

 

33.4

 

 

 

34.8

 

 

 

1.4

 

ppts.

Restaurant margin

 

 

11.7

%

 

 

9.5

%

 

 

2.2

 

ppts.

 

 

16.3

%

 

 

13.3

%

 

 

3.0

 

ppts.

Operating margin

 

 

7.9

%

 

 

4.7

%

 

 

3.2

 

ppts.

 

 

14.1

%

 

 

10.7

%

 

 

3.4

 

ppts.

 

Percentages may not recompute due to rounding.

7


 

Yum China Holdings, Inc.

Pizza Hut Casual Dining Operating Results

(amounts in US$ million)

(unaudited)

 

 

 

Quarter ended

 

 

% Change

 

Year ended

 

 

% Change

 

 

12/31/16

 

 

12/31/15

 

 

B/(W)

 

12/31/16

 

 

12/31/15

 

 

B/(W)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company sales

 

$

520

 

 

 

523

 

 

 

 

 

 

$

1,772

 

 

 

1,824

 

 

 

(3

)

 

Franchise fees and income

 

 

1

 

 

 

1

 

 

 

57

 

 

 

 

2

 

 

 

1

 

 

 

142

 

 

Total revenues

 

 

521

 

 

 

524

 

 

 

 

 

 

 

1,774

 

 

 

1,825

 

 

 

(3

)

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

131

 

 

 

156

 

 

 

16

 

 

 

 

464

 

 

 

543

 

 

 

14

 

 

Payroll and employee benefits

 

 

135

 

 

 

126

 

 

 

(7

)

 

 

 

415

 

 

 

391

 

 

 

(6

)

 

Occupancy and other operating expenses

 

 

200

 

 

 

212

 

 

 

5

 

 

 

 

645

 

 

 

665

 

 

 

3

 

 

Company restaurant expenses

 

 

466

 

 

 

494

 

 

 

5

 

 

 

 

1,524

 

 

 

1,599

 

 

 

5

 

 

General and administrative expenses

 

 

26

 

 

 

24

 

 

 

(10

)

 

 

 

80

 

 

 

73

 

 

 

(10

)

 

Franchise expenses

 

 

2

 

 

 

 

 

NM

 

 

 

 

3

 

 

 

 

 

NM

 

 

Closures and impairment expenses, net

 

 

7

 

 

 

7

 

 

 

15

 

 

 

 

17

 

 

 

8

 

 

 

(112

)

 

Total costs and expenses, net

 

 

501

 

 

 

525

 

 

 

5

 

 

 

 

1,624

 

 

 

1,680

 

 

 

3

 

 

Operating Profit

 

$

20

 

 

$

(1

)

 

NM

 

 

 

$

150

 

 

$

145

 

 

 

4

 

 

Company sales

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

Food and paper

 

 

25.2

 

 

 

29.8

 

 

 

4.6

 

ppts.

 

 

26.2

 

 

 

29.8

 

 

 

3.6

 

ppts.

Payroll and employee benefits

 

 

25.9

 

 

 

24.1

 

 

 

(1.8

)

ppts.

 

 

23.4

 

 

 

21.5

 

 

 

(1.9

)

ppts.

Occupancy and other operating expenses

 

 

38.5

 

 

 

40.5

 

 

 

2.0

 

ppts.

 

 

36.4

 

 

 

36.4

 

 

 

 

ppts.

Restaurant margin

 

 

10.4

%

 

 

5.6

%

 

 

4.8

 

ppts.

 

 

14.0

%

 

 

12.3

%

 

 

1.7

 

ppts.

Operating margin

 

 

4.1

%

 

 

(0.1

)%

 

 

4.2

 

ppts.

 

 

8.5

%

 

 

7.9

%

 

 

0.5

 

ppts.

 

Percentages may not recompute due to rounding.

8


 

Yum China Holdings, Inc.

Consolidated and Combined Balance Sheets

(amounts in US$ million, except for number of shares)

(unaudited)

 

 

 

12/31/16

 

 

12/31/15

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

885

 

 

$

425

 

Short-term investments

 

 

79

 

 

 

 

Accounts receivable, net

 

 

74

 

 

 

33

 

Inventories, net

 

 

268

 

 

 

189

 

Prepaid expenses and other current assets

 

 

120

 

 

 

152

 

Total Current Assets

 

 

1,426

 

 

 

799

 

Property, plant and equipment, net

 

 

1,647

 

 

 

1,841

 

Goodwill

 

 

79

 

 

 

85

 

Intangible assets, net

 

 

88

 

 

 

107

 

Investments in unconsolidated affiliates

 

 

71

 

 

 

61

 

Other assets

 

 

254

 

 

 

192

 

Deferred income taxes

 

 

162

 

 

 

116

 

Total Assets

 

 

3,727

 

 

 

3,201

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

 

971

 

 

 

926

 

Income taxes payable

 

 

33

 

 

 

22

 

Total Current Liabilities

 

 

1,004

 

 

 

948

 

Capital lease obligations

 

 

28

 

 

 

34

 

Other liabilities and deferred credits

 

 

252

 

 

 

234

 

Total Liabilities

 

 

1,284

 

 

 

1,216

 

Redeemable Noncontrolling Interest

 

 

 

 

 

6

 

Equity

 

 

 

 

 

 

 

 

Common stock,  $0.01 par value; 1,000,000,000 shares authorized; 383,344,835.42 shares

    and nil shares issued and outstanding at December 31, 2016 and 2015, respectively

 

 

4

 

 

 

 

Treasury stock

 

 

(20

)

 

 

 

Additional paid-in capital

 

 

2,352

 

 

 

 

Retained earnings(a)

 

 

40

 

 

 

 

Parent Company Investment(b)

 

 

 

 

 

1,791

 

Accumulated other comprehensive income

 

 

1

 

 

 

130

 

Total  Equity – Yum China Holdings, Inc.

 

 

2,377

 

 

 

1,921

 

Noncontrolling interests

 

 

66

 

 

 

58

 

Total Equity

 

 

2,443

 

 

 

1,979

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

3,727

 

 

$

3,201

 

 

(a)

Retained earnings represent the Company’s earnings after taxes generated from November 1, 2016 to December 31, 2016.

(b)

Parent Company Investment represents Yum! Brands, Inc.’s (“YUM”) historical investment in the Company, the Company’s accumulated net earnings after taxes, and the net effect of transactions with and allocations from YUM. Upon the spin-off, Parent Company Investment was reclassified into the Company’s common stock and additional paid-in capital.  

 

9


 

Yum China Holdings, Inc.

Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

 

 

 

Year ended

 

 

 

12/31/16

 

 

12/31/15

 

Cash Flows - Operating Activities

 

 

 

 

 

 

 

 

Net income - including noncontrolling interests

 

$

514

 

 

$

328

 

Depreciation and amortization

 

 

402

 

 

 

425

 

Closures and impairment expenses

 

 

78

 

 

 

64

 

Refranchising gain

 

 

(15

)

 

 

(13

)

Deferred income taxes

 

 

(40

)

 

 

29

 

Equity income from investments in unconsolidated affiliates

 

 

(54

)

 

 

(41

)

Distributions of income received from unconsolidated affiliates

 

 

35

 

 

 

21

 

Excess tax benefit from share-based compensation

 

 

(2

)

 

 

(3

)

Share-based compensation expense

 

 

16

 

 

 

14

 

Gain from changes in fair value of financial instruments

 

 

(21

)

 

 

 

Changes in accounts receivable

 

 

(54

)

 

 

(5

)

Changes in inventories

 

 

(96

)

 

 

61

 

Changes in prepaid expenses and other current assets

 

 

7

 

 

 

(8

)

Changes in accounts payable and other current liabilities

 

 

123

 

 

 

31

 

Changes in income taxes payable

 

 

6

 

 

 

(14

)

Other, net

 

 

(35

)

 

 

21

 

Net Cash Provided by Operating Activities

 

 

864

 

 

 

910

 

Cash Flows - Investing Activities

 

 

 

 

 

 

 

 

Capital spending

 

 

(436

)

 

 

(512

)

Changes in short-term investments, net

 

 

(83

)

 

 

 

Proceeds from refranchising of restaurants

 

 

32

 

 

 

27

 

Proceeds from disposal of aircraft

 

 

19

 

 

 

 

Other, net

 

 

(3

)

 

 

(8

)

Net Cash Used in Investing Activities

 

 

(471

)

 

 

(493

)

Cash Flows - Financing Activities

 

 

 

 

 

 

 

 

Net transfers to Parent

 

 

(357

)

 

 

(214

)

Payment of capital lease obligations

 

 

(3

)

 

 

(2

)

Excess tax benefit from share-based compensation

 

 

2

 

 

 

3

 

Proceeds from issuance of common stock and warrants

 

 

460

 

 

 

 

Other, net

 

 

(7

)

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

 

95

 

 

 

(213

)

Effect of Exchange Rate on Cash and Cash Equivalents

 

 

(28

)

 

 

(17

)

Net Increase in Cash and Cash Equivalents

 

 

460

 

 

 

187

 

Cash and Cash Equivalents – Beginning of Year

 

 

425

 

 

 

238

 

Cash and Cash Equivalents – End of Year

 

$

885

 

 

$

425

 

 

10


 

Reconciliation of Reported Results to Non-GAAP Measures

(amounts in US$ million, except for number of shares and per share amounts)

(unaudited)

 

In this press release:

 

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 foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

 

System sales growth includes the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for 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 on the Consolidated and Combined 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.

 

Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the Company system one year or more.

 

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 as a percentage of sales is defined as Restaurant profit divided by Company sales.  

 

In addition to the results provided in accordance with US Generally Accepted Accounting Principles (“GAAP”) in this press release, the Company provides non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings (Loss) Per Common Share before Special Items, effective tax rate before Special Items and Adjusted EBITDA. Included in Special Items are reversal of (provision for) losses associated with planned sales of aircraft, incremental restaurant-level impairment upon spin-off, changes in fair value of financial instruments and impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (b), (c), (d), (e) and (f) in the accompanying notes. 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. These non-GAAP 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 non-GAAP 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 size and/or nature.  These non-GAAP measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Consolidated and Combined Summary of Results and other information presented herein. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures follows.

11


 

 

 

 

Quarter ended

 

 

Year ended

 

 

 

12/31/16

 

 

12/31/15

 

 

12/31/16

 

 

12/31/15

 

Detail of Special Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reversal of (provision for) losses associated with sales of aircraft(b)

 

 

 

 

 

(15

)

 

 

2

 

 

 

(15

)

Incremental restaurant-level impairment upon spin-off(c)

 

 

(17

)

 

 

 

 

 

(17

)

 

 

 

Special Items Expense - Operating Profit

 

 

(17

)

 

 

(15

)

 

 

(15

)

 

 

(15

)

Changes in fair value of financial instruments(d)

 

 

21

 

 

 

 

 

 

21

 

 

 

 

Tax benefit on Special Items(e)

 

 

17

 

 

 

4

 

 

 

16

 

 

 

4

 

Special items income (expense), net of tax –  including

   noncontrolling interests

 

 

21

 

 

 

(11

)

 

 

22

 

 

 

(11

)

Special items income (expense), net of tax –

  noncontrolling interests(f)

 

 

 

 

 

 

 

 

(8

)

 

 

 

Special Items Income (Expense), net of tax –

   Yum China Holdings, Inc.

 

 

21

 

 

 

(11

)

 

 

30

 

 

 

(11

)

Weighted average diluted shares outstanding

 

 

379,915,075

 

 

 

363,758,219

 

 

 

369,143,838

 

 

 

363,758,219

 

Special Items Diluted Earnings (Loss) Per Common Share

 

 

0.06

 

 

 

(0.03

)

 

 

0.08

 

 

 

(0.03

)

Reconciliation of Reported Operating Profit

   to Operating Profit Before Special Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported Operating Profit

 

 

58

 

 

 

5

 

 

 

640

 

 

 

488

 

Special Items Expense - Operating Profit

 

 

(17

)

 

 

(15

)

 

 

(15

)

 

 

(15

)

Operating Profit before Special Items

 

 

75

 

 

 

20

 

 

 

655

 

 

 

503

 

Reconciliation of Reported EPS to EPS Before Special Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported Diluted Earnings (Loss) Per Common Share

 

$

0.23

 

 

$

(0.08

)

 

$

1.36

 

 

$

0.89

 

Special Items Diluted Earnings (Loss) Per Common Share

 

 

0.06

 

 

 

(0.03

)

 

 

0.08

 

 

 

(0.03

)

Diluted Earnings (Loss) Per Common Share before Special Items

 

$

0.17

 

 

$

(0.05

)

 

$

1.28

 

 

$

0.92

 

Reconciliation of Reported Effective Tax Rate

   to Effective Tax Rate Before Special Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported effective tax rate

 

 

(8.4

)%

 

 

437.4

%

 

 

23.5

%

 

 

33.9

%

Impact on tax rate as a result of Special Items

 

 

(20.6

)%

 

 

257.1

%

 

 

(2.7

)%

 

 

0.2

%

Effective tax rate before Special Items

 

 

12.2

%

 

 

180.3

%

 

 

26.2

%

 

 

33.7

%

 

 

12


 

Reconciliation of Reported Net Income (Loss) to Adjusted EBITDA

(amounts in US$ million, except per share amounts)

(unaudited)

Reported net income (loss), along with the reconciliation to Adjusted EBITDA, is presented below.

 

 

 

Quarter ended

 

 

Year ended

 

 

 

12/31/16

 

 

12/31/15

 

 

12/31/16

 

 

12/31/15

 

Reconciliation of Reported Net Income (Loss) to Adjusted

   EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) – Yum China Holdings, Inc.

 

$

88

 

 

$

(29

)

 

$

502

 

 

$

323

 

Net income – noncontrolling interests

 

 

2

 

 

 

 

 

 

12

 

 

 

5

 

Income tax (benefit) provision

 

 

(7

)

 

 

38

 

 

 

158

 

 

 

168

 

Interest income, net

 

 

(4

)

 

 

(4

)

 

 

(11

)

 

 

(8

)

Change in fair value of financial instruments

 

 

(21

)

 

 

 

 

 

(21

)

 

 

 

Reported Operating Profit

 

 

58

 

 

 

5

 

 

 

640

 

 

 

488

 

Depreciation and amortization

 

 

130

 

 

 

140

 

 

 

402

 

 

 

425

 

Store impairment charges

 

 

27

 

 

 

43

 

 

 

70

 

 

 

70

 

Special Items Expense – Operating Profit

 

 

17

 

 

 

15

 

 

 

15

 

 

 

15

 

Adjusted EBITDA

 

$

232

 

 

$

203

 

 

$

1,127

 

 

$

998

 

 

13


 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

 

Quarter Ended 12/31/16

 

KFC

 

 

Pizza Hut

Casual Dining

 

 

Others

 

 

Corporate

and

Unallocated

 

 

Total

 

Total revenues

 

$

1,371

 

 

$

521

 

 

$

86

 

 

$

 

 

$

1,978

 

Company restaurant expenses

 

 

1,178

 

 

 

466

 

 

 

80

 

 

 

 

 

 

1,724

 

General and administrative expenses

 

 

60

 

 

 

26

 

 

 

10

 

 

 

57

 

 

 

153

 

Franchise expenses

 

 

18

 

 

 

2

 

 

 

 

 

 

 

 

 

20

 

Closures and impairment expenses, net

 

 

16

 

 

 

7

 

 

 

2

 

 

 

17

 

 

 

42

 

Refranchising gain, net

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(7

)

Other income, net

 

 

(7

)

 

 

 

 

 

(5

)

 

 

 

 

 

(12

)

 

 

 

1,265

 

 

 

501

 

 

 

87

 

 

 

67

 

 

 

1,920

 

Operating Profit (Loss)

 

$

106

 

 

$

20

 

 

$

(1

)

 

$

(67

)

 

$

58

 

 

Quarter Ended 12/31/15

 

KFC

 

 

Pizza Hut

Casual Dining

 

 

Others

 

 

Corporate

and

Unallocated

 

 

Total

 

Total revenues

 

$

1,430

 

 

$

524

 

 

$

94

 

 

$

 

 

$

2,048

 

Company restaurant expenses

 

 

1,261

 

 

 

494

 

 

 

93

 

 

 

 

 

 

1,848

 

General and administrative expenses

 

 

54

 

 

 

24

 

 

 

9

 

 

 

50

 

 

 

137

 

Franchise expenses

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

21

 

Closures and impairment expenses, net

 

 

33

 

 

 

7

 

 

 

2

 

 

 

 

 

 

42

 

Refranchising gain, net

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Other income, net

 

 

(7

)

 

 

 

 

 

(3

)

 

 

11

 

 

 

1

 

 

 

 

1,362

 

 

 

525

 

 

 

101

 

 

 

55

 

 

 

2,043

 

Operating Profit (Loss)

 

$

68

 

 

$

(1

)

 

$

(7

)

 

$

(55

)

 

$

5

 

 

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results.  Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items.  See Reconciliation of Reported Results to Non-GAAP Measures.

14


 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

 

Year ended 12/31/16

 

KFC

 

 

Pizza Hut

Casual Dining

 

 

Others

 

 

Corporate

and

Unallocated

 

 

Total

 

Total revenues

 

$

4,696

 

 

$

1,774

 

 

$

282

 

 

$

 

 

$

6,752

 

Company restaurant expenses

 

 

3,826

 

 

 

1,524

 

 

 

261

 

 

 

(1

)

 

 

5,610

 

General and administrative expenses

 

 

161

 

 

 

80

 

 

 

30

 

 

 

153

 

 

 

424

 

Franchise expenses

 

 

68

 

 

 

3

 

 

 

 

 

 

 

 

 

71

 

Closures and impairment expenses, net

 

 

41

 

 

 

17

 

 

 

3

 

 

 

17

 

 

 

78

 

Refranchising gain, net

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

(15

)

Other income, net

 

 

(45

)

 

 

 

 

 

(6

)

 

 

(5

)

 

 

(56

)

 

 

 

4,051

 

 

 

1,624

 

 

 

288

 

 

 

149

 

 

 

6,112

 

Operating Profit (Loss)

 

$

645

 

 

$

150

 

 

$

(6

)

 

$

(149

)

 

$

640

 

 

Year ended 12/31/15

 

KFC

 

 

Pizza Hut

Casual Dining

 

 

Others

 

 

Corporate

and

Unallocated

 

 

Total

 

Total revenues

 

$

4,768

 

 

$

1,825

 

 

$

316

 

 

$

 

 

$

6,909

 

Company restaurant expenses

 

 

4,032

 

 

 

1,599

 

 

 

300

 

 

 

 

 

 

5,931

 

General and administrative expenses

 

 

150

 

 

 

73

 

 

 

28

 

 

 

144

 

 

 

395

 

Franchise expenses

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Closures and impairment expenses, net

 

 

50

 

 

 

8

 

 

 

6

 

 

 

 

 

 

64

 

Refranchising gain, net

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

Other income, net

 

 

(33

)

 

 

 

 

 

(4

)

 

 

11

 

 

 

(26

)

 

 

 

4,269

 

 

 

1,680

 

 

 

330

 

 

 

142

 

 

 

6,421

 

Operating Profit (Loss)

 

$

499

 

 

$

145

 

 

$

(14

)

 

$

(142

)

 

$

488

 

 

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results.  Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items.  See Reconciliation of Reported Results to Non-GAAP Measures.

15


 

Notes to the Consolidated and Combined Summary of Results, Consolidated and

Combined Balance Sheets

and Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

 

(a)

Amounts presented as of and for the quarter and year ended December 31, 2016 are unaudited, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 may contain updates to the information disclosed in this press release.

 

(b)

During 2015, we made the decision to dispose of a corporate aircraft in China and recognized a loss of $15 million associated with the planned sale of the aircraft for the year ended December 31, 2015. We completed the sale during 2016. The sale proceeds of $19 million was greater than the net book value of $17 million of the aircraft at the time of disposal, which resulted in the reversal of $2 million of the previously recognized loss.

 

(c)

Incremental restaurant-level impairment represents additional impairment as a result of including the impact from the license fee paid to YUM on the individual restaurants future cash flow, which is equal to 3% of net system sales. Such license fee did not impact the impairment assessment prior to the spin-off as it was considered an intercompany charge at the time, whereas it became a charge from a third party after the spin-off and therefore should be considered in the impairment assessment.

 

(d)

In connection with the investment agreement with strategic investors entered into on September 1, 2016, the Company issued 19,145,169 shares of common stock on November 1, 2016, subject to post-closing adjustment by December 30, 2016, and warrants to purchase additional shares of common stock. The post-closing adjustment and the warrants were accounted for as derivative instruments and liability-classified equity contracts, respectively. These financial instruments were initially measured at fair value on the date of issuance, with subsequent changes in fair value of $21 million recognized in earnings during the year ended December 31, 2016. No subsequent fair value measurements were recognized after December 30, 2016.

 

(e)

The tax benefit was determined based upon the impact of the nature of each Special Item tax effected at the 25% China tax rate or the 35% US tax rate, except for the $21 million changes in fair value of financial instruments associated with the strategic investment which resulted in no income tax expense. Additionally, during the year ended December 31, 2016, we recognized a tax benefit of $26 million related to the legal entity restructuring of our Little Sheep business.  $12 million of this benefit was attributed to previous Little Sheep impairment losses recognized within Special Items in 2013 and 2014 and as such was classified as a Special Item consistent with the classification of those historical impairments.

 

(f)

During the year ended December 31, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to the Company pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interests was recorded as an $8 million loss attributable to noncontrolling interests.

 

16