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 ~~August~~March 31, ~~2017~~2019

☐	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		~~16/F Two Grand Gateway~~Yum China Building ~~3 Hong~~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)

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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	☒ ~~(Do not check if a small reporting company)~~☐	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 ☒

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

The number of shares outstanding of the registrant’s common stock as of ~~September 27, 2017~~May 3, 2019 was ~~384,275,398~~378,250,599 shares.

Yum China Holdings, Inc.

INDEX

		Page
		No.

Part I.	Financial Information

	Item 1 – Financial Statements	3

	Condensed Consolidated ~~and Combined~~ Statements of Income – Quarters Ended March 31, 2019 and ~~Years to date ended August 31, 2017 and 2016~~2018	3

	Condensed C~~onsolidated and~~ ~~Combined~~Consolidated Statements of Comprehensive Income – Quarters Ended March 31, 2019 and ~~Years to date ended August 31, 2017 and 2016~~2018	4

	Condensed C~~onsolidated and Combined~~Consolidated Statements of Cash Flows – ~~Years to date ended August~~Quarters Ended March 31, ~~2017~~2019 and ~~2016~~2018	5

	Condensed Consolidated Balance Sheets – ~~August~~March 31, ~~2017~~2019 and December 31, ~~2016~~2018	6

	Notes to Condensed Consolidated ~~and Combined~~ Financial Statements	7

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	1725

	Item 3 – Quantitative and Qualitative Disclosures about Market Risk	3239

	Item 4 – Controls and Procedures	3340

Part II.	Other Information

	Item 1 – Legal Proceedings	3441

	Item 1A – Risk Factors	3441

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	3441

	Item 6 – Exhibits	3542

	Signatures	3643

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated ~~and Combined~~ Statements of Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions, except ~~for number of shares and~~ per share data)

	Quarter ended						Year to date ended						Quarter Ended
Revenues	8/31/2017			8/31/2016			8/31/2017			8/31/2016			3/31/2019			3/31/2018
Company sales	$	1,998		$	1,848		$	4,818		$	4,684		$	2,089		$	2,016
Franchise fees and income		40			35			98			90			39			40
Revenues from transactions with franchisees and unconsolidated affiliates														170			161
Other revenues														6			4
Total revenues		2,038			1,883			4,916			4,774			2,304			2,221
Costs and Expenses, Net
Company restaurants
Food and paper		575			514			1,373			1,361			638			594
Payroll and employee benefits		403			376			1,018			963			466			442
Occupancy and other operating expenses		622			602			1,501			1,562			599			619
Company restaurant expenses		1,600			1,492			3,892			3,886			1,703			1,655
General and administrative expenses		120			101			294			271			114			114
Franchise expenses		20			20			48			51			20			20
Closures and impairment expenses, net		3			5			20			36
Refranchising gain, net		—			(4	)		(2	)		(8	)
Expenses for transactions with franchisees and unconsolidated affiliates														167			160
Other operating costs and expenses														5			4
Closures and impairment expenses (income), net														11			(1	)
Other income, net		(22	)		(17	)		(50	)		(44	)		(19	)		(126	)
Total costs and expenses, net		1,721			1,597			4,202			4,192			2,001			1,826
Operating Profit		317			286			714			582			303			395
Interest income, net		6			3			13			7			9			8
Investment gain														10			—
Income Before Income Taxes		323			289			727			589			322			403
Income tax provision		(102	)		(87	)		(213	)		(165	)		(93	)		(107	)
Net income – including noncontrolling interests		221			202			514			424			229			296
Net income – noncontrolling interests		10			10			21			10			7			8
Net Income – Yum China Holdings, Inc.	$	211		$	192		$	493		$	414		$	222		$	288
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (in millions):
Basic		385,836,842			363,758,219			387,028,586			363,758,219			379			386
Diluted		398,497,353			363,758,219			397,385,512			363,758,219			388			401
Basic Earnings Per Common Share	$	0.55		$	0.53		$	1.28		$	1.14		$	0.59		$	0.75
Diluted Earnings Per Common Share	$	0.53		$	0.53		$	1.24		$	1.14		$	0.57		$	0.72
Cash Dividends Declared Per Common Share													$	0.12		$	0.10

See accompanying Notes to Condensed Consolidated ~~and Combined~~ Financial Statements.

Condensed Consolidated ~~and Combined Stateme~~Statements o~~nts of~~f Comprehensive Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

	Quarter ended					Year to date ended					Quarter Ended
	8/31/2017		8/31/2016			8/31/2017		8/31/2016			3/31/2019		3/31/2018

Net income - including noncontrolling interests	$	221	$	202		$	514	$	424		$	229	$	296
Other comprehensive income, net of tax of nil:
Foreign currency gains (losses) arising during the period		76		(28	)		111		(57	)
Foreign currency translation adjustments												59		90
Comprehensive income - including noncontrolling interests		297		174			625		367			288		386
Comprehensive income - noncontrolling interests		12		8			24		9			10		11
Comprehensive Income - Yum China Holdings, Inc.	$	285	$	166		$	601	$	358		$	278	$	375

See accompanying Notes to Condensed Consolidated ~~and Combined~~ Financial Statements.

~~CondensedConsolidated and Combined St~~Condensed Consolidated Stateme~~atements~~nts of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

	Year to date ended						Quarter Ended
	8/31/2017			8/31/2016			3/31/2019			3/31/2018
Cash Flows – Operating Activities
Net income – including noncontrolling interests	$	514		$	424		$	229		$	296
Depreciation and amortization		265			272			111			118
Closures and impairment expenses		20			36
Refranchising gain		(2	)		(8	)
Deferred income taxes		(3	)		(26	)
Amortization of operating lease right-of-use assets								83			—
Closures and impairment expenses (income)								11			(1	)
Gain from re-measurement of equity interest upon acquisition								—			(98	)
Investment gain								(10	)		—
Equity income from investments in unconsolidated affiliates		(51	)		(44	)		(23	)		(23	)
Distributions of income received from unconsolidated affiliates		36			18			28			36
Deferred income taxes								6			23
Share-based compensation expense		16			9			6			6
Changes in accounts receivable		(2	)		(37	)		5			11
Changes in inventories		35			(35	)		34			48
Changes in prepaid expenses and other current assets		(7	)		34			(3	)		(7	)
Changes in accounts payable and other current liabilities		132			149			(39	)		85
Changes in income taxes payable		57			54			24			63
Changes in non-current operating lease liabilities								(103	)		—
Other, net		(23	)		(22	)		(15	)		(6	)
Net Cash Provided by Operating Activities		987			824			344			551
Cash Flows – Investing Activities
Capital spending		(262	)		(268	)		(110	)		(111	)
Purchases of short-term investments		(318	)		(53	)		(235	)		(160	)
Maturities of short-term investments		312			53			76			93
Proceeds from refranchising of restaurants		3			19
Proceeds from disposal of aircraft		—			19
Acquisition of business, net of cash acquired		(25	)		—			—			(88	)
Other, net		(4	)		(2	)		2			(1	)
Net Cash Used in Investing Activities		(294	)		(232	)		(267	)		(267	)
Cash Flows – Financing Activities
Net transfers to Parent		—			(243	)
Payment of capital lease obligation		(2	)		(3	)
Repayment of short-term borrowings assumed from acquisition								—			(10	)
Repurchase of shares of common stock		(128	)		—			(68	)		—
Proceeds from exercise of stock options		5			—
Cash dividends paid on common stock								(46	)		(39	)
Other, net		(17	)		(3	)		1			(2	)
Net Cash Used in Financing Activities		(142	)		(249	)		(113	)		(51	)
Effect of Exchange Rates on Cash and Cash Equivalents		41			(18	)		17			26
Net Increase in Cash and Cash Equivalents		592			325
Net (Decrease) Increase in Cash and Cash Equivalents								(19	)		259
Cash and Cash Equivalents - Beginning of Period		885			425			1,266			1,059
Cash and Cash Equivalents - End of Period	$	1,477		$	750		$	1,247		$	1,318

Supplemental Cash Flow Data
Cash paid for income tax		161			136			53			20

See accompanying Notes to Condensed Consolidated ~~and Combined~~ Financial Statements.

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ ~~millions, except for number of shares)~~millions)

							3/31/2019			12/31/2018
	8/31/2017			12/31/2016			(Unaudited)
ASSETS	(Unaudited)
Current Assets
Cash and cash equivalents	$	1,477		$	885		$	1,247		$	1,266
Short-term investments		91			79			284			122
Accounts receivable, net		81			74			77			80
Inventories, net		246			268			280			307
Prepaid expenses and other current assets		159			120			179			177
Total Current Assets		2,054			1,426			2,067			1,952
Property, plant and equipment, net		1,652			1,647			1,620			1,615
Operating lease right-of-use assets								2,016			—
Goodwill		107			79			273			266
Intangible assets, net		104			88			111			116
Deferred income taxes								104			89
Investments in unconsolidated affiliates		74			71			44			81
Other assets		301			254			527			491
Deferred income taxes		168			162
Total Assets	$	4,460		$	3,727		$	6,762		$	4,610
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable and other current liabilities	$	1,120		$	971		$	1,507		$	1,199
Income taxes payable		92			33			80			54
Total Current Liabilities		1,212			1,004			1,587			1,253
Capital lease obligations		28			28
Other liabilities and deferred credits		274			252
Non-current operating lease liabilities								1,869			—
Non-current finance lease liabilities								23			25
Other liabilities								220			355
Total Liabilities		1,514			1,284			3,699			1,633
Redeemable Noncontrolling Interest		5			—			1			1
Equity
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 388,196,025.42 shares and 383,344,835.42 shares issued at August 31, 2017 and December 31, 2016, respectively; 384,055,643 shares and 383,344,835.42 shares outstanding at August 31, 2017 and December 31, 2016, respectively		4			4
Common stock, $0.01 par value; 1,000 million shares authorized; 394 million shares and 392 million shares issued at March 31, 2019 and December 31, 2018, respectively; 379 million shares and 379 million shares outstanding at March 31, 2019 and December 31, 2018, respectively								4			4
Treasury stock		(148	)		(20	)		(525	)		(460	)
Additional paid-in capital		2,373			2,352			2,408			2,402
Retained earnings		533			40			1,060			944
Accumulated other comprehensive income		109			1
Accumulated other comprehensive income (loss)								39			(17	)
Total Equity – Yum China Holdings, Inc.		2,871			2,377			2,986			2,873
Noncontrolling interests		70			66			76			103
Total Equity		2,941			2,443			3,062			2,976
Total Liabilities, Redeemable Noncontrolling Interest and Equity	$	4,460		$	3,727		$	6,762		$	4,610

See accompanying Notes to Condensed Consolidated ~~and Combined~~ Financial Statements.

Notes to CondensedConsolidated ~~and Comb~~F~~ined Financial~~inancial Statements (Unaudited)

(Tabular amounts in US$ millions)

Note 1 – Description of the 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 separated from Yum! Brands, Inc. (“YUM” or the “Parent”) on October 31, 2016 (the “separation”), becoming an independent publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016.

The Company owns, franchises or has an ownership in entities that own and operate restaurants under the KFC, Pizza Hut, East Dawning, Little Sheep, ~~and~~ Taco Bell and COFFii & JOY concepts (collectively, the “Concepts”). In connection with the separation of the Company from 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 Yum China, 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 sub-license the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Taiwan and ~~Macau (the “PRC” or “China”).~~Macau. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants.

We own the intellectual property of East Dawning, ~~and~~ Little Sheep, ~~intellectual property~~and COFFii & JOY and pay no license fee related to these ~~concepts.~~Concepts.

~~During the quarter ended May 31, 2017, the~~The Company ~~completed the acquisition of~~also owns a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service ~~provider. The Company agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition,~~provider in China.

In addition, the Company ~~held 90%~~started a new e-commerce business in 2017, offering a wide selection of ~~Daojia’s outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Daojia became an operating segment of~~products including electronics, home and kitchen accessories, and other general merchandise to customers directly through the ~~Company. The acquisition was considered immaterial.~~Company’s e-commerce platform.

During the quarter ended May 31, 2017, Pizza Hut Casual Dining and Pizza Hut Home Service were combined and reported together as the Pizza Hut reportable segment. As a result, the Company has two reportable segments: KFC, which remains unchanged, and Pizza Hut. Our remaining operating segments, including the operations of East Dawning, Little Sheep, Taco Bell and Daojia, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior periods has been recast to align with this change in segment reporting. There was no impact to the consolidated and combined financial statements of the Company as a result of this change.

Note 2 – Basis of Presentation

In connection with our separation from YUM, the direct and indirect equity interests of all of our operating subsidiaries and intermediate holding companies were transferred from YUM to Yum China, when Yum China was still one of YUM’s subsidiaries, through a series of transactions, which were completed in August 2016. The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM.

The financial statements presented herein represent (i) for periods prior to October 31, 2016, the combined financial statements of YUM’s China businesses and operations when Yum China was a wholly-owned subsidiary of YUM (referred to as “Condensed Combined Financial Statements”) and (ii) for periods subsequent to October 31, 2016, the consolidated financial statements of the Company as a separate publicly traded company following its separation from YUM (referred to as “Condensed Consolidated Financial Statements” and, together with the Condensed Combined Financial Statements, referred to as the “Condensed Consolidated and Combined Financial Statements”).

Our preparation of the accompanying Condensed Consolidated ~~and Combined~~ 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.

The accompanying Condensed Combined Financial Statements have been prepared on a standalone basis and are derived from YUM’s consolidated financial statements and underlying accounting records. Transactions between the Company and YUM that were not cash settled were considered to be effectively settled at the time the transactions were recorded. The Condensed Combined Financial Statements include all revenues, costs, assets and liabilities directly attributable to the Company either through specific identification or allocation. The Condensed Combined Statements of Income include allocations for certain of YUM’s Corporate functions that provided a direct benefit to the Company. These costs have been allocated based on Company system sales relative to YUM’s global system sales. System sales includes the sales results of all restaurants regardless of ownership. All allocated costs have been deemed to have been paid to YUM in the period in which the costs were recorded. The Company considers the cost allocation methodology and results for the periods prior to October 31, 2016 to be reasonable. However, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent publicly traded company for the periods prior to October 31, 2016. Upon the separation, Parent Company Investment was adjusted as a result of settlement of certain assets and liabilities with YUM and formed the Company’s common stock and additional paid-in capital. See Note 3 for further discussion.

We have prepared the Condensed Consolidated ~~and Combined~~ 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 ~~and Combined~~ Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of ~~August~~March 31, ~~2017,~~2019, and the results of our operations, ~~and~~ comprehensive income ~~for the quarters and years to date ended August 31, 2017 and 2016,~~ and cash flows for the ~~years to date~~quarters ended ~~August~~March 31, ~~2017~~2019 and ~~2016.~~2018. 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 and Combined Financial Statements~~consolidated financial statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on ~~March 8, 2017.~~February 27, 2019.

Through the acquisition of Daojia in 2017, 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 has the obligation to absorb substantially all of the profits and 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.

During the first quarter of 2018, the Company completed the acquisition of an additional 36% equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), for cash consideration of approximately $98 million, increasing the Company’s equity interest to 83%, allowing the Company to consolidate the entity. The acquisition was considered immaterial. We began consolidating Wuxi KFC upon the completion of acquisition.

Recently Adopted Accounting Pronouncements

In ~~July 2015,~~February 2016, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU ~~No. 2015-11,~~ ~~Inventory (Topic 330)~~ ~~(ASU 2015-11)~~2016-02” or “ASC 842”), which ~~requires inventory within~~increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the ~~scope~~balance sheet and disclosing key information about leasing arrangements. The FASB subsequently issued amendments to clarify the implementation guidance. The Company adopted these standards on January 1, 2019, using a modified retrospective method for leases that exist at, or are entered into after, January 1, 2019, and has not recast the comparative periods presented in the Condensed Consolidated Financial Statements. Additionally, we elected the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

Upon the adoption of ASC 842, the Company recognized right-of-use assets and lease liabilities of approximately $2.0 billion and $2.2 billion, respectively, for operating leases of the ~~standard~~land and/or building of our restaurants and office spaces based on the present value of lease payments over the lease term. In addition, an impairment charge of $60 million (net of related impact on deferred taxes and noncontrolling interests) on right-of-use assets arising from existing operating leases as of January 1, 2019 was recorded as an adjustment to ~~be measured~~retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease right-of-use assets been recognized at the ~~lower~~time of impairment.

The following table summarizes the effect on the Consolidated Balance Sheet as a result of adopting ASC 842.

	December 31, 2018			Effect of adoption				January 1, 2019

ASSETS
Current Assets
Cash and cash equivalents	$	1,266						$	1,266
Short-term investments		122							122
Accounts receivable, net		80							80
Inventories, net		307							307
Prepaid expenses and other current assets		177			(39	)	^(a)		138
Total Current Assets		1,952			(39	)			1,913
Property, plant and equipment, net		1,615			(1	)			1,614
Operating lease right-of-use assets		—			1,997		^(b)		1,997
Goodwill		266							266
Intangible assets, net		116			(2	)	^(c)		114
Deferred income taxes		89			19		^(d)		108
Investments in unconsolidated affiliates		81			(1	)			80
Other assets		491			(4	)	^(c)		487
Total Assets	$	4,610		$	1,969			$	6,579
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable and other current liabilities	$	1,199		$	320		^(e)	$	1,519
Income taxes payable		54							54
Total Current Liabilities		1,253			320				1,573
Non-current operating lease liabilities		—			1,860		^(f)		1,860
Non-current finance lease liabilities		25			—				25
Other liabilities		355			(148	)	^(g)		207
Total Liabilities		1,633			2,032				3,665
Redeemable Noncontrolling Interest		1							1
Equity
Common stock		4							4
Treasury stock		(460	)						(460	)
Additional paid-in capital		2,402							2,402
Retained earnings		944			(60	)	^(h)		884
Accumulated other comprehensive loss		(17	)						(17	)
Total Equity – Yum China Holdings, Inc.		2,873			(60	)			2,813
Noncontrolling interests		103			(3	)	⁽ⁱ⁾		100
Total Equity		2,976			(63	)			2,913
Total Liabilities, Redeemable Noncontrolling Interest and Equity	$	4,610		$	1,969			$	6,579

(a)	Represents the current portion of prepaid rent reclassified to operating lease right-of-use assets.

(b)	Represents the net result of capitalization of operating lease payments and reclassification of prepaid rent, initial direct cost, deferred rent accrual and lease incentives, and offset by impairment of operating lease right-of-use assets that existed prior to the date of adoption.

(c)	Represents initial direct cost, favorable lease and non-current prepaid rent reclassified to operating lease right-of-use assets.

(d)	Represents the deferred tax impact related to impairment of operating lease right-of-use assets.

(e)	Represents recognition of the current portion of operating lease liabilities, offset by the reclassification of accrued rental payments and the current portion of deferred rent accrual to operating lease right-of-use assets.

(f)	Represents recognition of the non-current operating lease liabilities.

(g)	Represents reclassification of the non-current portion of deferred rent accrual and lease incentives to operating lease right-of-use assets.

(h)

Represents an impairment charge on operating lease right-of-use assets arising from existing operating leases as of January 1, 2019, net of related impact on deferred taxes and noncontrolling interests, with a corresponding reduction to the carrying amount of operating lease right-of-use assets. The impairment charge was recorded for those restaurants under operating leases with full impairment on the long-lived assets before January 1, 2019, as the additional impairment charge would have been recorded before January 1, 2019 had the operating lease right-of-use assets been recognized at the time of impairment.

(i)	Represents impairment of operating lease right-of-use assets attributable to noncontrolling interests.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and ~~net realizable value. Net realizable value is defined as~~Jobs Act (the “Tax Act”) and will improve the ~~estimated selling prices in the ordinary course~~usefulness of ~~business, less reasonably predictable costs of completion, disposal and transportation.~~information reported to financial statement users. ASU ~~2015-11~~2018-02 is effective for the Company ~~in the first quarter of 2017,~~from January 1, 2019, with early adoption permitted. We adopted ~~ASU 2015-11 during~~ the ~~quarter ended February 28, 2017,~~standard on January 1, 2019, and such adoption did not have a material impact on our financial statements.

In ~~March 2016,~~June 2018, the FASB issued ASU ~~No. 2016-09,~~ 2018-07, ~~Compensation-Stock~~Compensation – Stock Compensation (Topic 718) ~~(ASU 2016-09):~~ Improvements to ~~Employee~~Nonemployee Share-Based Payment ~~Accounting.~~Accounting (“ASU ~~2016-09 includes provisions to simplify several aspects of~~2018-07”). The new guidance largely aligns the accounting for share-based ~~payment~~awards issued to employees and non-employees. Existing guidance for employee awards will apply to nonemployee share-based transactions including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 includes a requirementwith limited exceptions. The new guidance also clarifies that ~~the tax effect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement. The simplification of income tax accounting for~~any share-based payment ~~transactions also impacts the computation of weighted-average diluted shares outstanding~~awards issued to customers should be evaluated under ~~the treasury stock method.~~ASC 606, Revenue from Contracts with Customers. ASU ~~2016-09~~2018-07 is effective for ~~fiscal years, and interim reporting periods within those years, beginning after December 15, 2016,~~the Company from January 1, 2019, with early adoption permitted. ~~The Company~~We adopted ~~ASU 2016-09 during~~ the ~~quarter ended February 28, 2017~~standard on January 1, 2019, and ~~the impact of the adoption resulted in the following:~~

~~The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when appropriate, as is currently required. This~~such adoption did not have a material impact on ~~the Company’s consolidated results of operations,~~our financial ~~condition or cash flows.~~statements.

The Company recorded an excess tax benefit of $0.2 million and $7.0 million within provision for income taxes for the quarter and year to date ended August 31, 2017, respectively, related to excess tax benefits on awards, on a prospective basis. Prior to adoption, the tax effect of share-based awards would have been recognized in additional paid-in capital.

Under ASU 2016-09, excess tax benefits from share-based arrangements are classified within cash flow from operating activities, rather than within cash flow from financing activities. The Company applied this provision on a retrospective basis and the prior period statement of cash flows was adjusted. This adoption did not have a material impact on the Company’s cash flows.

~~There was no material impact on the computation of weighted-average diluted shares outstanding.~~

Certain ~~comparative~~prior period items in the Condensed Consolidated ~~and Combined~~ Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.

Our fiscal year ends on December 31. The Company operates on a fiscal monthly calendar, with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter.

Note 3 – ~~Transactions~~Revenue Recognition

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

~~Prior~~Company Sales

Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we use our dedicated riders, or, in limited cases, third-party aggregators’ delivery staff. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders 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 ~~separation, there existed~~third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature.

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 ~~parent-subsidiary relationship between YUM and~~period of up to 12 months. We recognize breakage revenue, which is the ~~Company. We had the following transactions with YUM for the quarter and year~~amount of prepaid stored-value products that is not expected to ~~date ended August 31, 2016:~~

~~Allocation of Corporate Expenses~~

~~Prior to October 31, 2016, YUM historically performed centralized corporate functions on our behalf. Accordingly, certain YUM costs have been allocated to~~be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company ~~and reflected as expenses in the Condensed Combined Financial Statements. Management considers the allocation methodologies used~~expects to be ~~reasonable and appropriate reflections~~entitled to a breakage amount, or (2) when the likelihood of ~~the historical expenses attributable to the Company. The expenses reflect~~edredemption is remote, in ~~the Condensed Combined Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate, standalone entity.~~

Corporate expense allocations primarily relate to centralized corporate functions, including finance, accounting, treasury, tax, legal, internal audit and risk management functions. In addition, corporate expense allocations include, among other costs, IT maintenance, professional fees for legal services and expenses related to litigation, investigations or similar matters. Corporate allocations of $3 million and $9 million were allocated tosituations where the Company ~~during~~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 ~~quarter~~latest available information regarding redemption and ~~year to date ended August 31, 2016, respectively,~~expiration patterns.

Our privilege membership program offers privilege members benefits, such as free delivery and ~~have been included in general and administrative (“G&A”) expenses in~~discounts on coffee or breakfast items. The associated membership fees are recognized ratably over the Condensed Combined Statements of Income. All of the corporate allocations of costs are deemed to have been incurred and settled through Parent Company Investment in the Condensed Combined Balance Sheets in the period where the costs were recorded. Following the separation from YUM, we perform these functions using our own resources or purchased services.membership period.

~~License Fee~~

~~The Condensed Combined Statements of~~Franchise Fees and Income

Franchise fees and income primarily include ~~license~~upfront fees, such as initial fees and renewal fees, and continuing fees. We have determined that ~~were historically paid to YUM comprised of initial~~the services we provide in exchange for upfront fees and continuing fees ~~equal~~are highly interrelated with the franchise right. We recognize upfront 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 3%access our symbolic intellectual property in accordance with ASC 606. The franchise agreement term is generally 10 years for KFC and Pizza Hut, and five or 10 years for Little Sheep. We recognize continuing fees, which are based upon a percentage of ~~our Company and franchise~~franchisee sales, ~~prior to October 31, 2016. Total license fees paid during the quarter and year to date ended August 31, 2016 are reflected in the table below:~~as those sales occur.

Quarter ended

Year to date ended

8/31/2016

8/31/2016

Initial fees - Company

$
3

$
7

Initial fees - Franchise

—

1

Continuing Fees - Company

53

135

Continuing Fees - Franchise

13

35

Total

$
69

$
178

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

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

The Company ~~funds its operations through cash generated~~centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates, and then sells and delivers them to the restaurants. The performance obligation arising from such transactions is considered distinct from the ~~operation of~~franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its ~~Company-owned stores, franchise operations~~own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees and ~~dividend payments from~~ unconsolidated affiliates. ~~Prior~~Revenue is recognized upon transfer of control over ordered items, generally upon delivery to ~~October 31, 2016, excess cash was historically repatriated~~the franchisees and unconsolidated affiliates.

For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer support 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.

Loyalty Programs

Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns, including an estimate of the breakage for points that members will never redeem. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

Disaggregation of Revenue

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

	Quarter Ended 3/31/2019
Revenues	KFC		Pizza Hut		All Other Segments^(a)		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Company sales	$	1,539	$	541	$	9	$	—	$	2,089	$	—		$	2,089
Franchise fees and income		36		1		2		—		39		—			39
Revenues from transactions with franchisees and unconsolidated affiliates		17		1		7		145		170		—			170
Other revenues		—		—		14		1		15		(9	)		6
Total revenues	$	1,592	$	543	$	32	$	146	$	2,313	$	(9	)	$	2,304

	Quarter Ended 3/31/2018
Revenues	KFC		Pizza Hut		All Other Segments^(a)		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Company sales	$	1,444	$	564	$	8	$	—	$	2,016	$	—		$	2,016
Franchise fees and income		37		1		2		—		40		—			40
Revenues from transactions with franchisees and unconsolidated affiliates		17		—		7		137		161		—			161
Other revenues		—		—		4		1		5		(1	)		4
Total revenues	$	1,498	$	565	$	21	$	138	$	2,222	$	(1	)	$	2,221

(a)	As COFFii & JOY and our e-commerce business became operating segments starting from the first quarter of 2019, revenue by segment information for prior quarters has been recast to align with the change in segment reporting. Additional details on our reportable segments are included in Note 13.

Accounts Receivable

Accounts receivable mainly consist of trade receivables and royalties from franchisees and unconsolidated affiliates, and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Condensed Consolidated Balance Sheets. Our provision for uncollectible receivable balances is based upon pre-defined aging criteria or upon the occurrence of other events that indicate that we may not collect the balance due. Additionally, we monitor the financial condition of our franchisees and record provisions for estimated losses on receivables when we believe it probable that our franchisees will be unable to make their required payments. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Trade receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts.

Costs to Obtain Contracts

Costs to obtain contracts consist of upfront license fees that we paid to YUM ~~through intercompany loans~~prior to the separation in relation to initial fees or ~~dividends. Transfers~~renewal fees we received from franchisees and unconsolidated affiliates, as well as license fees that are payable to YUM in relation to our deferred revenue of ~~cash both~~prepaid stored-value products and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from ~~YUM~~such costs incurred. Such costs to obtain contracts are included ~~within Parent~~in Other assets on the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company ~~Investment~~did not incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $10 million and $8 million at March 31, 2019 and December 31, 2018, respectively.

Contract Liabilities

Contract liabilities at March 31, 2019 and December 31, 2018 were as follows:

Contract liabilities	3/31/2019		12/31/2018
- Deferred revenue related to prepaid stored-value products	$	80	$	73
- Deferred revenue related to customer loyalty programs		22		17
- Deferred revenue related to upfront fees		39		37
Total	$	141	$	127

Contract liabilities consist of deferred revenue related to prepaid stored-value products, customer loyalty programs and upfront fees. Deferred revenue related to prepaid stored-value products and customer loyalty programs is included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities on the Condensed ~~Combined~~Consolidated Balance Sheets. ~~YUM has issued debt for general corporate purposes but~~Revenue recognized that was included in ~~no case has~~the contract liability balance at the beginning of each period amounted to $33 million and $19 million in the quarter ended March 31, 2019 and March 31, 2018, respectively. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any ~~such debt been guaranteed or assumed by the Company or otherwise secured by the assets~~other factors during any of the ~~Company. As YUM’s debt and related interest is not directly attributable to the Company, no such amounts have been allocated to the Condensed Combined Financial Statements.~~periods presented.

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

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

On October 31, 2016, YUM’s shareholders of record as of October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. For periods ended October 31, 2016 and prior, basic and diluted earnings per share were computed using the number of shares of Yum China common stock outstanding as of October 31, 2016, the date on which Yum China common stock was distributed to YUM’s shareholders. The same number of shares was used to calculate basic and diluted earnings per share for the quarter and year to date ended August 31, 2016 since there were no dilutive securities until after the separation.

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

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Net Income – Yum China Holdings, Inc.

$
211

$
192

$
493

$
414

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

385,836,842

363,758,219

387,028,586

363,758,219

Effect of dilutive share-based employee compensation ^(a)

11,238,837

—

9,993,824

—

Effect of dilutive warrants^(b)

1,421,674

—

363,102

—

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

398,497,353

363,758,219

397,385,512

363,758,219

Basic Earnings Per Share

$
0.55

$
0.53

$
1.28

$
1.14

Diluted Earnings Per Share

$
0.53

$
0.53

$
1.24

$
1.14

Employee stock options, stock appreciation rights and warrants
   excluded from the diluted EPS computation ^(c)

8,200,405

—

10,256,326

—

	Quarter Ended
	3/31/2019		3/31/2018
Net Income – Yum China Holdings, Inc.	$	222	$	288
Weighted-average common shares outstanding (for basic calculation)^(a)		379		386
Effect of dilutive share-based awards^(a)		7		12
Effect of dilutive warrants^(b)		2		3
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)		388		401
Basic Earnings Per Common Share	$	0.59	$	0.75
Diluted Earnings Per Common Share	$	0.57	$	0.72
Share-based awards excluded from the diluted EPS computation^(c)		2		1

(a)

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

(b)

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

(c)	These outstanding ~~employee stock options,~~ stock appreciation rights, restricted stock units and ~~warrants~~performance share units were not included in the computation of diluted EPS because to do so would have been antidilutive for the quarters ~~and years to date~~ presented.

Note 5 – Equity

Changes in Equity and Redeemable Noncontrolling Interest

	Yum China Holdings, Inc.																								Yum China Holdings, Inc.
									Accumulated																									Accumulated
	Common				Additional				Other														Redeemable		Common				Additional					Other															Redeemable
	Stock				Paid-in		Retained		Comprehensive		Treasury Stock						Noncontrolling			Total			Noncontrolling		Stock				Paid-in		Retained			Comprehensive			Treasury Stock						Noncontrolling			Total			Noncontrolling
	Shares		Amount		Capital		Earnings		Income		Shares			Amount			Interests			Equity			Interest		Shares		Amount		Capital		Earnings			(Loss) Income			Shares			Amount			Interests			Equity			Interest
Balance at December 31, 2016		383,344,835.42	$	4	$	2,352	$	40	$	1		(784,686.42	)	$	(20	)	$	66		$	2,443		$	—
Balance at December 31, 2018																										392	$	4	$	2,402	$	944		$	(17	)		(13	)	$	(460	)	$	103		$	2,976		$	1
Net Income								493										21			514											222												7			229
Foreign currency translation gains										108								3			111
Foreign currency translation adjustments																																			56									3			59
Comprehensive income																					625			—																							288
Cash dividends declared ($0.12 per common share)																																(46	)														(46	)
Dividends declared																		(22	)		(22	)																						(34	)		(34	)
Acquisition of Daojia																		2			2			5
Repurchase of shares of common stock												(3,355,696.00	)		(128	)					(128	)																(2	)		(65	)					(65	)
Exercise and vesting of share-based awards		4,851,190.00		—		5															5					2		—		—																	—
Share-based compensation						16															16									6																	6
Balance at August 31, 2017		388,196,025.42	$	4	$	2,373	$	533	$	109		(4,140,382.42	)	$	(148	)	$	70		$	2,941		$	5
Cumulative effect of accounting change																																(60	)											(3	)		(63	)
Balance at March 31, 2019																										394	$	4	$	2,408	$	1,060		$	39			(15	)	$	(525	)	$	76		$	3,062		$	1

Share Repurchase Program

On February 7, 2017, we announced that our Board of Directors authorized a $300 million share repurchase program. ~~Under this~~On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization wefrom $300 million to an aggregate of $550 million. On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4

billion. The Company repurchased 1.7 million shares of Yum China common stock at a total cost of $65 million during the ~~year~~quarter ended March 31, 2019. This includes approximately 46 thousand shares repurchased for $2 million with trade dates prior to ~~date~~March 31, 2019 but cash settlement dates subsequent to March 31, 2019. There were no shares repurchased during the quarter ended ~~August~~March 31, ~~2017 as indicated below. All amounts exclude applicable transaction fees.~~2018. As of March 31, 2019, $895 million remained available for future share repurchases under the authorization.

Shares Repurchased
(thousands)

Dollar Value of
Shares
Repurchased

Remaining Dollar
Value of Shares
that may be
Repurchased

3,355,696

$
128

$
172

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

~~Refranchising~~

Gain ~~net~~from Re-Measurement of Equity Interest Upon Acquisition

In the first quarter of 2018, the Company completed the acquisition of Wuxi KFC. In connection with the acquisition, the Company also recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value using discounted cash flow valuation approach and incorporating assumptions and estimates that were not observable in the market. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, which were based on internal projections, historical performance of stores and the business environment, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium. The ~~Refranchising~~ gain ~~net by reportable~~was not allocated to any segment ~~and All Other Segments is presented below. We do not allocate such gains and losses to our segments~~ for performance reporting purposes.

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC

$
—

$
4

$
1

$
8

Pizza Hut

—

—

—

—

All Other Segments

—

—

1

—

Total Company

$
—

$
4

$
2

$
8

~~Store Closure and Impairment Activity~~

~~Store closure income and Store impairment charges by reportable segment and All Other Segments are presented below:~~Meituan Dianping (“Meituan”) Investment

Quarter ended

Year to date ended

8/31/2017

8/31/2017

Total
Company

KFC

Pizza Hut

All Other
Segments

Total
Company

KFC

Pizza Hut

All Other
Segments
Store closure income^(a)

$
3

$
2

$
1

$
—

$
8

$
5

$
3

$
—

Store impairment charges

(6
)

(3
)

(2
)

(1
)

(28
)

(15
)

(12
)

(1
)

Closure and impairment expenses

$
(3
)

$
(1
)

$
(1
)

$
(1
)

$
(20
)

$
(10
)

$
(9
)

$
(1
)

In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the Hong Kong Stock Exchange in September 2018. The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. As of March 31, 2019, the fair value of the investment was $57 million. The unrealized gain of $10 million was included in Investment gain in our Condensed Consolidated Statements of Income during the quarter ended March 31, 2019.

Quarter ended

Year to date ended

8/31/2016

8/31/2016

Total
Company

KFC

Pizza Hut

All Other
Segments

Total
Company

KFC

Pizza Hut

All Other
Segments
Store closure income^(a)

$
1

$
1

$
—

$
—

$
7

$
5

$
1

$
1

Store impairment charges

(6
)

(5
)

(1
)

—

(43
)

(30
)

(12
)

(1
)

Closure and impairment expenses

$
(5
)

$
(4
)

$
(1
)

$
—

$
(36
)

$
(25
)

$
(11
)

$
—

Incremental Restaurant-Level Impairment Upon Adoption of ASC 842

~~(a)~~

We performed an additional impairment evaluation of long-lived assets of restaurants as a result of adopting ASC 842 and recorded an incremental restaurant-level impairment charge of $12 million in the first quarter of 2019. See Note 11 for additional information.

Transition Tax

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

Store closure income include proceeds from forced store closures, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves and other facility-related expenses from previously closed stores. Remaining lease obligations for closed stores were not material at August 31, 2017 or December 31, 2016.

Note 7 – Other Income, net

	Quarter ended					Year to date ended					Quarter Ended
	8/31/2017		8/31/2016			8/31/2017			8/31/2016		3/31/2019			3/31/2018
Equity income from investments in unconsolidated affiliates	$	21	$	18		$	51		$	44	$	23		$	23
Foreign exchange gain and other		1		(1	)		(1	)		—
Gain from re-measurement of equity interest upon acquisition^(a)												—			98
Foreign exchange impact and other												(4	)		5
Other income, net	$	22	$	17		$	50		$	44	$	19		$	126

(a)	As a result of the acquisition of Wuxi KFC in the first quarter of 2018, as disclosed in Note 2, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes.

Note 8 – Supplemental Balance Sheet Information

Accounts Receivable, net	8/31/2017			12/31/2016			3/31/2019			12/31/2018
Accounts receivable, gross	$	83		$	76		$	79		$	81
Allowance for doubtful accounts		(2	)		(2	)		(2	)		(1	)
Accounts receivable, net	$	81		$	74		$	77		$	80

Prepaid Expenses and Other Current Assets	8/31/2017		12/31/2016		3/31/2019		12/31/2018
Receivables from payment processors and aggregators					$	46	$	49
Dividends receivable from unconsolidated affiliates						53		20
Prepaid rent	$	42	$	39		—		42
Other prepaid expenses and current assets^(a)		117		81
Other prepaid expenses and current assets						80		66
Prepaid expenses and other current assets	$	159	$	120	$	179	$	177

~~(a)~~

~~Includes receivables of $17 million and $16 million due from payment processors or aggregators as of August 31, 2017 and December 31, 2016, respectively.~~

Property, Plant and Equipment	3/31/2019			12/31/2018
Buildings and improvements	$	2,209		$	2,121
Finance leases, primarily buildings		26			26
Machinery, equipment and construction in progress		1,218			1,201
Property, plant and equipment, gross		3,453			3,348
Accumulated depreciation		(1,833	)		(1,733	)
Property, plant and equipment, net	$	1,620		$	1,615

Property, Plant and Equipment

8/31/2017

12/31/2016
Buildings and improvements

$
2,168

$
2,029

Capital leases, primarily buildings

30

29

Machinery and equipment

1,139

1,081

Property, plant and equipment, gross

3,337

3,139

Accumulated depreciation and amortization

(1,685
)

(1,492
)

Property, plant and equipment, net

$
1,652

$
1,647

Other Assets	3/31/2019		12/31/2018
VAT assets	$	249	$	226
Land use right		141		138
Long-term deposits		67		64
Investment in equity securities		57		47
Costs to obtain contracts		10		8
Others		3		8
Other Assets	$	527	$	491

Accounts Payable and Other Current Liabilities	8/31/2017		12/31/2016		3/31/2019		12/31/2018
Accounts payable	$	575		480	$	556	$	619
Operating leases liabilities						364		—
Accrued compensation and benefits						163		200
Contract liabilities						109		96
Accrued capital expenditures		92		132		106		137
Accrued compensation and benefits		204		191
Accrued taxes, other than income taxes		17		14
Dividends payable		5		—
Accrued marketing expenses						76		32
Other current liabilities		227		154		133		115
Accounts payable and other current liabilities	$	1,120	$	971	$	1,507	$	1,199

Other Liabilities and Deferred Credits

8/31/2017

12/31/2016
Deferred escalating minimum rent

$
161

$
153

Other noncurrent liabilities and deferred credits

113

99

Other liabilities and deferred credits

$
274

$
252

Other Liabilities	3/31/2019		12/31/2018
Accrued income tax payable	$	80	$	71
Deferred income tax liabilities		64		65
Contract liabilities		32		31
Deferred rent accrual		—		144
Other non-current liabilities		44		44
Other liabilities	$	220	$	355

Note 9 – Goodwill and Intangible Assets

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

	Total Company			KFC		Pizza Hut		All Other Segments			Total Company			KFC		Pizza Hut		All Other Segments
Balance as of December 31, 2016
Balance as of December 31, 2018
Goodwill, gross	$	461		$	70	$	9	$	382		$	648		$	238	$	19	$	391
Accumulated impairment losses^(a)		(382	)		—		—		(382	)		(382	)		—		—		(382	)
Goodwill, net		79			70		9		—			266			238		19		9
Goodwill acquired and allocated		23			5		9		9
Effect of currency translation adjustment		5			4		1		—			7			6		1		—
Balance as of August 31, 2017
Balance as of March 31, 2019
Goodwill, gross		489			79		19		391			655			244		20		391
Accumulated impairment losses^(a)		(382	)		—		—		(382	)		(382	)		—		—		(382	)
Goodwill, net	$	107		$	79	$	19	$	9		$	273		$	244	$	20	$	9

(a)	Accumulated impairment losses represent Little Sheep goodwill impairment.

Intangible assets, net as of ~~August~~March 31, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:

	8/31/2017							12/31/2016								3/31/2019										12/31/2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount^(a)		Accumulated Amortization			Accumulated impairment losses			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated impairment losses			Net Carrying Amount
Definite-lived intangible assets
Reacquired franchise rights	$	98	$	(81	)	$	17	$	93	$	(71	)	$	22		$	154	$	(108	)	$	—		$	46	$	150	$	(100	)	$	—		$	50
Daojia platform		17		—			17		—		—			—			16		(3	)		(10	)		3		16		(3	)		(10	)		3
Customer-related assets		12		(5	)		7		7		(4	)		3			12		(8	)		(2	)		2		12		(8	)		(2	)		2
Other		19		(10	)		9		19		(9	)		10
Others^(b)																	9		(3	)		—			6		17		(9	)		—			8
	$	146	$	(96	)	$	50	$	119	$	(84	)	$	35		$	191	$	(122	)	$	(12	)	$	57	$	195	$	(120	)	$	(12	)	$	63
Indefinite-lived intangible assets
Little Sheep trademark	$	54	$	—		$	54	$	53	$	—		$	53		$	54	$	—		$	—		$	54	$	53	$	—		$	—		$	53

Total intangible assets	$	200	$	(96	)	$	104	$	172	$	(84	)	$	88	��	$	245	$	(122	)	$	(12	)	$	111	$	248	$	(120	)	$	(12	)	$	116

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

(b)	Decrease in Others during the quarter ended March 31, 2019 is primarily due to the reclassification of favorable lease assets, with gross carrying amount of $7 million and accumulated amortization of $5 million, to right-of-use assets upon adoption of ASC 842.

Amortization expense of definite-lived intangible assets was $4$6 million and $3$6 million for the quarters ended ~~August~~March 31, ~~2017~~2019 and ~~2016, respectively, and $9 million and $8 million for the years to date ended August 31, 2017 and 2016,~~2018, respectively. As of ~~August~~March 31, ~~2017,~~2019, expected amortization expense for the unamortized definite-lived intangible assets is approximately $5$11 million for the remainder of ~~2017, $16 million in 2018, $9 million in~~ 2019, $4$13 million in 2020, ~~and $4~~$13 million in ~~2021.~~2021, $13 million in 2022 and $3 million in 2023.

Note 10 – Leases

As of March 31, 2019, we operated more than 8,600 restaurants, leasing the underlying land and/or building. We generally enter into lease agreements with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent;

(ii) the higher of a fixed base rent or a percentage of the restaurant’s sales revenue; or (iii) a percentage of the restaurant’s sales revenue. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Prior to the adoption of ASC 842, operating leases were not recognized on the balance sheet of the Company, but rent expenses were recognized on a straight-line basis over the lease term. Upon adoption, right-of-use assets and lease liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. This is consistent with the historical recognition of finance leases, which is unchanged upon adoption of ASC 842. Variable lease payments that do not depend on a rate or index are expensed as incurred. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with an initial term of 12 months or less; we recognize lease expense for these leases on a straight-line basis over the lease term. In addition, the Company has elected not to separate non-lease components (e.g., common area maintenance fees) from the lease components.

In limited cases, we sublease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of restaurant’s annual sales revenue. Income from sublease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Condensed Consolidated Statements of Income. The impact of ASC 842 on our accounting as a lessor was not significant.

Supplemental Balance Sheet
	3/31/2019		Account Classification
Assets
Operating lease right-of-use assets	$	2,016	Operating lease right-of-use assets
Finance lease right-of-use assets		14	Property, plant and equipment, net
Total leased assets	$	2,030

Liabilities
Current
Operating lease liabilities	$	364	Accounts payable and other current liabilities
Finance lease liabilities		2	Accounts payable and other current liabilities
Non-current
Operating lease liabilities		1,869	Non-current operating lease liabilities
Finance lease liabilities		23	Non-current finance lease liabilities
Total lease liabilities	$	2,258

Summary of Lease Cost	Quarter Ended			Account Classification
	3/31/2019

Operating lease cost	$	117		Occupancy and other operating expenses, G&A or Franchise expenses
Variable lease cost		91		Occupancy and other operating expenses or Franchise expenses
Short-term lease cost		3		Occupancy and other operating expenses or G&A
Sublease income		(7	)	Franchise fees and income or Other revenues
Total lease cost	$	204

Finance lease cost for the quarter ended March 31, 2019 is not material.

Supplemental Cash Flow Information		Quarter Ended
	3/31/2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	127
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	57

Cash paid related to finance leases and right-of-use assets obtained in exchange for new finance lease liabilities for the quarter ended March 31, 2019 is not material.

	Quarter Ended
Lease Term and Discount Rate	3/31/2019
Weighted-average remaining lease term (years)
Operating leases		7.3
Finance leases		12.0

Weighted-average discount rate
Operating leases		6.1	%
Finance leases		5.7	%

Summary of Future Lease Payments and Lease Liabilities

Maturities of lease liabilities as of March 31, 2019 were as follows:

	Amount of Operating Leases		Amount of Finance Leases		Total
Remainder of 2019	$	372	$	2	$	374
2020		460		3		463
2021		413		3		416
2022		353		3		356
2023		287		3		290
Thereafter		903		21		924
Total undiscounted lease payment		2,788		35		2,823
Less: imputed interest ^(a)		555		10		565
Present value of lease liabilities	$	2,233	$	25	$	2,258

(a)

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

As of March 31, 2019, we have additional lease agreements that have been signed but not yet commenced of $87 million. These leases will commence between the second quarter of 2019 and 2020 with lease term of 1 year to 20 years.

Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:

	Commitments
	Amount of Operating Leases		Amount of Finance Leases		Total
2019	$	466	$	3	$	469
2020		440		3		443
2021		394		3		397
2022		336		3		339
2023		275		3		278
Thereafter		864		22		886
	$	2,775	$	37	$	2,812

At December 31, 2018, the present value of minimum payments under finance leases was $27 million, after deducting imputed interest of $10 million. The current portion of finance lease obligations was $2 million as of December 31, 2018, and was classified in Accounts payable and other current liabilities.

Note 1011 – Fair Value Measurements

~~As of August 31, 2017, the carrying values~~

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

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

The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because ofit uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the ~~short-term nature of these instruments.~~levels within the fair value hierarchy occurred during the quarter ended March 31, 2019.

			Fair Value Measurement or Disclosure at March 31, 2019
	Balance at March 31, 2019		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	720	$	—	$	720	$	—
Money market funds		129		129
Fixed rate debt securities^(a)		89		89
Total cash equivalents		938		218		720		—
Short-term investments:
Time deposits		284				284
Total short-term investments		284		—		284		—
Other assets:
Investment in equity securities		57		57
Total	$	1,279	$	275	$	1,004	$	—

			Fair Value Measurement or Disclosure at December 31, 2018
	Balance at December 31, 2018		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	570	$	—	$	570	$	—
Money market funds		226		226
Fixed rate debt securities^(a)		153		153
Total cash equivalents		949		379		570		—
Short-term investments:
Time deposits		122				122
Total short-term investments		122		—		122		—
Other assets:
Investment in equity securities		47		47
Total	$	1,118	$	426	$	692	$	—

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

Non-Recurring Fair Value Measurements

In addition, certain of the Company’s assets, such as operating lease right-of-use (“ROU”) assets, property, plant and equipment, goodwill and intangible assets, are measured at fair value on a non-recurring basis, if determined to be impaired.

The following table presents amounts recognized from all non-recurring fair value measurements during the quarter ended March 31, 2019. All fair value measurements were based on unobservable inputs (Level 3). These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective quarter-end dates.

		Amount	Account Classification

ROU impairment prior to the adoption of ASC 842^(a)	$	82	Retained Earnings
Incremental restaurant-level impairment upon adoption of ASC 842^(b)		12	Closure and impairment expenses, net
Total		94

(a)

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

(b)

Incremental restaurant-level impairment upon adoption of ASC 842 represents additional impairment charges as a result of adopting the new lease standard in the first quarter of 2019. We performed an additional impairment evaluation of long-lived assets of restaurants, which includes operating lease right-of-use assets, and property, plant and equipment. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3).

During the quarter ~~and year to date~~ ended ~~August~~March 31, ~~2017,~~2018, we recorded restaurant-level impairment (Level 3) of $2 million and $20 million, respectively. During the quarter and year to date ended August 31, 2016, we recorded restaurant-level impairment (Level 3) of $2 million and $35 million, respectively. The remaining net book value of the assets measured at fair value as of August 31, 2017, subsequent to these impairments, was not significant.

During the quarter and year to date ended August 31, 2017, we recognized income of $3 million from the reversal of contingent consideration previously recorded for a business combination (Level 3), as the fair value of such contingent consideration is immaterial given the remote likelihood of the payment obligation.

nil.

Note 1112 – Income Taxes

	Quarter ended						Year to date ended						Quarter Ended
	8/31/2017			8/31/2016			8/31/2017			8/31/2016			3/31/2019			3/31/2018
Income tax provision	$	102		$	87		$	213		$	165		$	93		$	107
Effective tax rate		31.7	%		29.8	%		29.3	%		28.0	%		28.9	%		26.6	%

~~Our~~The higher effective tax rate is generally lower than the U.S. federal statutory rate of 35% due to the majority of our income being earned in China where the tax rate is lower than the U.S. rate. Our quarter and year to date effective tax rates for the ~~period~~quarter ended ~~August~~March 31, ~~2017 were higher than the prior year~~2019 was primarily due to ~~higher costs~~an adjustment of ~~repatriating current year earnings into~~transition tax based on the final regulations that were released by the U.S. Treasury Department and the IRS and became effective in the first quarter of 2019.

~~Note 12 – Reportable Operating Segments~~

~~During~~In December 2017, the ~~second~~U.S. enacted the Tax Act, which included a broad range of tax reforms, including, but not limited to, the establishment of a flat corporate income tax rate of 21%, the elimination or reduction of certain business deductions and the imposition of tax on deemed repatriation of accumulated undistributed foreign earnings. The Tax Act impacted Yum China in two material aspects: (1) in general, all of the foreign-source dividends received by Yum China from its foreign subsidiaries will be exempted from taxation starting from the tax year beginning after December 31, 2017 and (2) Yum China recorded additional income tax expense in the fourth quarter of 2017, ~~we integrated~~including an estimated one-time transition tax on its deemed repatriation of accumulated undistributed foreign earnings and additional tax related to revaluation of certain deferred tax assets.

We completed our analysis of the ~~businesses~~Tax Act in the fourth quarter of ~~Pizza Hut Casual Dining~~2018 according to guidance released by the U.S. Treasury Department and ~~Pizza Hut Home Service~~the IRS as of December 2018 and ~~began reporting them together~~made a reversal to provisional amount in the amount of $36 million for the transition tax recorded in 2017 accordingly. The U.S. Treasury Department and the IRS released the final transition tax regulations on January 15, 2019, which were published in the Federal Register and became effective on February 5, 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.

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

Note 13 –Segment Reporting

We have two reportable segments: KFC ~~which remains unchanged,~~ and Pizza Hut. ~~Our remaining~~Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, our six non-reportable operating segments, including the operations of East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and ~~Daojia,~~our e-commerce business, are combined and referred to as All Other Segments, as ~~these~~those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior ~~periods~~quarters has been recast to align with this change in segment reporting. ~~See Note 1.~~ There was no impact on the consolidated financial statements of the Company as a result of this change.

Quarter ended

Year to date ended
Revenues

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC

$
1,423

$
1,297

$
3,435

$
3,325

Pizza Hut

604

574

1,451

1,407

All Other Segments

11

12

30

42

Total

$
2,038

$
1,883

$
4,916

$
4,774

	Quarter Ended 3/31/2019
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	1,592	$	543	$	23	$	146		2,304	$	—		$	2,304
Inter-segment revenue		—		—		9		—		9		(9	)		—
Total	$	1,592	$	543	$	32	$	146	$	2,313	$	(9	)	$	2,304

Quarter ended

Year to date ended
Operating Profit

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC^(a)

$
286

$
238

$
647

$
538

Pizza Hut

80

82

177

132

All Other Segments

(8
)

(5
)

(8
)

(6
)

Unallocated and corporate expenses^(b)

(45
)

(35
)

(108
)

(96
)

Unallocated Other income^(b)

4

2

4

6

Unallocated Refranchising gain^(b)

—

4

2

8

Operating Profit

$
317

$
286

$
714

$
582

Interest income, net^(b)

6

3

13

7

Income Before Income Taxes

$
323

$
289

$
727

$
589

	Quarter Ended 3/31/2018
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	1,498	$	565	$	20	$	138		2,221	$	—		$	2,221
Inter-segment revenue		—		—		1		—		1		(1	)		—
Total	$	1,498	$	565	$	21	$	138	$	2,222	$	(1	)	$	2,221

	Identifiable Assets				Quarter Ended
	8/31/2017		12/31/2016
Operating Profit					3/31/2019			3/31/2018
KFC^(c)(b)	$	1,469	$	1,411	$	288		$	296
Pizza Hut		678		628		50			34
All Other Segments		141		160		(5	)		(4	)
Corporate^(d)		2,172		1,528
	$	4,460	$	3,727
Unallocated revenues from transactions with franchisees and unconsolidated affiliates^(c)						145			137
Unallocated Other revenues						1			1
Unallocated expenses from transactions with franchisees and unconsolidated affiliates^(c)						(143	)		(137	)
Unallocated Other operating costs and expenses						(1	)		(1	)
Unallocated and corporate G&A expenses						(33	)		(33	)
Unallocated Other income^(d)						1			102
Operating Profit					$	303		$	395
Interest income, net^(a)						9			8
Investment gain^(a)						10			—
Income Before Income Taxes					$	322		$	403

	Long-Lived Assets^(e)				Quarter Ended
	8/31/2017		12/31/2016
Impairment Charges					3/31/2019		3/31/2018
KFC(e)	$	1,119	$	1,099	$	8	$	1
Pizza Hut(e)		593		553		5		1
All Other Segments		113		129		1	$	—
Corporate		38		33
	$	1,863	$	1,814	$	14	$	2

	Total Assets
	3/31/2019		12/31/2018
KFC^(f)	$	3,082	$	1,745
Pizza Hut		1,073		558
All Other Segments		161		132
Corporate and Unallocated^(g)		2,446		2,175
	$	6,762	$	4,610

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

(b)

Includes equity income from investments in unconsolidated affiliates of ~~$21~~$23 million and ~~$18~~$23 million for the quarters ended ~~August~~March 31, ~~2017~~2019 and ~~2016, respectively, and $51 million and $44 million for the years to date ended August 31, 2017 and 2016,~~2018, respectively.

~~(b) Amounts have not been allocated to any segment for performance reporting purposes.~~

(c)

~~Includes investments in the~~Primarily includes revenues and associated expenses of transactions with franchisee and unconsolidated affiliates ~~totaling $74 million~~derived from the Company’s central procurement model whereby the Company centrally purchases substantially all food and ~~$71 million~~paper products from suppliers and then sells and delivers to restaurants, including franchisees and unconsolidated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the ~~quarter ended August 31, 2017~~transactions are deemed corporate revenues and ~~for the year ended December 31, 2016, respectively.~~expenses in nature.

(d)	Primarily includes gain from re-measurement of the previously held equity interest in connection with the acquisition of Wuxi KFC (See Note 2).

(e)	Primarily includes store closure impairment charges as well as incremental restaurant-level impairment charges as a result of adopting ASC 842 (See Note 11).

(f)	Includes investments in unconsolidated affiliates.

(g)	Primarily includes cash and cash equivalents, short-term investments, investment in equity securities, and inventories that are centrally managed.

~~(e)~~

~~Includes property, plant and equipment, net, goodwill, and intangible assets, net.~~

Note 1314 – Contingencies

Indemnification of China Tax on Indirect Transfers of Assets

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

YUM concluded and we concurred that it is more likely than not that YUM will not be subject to this tax with respect to the distribution. However, ~~given how recently Bulletin 7 was promulgated,~~ there are significant uncertainties regarding what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the taxing authorities will ultimately view the distribution. As a result, YUM’s position could be challenged by Chinese tax authorities resulting in a 10% tax assessed on the difference between the fair market value and the tax basis of the separated China business. As YUM’s tax basis in the China business is minimal, the amount of such tax could be significant.

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

Guarantees

From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of ~~August~~March 31, ~~2017,~~2019, we have provided guarantees of approximately $2$1 million on behalf of franchisees and no guarantees were outstanding for unconsolidated affiliates. ~~The maximum guarantee exposure is approximately $2 million.~~

Legal Proceedings

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

Note 1415 – Subsequent Events

~~Share Repurchase Program~~

On ~~October 4, 2017,~~April 29, 2019, the Company announced that the Board of Directors ~~increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million.~~

~~Dividend~~

~~On October 4, 2017, the Board of Directors approved~~declared a ~~regular quarterly cash dividend program, and declared an initial~~ cash dividend of ~~$0.10~~$0.12 per share, ~~on Yum China’s common stock,~~ payable as of the close of business on ~~December 21, 2017~~June 17, 2019 to stockholders of record as of the close of business on ~~November 30, 2017. Future dividends will be subject to review and approval by the Board of Directors.~~May 28, 2019. The total estimated cash dividend payable is approximately $46 million.

Item 2.

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

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

Introduction

Yum China Holdings, Inc. is the largest restaurant company in China, with over ~~7,700~~8,600 restaurants as of ~~August~~March 31, ~~2017.~~2019. Our growing restaurant base consists of China’s leading restaurant brands and concepts, primarily the KFC and Pizza Hut brands, as well as brands such as East Dawning, Little Sheep, Taco Bell and ~~Taco Bell.~~COFFii & JOY. Following our separation from YUM, we ~~have had~~obtained the exclusive right to operate and sub-license the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”), and we own the intellectual property of the East Dawning, ~~and~~ Little Sheep ~~marks~~and COFFii & JOY concepts outright. We were the first major global restaurant brand when we entered China in 1987 and we have developed deep operating experience in the market. We have since grown to become one of China’s largest restaurant developers with locations in over ~~1,100~~1,300 cities as of ~~August~~March 31, ~~2017 and opening an average of approximately two new restaurants per day over the past five years.~~2019.

KFC is the leading Quick-Service Restaurant (“QSR”) brand in the PRC in terms of system sales and number of restaurants. As of ~~August~~March 31, ~~2017,~~2019, KFC operated over ~~5,300~~6,000 restaurants in over ~~1,100~~1,300 cities across China. Measured by number of restaurants, we believe KFC has aan approximate two-to-one lead over the nearest Western QSR competitor in China, and KFC has continued to grow in both large and small cities. During the ~~second~~first quarter of ~~2017, we integrated~~2018, the ~~business~~Company completed the acquisition of an additional 36% interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), increasing the equity interest to 83% and allowing the Company to consolidate the entity.

Pizza Hut ~~Casual Dining and Pizza Hut Home Service as Pizza Hut. After the integration, Pizza Hut continues to be~~is the leading ~~Casual Dining Restaurant~~casual dining restaurant (“CDR”) brand in China ~~as measured by~~in terms of system sales and number of restaurants. As of March 31, 2019, Pizza Hut operated over 2,200 restaurants in over 500 cities. We believe Pizza Hut has ~~a five-to-one~~an approximate four-to-one lead in terms of number of restaurants over its nearest ~~Western CDR~~ competitor in China. ~~As of August 31, 2017, Pizza Hut operated over 2,100 restaurants in over 400 cities.~~

~~Separation from YUM~~

The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016.

~~Basis of Presentation~~

The financial statements presented in this Form 10-Q represent (i) for periods prior to October 31, 2016, the Condensed Combined Financial Statements of YUM’s China businesses and operations when Yum China was a wholly-owned subsidiary of YUM and (ii) for periods subsequent to October 31, 2016, the Condensed Consolidated Financial Statements of the Company as a separate publicly traded company following its separation from YUM. Throughout this Form 10-Q, when we refer to the “financial statements,” we are referring to the “Condensed Consolidated and Combined Financial Statements,” unless the context indicates otherwise.

The Condensed Combined Financial Statements have been prepared on a standalone basis and are derived from YUM’s consolidated financial statements and underlying accounting records. Transactions between the Company and YUM that were not cash settled were considered to be effectively settled at the time the transactions were recorded. The Condensed Combined Financial Statements include all revenues, costs, assets and liabilities directly attributable to the Company either through specific identification or allocation. The Condensed Combined Statements of Income include allocations for certain of YUM’s Corporate functions that provided a direct benefit to the Company. These costs have been allocated based on Company system sales relative to YUM’s global system sales. All allocated costs have been deemed to have been paid to YUM in the period in which the costs were recorded. The Company considers the cost allocation methodology and results thereof for the periods prior to October 31, 2016 to be reasonable. However, the allocations may not be indicative of the actual expense that the Company would have experienced had the Company operated as an independent publicly traded company for the periods prior to October 31, 2016. Upon the separation from YUM, Parent Company Investment was adjusted as a result of settlement of certain assets and liabilities with YUM and formed Yum China’s common stock and additional paid-in capital.

Overview

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

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

System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our Concepts, except for 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 onin the Condensed 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~~Effective January 1, 2018, the Company revised its definition of same-store sales growth isto represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open ~~and in the Company system~~for one year or ~~more.~~more, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores.

Company Restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. Within the Company ~~Sales~~sales and Restaurant ~~Profit~~profit analysis, Store Portfolio Actions represent the net impact of new unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation.

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides ~~non-GAAP~~ measures adjusted for Special Items, which ~~present~~include Adjusted Operating Profit, ~~before Special Items, Diluted~~Adjusted Net Income, Adjusted Earnings Per Common Share, ~~before Special Items,~~Adjusted Effective ~~tax rate before Special Items~~Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, depreciation and amortization, and other items, including store impairment ~~charges.~~charges and Special ~~Items consist of reversal of loss associated with sale of aircraft, income~~Items. The Special Item for the quarter ended March 31, 2019 represents impact from the ~~reversal~~U.S. Tax Cuts and Jobs Act (the “Tax Act”). The Special Item for the quarter ended March 31, 2018 represents a gain recognized from the re-measurement of ~~contingent consideration~~our previously ~~recorded for a business combination and impact of the redemption of the Little Sheep noncontrolling~~held equity interest ~~which are~~in Wuxi KFC at fair value upon acquisition, as described in ~~(a), (b), (c) and (d) in the accompanying notes.~~Note 2. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation and amortization, and other items, including store impairment charges and Special Items. These ~~non-GAAP~~adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these ~~non-GAAP~~adjusted measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that ~~we do~~the Company does not believe are indicative of our ongoing operations due to their nature.

All Note references in this MD&A refer to the Notes to the Condensed Consolidated ~~and Combined~~ Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except percentages and per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. References to quarters are references to the Company’s fiscal quarters. The Company’s third fiscal quarter of 2017 and 2016 consist of the three months ended August 31, 2017 and 2016, respectively. The Company’s 2017 and 2016 year to date periods discussed in this MD&A consist of the first eight months of 2017 and 2016, respectively.

Quarters Ended March 31, 2019 and ~~years to date ended August 31, 2017 and August 31, 2016~~2018

Results of Operations

Summary

The Company has two reportable segments: KFC and Pizza Hut. ~~Our remaining~~Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, our six non-reportable operating segments, including the operations of East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and ~~Daojia,~~our e-commerce business, are combined and referred to as All Other Segments, as ~~these~~those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior ~~periods~~quarters has been recast to align with this change in segment reporting. There was no impact on the consolidated financial statements of the Company as a result of this change. Additional details on our reportable operating segments are included in Note 13.

Quarterly highlights:

% Change

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

(Reported)

Operating Profit

(Ex F/X)

KFC

+11

+20

+11

)

Pizza Hut

—

+48

+57

All Other Segments(b)

(37

)

(15

)

+10

)

Total

+10

+11

(23

)

(18

)

Year to date highlights:

% Change

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

KFC
+8

+4

+5

+20

Pizza Hut
+7

+1

+8

+37

All Other Segments

(36
)

(8
)

+3

(81
)
Total
+7

+4

+6

+23

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

(a)	System Sales and Same-Store Sales percentages as shown in tables exclude the impact of F/X.

(b)	Sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty, are excluded from System Sales and Same-Store Sales.

As of ~~August~~March 31, ~~2017,~~2019, the Company operated over ~~7,700~~8,600 units, predominately KFC and Pizza Hut restaurants, which are the leading ~~quick service~~QSR and ~~casual dining restaurant brands,~~CDR brand, respectively, in mainland China. Given our strong competitive position, a growing economy and a population of approximately 1.4 billion in mainland China, the Company has rapidly added KFC and Pizza Hut restaurants.

As compared to the ~~third~~first quarter of ~~2016,~~2018, Company sales in the ~~third~~first quarter of ~~2017~~2019 increased ~~8% and~~4%, or 10%, if excluding the impact of F/X. The increase in Company sales ~~during~~for the quarter, excluding the impact of F/X, was driven by net unit growth and same-store sales growth.

The increase in Restaurant profit for the quarter, excluding the impact of F/X, was driven by same-store sales ~~leverage~~growth, net unit growth, labor efficiency and ~~labor efficiency,~~less depreciation expenses, partially offset by wage inflation, higher promotion and promotion costs. The increase in Restaurant profit for the year to date ended August 31, 2017 was primarily due to the impact of the retail tax structure reform implemented on May 1, 2016 and also driven by sales leverage, partially offset by wage inflationproduct upgrade cost and commodity inflation. ~~The benefit from the retail tax structure reform was most impactful on food and paper costs, although other items such as utility cost and rental expense also benefited from it.~~

The Consolidated ~~and Combined~~ Results of Operations for the quarters ended March 31, 2019 and ~~year to date ended August 31, 2017 and 2016~~2018 are presented below:

	Quarter ended						% B/(W)^(a)				Year to date ended						% B/(W)^(a)				Quarter Ended						% B/(W)^(a)
	8/31/2017			8/31/2016			Reported				8/31/2017			8/31/2016			Reported				3/31/2019			3/31/2018			Reported				Ex F/X
Company sales	$	1,998		$	1,848			8			$	4,818		$	4,684			3			$	2,089		$	2,016			4				10
Franchise fees and income		40			35			14				98			90			9				39			40			(1	)			5
Revenues from transactions with franchisees and unconsolidated affiliates																						170			161			5				12
Other revenues																						6			4			55				62
Total revenues	$	2,038		$	1,883			8			$	4,916		$	4,774			3			$	2,304		$	2,221			4				10
Restaurant profit	$	399		$	356			12			$	927		$	798			16			$	386		$	361			7				14
Restaurant Margin %		20.0	%		19.2	%		0.8		ppts.		19.3	%		17.0	%		2.3		ppts.		18.5	%		17.9	%		0.6		ppts.		0.6		ppts.
Operating Profit	$	317		$	286			11			$	714		$	582			23			$	303		$	395			(23	)			(18	)
Interest income, net		6			3		NM					13			7			77				9			8			17				24
Investment gain																						10			—		NM				NM
Income tax provision		(102	)		(87	)		(19	)			(213	)		(165	)		(29	)			(93	)		(107	)		13				9
Net Income - including noncontrolling interests		221			202			9				514			424			21				229			296			(23	)			(17	)
Net Income - noncontrolling interests		10			10			6				21			10		NM					7			8			13				7
Net Income - Yum China Holdings, Inc.	$	211		$	192			9			$	493		$	414			19			$	222		$	288			(23	)			(17	)
Diluted Earnings Per Share	$	0.53		$	0.53			—			$	1.24		$	1.14			9
Diluted Earnings Per Common Share																					$	0.57		$	0.72			(21	)			(15	)
Effective tax rate		31.7	%		29.8	%						29.3	%		28.0	%						28.9	%		26.6	%
Operating Profit before Special Items	$	314		$	283						$	711		$	580
Diluted Earnings Per Common Share before Special Items	$	0.52		$	0.52						$	1.23		$	1.11
Effective tax rate before Special Items		32.0	%		29.9	%						29.4	%		28.0	%
Adjusted Operating Profit																					$	303		$	297
Adjusted Net Income - Yum China Holdings, Inc.																					$	230		$	214
Adjusted Diluted Earnings Per Common Share																					$	0.59		$	0.53
Adjusted Effective Tax Rate																						26.5	%		27.1	%
Adjusted EBITDA	$	425		$	390						$	1,004		$	895						$	428		$	417

(a)	Represents period-over-period change in percentage. ~~NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.~~

Performance Metrics

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
System Sales Growth (Decline)

8
%

(3
)%

3
%

—
%

System Sales Growth, excluding F/X

10
%

3
%

7
%

5
%

Same-store Sales Growth (Decline)

6
%

(1
)%

4
%

1
%

	Quarter Ended
	3/31/2019			3/31/2018
System Sales Growth		3	%		15	%
System Sales Growth, excluding F/X		9	%		6	%
Same-Store Sales Growth		4	%		3	%

Unit Count	8/31/2017		8/31/2016		% Increase		3/31/2019		3/31/2018		% Increase
Company-owned		6,149		5,847		5		6,974		6,563		6
Unconsolidated affiliates		872		812		7		834		762		9
Franchisees		726		671		8		845		787		7
		7,747		7,330		6		8,653		8,112		7

Special Items

Special Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.

Quarter ended

Year to date ended
Detail of Special Items

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Reversal of loss associated with sale of aircraft ^(a)

—

3

—

2

Income from the reversal of contingent consideration^(b)

3

—

3

—

Special Items Income - Operating Profit

3

3

3

2

Tax Expenses on Special Items^(c)

—

(1
)

—

(1
)

Special Items Income, net of tax - including
   noncontrolling interests

3

2

3

1

Special Items Expense, net of tax of nil
   - noncontrolling interests^(d)

—

—

—

(8
)

Special Items Income, net of tax
   - Yum China Holdings, Inc.

$
3

$
2

$
3

$
9

Weighted average diluted shares outstanding

398,497,353

363,758,219

397,385,512

363,758,219

Special Items Diluted Earnings Per Common Share

$
0.01

$
0.01

$
0.01

$
0.03

Reconciliation of Reported Operating Profit to
   Operating Profit Before Special Items

Reported Operating Profit

$
317

$
286

$
714

$
582

Special Items Income - Operating Profit

3

3

3

2

Operating Profit before Special Items

$
314

$
283

$
711

$
580

Reconciliation of Reported EPS to EPS Before
   Special Items

Reported Diluted Earnings Per Common Share

$
0.53

$
0.53

$
1.24

$
1.14

Special Items Diluted Earnings Per Common Share

0.01

0.01

0.01

0.03

Diluted Earnings Per Common Share before Special Items

$
0.52

$
0.52

$
1.23

$
1.11

Reconciliation of Reported Effective Tax Rate to
   Effective Tax Rate Before Special Items

Reported effective tax rate (See Note 11)

31.7
%

29.8
%

29.3
%

28.0
%

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

(0.3
)%

(0.1
)%

(0.1
)%

(—
)%

Effective tax rate before Special Items

32.0
%

29.9
%

29.4
%

28.0
%

	Quarter Ended
Detail of Special Items	3/31/2019			3/31/2018
Gain from re-measurement of equity interest upon acquisition^(a)	$	—		$	98
Special Items, Operating Profit		—			98
Tax Expenses on Special Items^(b)		—			(24	)
Impact from the Tax Act^(c)		(8	)		—
Special items, net income – including noncontrolling interests		(8	)		74
Special items, net income – noncontrolling interests		—			—
Special Items, Net income – Yum China Holdings, Inc.	$	(8	)	$	74
Weighted-average diluted shares outstanding (in millions)		388			401
Special Items, Diluted Earnings Per Common Share	$	(0.02	)	$	0.19
Reconciliation of Operating Profit to Adjusted Operating Profit
Operating Profit	$	303		$	395
Special Items, Operating Profit		—			98
Adjusted Operating Profit	$	303		$	297
Reconciliation of Net Income to Adjusted Net Income
Net Income - Yum China Holdings, Inc.	$	222		$	288
Special Items, Net Income – Yum China Holdings, Inc.		(8	)		74
Adjusted Net Income - Yum China Holdings, Inc.	$	230		$	214
Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share	$	0.59		$	0.75
Special Items, Basic Earnings Per Common Share		(0.02	)		0.20
Adjusted Basic Earnings Per Common Share	$	0.61		$	0.55		��
Diluted Earnings Per Common Share	$	0.57		$	0.72
Special Items, Diluted Earnings Per Common Share		(0.02	)		0.19
Adjusted Diluted Earnings Per Common Share	$	0.59		$	0.53
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate
Effective tax rate (See Note 12)		28.9	%		26.6	%
Impact on effective tax rate as a result of Special Items^(b)(c)		2.4	%		(0.5	)%
Adjusted effective tax rate		26.5	%		27.1	%

(a)

~~During the quarter ended August 31, 2016, we completed the sale of~~As a ~~corporate aircraft and recorded the reversal of a portion~~result of the ~~loss~~acquisition of Wuxi KFC in the first quarter of 2018, the Company recognized a gain of $98 million from the re-measurement of our previously ~~recognized within Special Items in 2015~~held 47% equity interest at fair value, which was not allocated to ~~reflect the final proceeds of the sale.~~any segment for performance reporting purposes. (See Note 2)

(b)	During the quarter ended August 31, 2017, we recognized income from the reversal of contingent consideration previously recorded for a business combination as the likelihood of making payment becomes remote.

~~(c)~~

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

~~(d)~~(c)

~~During~~We completed the ~~quarter ended May 31, 2016,~~evaluation of the ~~Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to~~impact on our transition tax computation based on the ~~Company pursuant to their redemption rights. The difference between~~final regulations that were released by 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,~~U.S. Treasury Department and the ~~carrying value~~IRS and became effective in the first quarter of ~~their redeemable noncontrolling interests was~~2019, and recorded as an additional amount of $8 million ~~loss attributable to noncontrolling interests.~~for the transition tax accordingly.

Adjusted EBITDA

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

	Quarter ended						Year to date ended						Quarter Ended
Reconciliation of Net Income to Adjusted EBITDA	8/31/2017			8/31/2016			8/31/2017			8/31/2016			3/31/2019			3/31/2018
Net Income — Yum China Holdings, Inc.													$	222		$	288
Net Income — noncontrolling interests	$	10		$	10		$	21		$	10			7			8
Net Income — Yum China Holdings, Inc.		211			192			493			414
Income tax provision		102			87			213			165			93			107
Interest income, net		(6	)		(3	)		(13	)		(7	)		(9	)		(8	)
Investment gain														(10	)		—
Operating Profit		317			286			714			582			303			395
Special Items, Operating Profit														—			(98	)
Adjusted Operating Profit														303			297
Depreciation and amortization		105			101			265			272			111			118
Store impairment charges (See Note 6)		6			6			28			43
Special Items Income – Operating profit		(3	)		(3	)		(3	)		(2	)
Store impairment charges														14			2
Adjusted EBITDA	$	425		$	390		$	1,004		$	895		$	428		$	417

Segment Results

KFC

	Quarter ended														Year to date ended														Quarter Ended
							% B/(W)														% B/(W)														% B/(W)
	8/31/2017			8/31/2016			Reported				Ex F/X				8/31/2017			8/31/2016			Reported				Ex F/X				3/31/2019			3/31/2018			Reported				Ex F/X
Company sales	$	1,385		$	1,263			10				11			$	3,342		$	3,238			3				7			$	1,539		$	1,444			7				13
Franchise fees and income		38			34			13				14				93			87			7				11				36			37			(3	)			3
Revenues from transactions with franchisees and unconsolidated affiliates																														17			17			—				2
Total revenues	$	1,423		$	1,297			10				12			$	3,435		$	3,325			3				7			$	1,592		$	1,498			6				13

Restaurant profit	$	292		$	250			17				19			$	671		$	589			14				18			$	309		$	301			2				9
Restaurant margin %		21.1	%		19.7	%		1.4		ppts.		1.4		ppts.		20.1	%		18.2	%		1.9		ppts.		1.9		ppts.		20.0	%		20.9	%		(0.9	)	ppts.		(0.9	)	ppts.

G&A expenses	$	42		$	39			(7	)			(9	)		$	106		$	101			(6	)			(10	)		$	49		$	46			(5	)			(12	)
Closure and impairment expenses, net	$	1		$	4			40				38			$	10		$	25			58				56
Franchise expenses																													$	19		$	19			1				(5	)
Expenses for transactions with franchisees and unconsolidated affiliates																													$	17		$	17			1				(1	)
Closures and impairment expenses, net																													$	7		$	—		NM				NM
Other income, net	$	(18	)	$	(16	)		14				16			$	(45	)	$	(38	)		18				23			$	(18	)	$	(23	)		(24	)			(19	)
Operating Profit	$	286		$	238			20				22			$	647		$	538			20				24			$	288		$	296			(3	)			3

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
System Sales Growth (Decline)

10
%

(4
)%

4
%

1
%

System Sales Growth, excluding F/X

11
%

2
%

8
%

7
%

Same-Store Sales Growth (Decline)

7
%

(1
)%

4
%

4
%

	Quarter Ended
	3/31/2019			3/31/2018
System Sales Growth		5	%		18	%
System Sales Growth, excluding F/X		11	%		9	%
Same-Store Sales Growth		5	%		5	%

Unit Count	8/31/2017		8/31/2016		% Increase		3/31/2019		3/31/2018		% Increase
Company-owned		4,007		3,832		5		4,732		4,353		9
Unconsolidated affiliates		872		812		7		834		762		9
Franchisees		468		443		6		512		487		5
		5,347		5,087		5		6,078		5,602		8

Company Sales and Restaurant Profit

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

	Quarter ended															Quarter Ended
Income (Expense)	8/31/2016			Store Portfolio Actions			Other			F/X			8/31/2017			3/31/2018			Store Portfolio Actions			Other			F/X			3/31/2019
Company sales	$	1,263		$	44		$	99		$	(21	)	$	1,385		$	1,444		$	128		$	64		$	(97	)	$	1,539
Cost of sales		(365	)		(13	)		(36	)		6			(408	)		(424	)		(41	)		(41	)		30			(476	)
Cost of labor		(243	)		(7	)		(17	)		4			(263	)		(293	)		(26	)		(22	)		21			(320	)
Occupancy and other		(405	)		(11	)		(13	)		7			(422	)
Occupancy and other operating expenses																	(426	)		(36	)		1			27			(434	)
Restaurant profit	$	250		$	13		$	33		$	(4	)	$	292		$	301		$	25		$	2		$	(19	)	$	309

Year to date ended
Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017
Company sales

$
3,238

$
94

$
139

$
(129
)

$
3,342

Cost of sales

(970
)

(27
)

(31
)

39

(989
)

Cost of labor

(625
)

(18
)

(49
)

26

(666
)

Occupancy and other

(1,054
)

(23
)

22

39

(1,016
)

Restaurant profit

$
589

$
26

$
81

$
(25
)

$
671

The ~~increases~~increase in Company sales and Restaurant profit ~~associated with store portfolio actions~~ for the quarter, excluding the impact of F/X, was primarily driven by net unit ~~growth. Significant other factors impacting Company sales and Restaurant profit were~~growth including the ~~Company~~acquisition of Wuxi KFC, same-store sales growth ~~of 7%,~~and lower depreciation expenses, partially offset by commodity inflation of 5%, higher labor costs ~~including~~mainly due to wage inflation of 8%6% and higher promotion costs.

The year-to-date increases in Company sales and Restaurant profit associated with store portfolio actions was driven by net unit growth. Significant other factors impacting Company sales and Restaurant profit were the Company same-store sales growth of 4% and the favorable impact from retail tax structure reform (primarily in cost of sales), partially offset by higher labor costs including wage inflation of 8%, commodity inflation of 3% and promotion costs.

Franchise Fees and Income

The ~~quarter and year-to-date increases~~increase in Franchise fees and income for the quarter, excluding the impact of F/X, was primarily driven by the ~~impact~~same-store sales growth of ~~refranchising~~unconsolidated affiliates and franchisees and net unit ~~growth.~~growth, partially offset by the impact of the acquisition of Wuxi KFC.

G&A Expenses

The ~~quarter and year-to-date increases~~increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs mainly due to ~~wage inflation.~~merit increases.

Operating Profit

The increase in Operating Profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth and net unit growth including the acquisition of Wuxi KFC, partially offset by higher restaurant operating costs, higher store impairment charges due to an additional impairment evaluation performed in the first quarter of 2019 as a result of adopting the new lease standard, and higher G&A expenses.

The year-to-date increase in Operating Profit, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth and lower closure and impairment expenses, partially offset by higher G&A expenses and higher restaurant operating costs.

Pizza Hut

	Quarter ended														Year to date ended														Quarter Ended
							% B/(W)														% B/(W)														% B/(W)
	8/31/2017			8/31/2016			Reported				Ex F/X				8/31/2017			8/31/2016			Reported				Ex F/X				3/31/2019			3/31/2018			Reported				Ex F/X
Company sales	$	603		$	573			5				7			$	1,449		$	1,405			3				7			$	541		$	564			(4	)			2
Franchise fees and income		1			1			37				40				2			2			31				36				1			1			45				54
Revenues from transactions with franchisees and unconsolidated affiliates																														1			—		NM				NM
Total revenues	$	604		$	574			5				7			$	1,451		$	1,407			3				7			$	543		$	565			(4	)			2

Restaurant profit	$	108		$	108			1				2			$	256		$	210			22				26			$	77		$	60			31				39
Restaurant margin %		17.8	%		18.7	%		(0.9	)	ppts.		(0.8	)	ppts.		17.6	%		14.9	%		2.7		ppts.		2.7		ppts.		14.3	%		10.5	%		3.8		ppts.		3.8		ppts.

G&A expenses	$	27		$	25			(4	)			(6	)		$	70		$	68			(1	)			(5	)		$	24		$	28			14				9
Closure and impairment expenses, net	$	1		$	1			54				56			$	9		$	11			23				20
Franchise expenses																													$	1		$	1			(50	)			(59	)
Expenses for transactions with franchisees and unconsolidated affiliates																													$	1		$	—		NM				NM
Closures and impairment expenses, net																													$	3		$	(1	)	NM				NM
Other income, net																													$	—		$	(1	)		(100	)			(100	)
Operating Profit	$	80		$	82			—				2			$	177		$	132			37				42			$	50		$	34			48				57

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016

System Sales Growth (Decline)

6
%

1
%

3
%

(3
)%

System Sales Growth, excluding F/X

7
%

7
%

7
%

3
%

Same-Store Sales Growth (Decline)

—
%

(4
)%

1
%

(8
)%

	Quarter Ended
	3/31/2019			3/31/2018
System Sales (Decline) Growth		(3	)%		7	%
System Sales Growth (Decline), excluding F/X		3	%		(1	)%
Same-Store Sales Growth (Decline)		1	%		(5	)%

Unit Count	8/31/2017		8/31/2016		% Increase		3/31/2019		3/31/2018		% Increase
Company-owned		2,114		1,973		7		2,190		2,183		—
Franchisees		29		20		45		59		31		90
		2,143		1,993		8		2,249		2,214		2

Company Sales and Restaurant Profit

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

	Quarter ended															Quarter Ended
Income (Expense)	8/31/2016			Store Portfolio Actions			Other			F/X			8/31/2017			3/31/2018			Store Portfolio Actions			Other			F/X			3/31/2019
Company sales	$	573		$	38		$	2		$	(10	)	$	603		$	564		$	5		$	6		$	(34	)	$	541
Cost of sales		(144	)		(11	)		(12	)		3			(164	)		(167	)		(1	)		(1	)		10			(159	)
Cost of labor		(129	)		(8	)		1			2			(134	)		(147	)		—			(4	)		8			(143	)
Occupancy and other		(192	)		(10	)		2			3			(197	)
Occupancy and other operating expenses																	(190	)		—			18			10			(162	)
Restaurant profit	$	108		$	9		$	(7	)	$	(2	)	$	108		$	60		$	4		$	19		$	(6	)	$	77

Year to date ended

Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017

Company sales

$
1,405

$
94

$
6

$
(56
)

$
1,449

Cost of sales

(376
)

(24
)

9

15

(376
)

Cost of labor

(326
)

(23
)

(5
)

13

(341
)

Occupancy and other

(493
)

(26
)

25

18

(476
)

Restaurant profit

$
210

$
21

$
35

$
(10
)

$
256

The ~~increases~~increase in Company sales and Restaurant profit ~~associated with store portfolio actions~~ for the quarter, was primarily driven by net unit growth. Company sales and Restaurant profit were negatively impacted by promotion costs and higher labor costs including wage inflation of 6%, partially offset by labor efficiency.

The year-to-date increases in Company sales and Restaurant profit associated with store portfolio actions was primarily driven by net unit growth. Significant other factors impacting Company sales and Restaurant profit were the favorable impact from retail tax structure reform (primarily in cost of sales), Company same-store sales growth of 1% and labor efficiency, partially offset by higher labor costs including wage inflation of 6% and commodity inflation of 1%.

~~G&A Expenses~~

~~The quarter and year-to-date increases in G&A expenses,~~ excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth, labor efficiency, lower depreciation expenses and commodity deflation, partially offset by higher ~~compensation~~labor costs ~~due~~mainly attributable to wage inflation of 5%, and ~~increased headcounts.~~higher promotion and product upgrade costs.

G&A Expenses

The decrease in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by lower cost allocation reflecting reduced development activities, and higher government incentives received.

Operating Profit

The increase in Operating Profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth, lower restaurant operating costs and lower G&A expenses, partially offset by higher ~~restaurant operating costs mainly attributable~~store impairment charges due to ~~promotion costs and wage inflation.~~

~~The year-to-date increase~~an additional impairment evaluation performed in ~~Operating Profit, excluding~~ the ~~impact~~first quarter of ~~F/X, was primarily driven by lower restaurant operating costs including~~2019 as a result of adopting the ~~favorable impact of the retail tax structure reform, net unit growth and same-store sales growth.~~new lease standard.

All Other Segments

All Other Segments includes East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and ~~Daojia.~~our e-commerce business.

	Quarter ended														Year to date ended														Quarter Ended
							% B/(W)														% B/(W)															% B/(W)
	8/31/2017			8/31/2016			Reported				Ex F/X				8/31/2017			8/31/2016			Reported				Ex F/X				3/31/2019			3/31/2018				Reported				Ex F/X
Company sales	$	10		$	12			(23	)			(22	)		$	27		$	41			(34	)			(31	)		$	9		$	8				3				9
Franchise fees and income		1			—			86				93				3			1			65				74				2			2				29				36
Revenues from transactions with franchisees and unconsolidated affiliates																														7			7				4				11
Other revenues																														14			4			NM				NM
Total revenues	$	11		$	12			(18	)			(16	)		$	30		$	42			(29	)			(26	)		$	32		$	21				50				59

Restaurant (loss) profit		(1	)		(3	)		88				87			$	—		$	(2	)		NM				NM
Restaurant profit																													$	(1	)	$	—		��	NM				NM
Restaurant margin %		(1.5	)%		(7.7	)%		6.2		ppts.		6.1		ppts.		2.2	%		(1.7	)%		3.9		ppts.		4.0		ppts.		(5.6	)%		1.7	%			(7.3	)	ppts.		(7.3	)	ppts.

G&A expenses	$	6		$	2		NM				NM				$	10		$	6			(74	)			(78	)		$	8		$	7				(7	)			(13	)
Expenses for transactions with franchisees and unconsolidated affiliates																													$	6		$	6				(9	)			(16	)
Other operating costs and expenses																													$	12		$	4			NM				NM
Closures and impairment expenses, net																													$	1		$	—			NM				NM
Operating Loss	$	(8	)	$	(5	)	NM				NM				$	(8	)	$	(6	)		(81	)			(77	)		$	(5	)	$	(4	)			2				(3	)

	Quarter Ended
	3/31/2019			3/31/2018
Same-Store Sales Decline		(15	)%		(5	)%

The ~~decrease~~increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by ~~unit closures~~the launch of our e-commerce business and ~~refranchising.~~

~~The year-to-date~~COFFii & JOY, partially offset by the decrease in Company sales of Little Sheep.

The increase in Other revenue for the quarter, excluding the impact of F/X, was primarily driven by ~~unit closures, refranchising~~inter-segment revenue generated from our e-commerce business and ~~same-store sales decline of 8%.~~

~~Corporate & Unallocated~~

Quarter ended

Year to date ended

Income (Expense)

8/31/2017

8/31/2016

% B/(W)

8/31/2017

8/31/2016

% B/(W)

Corporate G&A expenses

$
(45
)

$
(35
)

(31
)

$
(108
)

$
(96
)

(13
)

Refranchising gain, net (See Note 6)

—

4

(87
)

2

8

(74
)

Other unallocated

4

2

NM

4

6

(23
)

Interest income, net

6

3

NM

13

7

77

Income tax provision (See Note 11)

(102
)

(87
)

(19
)

(213
)

(165
)

(29
)

Effective tax rate (See Note 11)

31.7
%

29.8
%

(1.9
)%

29.3
%

28.0
%

(1.3
)%

~~Corporate G&A Expenses~~Daojia.

The ~~quarter and year-to-date increases~~increase in G&A expenses, for the quarter, excluding the impact of F/X, ~~resulted~~was mainly due to G&A expenses incurred by COFFii & JOY, which was launched in the second half of 2018.

Corporate and Unallocated

	Quarter Ended
							% B/(W)
	3/31/2019			3/31/2018			Reported			Ex F/X
Revenues from transactions with franchisees and unconsolidated affiliates	$	145		$	137			6			13
Other revenue		1			1			71			83
Expenses for transactions with franchisees and unconsolidated affiliates		143			137			(5	)		(12	)
Other operating costs and expenses		1			1			(24	)		(33	)
Corporate G&A expenses		33			33			(1	)		(6	)
Other unallocated income (See Note 13)		(1	)		(102	)		(100	)		(100	)
Interest income, net		9			8			17			24
Investment gain		10			—		NM			NM
Income tax provision (See Note 12)		(93	)		(107	)		13			9
Effective tax rate (See Note 12)		28.9	%		26.6	%		(2.3	)%		(2.3	)%

Revenues from ~~higher compensation costs~~Transactions with Franchisees and Unconsolidated Affiliates

The increase in Revenues from transactions with franchisees and unconsolidated affiliates for the quarter, excluding the impact of F/X, was mainly driven by system sales growth of franchisees and unconsolidated affiliates and an increase in the selling prices of food and paper products due to commodity inflation, partially ~~attributable~~offset by the impact from the acquisition of Wuxi KFC.

G&A Expenses

The increase in Corporate G&A expenses for the quarter, excluding the impact of F/X, was mainly driven by lower government incentives received.

Other Unallocated Income

The decrease in Other unallocated income for the quarter, excluding the impact of F/X, was primarily due to ~~hiring additional personnel to perform public company functions, as well as increased professional service fees.~~ a gain of $98 million recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition in the first quarter of 2018.

Interest and Other Income, Net

The ~~quarter and year-to-date increases~~increase in interest income, net was mainly driven by higher returns on ~~larger~~ balances of short-term investments and cash equivalents which mainly include time deposits.

Investment Gain

The Investment gain represents the unrealized gain of $10 million related to investment in equity securities of Meituan Dianping (“Meituan”). See Note 6.

Income Tax Provision

Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%~~. To the extent those earnings are not deemed permanently reinvested in China, we are required to record U.S.~~, withholding tax on ~~those~~repatriation of earnings ~~net~~outside of ~~a credit for the foreign taxes paid in China.~~China and U.S. corporate income tax, if any. Our effective tax rate was ~~31.7%~~28.9% and ~~29.8%~~26.6% for the quarters ended ~~August~~March 31, ~~2017~~2019 and ~~2016, respectively, and 29.3% and 28.0% for the year to date ended August 31, 2017 and 2016,~~2018, respectively. The higher effective tax rate for the quarter ~~and year to date ended August 31, 2017~~ was primarily due to ~~higher costs~~an adjustment of ~~repatriating current year earnings into~~transition tax based on the final regulations that were released by the U.S. Treasury Department and the IRS and became effective in the first quarter of 2019.

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

Tax Examination on Transfer Pricing

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

PRC Value-Added Tax (“VAT”)

Effective May 1, 2016, the Chinese government implemented reform to its retail tax structure, which is intended to be a progressive and positive shift to more closely align with a more modern service-based economy. Under this reform, a 6% output ~~VAT~~value-added tax (“VAT”) replaced the 5% business tax (“BT”) previously applied to certain restaurant sales. VAT was imposed on goods and services at the rates of 17%, 13%, 11% and 6%. Input VAT would be creditable to the aforementioned 6% output VAT. Effective from July 1, 2017, the 13% VAT rate primarily applicable to certain agricultural products was reduced to 11%. Effective from May 1, 2018, the VAT rates of 17% and 11% were lowered to 16% and 10%, respectively. Effective from April 1, 2019, the VAT rates of 16% and 10% were further lowered to 13% and 9%, respectively. These rate changes impact our input VAT on all materials and certain services, mainly including construction, transportation and leasing. However, the impact on our operating results is not expected to be significant.

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

As of ~~August~~March 31, ~~2017,~~2019, an input VAT credit asset of ~~$120~~$249 million and payable of $3$6 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, inon the Condensed Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against ~~net~~ VAT payables more than one year from ~~August~~March 31, ~~2017.~~2019. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year.

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

Foreign Currency Exchange Rate

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

Consolidated ~~and Combined~~ Cash Flows

Our cash flows for the ~~year to date~~quarters ended ~~August~~March 31, ~~2017~~2019 and ~~2016~~2018 were as follows:

Net cash provided by operating activities was ~~$987~~$344 million in ~~2017~~2019 as compared to ~~$824~~$551 million in ~~2016.~~2018. The ~~increase~~decrease was primarily driven by ~~higher Net Income and~~ timing of payments for inventory.

Net cash used in investing activities was ~~$294~~$267 million in ~~2017 as compared~~both 2019 and 2018, which is mainly due to ~~$232 million~~higher cash outflow related to short-term investment activities in ~~2016. The increase was primarily driven by~~2019, lapping cash outflow in 2018 related to the acquisition of ~~Daojia in 2017, lapping cash proceeds generated from the sale of aircraft and the impact from refranchising, which reduced net cash used in 2016.~~Wuxi KFC.

Net cash used in financing activities ~~of $142~~was $113 million in ~~2017~~2019 as compared to $51 million in 2018. The increase was ~~mainly related to~~primarily driven by share repurchases ~~of $128 million and net cash used~~ in ~~financing activities of $249 million~~2019, while no shares were repurchased in ~~2016 mainly represented changes in net investment by Parent.~~the quarter ended March 31, 2018.

Liquidity and Capital Resources

Historically we have funded our operations through cash generated from the operation of our Company-owned stores and from our franchise operations and dividend payments from our unconsolidated affiliates. ~~Prior to October 31, 2016, excess cash was historically repatriated to YUM through intercompany loans or dividends.~~

Our ability to fund our future operations and capital needs will depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and to make capital expenditures, ~~and any~~ distributions to our stockholders orand share repurchases as well as any acquisition or investment we may make. We believe that our future cash from operations, together with our access to funds on hand and ~~the~~ capital markets, will provide adequate resources to fund these uses of cash and that our existing cash and net cash from operations will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months.

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

our financial performance;

our credit ratings or absence of a credit rating;

the liquidity of the overall capital markets; and

the state of the Chinese, U.S. and global economies.

There can be no assurance, particularly as a relatively new company that currently has no credit rating, that we will have access to the capital markets on terms acceptable to us or at all.

Generally our income is subject to the Chinese statutory tax rate of 25%. However, to the extent our cash flows from operations exceed our China cash requirements, the excess cash may be subject to an ~~overall~~additional 10% withholding tax ~~rate equal~~levied by the Chinese tax authority, subject to ~~the 35% U.S. statutory income~~any reduction or exemption set forth in relevant tax ~~rate.~~treaties or tax arrangements.

Dividends and Share Repurchases

On February 7, 2017, we announced that our ~~board~~Board of ~~directors~~Directors authorized a $300 million share repurchase program. On October 4, 2017, the Board of Directors increased Yum China’s share repurchase authorization from $300 million to an aggregate of $550 million. On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4 billion. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. ~~As of August~~During the quarter ended March 31, ~~2017,~~2019, the Company ~~has~~ repurchased ~~$128~~$65 million, or ~~3,355,696~~1.7 million shares, of common stock under the repurchase program. The Company did not repurchase any shares of common stock under the repurchase program for the quarter ended March 31, 2018.

For the quarters ended March 31, 2019 and 2018, we paid cash dividends of approximately $46 million and $39 million, respectively, to our stockholders through quarterly dividend payments of $0.12 and $0.10 per share, respectively.

On ~~October 4, 2017,~~April 29, 2019, the Board of Directors ~~increased Yum China’s existing~~declared a cash dividend of $0.12 per share, ~~repurchase authorization from $300 million~~payable as of the close of business on June 17, 2019 to ~~an aggregate~~stockholders of ~~$550~~record as of the close of business on May 28, 2019. The total estimated cash dividend payable is approximately $46 million.

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

On October 4, 2017, the Board of Directors approved a regular quarterly cash dividend program, and declared an initial cash dividend of $0.10 per share on Yum China’s common stock, payable as of the close of business on December 21, 2017 to stockholders of record as of the close of business on November 30, 2017. Future dividends will be subject to review and approval by the Board of Directors.

Borrowing Capacity

As of ~~August~~March 31, ~~2017,~~2019, the Company had credit facilities of ~~RMB2,300~~RMB 2,842 million (approximately ~~$350~~$423 million), comprised of onshore credit facilities of RMB1,500 million (approximately $223 million) in the aggregate and offshore credit facilities of $200 million in the aggregate.

The credit facilities ~~have~~had remaining terms ~~ranging from 1 to 3 years.~~of one year or less as of March 31, 2019. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China ~~and contains financial covenants including, among other things, limitations on certain additional indebtedness and liens, and certain other transactions specified in~~or London Interbank Offered Rate (LIBOR) administered by the ~~respective agreement.~~ICE Benchmark Administration. Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. ~~Interest~~Some of the credit facilities contain covenants including, among other things, limitations on ~~any outstanding borrowings is due at least monthly.~~certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sublimits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As of ~~August~~March 31, ~~2017,~~2019, we had outstanding bank guarantees of RMB 68 million (approximately $10 million) to secure our lease payment to landlords for certain Company-owned restaurants. The borrowing capacity under the ~~full~~credit facilities was therefore reduced by the same amount, while there were no borrowings outstanding as of ~~borrowings was available to us under each facility.~~March 31, 2019.

Off-Balance Sheet Arrangements

See the Guarantees section of Note 1314 for discussion of our off-balance sheet arrangements.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

See Note 2 for details of recently adopted accounting pronouncements.

New Accounting Pronouncements Not Yet Adopted

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ (ASU 2014-09), to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries. In July 2015, the FASB approved a one-year deferral of the effective date of the new revenue standard. ASU 2014-09 is now effective for the Company in our first quarter of fiscal 2018 with early adoption permitted in the first quarter of 2017. The standard allows for either a full retrospective or modified retrospective transition method. In March and April 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU No. 2016-08, ~~Revenue from Contracts with Customers (Topic 606)~~: ~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~ ~~and ASU No. 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~. We do not believe these standards will impact our recognition of revenue from Company-owned restaurants or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. However, the initial fees from franchisees, which are currently recognized as revenue when we have performed substantially all initial services required by the franchise agreement, generally upon the opening of a store, will be recognized over the term of the franchise agreement because the franchise rights will be accounted for as rights to access our symbolic intellectual property. This will result in additional deferred revenue associated with the franchise right upon adoption of the new standard. We recognized $2 million and $5 million of initial fees, including renewal fees, as revenue for the quarter and year to date ended August 31, 2017, respectively. We are evaluating whether the standards will have an impact on transactions currently not included in our revenues such as franchisee contributions to and subsequent expenditures from advertising programs. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our statements of income or cash flows. We are evaluating whether the new standards will impact the principal/agent determinations in these arrangements. If we determine we are the principal in these arrangements we would include contributions to and expenditures from these advertising programs within our Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported revenues and expenses, such impact would largely be offsetting and we would not expect there to be a significant impact on our reported Net Income. In addition, we are continuing to evaluate the impact the adoption of these standards will have on the recognition and presentation of other revenue transactions with unconsolidated affiliates and franchisees. The new guidance also requires enhanced disclosures, including the identification of performance obligations and significant judgments in measurement and recognition.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ (ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the Company in our first quarter of fiscal 2019 with early adoption permitted. The standard must be adopted using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect that this standard will have a material effect on our financial statements. While we are continuing to assess the effect of adoption, we currently believe the most significant changes relate to the recognition of right-of-use assets and lease liabilities on our balance sheet for operating leases of the land and/or building of our restaurants and office space. At August 31, 2017, we operated more than 6,100 restaurants, leasing the underlying land and/or building, with our commitments expiring within 20 years from the inception of the lease. The amount of our future minimum lease payments under operating leases was approximately $3 billion as of August 31, 2017. We anticipate continuing to add more restaurants and increase our leasing activity between now and adoption.

In June 2016, the FASB issued ASU ~~No.~~ 2016-13, Financial ~~Instruments-Credit~~Instruments – Credit Losses (Topic 326) ~~(ASU 2016-13)~~: Measurement of Credit Losses on Financial Instruments(“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for

financial assets held. In November 2018, the FASB issued ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments-Credit Losses to clarify the implementation guidance. ASU 2016-13 is effective for the Company ~~in the first quarter of~~from January 1, 2020, with early adoption ~~permitted beginning~~permitted. The adoption of this standard may result in ~~the first quarter~~a change of ~~2019. We~~our provision policy primarily for accounts receivable, and we are currently evaluating the impact the adoption of this standard will have on our financial statements.

In August ~~2016,~~2018, the FASB issued ASU ~~No. 2016-15,~~2018-13, ~~Statement of Cash Flows~~Fair Value Measurement (Topic ~~230)~~ 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement( (“ASU ~~2016-15)~~2018-13”), which ~~provides clarification regarding how certain cash receipts and cash payment are presented and classified in~~amended the ~~statement of cash flows. This update addresses eight specific cash flow issues with~~fair value measurement guidance by modifying the ~~objective of reducing the existing diversity in practice.~~disclosure requirements. ASU ~~2016-15~~2018-13 is effective for ~~annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in~~ the ~~first quarter of 2018 using a retrospective transition method,~~Company from January 1, 2020, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

In ~~October 2016,~~August 2018, the FASB issued ASU ~~No. 2016-16,~~2018-15, ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ~~(ASU 2016-16)~~(“ASU 2018-15”), which ~~requires~~aligns the ~~recognition of~~requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. ASU 2018-15 is effective for the ~~income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance will require a modified retrospective application~~Company from January 1, 2020, with ~~a cumulative adjustment to opening retained earnings at the beginning of the first quarter of 2018, but permits~~early adoption ~~at the beginning of an earlier annual period.~~permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

In November ~~2016,~~2018, the FASB issued ASU ~~No. 2016-18,~~2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18) ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ ~~(ASU 2016-18)~~(“ASU 2018-18”), which ~~requires~~clarifies that ~~entities show~~transactions in a collaborative arrangement should be accounted for under ASC 606 when the ~~changes~~counterparty is a customer for a distinct good or service. The amendment also precludes an entity from presenting consideration from a transaction in ~~total cash, cash equivalents, restricted cash and restricted cash equivalents in~~a collaborative arrangement as revenue if the ~~statement of cash flows.~~counterparty is not a customer for that transaction. ASU ~~2016-18~~2018-18 is effective for ~~fiscal years beginning after December 15, 2017, and interim periods within those fiscal years,~~the Company from January 1, 2020, with early adoption permitted. We ~~do not expect~~are currently evaluating the impact the adoption of this ~~guidance to~~standard will have ~~a material impact~~ on our financial statements.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~ (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~ (ASU 2017-04), which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. ASU 2017-04 is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our financial statements.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting~~ (ASU 2017-09), which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2018, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

Cautionary Note Regarding Forward-Looking Statements

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

•

Risks related to our business and industry, such as (a) food safety and food-borne illness concerns, (b) significant failure to maintain effective quality control systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other diseases, (e) the fact that we derive substantially all of our revenue from our operations in China, (f) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals and the potential cannibalization of existing sales by aggressive development, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, delivery aggregators, internet infrastructure operators and internet service providers, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to COFFii & JOY may not be successful, (u) challenges and risks related to our new e-commerce business; (v) the anticipated benefits of the acquisition of Daojia may not be realized in a timely manner or at all, (w) the Chinese government may determine that the VIE structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (x) our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media, (y) litigation and failure to comply with anti-bribery or anti-corruption laws, (z) U.S. federal income taxes, changes in tax rates, disagreements with taxing authorities and imposition of new taxes, (aa) changes in consumer discretionary spending and general economic conditions, (bb) competition in the retail food industry, (cc) loss or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (dd) our inability to adequately protect the intellectual property we own or have the right to use, (ee) YUM’s failure to protect its intellectual property, (ff) seasonality and certain major events in China, (gg) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (hh) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (ii) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (jj) failure by us to

Risks related to our business and industry, such as (a) food safety and food-borne illness concerns, (b) failure to maintain effective quality control systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other diseases, (e) the fact that we derive substantially all of our revenue from our operations in China, (f) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food and other supplies, (i) our inability to attain our target development goals and the potential cannibalization of existing sales by aggressive development, (j) fluctuation of raw materials prices, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) failure to protect the integrity and security of personal information of our customers and employees, (p) the dependence of our delivery business on the performance of, and our long-term relationships with, third-party aggregators and mobile payment processors, (q) our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media, (r) litigation and failure to comply with anti-bribery or anti-corruption laws, (s) U.S. federal income taxes, changes in tax rates, disagreements with taxing authorities and imposition of new taxes, (t) changes in consumer discretionary spending and general economic conditions, (u) competition in the retail food industry, (v) loss or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (w) our inability to adequately protect the intellectual property we own or have the right to use, (x) YUM’s failure to protect its intellectual property, (y) seasonality and certain major events in China, (z) failure of or damage to information systems, (aa) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (bb) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (cc) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (dd) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC and (ee) unforeseeable business interruptions;

maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC and (kk) unforeseeable business interruptions;

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

Risks related to the separation and related transactions, such as (a) not achieving all of the anticipated benefits, (b) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (c) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (d) limitations on our ability to engage in strategic transactions as a result of the separation, (e) our inability to satisfy financial reporting and other requirements to which we are subject as an independent publicly traded company, (f) limited experience of our management in managing a public company, (g) inability to access capital markets on acceptable terms, (h) increased administrative and other costs incurred by virtue of our status as an independent public company, (i) limitations on our ability to compete with YUM and other restrictions on our operations contained in the master license agreement, (j) failure by YUM to perform its obligations under the transaction agreements that we entered into with it as part of the separation, (k) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement and there being no assurance that the indemnity provided by YUM with respect to certain liabilities in connection with the separation will be sufficient to insure us against the full amount of such liabilities, (l) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, (m) potential liabilities due to fraudulent transfer considerations and (n) actual or potential conflicts of interest of certain of our executive officers and directors because of their previous positions at ~~YUM; and~~

Risks related to the acquisition of Daojia, including that (a) the PRC government may determine that the variable interest entity structure of Daojia does not comply with PRC laws on foreign investment in restricted industries, (b) the integration of Daojia may require significant time, attention and resources, potentially diverting attention from the conduct of our core businesses, and (c) the expected synergies from the acquisition may not be realized.YUM.

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 “Forward-Looking Statements” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016)~~2018) for additional information regarding factors that could affect our financial and other results. You should not place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Form 10-Q. We are not undertaking to update any of these statements, except as required by law.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. ~~We chose not~~While substantially all of our supply purchases are denominated in RMB, from time to ~~hedge our foreign currency denominated earnings through~~time, we enter into agreements at predetermined exchange rates with third parties to purchase certain amount of goods and services sourced overseas and make payments in the ~~use of financial instruments, and attempted~~corresponding local currencies when practical, to minimize the related foreign currency exposure ~~by purchasing goods and services from third parties in local currencies when practical.~~with immaterial impact on our financial statements.

As substantially all of the Company’s assets are located in China, the Company is exposed to movements in the RMB foreign currency exchange rate. For the quarter ended ~~August~~March 31, ~~2017,~~2019, the Company’s Operating Profit would have decreased approximately ~~$29~~$28 million if the RMB weakened 10% relative to the ~~U.S. dollar.~~US$. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices.

Commodity Price Risk

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

Investment Risk

In September 2018, we invested $74 million in Meituan’s ordinary shares. The equity investment is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 6 for further discussion on our investment in Meituan.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended ~~August~~March 31, ~~2017.~~

2019.

PART II – Other Information

Item 1.

Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 1314 to the Company’s Condensed Consolidated ~~and Combined~~ Financial Statements set forth in Part I of this report.

Item 1A.

Risk Factors

We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. There have been no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, which was filed with the SEC on ~~March 8, 2017.~~February 27, 2019.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On February 7, 2017, we announced that our ~~board~~Board of ~~directors~~Directors authorized a $300 million share repurchase program. This authorization does not have an expiration date. The following table provides information as of August 31, 2017 with respect to shares of common stock repurchased by the Company under this authorization:

Period

Total Number of
Shares Purchased

Average Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased under the
Plans or Programs
(millions)
Cumulative through May 31, 2017

1,072,602

$
36.27

1,072,602

$
261

6/1/17-6/30/17

1,650,832

$
39.98

1,650,832

$
195

7/1/17-7/31/17

523,595

$
36.75

523,595

$
176

8/1/17-8/31/17

108,667

$
36.52

108,667

$
172

Total for the quarter ended August 31, 2017

2,283,094

$
39.08

2,283,094

$
172

Cumulative total

3,355,696

$
38.18

3,355,696

$
172

On October 4, 2017, the Board of Directors increased Yum China’s ~~existing~~ share repurchase authorization from $300 million to an aggregate of $550 million.

On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4 billion. The authorizations do not have an expiration date.

The following table provides information as of March 31, 2019 with respect to shares of Yum China common stock repurchased by the Company during the quarter then ended:

Period	Total Number of Shares Repurchased (thousands)		Average Price Paid Per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (thousands)		Approximate Dollar Value of Shares that May Yet Be Repurchased under the Plans or Programs (millions)

1/1/19-1/31/19		896	$	34.24		896	$	929
2/1/19-2/28/19		314	$	41.44		314	$	916
3/1/19-3/31/19		497	$	42.28		497	$	895
Total		1,707	$	37.90		1,707	$	895

Item 6.

Exhibits

Exhibit Number		Description of Exhibits

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

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

~~3.3~~10.1		~~Certificate~~Term Employment Agreement, dated as of ~~Designations of Preferred Stock~~March 22, 2019, by and between Yum China Holdings, Inc. and Shella Ng (incorporated by reference to Exhibit ~~3.1~~10.1 to Yum China Holdings, Inc.’s ~~Registration Statement~~Current Report on Form ~~8-A~~8-K filed on ~~October 27, 2016)~~March 22, 2019).

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

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

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

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

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema Document *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *

*Filed or furnished herewith.~~herewith.~~

SIGNATURES

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

	Yum China Holdings, Inc.
	(Registrant)

Date:	~~October 6, 2017~~May 10, 2019	/s/ ~~Jacky Lo~~Xueling Lu
		~~Chief Financial~~Controller and Principal Accounting Officer
		~~Treasurer, Controller and Principal Accounting Officer~~

3643

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (millions)
Cumulative through May 31, 2017		1,072,602	$	36.27		1,072,602	$	261

6/1/17-6/30/17		1,650,832	$	39.98		1,650,832	$	195
7/1/17-7/31/17		523,595	$	36.75		523,595	$	176
8/1/17-8/31/17		108,667	$	36.52		108,667	$	172
Total for the quarter ended August 31, 2017		2,283,094	$	39.08		2,283,094	$	172

Cumulative total		3,355,696	$	38.18		3,355,696	$	172