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 31, 2017~~June 30, 2021

☐	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)

~~(469) 980-2898~~

~~(Registrant’s Telephone Number, Including Area Code)~~

Not Applicable

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	YUMC	New York Stock Exchange
Common Stock, par value $0.01 per share	9987	The Stock Exchange of Hong Kong Limited

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or15(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.

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

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

The number of shares outstanding of the registrant’s common stock as of ~~September 27, 2017~~August 2, 2021 was ~~384,275,398~~420,884,516 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 and Years to ~~date ended August 31, 2017~~Date Ended June 30, 2021 and ~~2016~~2020 (Unaudited)	3

	Condensed C~~onsolidated and~~ ~~Combined~~Consolidated Statements of Comprehensive Income – Quarters and Years to ~~date ended August 31, 2017~~Date Ended June 30, 2021 and ~~2016~~2020 (Unaudited)	4

	Condensed C~~onsolidated and Combined~~Consolidated Statements of Cash Flows – Years to ~~date ended August 31, 2017~~Date Ended June 30, 2021 and ~~2016~~2020 (Unaudited)	5

	Condensed Consolidated Balance Sheets – ~~August 31, 2017~~June 30, 2021 (Unaudited) and December 31, ~~2016~~2020	6

	Notes to Condensed Consolidated ~~and Combined~~ Financial Statements (Unaudited)	7

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	1728

	Item 3 – Quantitative and Qualitative Disclosures ~~about~~About Market Risk	3247

	Item 4 – Controls and Procedures	3347

Part II.	Other Information

	Item 1 – Legal Proceedings	3448

	Item 1A – Risk Factors	3448

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	3448

	Item 6 – Exhibits	3549

	Signatures	3650

PART I – ~~FINANCI~~ALFINANCIAL 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						Year to Date Ended
Revenues	8/31/2017			8/31/2016			8/31/2017			8/31/2016			6/30/2021			6/30/2020			6/30/2021			6/30/2020
Company sales	$	1,998		$	1,848		$	4,818		$	4,684		$	2,233		$	1,692		$	4,564		$	3,240
Franchise fees and income		40			35			98			90			38			37			80			72
Revenues from transactions with franchisees and unconsolidated affiliates														164			157			335			318
Other revenues														16			16			29			26
Total revenues		2,038			1,883			4,916			4,774			2,451			1,902			5,008			3,656
Costs and Expenses, Net
Company restaurants
Food and paper		575			514			1,373			1,361			686			556			1,390			1,051
Payroll and employee benefits		403			376			1,018			963			540			384			1,084			778
Occupancy and other operating expenses		622			602			1,501			1,562			653			521			1,301			1,015
Company restaurant expenses		1,600			1,492			3,892			3,886			1,879			1,461			3,775			2,844
General and administrative expenses		120			101			294			271			136			113			266			212
Franchise expenses		20			20			48			51			16			16			33			33
Expenses for transactions with franchisees and unconsolidated affiliates														160			160			329			316
Other operating costs and expenses														13			13			24			23
Closures and impairment expenses, net		3			5			20			36			13			21			11			29
Refranchising gain, net		—			(4	)		(2	)		(8	)
Other income, net		(22	)		(17	)		(50	)		(44	)
Other expenses (income), net														1			(10	)		(5	)		(26	)
Total costs and expenses, net		1,721			1,597			4,202			4,192			2,218			1,774			4,433			3,431
Operating Profit		317			286			714			582			233			128			575			225
Interest income, net		6			3			13			7			16			8			31			17
Investment gain (loss)														8			45			(4	)		37
Income Before Income Taxes		323			289			727			589			257			181			602			279
Income tax provision		(102	)		(87	)		(213	)		(165	)		(64	)		(45	)		(166	)		(77	)
Net income – including noncontrolling interests		221			202			514			424			193			136			436			202
Net income – noncontrolling interests		10			10			21			10			12			4			25			8
Net Income – Yum China Holdings, Inc.	$	211		$	192		$	493		$	414		$	181		$	132		$	411		$	194
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			421			377			420			376
Diluted		398,497,353			363,758,219			397,385,512			363,758,219			435			388			434			387
Basic Earnings Per Common Share	$	0.55		$	0.53		$	1.28		$	1.14		$	0.43		$	0.35		$	0.98		$	0.51
Diluted Earnings Per Common Share	$	0.53		$	0.53		$	1.24		$	1.14		$	0.42		$	0.34		$	0.95		$	0.50

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

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

~~Yum China Holdings, Inc.~~

~~(in US$ millions)~~

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016

Net income - including noncontrolling interests

$
221

$
202

$
514

$
424

Other comprehensive income, net of tax of nil:

Foreign currency gains (losses) arising during the period

76

(28
)

111

(57
)

Comprehensive income - including noncontrolling interests

297

174

625

367

Comprehensive income - noncontrolling interests

12

8

24

9

Comprehensive Income - Yum China Holdings, Inc.

$
285

$
166

$
601

$
358

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

~~CondensedConsolidated and Combined Statements of Cash Flows (Unaudited)~~

Yum China Holdings, Inc.

(in US$ millions)

Year to date ended

8/31/2017

8/31/2016
Cash Flows – Operating Activities

Net income – including noncontrolling interests

$
514

$
424

Depreciation and amortization

265

272

Closures and impairment expenses

20

36

Refranchising gain

(2
)

(8
)

Deferred income taxes

(3
)

(26
)

Equity income from investments in unconsolidated affiliates

(51
)

(44
)

Distributions of income received from unconsolidated affiliates

36

18

Share-based compensation expense

16

9

Changes in accounts receivable

(2
)

(37
)

Changes in inventories

35

(35
)

Changes in prepaid expenses and other current assets

(7
)

34

Changes in accounts payable and other current liabilities

132

149

Changes in income taxes payable

57

54

Other, net

(23
)

(22
)

Net Cash Provided by Operating Activities

987

824

Cash Flows – Investing Activities

Capital spending

(262
)

(268
)

Purchases of short-term investments

(318
)

(53
)

Maturities of short-term investments

312

53

Proceeds from refranchising of restaurants

3

19

Proceeds from disposal of aircraft

—

19

Acquisition of business, net of cash acquired

(25
)

—

Other, net

(4
)

(2
)

Net Cash Used in Investing Activities

(294
)

(232
)

Cash Flows – Financing Activities

Net transfers to Parent

—

(243
)

Payment of capital lease obligation

(2
)

(3
)

Repurchase of shares of common stock

(128
)

—

Proceeds from exercise of stock options

5

—

Other, net

(17
)

(3
)

Net Cash Used in Financing Activities

(142
)

(249
)

Effect of Exchange Rates on Cash and Cash Equivalents

41

(18
)

Net Increase in Cash and Cash Equivalents

592

325

Cash and Cash Equivalents - Beginning of Period

885

425

Cash and Cash Equivalents - End of Period

$
1,477

$
750

Supplemental Cash Flow Data

Cash paid for income tax

161

136

	Quarter Ended				Year to Date Ended
	6/30/2021		6/30/2020		6/30/2021		6/30/2020
Net income - including noncontrolling interests	$	193	$	136	$	436	$	202
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments		58		7		40		(35	)
Comprehensive income - including noncontrolling interests		251		143		476		167
Comprehensive income - noncontrolling interests		15		4		27		6
Comprehensive Income - Yum China Holdings, Inc.	$	236	$	139	$	449	$	161

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

CondensedCo~~nsolidated Balance Sheets~~ Consolidated Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

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

8/31/2017

12/31/2016
ASSETS

(Unaudited)

Current Assets

Cash and cash equivalents

$
1,477

$
885

Short-term investments

91

79

Accounts receivable, net

81

74

Inventories, net

246

268

Prepaid expenses and other current assets

159

120

Total Current Assets

2,054

1,426

Property, plant and equipment, net

1,652

1,647

Goodwill

107

79

Intangible assets, net

104

88

Investments in unconsolidated affiliates

74

71

Other assets

301

254

Deferred income taxes

168

162

Total Assets

$
4,460

$
3,727

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

Current Liabilities

Accounts payable and other current liabilities

$
1,120

$
971

Income taxes payable

92

33

Total Current Liabilities

1,212

1,004

Capital lease obligations

28

28

Other liabilities and deferred credits

274

252

Total Liabilities

1,514

1,284

Redeemable Noncontrolling Interest

5

—

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

Treasury stock

(148
)

(20
)

Additional paid-in capital

2,373

2,352

Retained earnings

533

40

Accumulated other comprehensive income

109

1

Total Equity – Yum China Holdings, Inc.

2,871

2,377

Noncontrolling interests

70

66

Total Equity

2,941

2,443

Total Liabilities, Redeemable Noncontrolling Interest and Equity

$
4,460

$
3,727

	Year to Date Ended
	6/30/2021			6/30/2020
Cash Flows – Operating Activities
Net income – including noncontrolling interests	$	436		$	202
Depreciation and amortization		252			214
Non-cash operating lease cost		204			178
Closures and impairment expenses		11			29
Investment loss (gain)		4			(37	)
Equity income from investments in unconsolidated affiliates		(27	)		(34	)
Distributions of income received from unconsolidated affiliates		21			25
Deferred income taxes		29			6
Share-based compensation expense		25			17
Changes in accounts receivable		(5	)		6
Changes in inventories		22			35
Changes in prepaid expenses and other current assets		8			17
Changes in accounts payable and other current liabilities		16			(16	)
Changes in income taxes payable		1			17
Changes in non-current operating lease liabilities		(204	)		(194	)
Other, net		(20	)		(13	)
Net Cash Provided by Operating Activities		773			452
Cash Flows – Investing Activities
Capital spending		(303	)		(185	)
Purchases of short-term investments		(2,824	)		(1,093	)
Purchases of long-term time deposits		(25	)		(57	)
Maturities of short-term investments		2,801			662
Contribution to unconsolidated affiliates		—			(13	)
Acquisition of business, net of cash acquired		—			(177	)
Investment in equity securities		(261	)		—
Disposal of equity securities		—			54
Other, net		1			48
Net Cash Used in Investing Activities		(611	)		(761	)
Cash Flows – Financing Activities
Repurchase of shares of common stock		—			(8	)
Cash dividends paid on common stock		(101	)		(45	)
Dividends paid to noncontrolling interests		(14	)		(7	)
Other, net		(4	)		1
Net Cash Used in Financing Activities		(119	)		(59	)
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash		8			(6	)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash		51			(374	)
Cash, Cash Equivalents and Restricted Cash - Beginning of Period		1,158			1,055
Cash, Cash Equivalents and Restricted Cash - End of Period	$	1,209		$	681

Supplemental Cash Flow Data
Cash paid for income tax		150			64
Non-cash Investing and Financing Activities
Capital expenditures included in accounts payable and other current liabilities		185			122

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

CondensedConsolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

	6/30/2021			12/31/2020
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,209		$	1,158
Short-term investments		3,139			3,105
Accounts receivable, net		105			99
Inventories, net		380			398
Prepaid expenses and other current assets		207			176
Total Current Assets		5,040			4,936
Property, plant and equipment, net		1,822			1,765
Operating lease right-of-use assets		2,205			2,164
Goodwill		841			832
Intangible assets, net		228			246
Deferred income tax assets		73			98
Investments in unconsolidated affiliates		301			85
Other assets		794			749
Total Assets	$	11,304		$	10,875

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable and other current liabilities	$	2,042		$	1,995
Income taxes payable		74			72
Total Current Liabilities		2,116			2,067
Non-current operating lease liabilities		1,941			1,915
Non-current finance lease liabilities		28			28
Deferred income tax liabilities		232			227
Other liabilities		159			167
Total Liabilities		4,476			4,404

Redeemable Noncontrolling Interest		12			12

Equity
Common stock, $0.01 par value; 1,000 million shares authorized; 441 million shares and 440 million shares issued at June 30, 2021 and December 31, 2020, respectively; 421 million shares and 420 million shares outstanding at June 30, 2021 and December 31, 2020, respectively		4			4
Treasury stock		(728	)		(728	)
Additional paid-in capital		4,679			4,658
Retained earnings		2,415			2,105
Accumulated other comprehensive income		205			167
Total Yum China Holdings, Inc. Stockholders' Equity		6,575			6,206
Noncontrolling interests		241			253
Total Equity		6,816			6,459
Total Liabilities, Redeemable Noncontrolling Interest and Equity	$	11,304		$	10,875

See accompanying Notes to CondensedConsolidated ~~and Combined~~Financial Statements.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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 (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, ~~Little Sheep~~Taco Bell and ~~Taco Bell~~Lavazza concepts (collectively, the ~~“Concepts”~~“concepts”). In connection with the separation of the Company in 2016 from ~~YUM, Yum! Restaurants Asia Pte. Ltd.~~its former parent company, YUM! Brands, Inc. (“YUM”), a ~~wholly-owned indirect subsidiary of YUM, and~~master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of ~~Yum~~the Company, and YUM, through YRI China ~~entered into~~Franchising LLC, a ~~50-year~~subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019. Pursuant to the 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~~we are the exclusive ~~right to use and sub-license the use of intellectual property owned by YUM and its subsidiaries for the development and operation~~licensee 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 ~~excluding Hong Kong, Taiwan and Macau~~ (the “PRC” or “China”)., excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years 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. 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 ~~East Dawning and~~intellectual property of Little Sheep, ~~intellectual property~~Huang Ji Huang, COFFii & JOY and East Dawning, and pay no license fee related to these 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~~provider in China.

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

In April 2020, the Company completed the acquisition of a 93.3% interest in the Huang Ji Huang group (“Huang Ji Huang”), a leading Chinese-style casual dining franchise business, for cash consideration of ~~$36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the~~$185 million. Upon acquisition, ~~the Company held 90% of Daojia’s outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Daojia~~Huang Ji Huang became an operating segment of the Company. The acquisition was considered immaterial. Following the acquisition, we established a Chinese dining business unit comprising our three Chinese dining brands, namely Little Sheep, Huang Ji Huang and East Dawning.

~~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,~~Also in April 2020, the Company partnered with Lavazza Group, the world-renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China.

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

The Company has ~~two~~2 reportable segments: KFC ~~which remains unchanged,~~ and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, ~~Little Sheep,~~ Taco Bell, Lavazza, Daojia and ~~Daojia,~~our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. ~~Segment financial information for prior periods has been recast to align with this change~~Additional details on our reportable operating segments are included in ~~segment reporting. There was no impact to~~Note 13.

The Company’s common stock is listed on the ~~consolidated and combined financial statements~~New York Stock Exchange (“NYSE”) under the symbol “YUMC”. On September 10, 2020, the Company completed a secondary listing of its common stock on the Main Board of the Hong Kong Stock Exchange (“HKEX”) under the stock code “9987”, in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company ~~as a result of this change.~~from the global offering after deducting underwriting fees and the offering expenses amounted to US$2.2 billion.

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 31, 2017, and the~~June 30, 2021, results of our operations and comprehensive income for the quarters and years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016,~~2020, and cash flows for the years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016.~~2020. 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 26, 2021.

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

~~Recently Adopted Accounting Pronouncements~~

~~In July 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-11,~~ ~~Inventory (Topic 330)~~ ~~(ASU 2015-11), which requires inventory within the scope~~The results of ~~the standard to be measured at the lower of cost~~Huang Ji Huang and ~~net realizable value. Net realizable value is defined as the estimated selling prices~~Suzhou KFC’s operations have been included in the ~~ordinary course~~Company’s Condensed Consolidated Financial Statements since the acquisition dates of ~~business, less reasonably predictable costs of completion, disposal~~April 8, 2020 and transportation. ASU 2015-11 is effective for the Company in the first quarter of 2017, with early adoption permitted. We adopted ASU 2015-11 during the quarter ended February 28, 2017, and such adoption did not have a material impact on our financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718)~~ ~~(ASU 2016-09):~~ ~~Improvements to Employee Share-Based Payment Accounting.~~ ASU 2016-09 includes provisions to simplify several aspects of accounting for share-based payment 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 requirement 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 share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 during the quarter ended February 28, 2017 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 adoption did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

~~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.3, 2020, respectively.

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 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~~Recently Adopted Accounting Pronouncements

In December ~~31.~~2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ~~Company operates on~~guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a ~~fiscal monthly calendar, with two months~~step-up in the ~~first quarter, three months~~tax basis of goodwill. We adopted the standard on January 1, 2021 and such adoption did not have a material impact on our financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which clarifies the interaction between equity securities under Topic 321 and investments accounted for under the equity method in Topic 323 and the ~~second~~accounting for certain forward contracts and ~~third quarters~~purchased options accounted for under Topic 815. We adopted the standard on January 1, 2021 and ~~four months~~such adoption did not have a material impact on our financial statements.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs (“ASU 2020-08”), which clarifies that an entity should reevaluate for each reporting period whether a callable debt security is within the scope of certain guidance in ASC 310-20 that was issued in ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. We adopted the ~~fourth quarter.~~standard on January 1, 2021 and such adoption did not have a material impact on our financial statements.

Note 3 – Revenue Recognition

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

Company Sales

Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we either used our dedicated riders or third-party aggregators’ delivery staff in the past. Starting in 2019, we use our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores. 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 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 period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

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

Franchise Fees and Income

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

Revenues from Transactions with ~~YUM~~Franchisees and Unconsolidated Affiliates

~~Prior~~

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

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

For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to 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 and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.

Disaggregation of Revenue

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

	Quarter Ended 6/30/2021
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	1,687	$	533	$	13	$	—	$	2,233	$	—		$	2,233
Franchise fees and income		30		2		6		—		38		—			38
Revenues from transactions with franchisees and unconsolidated affiliates		14		2		23		125		164		—			164
Other revenues		3		1		64		2		70		(54	)		16
Total revenues	$	1,734	$	538	$	106	$	127	$	2,505	$	(54	)	$	2,451

	Quarter Ended 6/30/2020
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	1,260	$	422	$	10	$	—	$	1,692	$	—		$	1,692
Franchise fees and income		32		1		4		—		37		—			37
Revenues from transactions with franchisees and unconsolidated affiliates		15		1		11		130		157		—			157
Other revenues		—		—		25		1		26		(10	)		16
Total revenues	$	1,307	$	424	$	50	$	131	$	1,912	$	(10	)	$	1,902

	Year to Date Ended 6/30/2021
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	3,470	$	1,071	$	23	$	—	$	4,564	$	—		$	4,564
Franchise fees and income		63		4		13		—		80		—			80
Revenues from transactions with franchisees and unconsolidated affiliates		29		3		49		254		335		—			335
Other revenues		4		1		99		4		108		(79	)		29
Total revenues	$	3,566	$	1,079	$	184	$	258	$	5,087	$	(79	)	$	5,008

	Year to Date Ended 6/30/2020
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	2,480	$	744	$	16	$	—	$	3,240	$	—		$	3,240
Franchise fees and income		65		2		5		—		72		—			72
Revenues from transactions with franchisees and unconsolidated affiliates		31		2		16		269		318		—			318
Other revenues		—		—		41		2		43		(17	)		26
Total revenues	$	2,576	$	748	$	78	$	271	$	3,673	$	(17	)	$	3,656

Accounts Receivable

Accounts receivable primarily 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 of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Accounts receivable that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of June 30, 2021 and December 31, 2020, the ending balances of provision for accounts receivable were both $1 million, and amounts of accounts receivable past due were immaterial. Receivables due from unconsolidated affiliates, including accounts receivable and dividend receivables, were $88 million and $50 million as of June 30, 2021 and December 31, 2020, respectively.

Costs to Obtain Contracts

Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to the separation ~~there existed a parent-subsidiary relationship between~~in relation to initial fees or renewal fees we received from franchisees and unconsolidated affiliates, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the ~~Company. We had~~Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets on the ~~following transactions~~Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with ~~YUM for~~ the ~~quarter and year 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~~transfer to the ~~Company and reflected as expenses in the Condensed Combined Financial Statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections~~customer of the ~~historical expenses attributable~~goods or services to which the assets relate. Subsequent to the ~~Company.~~separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The ~~expenses reflected in the Condensed Combined Financial Statements may not be indicative~~Company did 0t incur any impairment losses related to costs to obtain contracts during any 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~~presented. Costs 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 $3obtain contracts were $8 million and $9 million at June 30, 2021 and December 31, 2020, respectively.

Contract Liabilities

Contract liabilities at June 30, 2021 and December 31, 2020 were ~~allocated~~as follows:

Contract liabilities	6/30/2021		12/31/2020
- Deferred revenue related to prepaid stored-value products	$	121	$	117
- Deferred revenue related to upfront franchise fees		41		38
- Deferred revenue related to customer loyalty programs		24		23
- Deferred revenue related to privilege membership programs		18		27
- Others		2		1
Total	$	206	$	206

Contract liabilities primarily consist of deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise fees. Deferred revenue related to prepaid stored-value products, privilege membership programs and customer loyalty programs is included in Accounts payable and other current liabilities in the ~~Company during~~Condensed Consolidated Balance Sheets. Deferred revenue related to upfront franchise fees that we expect to recognize as revenue in the ~~quarter~~next 12 months is included in Accounts payable and ~~year~~other current liabilities, and the remaining balance is included in Other liabilities in the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $68 million and $48 million for the quarters ended June 30, 2021 and 2020, respectively, and $101 million and $63 million for the years to date ended ~~August 31, 2016,~~June 30, 2021 and 2020, respectively ~~and have been included~~. Changes in ~~general and administrative (“G&A”) expenses~~contract liability balances were not materially impacted by business acquisition, change in ~~the Condensed Combined Statements~~estimate of ~~Income. All~~transaction price or any other factors during any 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.

~~License Fee~~

The Condensed Combined Statements of Income include license fees that were historically paid to YUM comprised of initial fees and continuing fees equal to 3% of our Company and franchise 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:periods presented.

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

~~Cash Management and Treasury~~

The Company ~~funds its operations through cash generated from~~has elected, as a practical expedient, not to disclose the ~~operation~~value of ~~its Company-owned stores,~~remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for the franchise ~~operations~~right and dividend payments from unconsolidated affiliates. Prior to October 31, 2016, excess cash was historically repatriated to YUM through intercompany loans or dividends. Transfers of cash both to and from YUM are included within Parent Company Investment in the Condensed Combined Balance Sheets. YUM has issued debt for general corporate purposes but in no case has any such debt been guaranteed or assumed by the Company or otherwise secured by the assetsother related services. The remaining duration of the ~~Company. As YUM’s debt~~performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and ~~related interest is not directly attributable~~revenues from advertising services and other services provided to ~~the Company, no such amounts have been allocated to the Condensed Combined Financial Statements.~~franchisees and unconsolidated affiliates based on a 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				Year to Date Ended
	6/30/2021		6/30/2020		6/30/2021		6/30/2020
Net Income – Yum China Holdings, Inc.	$	181	$	132	$	411	$	194
Weighted-average common shares outstanding (for basic calculation)^(a)		421		377		420		376
Effect of dilutive share-based awards^(a)		6		6		6		7
Effect of dilutive warrants^(b)		8		5		8		4
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)^(a)		435		388		434		387
Basic Earnings Per Common Share	$	0.43	$	0.35	$	0.98	$	0.51
Diluted Earnings Per Common Share	$	0.42	$	0.34	$	0.95	$	0.50
Share-based awards excluded from the diluted EPS computation^(c)		2		4		2		4

(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 incremental shares arising from outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect. In September 2020, 41,910,700 common shares were issued as a result of the Company’s global offering and secondary listing on the HKEX and they were included in the calculated weighted-average common shares outstanding.

(b)

Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors ~~two~~2 tranches of warrants on January 9, 2017, with each tranche initially providing the right to purchase 8,200,405 shares of Yum China common stock, at an initial exercise price of $31.40 and $39.25 per share, ~~respectively.~~respectively, subject to customary anti-dilution adjustments. The warrants may be exercised at any time through October 31, 2021. The incremental shares arising from outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the ~~period~~periods exceeds the applicable exercise price of the warrants.

(c)

These outstanding ~~employee stock options,~~ stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and ~~warrants~~performance stock units (“PSUs”) were ~~not included in~~excluded from the computation of diluted EPS because to do so would have been antidilutive for the quarters presented, or because certain PSUs are contingently issuable based on the achievement of performance and ~~years to date presented.~~market conditions, which have not been met as of June 30, 2021 and 2020.

Note 5 – Equity

Changes in Equity and Redeemable Noncontrolling Interest (in millions)

	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			Income (Loss)			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 March 31, 2021																										440	$	4	$	4,664	$	2,285		$	150			(20	)	$	(728	)	$	226		$	6,601		$	12
Net Income								493										21			514											181												12			193			—
Foreign currency translation gains										108								3			111
Foreign currency translation adjustments																																			55									3			58			—
Comprehensive income																					625			—																							251			—
Dividends declared																		(22	)		(22	)
Acquisition of Daojia																		2			2			5
Repurchase of shares of common stock												(3,355,696.00	)		(128	)					(128	)
Cash dividends declared ($0.12 per common share)																																(51	)														(51	)
Exercise and vesting of share-based awards		4,851,190.00		—		5															5					1		—		—																	—
Share-based compensation						16															16									15																	15
Balance at August 31, 2017		388,196,025.42	$	4	$	2,373	$	533	$	109		(4,140,382.42	)	$	(148	)	$	70		$	2,941		$	5
Balance at June 30, 2021																										441	$	4	$	4,679	$	2,415		$	205			(20	)	$	(728	)	$	241		$	6,816		$	12

Balance at March 31, 2020																										396	$	4	$	2,434	$	1,433		$	(89	)		(20	)	$	(728	)	$	100		$	3,154		$	—
Net Income																																132												4		136				—
Foreign currency translation adjustments																																			7									—			7			—
Comprehensive income																																														143				—
Acquisition of business																																															—			12
Dividends declared																																												(32	)		(32	)
Exercise and vesting of share-based awards																										1		—		—																	—
Share-based compensation																													10																	10
Balance at June 30, 2020																										397	$	4	$	2,444	$	1,565		$	(82	)		(20	)	$	(728	)	$	72		$	3,275		$	12

	Yum China Holdings, Inc.
											Accumulated
	Common				Additional						Other															Redeemable
	Stock				Paid-in			Retained			Comprehensive			Treasury Stock						Noncontrolling			Total			Noncontrolling
	Shares		Amount		Capital			Earnings			Income (Loss)			Shares*			Amount			Interests			Equity			Interest
Balance at December 31, 2020		440	$	4	$	4,658		$	2,105		$	167			(20	)	$	(728	)	$	253		$	6,459		$	12
Net Income									411												25			436			—
Foreign currency translation adjustments												38									2			40			—
Comprehensive income									��															476			—
Cash dividends declared ($0.24 per common share)									(101	)														(101	)
Dividends declared																					(39	)		(39	)
Exercise and vesting of share-based awards		1		—		(4	)																	(4	)
Share-based compensation						25																		25
Balance at June 30, 2021		441	$	4	$	4,679		$	2,415		$	205			(20	)	$	(728	)	$	241		$	6,816		$	12

Balance at December 31, 2019		395	$	4	$	2,427		$	1,416		$	(49	)		(19	)	$	(721	)	$	98		$	3,175		$	—
Net Income									194												8			202			—
Foreign currency translation adjustments												(33	)								(2	)		(35	)		—
Comprehensive income																								167			—
Acquisition of business																								—			12
Cash dividends declared ($0.12 per common share)									(45	)														(45	)
Dividends declared																					(32	)		(32	)
Repurchase of shares of common stock															—			(7	)					(7	)
Exercise and vesting of share-based awards		2		—		—																		—
Share-based compensation						17																		17
Balance at June 30, 2020		397	$	4	$	2,444		$	1,565		$	(82	)		(20	)	$	(728	)	$	72		$	3,275		$	12

*: Shares may not add due to rounding.

Share Repurchase Program

~~On February 7, 2017, we announced that our~~Our Board of Directors has authorized ~~a $300 million~~an aggregate of $1.4 billion for our share repurchase program. ~~Under this authorization, we repurchased~~The Company suspended the share repurchase starting in the second quarter of 2020. NaN shares of Yum China common stock ~~during~~were repurchased for the year to date ended ~~August 31, 2017 as indicated below. All amounts exclude applicable transaction fees.~~June 30, 2021 and 0.2 million shares at a total cost of $7 million were repurchased for the year to date ended June 30, 2020. As of June 30, 2021, $692 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

Impact of COVID-19 Pandemic

Starting in the first quarter of 2020, the COVID-19 pandemic significantly impacted the Company’s operations, resulting in a significant decline in Operating profit mainly driven by same-store sales declines and ~~Cash Flows~~temporary store closures. While the lingering effects of the pandemic continue to impact our operations, the Company reported substantial year-over-year growth in the first half of 2021, as prior year periods were significantly impacted by COVID-19. Operating profit was $233 million and $128 million for the quarters ended June 30, 2021 and 2020, respectively, and $575 million and $225 million for the years to date ended June 30, 2021 and 2020, respectively.

~~Refranchising Gain, net~~

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

In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange listed company, for a total consideration of approximately $261 million. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier.

The ~~Refranchising gain, net by reportable segment and All Other Segments is presented below. We do not allocate such gains and losses to~~Company accounted for the equity securities at fair value based on their closing market price on each measurement date, with subsequent fair value changes recorded in our ~~segments for performance reporting purposes.~~Condensed Consolidated Statements of Income.

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

In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being Sunner’s second largest shareholder, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment and reclassified this investment from Other assets to Investment in unconsolidated affiliates in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. As a result, no equity income from Sunner was recorded for the quarter ended June 30, 2021. The unrealized loss of $5 million and $22 million was included in Investment gain or loss in our Condensed Consolidated Statements of Income for the quarter and year to date ended June 30, 2021, respectively, representing changes in fair value before the equity method of accounting was applied.

Since Sunner became the Company’s unconsolidated affiliate in May 2021, the Company purchased inventories of $73 million from Sunner during the quarter ended June 30, 2021, and the Company’s accounts payable and other current liabilities due to Sunner were $55 million as of June 30, 2021.

As of June 30, 2021, the Company’s investment in Sunner was stated at the carrying amount of $243 million, with the market value of $230 million based on its quoted closing price.

Meituan Dianping (“Meituan”) Investment

In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan for proceeds of approximately $54 million, and realized a $17 million pre-tax gain which was recognized during the holding period.

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

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

	Quarter Ended				Year to Date Ended
	6/30/2021		6/30/2020		6/30/2021		6/30/2020
Unrealized gains recorded on equity securities still held as of the end of the period	$	13	$	42	$	14	$	38
Gains (losses) recorded on equity securities sold during the period		—		3		—		(1	)
Gains recorded on equity securities	$	13	$	45	$	14	$	37

Store ~~Closure and~~ Impairment ~~Activity~~Charges

~~Store closure income and Store~~

We recorded store impairment charges ~~by reportable segment~~of $16 million and ~~All Other Segments are presented below:~~$19 million for the quarter and year to date ended June 30, 2021, respectively, and $24 million and $36 million for the quarter and year to date ended June 30, 2020, respectively. The decrease in store impairment charges for the quarter and year to date ended June 30, 2021 is due to higher impairment recorded in the first half of 2020 considering the adverse economic effects of the COVID-19 pandemic. See Note 11 for additional information.

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
)

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
)

$
—

~~(a)~~

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,~~Expenses (Income), net

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Equity income from investments in unconsolidated affiliates

$
21

$
18

$
51

$
44

Foreign exchange gain and other

1

(1
)

(1
)

—

Other income, net

$
22

$
17

$
50

$
44

	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020
Equity income from investments in unconsolidated affiliates	$	(10	)	$	(14	)	$	(27	)	$	(34	)
Amortization of reacquired franchise rights^(a)		10			3			19			6
Derecognition of indemnification assets related to Daojia^(b)		—			3			—			3
Foreign exchange impact and other		1			(2	)		3			(1	)
Other expenses (income), net	$	1		$	(10	)	$	(5	)	$	(26	)

(a)

Increase in amortization of reacquired franchise rights resulted from the acquisition of Suzhou KFC as disclosed in Note 1, with $61 million of the purchase price allocated to intangible assets related to reacquired franchise right, which is being amortized over the remaining franchise contract period.

(b)

In the quarter ended June 30, 2020, the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right pursuant to the purchase agreement expired. The expense was included in Other expenses (income), net, but 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			6/30/2021			12/31/2020
Accounts receivable, gross	$	83		$	76		$	106		$	100
Allowance for doubtful accounts		(2	)		(2	)		(1	)		(1	)
Accounts receivable, net	$	81		$	74		$	105		$	99

Prepaid Expenses and Other Current Assets	8/31/2017		12/31/2016		6/30/2021		12/31/2020
Prepaid rent	$	42	$	39
Other prepaid expenses and current assets^(a)		117		81
Receivables from payment processors and aggregators					$	32	$	47
Dividends receivable from unconsolidated affiliates						44		10
Other prepaid expenses and current assets						131		119
Prepaid expenses and other current assets	$	159	$	120	$	207	$	176

Property, Plant and Equipment	6/30/2021			12/31/2020
Buildings and improvements	$	2,466		$	2,367
Finance leases, primarily buildings		37			36
Machinery and equipment, and construction in progress		1,568			1,490
Property, plant and equipment, gross		4,071			3,893
Accumulated depreciation		(2,249	)		(2,128	)
Property, plant and equipment, net	$	1,822		$	1,765

Other Assets	6/30/2021		12/31/2020
VAT assets	$	272	$	270
Land use right		139		140
Investment in equity securities		173		160
Long-term deposits		88		83
Investment in long-term time deposits^(a)		87		61
Costs to obtain contracts		8		9
Others		27		26
Other Assets	$	794	$	749

Accounts Payable and Other Current Liabilities	6/30/2021		12/31/2020
Accounts payable	$	712	$	708
Operating lease liabilities		445		448
Accrued compensation and benefits		234		238
Contract liabilities		172		175
Accrued capital expenditures		185		203
Accrued marketing expenses		120		73
Other current liabilities		174		150
Accounts payable and other current liabilities	$	2,042	$	1,995

Other Liabilities	6/30/2021		12/31/2020
Accrued income tax payable	$	53	$	66
Contract liabilities		34		31
Other non-current liabilities		72		70
Other liabilities	$	159	$	167

(a)

~~Includes receivables~~As of ~~$17 million and $16 million due from payment processors or aggregators as of August 31, 2017~~June 30, 2021 and December 31, ~~2016, respectively.~~2020, the Company had $87 million and $61 million invested in long-term time deposits, bearing a fixed interest rate with original maturity of three years. The asset is restricted for use in order to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements.

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

Accounts Payable and Other Current Liabilities

8/31/2017

12/31/2016
Accounts payable

$
575

480

Accrued capital expenditures

92

132

Accrued compensation and benefits

204

191

Accrued taxes, other than income taxes

17

14

Dividends payable

5

—

Other current liabilities

227

154

Accounts payable and other current liabilities

$
1,120

$
971

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

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, 2020
Goodwill, gross	$	461		$	70	$	9	$	382		$	1,223		$	748	$	20	$	455
Accumulated impairment losses^(a)		(382	)		—		—		(382	)		(391	)		—		—		(391	)
Goodwill, net		79			70		9		—			832			748		20		64
Goodwill acquired and allocated		23			5		9		9
Effect of currency translation adjustment		5			4		1		—
Balance as of August 31, 2017
Effect of currency translation adjustments												9			8		—		1
Balance as of June 30, 2021
Goodwill, gross		489			79		19		391			1,232			756		20		456
Accumulated impairment losses^(a)		(382	)		—		—		(382	)		(391	)		—		—		(391	)
Goodwill, net	$	107		$	79	$	19	$	9		$	841		$	756	$	20	$	65

(a)	Accumulated impairment losses represent goodwill impairment attributable to the reporting units of Little Sheep ~~goodwill impairment.~~and Daojia.

Intangible assets, net as of ~~August 31, 2017~~June 30, 2021 and December 31, ~~2016~~2020 are as follows:

	8/31/2017							12/31/2016								6/30/2021										12/31/2020
	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^(b)			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses^(b)			Net Carrying Amount
Definite-lived intangible assets
Finite-lived intangible assets
Reacquired franchise rights	$	98	$	(81	)	$	17	$	93	$	(71	)	$	22		$	225	$	(163	)	$	—		$	62	$	223	$	(144	)	$	—		$	79
Huang Ji Huang franchise related assets																	23		(2	)		—			21		23		(1	)		—			22
Daojia platform		17		—			17		—		—			—			16		(4	)		(12	)		—		16		(4	)		(12	)		—
Customer-related assets		12		(5	)		7		7		(4	)		3			12		(9	)		(2	)		1		12		(8	)		(2	)		2
Other		19		(10	)		9		19		(9	)		10
Others																	9		(4	)		—			5		9		(4	)		—			5
	$	146	$	(96	)	$	50	$	119	$	(84	)	$	35		$	285	$	(182	)	$	(14	)	$	89	$	283	$	(161	)	$	(14	)	$	108
Indefinite-lived intangible assets
Little Sheep trademark	$	54	$	—		$	54	$	53	$	—		$	53		$	56	$	—		$	—		$	56	$	56	$	—		$	—		$	56
Huang Ji Huang trademark																	83		—			—			83		82		—			—			82
																$	139	$	—		$	—		$	139	$	138	$	—		$	—		$	138

Total intangible assets	$	200	$	(96	)	$	104	$	172	$	(84	)	$	88	��	$	424	$	(182	)	$	(14	)	$	228	$	421	$	(161	)	$	(14	)	$	246

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

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

Amortization expense of ~~definite-lived~~finite-lived intangible assets was $4$11 million and $3 million for the quarters ended ~~August 31, 2017~~June 30, 2021 and ~~2016,~~2020, respectively, and $9$21 million and $8$6 million for the years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016,~~2020, respectively. As of ~~August 31, 2017,~~June 30, 2021, expected amortization expense for the unamortized ~~definite-lived~~finite-lived intangible assets is approximately $5$21 million for the remainder of ~~2017, $16~~2021, $41 million in ~~2018, $9 million in 2019,~~2022, $4 million in ~~2020 and $4~~2023, $2 million in ~~2021.~~2024 and $2 million in 2025.

Note 10 – Leases

As of June 30, 2021, we operated over 8,500 Company-owned restaurants, leasing the underlying land and/or building. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Condensed Consolidated Statements of Income.

Supplemental Balance Sheet
	6/30/2021		12/31/2020		Account Classification
Assets
Operating lease right-of-use assets	$	2,205	$	2,164	Operating lease right-of-use assets
Finance lease right-of-use assets		20		20	Property, plant and equipment, net
Total leased assets	$	2,225	$	2,184

Liabilities
Current
Operating lease liabilities	$	445	$	448	Accounts payable and other current liabilities
Finance lease liabilities		2		2	Accounts payable and other current liabilities
Non-current
Operating lease liabilities		1,941		1,915	Non-current operating lease liabilities
Finance lease liabilities		28		28	Non-current finance lease liabilities
Total lease liabilities	$	2,416	$	2,393

Summary of Lease Cost	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020			Account Classification

Operating lease cost	$	138		$	120		$	274		$	241		Occupancy and other operating expenses, G&A or Franchise expenses
Finance lease cost
Amortization of leased assets		—			—			1			1		Occupancy and other operating expenses
Interest on lease liabilities		1			1			1			1		Interest expense, net
Variable lease cost ^(a)		87			55			182			104		Occupancy and other operating expenses or Franchise expenses
Short-term lease cost		3			2			5			5		Occupancy and other operating expenses or G&A
Sub-lease income		(6	)		(6	)		(14	)		(12	)	Franchise fees and income or Other revenues
Total lease cost	$	223		$	172		$	449		$	340

(a)

The Company was granted $2 million and $11 million in lease concessions from landlords related to the effects of the COVID-19 pandemic during the quarters ended June 30, 2021 and 2020, respectively, and $7 million and $25 million during the years to date ended June 30, 2021 and 2020, respectively. The lease concessions were primarily in the form of rent reduction over the period of time when the Company’s restaurant business was adversely impacted. The Company applied the interpretive guidance in a FASB staff Q&A document issued in April 2020 and elected: (1) not to evaluate whether a concession received in response to the COVID-19 pandemic is a lease modification and (2) to assume such concession was contemplated as part of the existing lease contract with no contract modification. Such concession was recognized as negative variable lease cost in the period the concession was granted.

Supplemental Cash Flow Information	Year to Date Ended
	6/30/2021		6/30/2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	286	$	233
Operating cash flows from finance leases		1		1
Financing cash flows from finance leases		1		1
Right-of-use assets obtained in exchange for new lease liabilities^(b):
Operating leases	$	215	$	93
Finance leases		—		(1	)

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


Lease Term and Discount Rate	6/30/2021			6/30/2020
Weighted-average remaining lease term (years)
Operating leases		7.0			6.9
Finance leases		10.7			11.1

Weighted-average discount rate
Operating leases		5.8	%		6.0	%
Finance leases		5.7	%		5.8	%

Summary of Future Lease Payments and Lease Liabilities

Maturities of lease liabilities as of June 30, 2021 were as follows:

	Amount of Operating Leases		Amount of Finance Leases		Total
Remainder of 2021	$	306	$	2	$	308
2022		509		4		513
2023		447		4		451
2024		379		4		383
2025		316		4		320
Thereafter		956		22		978
Total undiscounted lease payment		2,913		40		2,953
Less: imputed interest^(c)		527		10		537
Present value of lease liabilities	$	2,386	$	30	$	2,416

(c)

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

As of June 30, 2021, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $166 million. These leases will commence between the third quarter of 2021 and 2023 with lease terms of 1 year to 20 years.

Note 1011 – Fair Value Measurementsand Disclosures

~~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, long-term time deposits, accounts receivable, ~~and~~ accounts payable ~~approximated~~and lease liabilities, and the carrying values of these assets and liabilities approximate their fair ~~values~~value in general.

The Company accounts for its investment in equity securities at fair value, which is determined based on the respective closing market price for the securities 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, long-term time deposits 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. NaN transfers among the ~~short-term nature of these instruments.~~levels within the fair value hierarchy occurred during the quarters and years to date ended June 30, 2021 and 2020.

			Fair Value Measurement or Disclosure at June 30, 2021
	Balance at June 30, 2021		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	551			$	551
Fixed income debt securities^(a)		170				170
Total cash equivalents		721		—		721		—
Short-term investments:
Time deposits		2,024				2,024
Fixed income debt securities^(a)		830				830
Structured deposits^(b)		234				234
Variable return investments		51		51
Total short-term investments		3,139		51		3,088		—
Other assets:
Investment in equity securities		173		173
Long-term time deposits		87				87
Total	$	4,120	$	224	$	3,896	$	—

			Fair Value Measurement or Disclosure at December 31, 2020
	Balance at December 31, 2020		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	601			$	601
Fixed income debt securities^(a)		207		207
Total cash equivalents		808		207		601		—
Short-term investments:
Time deposits		2,165				2,165
Fixed income debt securities^(a)		784		104		680
Variable return investments		156		156
Total short-term investments		3,105		260		2,845		—
Other assets:
Investment in equity securities		160		160
Long-term time deposits		61				61
Total	$	4,134	$	627	$	3,507	$	—

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

(b)

Represented certain structured deposits invested in 2021. These investments are principal-protected and provide returns in the form of both fixed and variable interests. Such variable interest rates indexed to gold prices or foreign exchange rates are considered embedded derivatives and bifurcated from host contracts, and measured at fair value on a recurring basis. The fair value change of the embedded derivatives is recorded in Investment gain or loss in our Condensed Consolidated Statements of Income. The remaining host contracts to receive guaranteed principal and fixed interest are measured at amortized cost, with accretion of interest recorded in Interest income in our Condensed Consolidated Statements of Income. As of June 30, 2021, the fair value of embedded derivatives included in Short-term investments was immaterial.

Non-Recurring Fair Value Measurements

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

~~During~~

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

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

The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters and years to date ended June 30, 2021 and 2020. These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-end dates.

	Quarter Ended				Year to Date Ended
	6/30/2021		6/30/2020		6/30/2021		6/30/2020		Account Classification
Restaurant-level impairment^(a)	$	13	$	21	$	13	$	30	Closure and impairment expenses, net
Total	$	13	$	21	$	13	$	30

(a)

Restaurant-level impairment charges are recorded in Closures and impairment expenses, net and resulted primarily from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. We performed an additional impairment evaluation in the first quarter of 2020, considering the adverse effects of the COVID-19 pandemic as an impairment indicator. After considering the impairment charges recorded during the corresponding periods, the fair value of assets as of the relevant measurement date was both $50 million for the quarter and year to date ended June 30, 2021,and $49 million and $76 million for the quarter and year to date ended June 30, 2020, respectively.

Note 12 – Income Taxes

	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020
Income tax provision	$	64		$	45		$	166		$	77
Effective tax rate		24.8	%		25.2	%		27.6	%		27.8	%

The lower effective tax rate for the quarter and year to date ended ~~August 31,~~June 30, 2021 was primarily due to lower residual U.S. tax, offset by less tax benefit from equity income from investments in unconsolidated affiliates, and higher estimated repatriation of earnings outside of China subject to foreign withholding tax.

In December 2017, ~~we recorded restaurant-level impairment (Level 3)~~the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which included a broad range of ~~$2 million~~tax reforms. 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 ~~$20 million, respectively. During~~therefore included it in estimating the ~~quarter~~annual effective tax rate.

We are subject to reviews, examinations and ~~year~~audits by Chinese tax authorities, the Internal Revenue Service and other tax authorities with respect to ~~date ended August 31,~~income and non-income based taxes. Since 2016, we ~~recorded restaurant-level impairment (Level 3) of $2 million~~have been under a national audit on transfer pricing by the Chinese State Taxation Administration (“STA”) in China regarding our related party transactions for the period from 2006 to 2015. The information and ~~$35 million, respectively.~~views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ~~remaining net book value~~ultimate assessment and decision 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 likelihoodSTA will depend upon further review of the ~~payment obligation.~~information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore, it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.

Note ~~11 – Income Taxes~~

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Income tax provision

$
102

$
87

$
213

$
165

Effective tax rate

31.7
%

29.8
%

29.3
%

28.0
%

Our 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 ended August 31, 2017 were higher than the prior year primarily due to higher costs of repatriating current year earnings into the U.S.13 –Segment Reporting

~~Note 12 – Reportable Operating Segments~~

During the second quarter of 2017, we integrated the businesses of Pizza Hut Casual Dining and Pizza Hut Home Service and began reporting them together as the Pizza Hut reportable segment. As a result, the Company has twoWe have 2 reportable segments: KFC ~~which remains unchanged,~~ and Pizza Hut. Our remaining non-reportable operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, ~~Little Sheep,~~ Taco Bell, Lavazza, Daojia and ~~Daojia,~~our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in ~~the~~ aggregate. ~~Segment financial information for prior periods has been recast to align with this change in segment reporting. See Note 1.~~

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 6/30/2021
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	1,734	$	538	$	52	$	127	$	2,451	$	—		$	2,451
Inter-segment revenue		—		—		54		—		54		(54	)		—
Total	$	1,734	$	538	$	106	$	127	$	2,505	$	(54	)	$	2,451

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 6/30/2020
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	1,307	$	424	$	40	$	131	$	1,902	$	—		$	1,902
Inter-segment revenue		—		—		10		—		10		(10	)		—
Total	$	1,307	$	424	$	50	$	131	$	1,912	$	(10	)	$	1,902

	Year to Date Ended 6/30/2021
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	3,566	$	1,079	$	105	$	258	$	5,008	$	—		$	5,008
Inter-segment revenue		—		—		79		—		79		(79	)		—
Total	$	3,566	$	1,079	$	184	$	258	$	5,087	$	(79	)	$	5,008

Identifiable Assets

8/31/2017

12/31/2016

KFC^(c)

$
1,469

$
1,411

Pizza Hut

678

628

All Other Segments

141

160

Corporate^(d)

2,172

1,528

$
4,460

$
3,727

	Year to Date Ended 6/30/2020
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated^(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	2,576	$	748	$	61	$	271	$	3,656	$	—		$	3,656
Inter-segment revenue		—		—		17		—		17		(17	)		—
Total	$	2,576	$	748	$	78	$	271	$	3,673	$	(17	)	$	3,656

	Quarter Ended						Year to Date Ended
Operating Profit (Loss)	6/30/2021			6/30/2020			6/30/2021			6/30/2020
KFC^(b)	$	240		$	159		$	567		$	312
Pizza Hut		39			15			99			(13	)
All Other Segments		(6	)		(2	)		(9	)		(12	)
Unallocated revenues from transactions with franchisees and unconsolidated affiliates^(c)		125			130			254			269
Unallocated Other revenues		2			1			4			2
Unallocated expenses from transactions with franchisees and unconsolidated affiliates^(c)		(123	)		(135	)		(252	)		(270	)
Unallocated Other operating costs and expenses		(2	)		(1	)		(5	)		(2	)
Unallocated and corporate G&A expenses		(40	)		(37	)		(81	)		(58	)
Unallocated Other expenses		(2	)		(2	)		(2	)		(3	)
Operating Profit	$	233		$	128		$	575		$	225
Interest income, net^(a)		16			8			31			17
Investment gain (loss)^(a)		8			45			(4	)		37
Income Before Income Taxes	$	257		$	181		$	602		$	279

	Long-Lived Assets^(e)				Quarter Ended				Year to Date Ended
	8/31/2017		12/31/2016
Impairment Charges					6/30/2021		6/30/2020		6/30/2021		6/30/2020
KFC(d)	$	1,119	$	1,099	$	9	$	12	$	11	$	16
Pizza Hut(d)		593		553		6		10		7		17
All Other Segments(d)		113		129		1		2		1		3
Corporate		38		33
	$	1,863	$	1,814	$	16	$	24	$	19	$	36

	Total Assets
	6/30/2021		12/31/2020
KFC^(e)	$	4,188	$	4,084
Pizza Hut		906		906
All Other Segments		377		378
Corporate and Unallocated^(f)		5,833		5,507
	$	11,304	$	10,875

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

(b)

Includes equity income from investments in unconsolidated affiliates of ~~$21~~$13 million and ~~$18~~$14 million for the quarters ended ~~August 31, 2017~~June 30, 2021 and ~~2016,~~2020, respectively, and ~~$51~~$32 million and ~~$44~~$34 million for the years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016,~~2020, respectively.

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

(c)

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

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

(e)	Includes investments in ~~the~~ unconsolidated ~~affiliates totaling $74 million and $71 million for the quarter ended August 31, 2017 and for the year ended December 31, 2016, respectively.~~affiliates.

~~(d)~~(f)

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

YUM concluded, and we concurred, that it is more likely than not that YUM will not be subject to this tax with respect to the ~~distribution.~~pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM in connection with the separation (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 a tax could be significant.

Any tax liability arising from the application of Bulletin 7 to the distribution is expected to be settled in accordance with the tax matters agreement between the Company and YUM. Pursuant to the tax matters agreement, to the extent any Chinese indirect transfer tax pursuant to Bulletin 7 is imposed, such tax and related losses will be allocated between YUM and the Company in proportion to their respective share of the combined market capitalization of YUM and the Company during the ~~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 for Franchisees and Unconsolidated Affiliates

From time to time, we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of ~~August 31, 2017, we have provided guarantees of approximately $2 million on behalf of franchisees and no~~June 30, 2021, 0 guarantees were outstanding for unconsolidated ~~affiliates. The maximum guarantee exposure is approximately $2 million.~~affiliates and franchisees.

Legal Proceedings

~~From time to time, the~~

The Company is subject to various lawsuits covering a variety of ~~allegations.~~allegations from time to time. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Condensed Consolidated ~~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,~~July 28, 2021, 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~~China's common stock, payable as of the close of business on ~~December 21, 2017~~September 16, 2021, 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.~~August 25, 2021. Total estimated cash dividend payable is approximately $51 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 ongoing transfer pricing audit, the retail tax structure reform, ~~and the potential effects thereof,~~impacts of COVID-19, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases ~~our ability to pay~~and dividends, and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.

Introduction

Yum China Holdings, Inc. is the largest restaurant company in China in terms of system sales, with over ~~7,700~~11,000 restaurants covering over 1,500 cities primarily in China as of ~~August 31, 2017.~~June 30, 2021. Our growing restaurant base consists of ~~China’s leading restaurant brands~~our flagship KFC and ~~concepts, primarily KFC,~~ Pizza Hut brands, as well as emerging brands such as Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, ~~Little Sheep~~Taco Bell and ~~Taco Bell. Following our separation from YUM, we~~Lavazza. We have ~~had~~ the exclusive right to operate and ~~sub-license~~sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Macau and Taiwan, and ~~Macau (the “PRC” or “China”), and we~~ own the intellectual property of the Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning ~~and Little Sheep marks~~concepts outright. We ~~were~~also established a joint venture with Lavazza Group, the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee shop concept in China. KFC was the first major global restaurant brand ~~when we entered~~to enter China ~~in 1987 and~~as early as 1987. With more than 30 years of operations, we have developed ~~deep~~extensive operating experience in the China market. We have since grown to become ~~one of China’s~~the largest restaurant ~~developers with locations~~company in ~~over 1,100 cities as~~China in terms of ~~August 31, 2017~~system sales. We believe that there are significant opportunities to expand within China, and ~~opening an average of approximately two~~we intend to focus our efforts on increasing our geographic footprint in both existing and new ~~restaurants per day over the past five years.~~cities.

KFC is the leading ~~Quick-Service Restaurant~~and the largest quick-service restaurant (“QSR”) brand in China in terms of system sales. As of June 30, 2021, KFC operated over 7,600 restaurants in over 1,500 cities across China. During the ~~PRC~~quarter ended September 30, 2020, the Company completed the acquisition of an additional 25% interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”), increasing our equity interest to 72% and allowing the Company to consolidate the entity.

Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of system sales and number of restaurants. As of August 31, 2017, KFC operated over 5,300 restaurants in over 1,100 cities across China. Measured by number of restaurants, we believe KFC has a 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 quarter of 2017, we integrated the business of Pizza Hut Casual Dining and Pizza Hut Home Service as Pizza Hut. After the integration, Pizza Hut continues to be the leading Casual Dining Restaurant (“CDR”) brand in China as measured by system sales and number of restaurants. We believe Pizza Hut has a five-to-one lead in terms of number of restaurants over its nearest Western CDR competitor in China. As of August 31, 2017,June 30, 2021, Pizza Hut operated over ~~2,100~~2,400 restaurants in over ~~400~~500 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~~Company’s common stock is listed on ~~a standalone basis and are derived from YUM’s consolidated financial statements and underlying accounting records. Transactions between~~the NYSE under the symbol “YUMC”. On September 10, 2020, the Company ~~and YUM that were not cash settled were considered to be effectively settled at~~completed its secondary listing on the ~~time~~Main Board of the ~~transactions were recorded. The Condensed Combined Financial Statements include all revenues, costs, assets and liabilities directly attributable to~~HKEX under the stock code “9987”, in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company ~~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~~from the global offering after deducting underwriting fees and the offering expenses amounted 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.US$2.2 billion.

Overview

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

•

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

•

System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at an average rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.

•

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

•

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

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

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

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings Per Common Share before Special Items, Effective tax rate before Special Items and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items, including store impairment charges. Special Items consist of reversal of loss associated with sale of aircraft, income from the reversal of contingent consideration previously recorded for a business combination and impact of the redemption of the Little Sheep noncontrolling interest which are described in (a), (b), (c) and (d) in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that we do 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 and ~~years~~Years to ~~date ended August 31, 2017~~Date Ended June 30, 2021 and ~~August 31, 2016~~2020

Results of Operations

Summary

The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, ~~Little Sheep,~~ Taco Bell, Lavazza, Daojia 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 has been recast to align with this change~~Additional details on our reportable operating segments are included in ~~segment reporting.~~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

+14

+13

+50

+37

Pizza Hut

—

+16

+11

+151

+128

All Other Segments

(37

)

All Other Segments^(b)

+24

(54

)

(41

)

Total

+10

+11

+14

+11

+83

+65

Year to date highlights:

% Change

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

(Reported)

Operating Profit

(Ex F/X)

KFC

+19

+13

+81

+67

Pizza Hut

+33

+23

All Other Segments^(b)

+14

+37

+42

Total

+24

+11

+156

+134

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 not meaningful.

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

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

As of ~~August 31, 2017,~~June 30, 2021, the Company operated over ~~7,700~~11,000 units, predominately KFC and Pizza Hut restaurants, which are the leading ~~quick service~~ and ~~casual dining restaurant~~largest QSR and CDR brands, respectively, in mainland ~~China. Given~~China in terms of system sales. We believe that there are significant opportunities to expand within China, and we intend to focus our ~~strong competitive position,~~efforts on increasing our geographic footprint in both existing and new cities.

Second quarter operations improved from a ~~growing economy~~year ago. System sales and ~~a population~~Operating profit grew year over year. System sales growth was led by accelerated new store openings and same-store sales growth. Operating profit growth was further driven by lower commodity prices, and productivity improvements. Traffic at our transportation and tourist locations improved from the first quarter but remained well below 2019 levels. The Company reported substantial year-over-year growth in the first half of ~~approximately 1.4 billion in mainland China,~~2021, as the ~~Company has rapidly added KFC and Pizza Hut restaurants.~~ prior year periods were significantly impacted by COVID-19.

As compared to the ~~third~~second quarter of ~~2016,~~2020, Company sales in the ~~third~~second quarter of ~~2017~~2021 increased ~~8% and 10%~~32%, ifor 20% excluding the impact of F/X. Company sales for the year to date ended June 30, 2021 increased 41%, or 30% excluding the impact of F/X. The increase in Company sales ~~during~~for the quarter, excluding the impact of F/X, was ~~driven by~~attributable to net unit growth including the acquisition of Suzhou KFC and same-store sales growth. The year to date increase in ~~Restaurant~~Company sales, excluding the impact of F/X, was attributable to net unit growth including the acquisition of Suzhou KFC, same-store sales growth and fewer temporary store closures.

The quarter and year to date increase in Operating profit, ~~for~~excluding the ~~quarter~~impact of F/X, was primarily driven by ~~same-store~~the increase in Company sales, ~~leverage~~commodity deflation of 7%, higher productivity and ~~labor efficiency,~~lower store impairment charges, partially offset by lower temporary relief provided by landlords and government agencies, wage inflation and ~~promotion~~higher compensation 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 inflation 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 and ~~year~~years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016~~2020 are presented below:

	Quarter ended						% B/(W)^(a)				Year to date ended						% B/(W)^(a)				Quarter Ended						% B/(W) ^(a)								Year to Date Ended						% B/(W) ^(a)
	8/31/2017			8/31/2016			Reported				8/31/2017			8/31/2016			Reported				6/30/2021			6/30/2020			Reported				Ex F/X				6/30/2021			6/30/2020			Reported				Ex F/X
Company sales	$	1,998		$	1,848			8			$	4,818		$	4,684			3			$	2,233		$	1,692			32				20			$	4,564		$	3,240			41				30
Franchise fees and income		40			35			14				98			90			9				38			37			4				(5	)			80			72			11				2
Revenues from transactions with franchisees and unconsolidated affiliates																						164			157			5				(4	)			335			318			6				(3	)
Other revenues																						16			16			(1	)			(9	)			29			26			11				2
Total revenues	$	2,038		$	1,883			8			$	4,916		$	4,774			3			$	2,451		$	1,902			29				17			$	5,008		$	3,656			37				26
Restaurant profit	$	399		$	356			12			$	927		$	798			16			$	354		$	231			53				39			$	789		$	396			99				83
Restaurant Margin %		20.0	%		19.2	%		0.8		ppts.		19.3	%		17.0	%		2.3		ppts.		15.8	%		13.7	%		2.1		ppts.		2.1		ppts.		17.3	%		12.2	%		5.1		ppts.		5.1		ppts.
Operating Profit	$	317		$	286			11			$	714		$	582			23			$	233		$	128			83				65			$	575		$	225			156				134
Interest income, net		6			3		NM					13			7			77				16			8			85				75				31			17			77				67
Investment gain (loss)																						8			45			(83	)			(83	)			(4	)		37		NM				NM
Income tax provision		(102	)		(87	)		(19	)			(213	)		(165	)		(29	)			(64	)		(45	)		(39	)			(29	)			(166	)		(77	)		(113	)			(100	)
Net Income - including noncontrolling interests		221			202			9				514			424			21				193			136			42				29				436			202			116				97
Net Income - noncontrolling interests		10			10			6				21			10		NM					12			4			(229	)			(200	)			25			8			(216	)			(192	)
Net Income - Yum China Holdings, Inc.	$	211		$	192			9			$	493		$	414			19			$	181		$	132			37				24			$	411		$	194			112				93
Diluted Earnings Per Share	$	0.53		$	0.53			—			$	1.24		$	1.14			9
Diluted Earnings Per Common Share																					$	0.42		$	0.34			24				12			$	0.95		$	0.50			90				72
Effective tax rate		31.7	%		29.8	%						29.3	%		28.0	%						24.8	%		25.2	%										27.6	%		27.8	%
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	%
Supplementary information - Non-GAAP Measures^(b)
Adjusted Operating Profit																					$	237		$	132										$	582		$	230
Adjusted Net Income - Yum China Holdings, Inc.																					$	185		$	136										$	418		$	199
Adjusted Diluted Earnings Per Common Share																					$	0.42		$	0.35										$	0.96		$	0.51
Adjusted Effective Tax Rate																						24.5	%		24.6	%										27.2	%		27.3	%
Adjusted EBITDA	$	425		$	390						$	1,004		$	895						$	377		$	261										$	853		$	480

(a)	Represents the period-over-period change in percentage. ~~NM refers~~

(b)	See “Non-GAAP Measures” below for definitions and reconciliations of the most directly comparable GAAP financial measures to ~~changes over 100%, from negative to positive amounts or from zero to an amount.~~the non-GAAP measures.

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
%

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

6,149

5,847

5

Unconsolidated affiliates

872

812

7

Franchisees

726

671

8

7,747

7,330

6

	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020
System Sales Growth (Decline)		26	%		(8	)%		34	%		(16	)%
System Sales Growth (Decline), excluding F/X		14	%		(4	)%		24	%		(13	)%
Same-Store Sales Growth (Decline)		5	%		(11	)%		8	%		(13	)%

~~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
%

Unit Count	6/30/2021		6/30/2020		% Increase (Decrease)
Company-owned^(a)		8,594		7,479		15
Unconsolidated affiliates^(a)		754		947		(20	)
Franchisees		1,675		1,527		10
Other		-		1	NM
		11,023		9,954		11

(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 previously recognized within Special Items~~acquisition of Suzhou KFC in ~~2015~~the third quarter of 2020, the restaurant units of Suzhou KFC were transferred from unconsolidated affiliates to ~~reflect the final proceeds of the sale.~~Company-owned.

Non-GAAP Measures

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share (“EPS”), Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, certain non-cash expenses, consisting of depreciation and amortization as well as store impairment charges and Special Items.

The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures.

~~(b)~~

Quarter Ended

Year to Date Ended

6/30/2021

6/30/2020

6/30/2021

6/30/2020

Non-GAAP Reconciliations

Reconciliation of Operating Profit to Adjusted Operating Profit

Operating Profit

$
233

$
128

$
575

$
225

Special Items, Operating Profit

(4
)

(4
)

(7
)

(5
)

Adjusted Operating Profit

$
237

$
132

$
582

$
230

Reconciliation of Net Income to Adjusted Net Income

Net Income - Yum China Holdings, Inc.

$
181

$
132

$
411

$
194

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

(4
)

(4
)

(7
)

(5
)

Adjusted Net Income - Yum China Holdings, Inc.

$
185

$
136

$
418

$
199

Reconciliation of EPS to Adjusted EPS

Basic Earnings Per Common Share

$
0.43

$
0.35

$
0.98

$
0.51

Special Items, Basic Earnings Per Common Share

(0.01
)

(0.01
)

(0.01
)

(0.02
)

Adjusted Basic Earnings Per Common Share

$
0.44

$
0.36

$
0.99

$
0.53

Diluted Earnings Per Common Share

$
0.42

$
0.34

$
0.95

$
0.50

Special Items, Diluted Earnings Per Common Share

—

(0.01
)

(0.01
)

(0.01
)

Adjusted Diluted Earnings Per Common Share

$
0.42

$
0.35

$
0.96

$
0.51

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

Effective tax rate (See Note 12)

24.8
%

25.2
%

27.6
%

27.8
%

Impact on effective tax rate as a result of Special Items

0.3
%

0.6
%

0.4
%

0.5
%

Adjusted effective tax rate

24.5
%

24.6
%

27.2
%

27.3
%

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)~~

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

~~Adjusted EBITDA~~

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

	Quarter ended						Year to date ended						Quarter Ended						Year to Date Ended
Reconciliation of Net Income to Adjusted EBITDA	8/31/2017			8/31/2016			8/31/2017			8/31/2016			6/30/2021			6/30/2020			6/30/2021			6/30/2020
Net Income — Yum China Holdings, Inc.													$	181		$	132		$	411		$	194
Net Income — noncontrolling interests	$	10		$	10		$	21		$	10			12			4			25			8
Net Income — Yum China Holdings, Inc.		211			192			493			414
Income tax provision		102			87			213			165			64			45			166			77
Interest income, net		(6	)		(3	)		(13	)		(7	)		(16	)		(8	)		(31	)		(17	)
Investment (gain) loss														(8	)		(45	)		4			(37	)
Operating Profit		317			286			714			582			233			128			575			225
Special Items, Operating Profit														4			4			7			5
Adjusted Operating Profit														237			132			582			230
Depreciation and amortization		105			101			265			272			124			105			252			214
Store impairment charges (See Note 6)		6			6			28			43
Special Items Income – Operating profit		(3	)		(3	)		(3	)		(2	)
Store impairment charges														16			24			19			36
Adjusted EBITDA	$	425		$	390		$	1,004		$	895		$	377		$	261		$	853		$	480

Details of Special Items are presented below:

	Quarter Ended						Year to Date Ended
Details of Special Items	6/30/2021			6/30/2020			6/30/2021			6/30/2020
Share-based compensation expense for Partner PSU Awards⁽¹⁾	$	(4	)	$	(1	)	$	(7	)	$	(2	)
Derecognition of indemnification assets related to Daojia⁽²⁾		—			(3	)		—			(3	)
Special Items, Operating Profit		(4	)		(4	)		(7	)		(5	)
Tax Expenses on Special Items⁽³⁾		—			—			—			—
Special items, net income – including noncontrolling interests		(4	)		(4	)		(7	)		(5	)
Special items, net income – noncontrolling interests		—			—			—			—
Special Items, Net income – Yum China Holdings, Inc.	$	(4	)	$	(4	)	$	(7	)	$	(5	)
Weighted-average diluted shares outstanding (in millions)		435			388			434			387
Special Items, Diluted Earnings Per Common Share	$	—		$	(0.01	)	$	(0.01	)	$	(0.01	)

(1)

In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant similar special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized share-based compensation cost of $4 million and $7 million associated with the Partner PSU Awards for the quarter and year to date ended June 30, 2021, respectively, and $1 million and $2 million for the quarter and year to date ended June 30, 2020, respectively.

(2)

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

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, store impairment charges and Special Items. Store impairment charges included as an adjustment item in Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants, and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If these restaurant-level assets were not impaired, depreciation of the assets would have been recorded and included in EBITDA. Therefore, store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants. The Company believes that investors and analyst may find it useful in measuring operating performance without regard to such non-cash item.

These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these adjusted measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.

Segment Results

KFC

	Quarter ended														Year to date ended														Quarter Ended														Year to Date Ended
							% B/(W)														% 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				6/30/2021			6/30/2020			Reported				Ex F/X				6/30/2021			6/30/2020			Reported				Ex F/X
Company sales	$	1,385		$	1,263			10				11			$	3,342		$	3,238			3				7			$	1,687		$	1,260			34				22			$	3,470		$	2,480			40				29
Franchise fees and income		38			34			13				14				93			87			7				11				30			32			(3	)			(12	)			63			65			(2	)			(10	)
Revenues from transactions with franchisees and unconsolidated affiliates																														14			15			(5	)			(14	)			29			31			(5	)			(13	)
Other revenues																														3			—		NM				NM					4			—		NM				NM
Total revenues	$	1,423		$	1,297			10				12			$	3,435		$	3,325			3				7			$	1,734		$	1,307			33				21			$	3,566		$	2,576			38				27

Restaurant profit	$	292		$	250			17				19			$	671		$	589			14				18			$	284		$	183			55				41			$	639		$	349			83				68
Restaurant margin %		21.1	%		19.7	%		1.4		ppts.		1.4		ppts.		20.1	%		18.2	%		1.9		ppts.		1.9		ppts.		16.8	%		14.6	%		2.2		ppts.		2.2		ppts.		18.4	%		14.1	%		4.3		ppts.		4.3		ppts.

G&A expenses	$	42		$	39			(7	)			(9	)		$	106		$	101			(6	)			(10	)		$	58		$	42			(38	)			(26	)		$	113		$	88			(28	)			(18	)
Closure and impairment expenses, net	$	1		$	4			40				38			$	10		$	25			58				56
Franchise expenses																													$	15		$	16			2				11			$	31		$	32			3				10
Expenses for transactions with franchisees and unconsolidated affiliates																													$	14		$	15			6				15			$	29		$	31			6				14
Other operating costs and expenses																													$	1			—		NM				NM				$	1			—		NM				NM
Closures and impairment expenses, net																													$	6		$	10			36				42			$	6		$	11			43				48
Other income, net	$	(18	)	$	(16	)		14				16			$	(45	)	$	(38	)		18				23			$	(3	)	$	(12	)		(76	)			(79	)		$	(12	)	$	(29	)		(58	)			(61	)
Operating Profit	$	286		$	238			20				22			$	647		$	538			20				24			$	240		$	159			50				37			$	567		$	312			81				67

	Quarter ended						Year to date ended						Quarter Ended						Year to Date Ended
	8/31/2017			8/31/2016			8/31/2017			8/31/2016			6/30/2021			6/30/2020			6/30/2021			6/30/2020
System Sales Growth (Decline)		10	%		(4	)%		4	%		1	%		25	%		(9	)%		29	%		(14	)%
System Sales Growth, excluding F/X		11	%		2	%		8	%		7	%
System Sales Growth (Decline), excluding F/X														14	%		(6	)%		19	%		(10	)%
Same-Store Sales Growth (Decline)		7	%		(1	)%		4	%		4	%		4	%		(10	)%		5	%		(11	)%

Unit Count	6/30/2021		6/30/2020		% Increase (Decrease)
Company-owned^(a)		6,207		5,231		19
Unconsolidated affiliates^(a)		740		947		(22	)
Franchisees		662		571		16
		7,609		6,749		13

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

4,007

3,832

5

Unconsolidated affiliates

872

812

7

Franchisees

468

443

6

5,347

5,087

5

(a)	As a result of the acquisition of Suzhou KFC in the third quarter of 2020, the restaurant units of Suzhou KFC were transferred from unconsolidated affiliates to Company-owned.

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			6/30/2020			Store Portfolio Actions			Other			F/X			6/30/2021
Company sales	$	1,263		$	44		$	99		$	(21	)	$	1,385		$	1,260		$	222		$	54		$	151		$	1,687
Cost of sales		(365	)		(13	)		(36	)		6			(408	)		(419	)		(73	)		17			(47	)		(522	)
Cost of labor		(243	)		(7	)		(17	)		4			(263	)		(271	)		(52	)		(32	)		(36	)		(391	)
Occupancy and other		(405	)		(11	)		(13	)		7			(422	)
Occupancy and other operating expenses																	(387	)		(57	)		(3	)		(43	)		(490	)
Restaurant profit	$	250		$	13		$	33		$	(4	)	$	292		$	183		$	40		$	36		$	25		$	284

	Year to date ended															Year to Date Ended
Income (Expense)	8/31/2016			Store Portfolio Actions			Other			F/X			8/31/2017			6/30/2020			Store Portfolio Actions			Other			F/X			6/30/2021
Company sales	$	3,238		$	94		$	139		$	(129	)	$	3,342		$	2,480		$	581		$	131		$	278		$	3,470
Cost of sales		(970	)		(27	)		(31	)		39			(989	)		(811	)		(184	)		18			(85	)		(1,062	)
Cost of labor		(625	)		(18	)		(49	)		26			(666	)		(558	)		(118	)		(50	)		(63	)		(789	)
Occupancy and other		(1,054	)		(23	)		22			39			(1,016	)
Occupancy and other operating expenses																	(762	)		(131	)		(9	)		(78	)		(980	)
Restaurant profit	$	589		$	26		$	81		$	(25	)	$	671		$	349		$	148		$	90		$	52		$	639

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 the Company~~ same-store sales growth, net unit growth including the acquisition of 7%Suzhou KFC and commodity deflation of 8%, partially offset by ~~higher labor costs including~~lower temporary relief provided by landlords and government agencies and wage inflation of ~~8% and promotion costs.~~ 3%.

The ~~year-to-date increases~~year to date increase in Company sales and Restaurant profit, ~~associated with store portfolio actions~~excluding the impact of F/X, was primarily driven by ~~net unit growth. Significant other factors impacting Company sales and Restaurant profit were the Company~~ same-store sales growth, net unit growth including the acquisition of 4%Suzhou KFC, fewer temporary store closures and ~~the favorable impact from retail tax structure reform (primarily in cost~~commodity deflation of ~~sales)~~7%, partially offset by ~~higher labor costs including~~lower temporary relief provided by landlords and government agencies, increased value promotions and wage inflation of ~~8%, commodity inflation of~~ 3% ~~and promotion costs.~~.

Franchise Fees and Income

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

The year to date decrease in Franchise fees and income, excluding the impact of F/X, was primarily driven by the ~~impact~~acquisition of ~~refranchising and~~Suzhou KFC, partially offset by the net unit ~~growth.~~growth, same-store sales growth and fewer temporary store closures.

G&A Expenses

The quarter and ~~year-to-date increases~~year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by lapping one-time reductions in social security contributions in 2020, merit increases and higher ~~compensation costs due to wage inflation.~~performance-based compensation.

Operating Profit

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

Pizza Hut

	Quarter Ended														Year to Date Ended
							% B/(W)														% B/(W)
	6/30/2021			6/30/2020			Reported				Ex F/X				6/30/2021			6/30/2020			Reported				Ex F/X
Company sales	$	533		$	422			26				15			$	1,071		$	744			44				32
Franchise fees and income		2			1			32				20				4			2			56				43
Revenues from transactions with franchisees and unconsolidated affiliates		2			1			76				60				3			2			83				68
Other revenues		1			—		NM				NM					1			—		NM				NM
Total revenues	$	538		$	424			26				15			$	1,079		$	748			44				32

Restaurant profit	$	70		$	47			48				34			$	152		$	48			217				190
Restaurant margin %		13.1	%		11.2	%		1.9		ppts.		1.9		ppts.		14.2	%		6.4	%		7.8		ppts.		7.8		ppts.

G&A expenses	$	28		$	23			(19	)			(9	)		$	53		$	47			(12	)			(3	)
Franchise expenses	$	1		$	—			(32	)			(20	)		$	2		$	1			(35	)			(24	)
Expenses for transactions with franchisees and unconsolidated affiliates	$	2		$	1			(72	)			(56	)		$	3		$	2			(73	)			(59	)
Closures and impairment expenses, net	$	5		$	10			49				54			$	3		$	15			79				81
Operating Profit (Loss)	$	39		$	15			151				128			$	99		$	(13	)	NM				NM

	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020
System Sales Growth (Decline)		27	%		(16	)%		45	%		(28	)%
System Sales Growth (Decline), excluding F/X		16	%		(12	)%		33	%		(25	)%
Same-Store Sales Growth (Decline)		11	%		(12	)%		23	%		(22	)%

Unit Count	6/30/2021		6/30/2020		% Increase
Company-owned		2,298		2,150		7
Franchisees		127		108		18
		2,425		2,258		7

Company Sales and Restaurant Profit

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

	Quarter Ended
Income (Expense)	6/30/2020			Store Portfolio Actions			Other			F/X			6/30/2021
Company sales	$	422		$	21		$	40		$	50		$	533
Cost of sales		(134	)		(7	)		(5	)		(14	)		(160	)
Cost of labor		(111	)		(6	)		(17	)		(12	)		(146	)
Occupancy and other operating expenses		(130	)		(5	)		(6	)		(16	)		(157	)
Restaurant profit	$	47		$	3		$	12		$	8		$	70

	Year to Date Ended
Income (Expense)	6/30/2020			Store Portfolio Actions			Other			F/X			6/30/2021
Company sales	$	744		$	74		$	166		$	87		$	1,071
Cost of sales		(236	)		(22	)		(37	)		(25	)		(320	)
Cost of labor		(215	)		(16	)		(35	)		(23	)		(289	)
Occupancy and other operating expenses		(245	)		(16	)		(23	)		(26	)		(310	)
Restaurant profit	$	48		$	20		$	71		$	13		$	152

The increase in ~~Operating Profit~~Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, commodity deflation of 6% and ~~net unit growth,~~higher productivity, partially offset by ~~higher restaurant operating costs~~lower temporary relief provided by landlords and ~~G&A expenses.~~government agencies and wage inflation of 4%.

The ~~year-to-date~~year to date increase in ~~Operating Profit,~~Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales growth, ~~net unit growth~~commodity deflation of 6%, fewer temporary store closures and ~~lower closure and impairment expenses,~~higher productivity, partially offset by ~~higher G&A expenses~~lower temporary relief provided by landlords and ~~higher restaurant operating costs.~~

~~Pizza Hut~~

Quarter ended

Year to date ended

% B/(W)

% B/(W)

8/31/2017

8/31/2016

Reported

Ex F/X

8/31/2017

8/31/2016

Reported

Ex F/X

Company sales

$
603

$
573

5

7

$
1,449

$
1,405

3

7

Franchise fees and income

1

1

37

40

2

2

31

36

Total revenues

$
604

$
574

5

7

$
1,451

$
1,407

3

7

Restaurant profit

$
108

$
108

1

2

$
256

$
210

22

26

Restaurant margin %

17.8
%

18.7
%

(0.9
)
ppts.

(0.8
)
ppts.

17.6
%

14.9
%

2.7

ppts.

2.7

ppts.

G&A expenses

$
27

$
25

(4
)

(6
)

$
70

$
68

(1
)

(5
)

Closure and impairment expenses, net

$
1

$
1

54

56

$
9

$
11

23

20

Operating Profit

$
80

$
82

—

2

$
177

$
132

37

42

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
)%

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

2,114

1,973

7

Franchisees

29

20

45

2,143

1,993

8

~~Company Sales~~government agencies and ~~Restaurant Profit~~

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

Quarter ended
Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017
Company sales

$
573

$
38

$
2

$
(10
)

$
603

Cost of sales

(144
)

(11
)

(12
)

3

(164
)

Cost of labor

(129
)

(8
)

1

2

(134
)

Occupancy and other

(192
)

(10
)

2

3

(197
)

Restaurant profit

$
108

$
9

$
(7
)

$
(2
)

$
108

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 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.~~3%.

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

Operating Profit

The quarter and year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower store impairment charges.

All Other Segments

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

	Quarter Ended														Year to Date Ended
							% B/(W)														% B/(W)
	6/30/2021			6/30/2020			Reported				Ex F/X				6/30/2021			6/30/2020			Reported				Ex F/X
Company sales	$	13		$	10			23				12			$	23		$	16			42				31
Franchise fees and income		6			4			50				36				13			5			165				142
Revenues from transactions with franchisees and unconsolidated affiliates		23			11			114				95				49			16			217				191
Other revenues		64			25			163				139				99			41			143				122
Total revenues	$	106		$	50			114				95			$	184		$	78			138				118

Restaurant loss	$	(1	)	$	—		NM				NM				$	(3	)	$	(3	)		10				16
Restaurant margin %		(7.8	)%		2.0	%		(9.8	)	ppts.		(9.8	)	ppts.		(10.3	)%		(16.4	)%		6.1		ppts.		6.1		ppts.

G&A expenses	$	10		$	11			12				20			$	19		$	19			(2	)			6
Expenses for transactions with franchisees and unconsolidated affiliates	$	21		$	9			(135	)			(114	)		$	45		$	13			(254	)			(225	)
Other operating costs and expenses	$	63		$	21			(202	)			(174	)		$	96		$	36			(164	)			(142	)
Closures and impairment expenses, net	$	2		$	1			3				12			$	2		$	3			53				57
Other expenses, net	$	2		$	—		NM				NM				$	5		$	—		NM				NM
Operating Loss	$	(6	)	$	(2	)		(54	)			(41	)		$	(9	)	$	(12	)		37				42

	Quarter Ended						Year to Date Ended
	6/30/2021			6/30/2020			6/30/2021			6/30/2020
Same-Store Sales Growth (Decline)		8	%		(27	)%		14	%		(29	)%

Total Revenues

The increase in ~~Operating Profit~~Total revenues of all other segments for the quarter, excluding the impact of F/X, was primarily driven by ~~net unit growth, partially offset~~the revenue generated by ~~higher restaurant operating costs mainly attributable~~our delivery team for services provided to ~~promotion costs~~KFC and ~~wage inflation.~~Pizza Hut restaurants.

The ~~year-to-date~~year to date increase in ~~Operating Profit,~~Total revenues of all other segments, excluding the impact of F/X, was primarily driven by ~~lower restaurant operating costs including~~ the ~~favorable impact~~revenue generated by our delivery team for services provided to KFC and Pizza Hut restaurants and the consolidation of ~~the retail tax structure reform, net unit growth and same-store sales growth.~~

~~All Other Segments~~

~~All Other Segments includes East Dawning, Little Sheep, Taco Bell and Daojia.~~Huang Ji Huang.

Quarter ended

Year to date ended

% B/(W)

% B/(W)

8/31/2017

8/31/2016

Reported

Ex F/X

8/31/2017

8/31/2016

Reported

Ex F/X

Company sales

$
10

$
12

(23
)

(22
)

$
27

$
41

(34
)

(31
)

Franchise fees and income

1

—

86

93

3

1

65

74

Total revenues

$
11

$
12

(18
)

(16
)

$
30

$
42

(29
)

(26
)

Restaurant (loss) profit

(1
)

(3
)

88

87

$
—

$
(2
)

NM

NM

Restaurant margin %

(1.5
)%

(7.7
)%

6.2

ppts.

6.1

ppts.

2.2
%

(1.7
)%

3.9

ppts.

4.0

ppts.

G&A expenses

$
6

$
2

NM

NM

$
10

$
6

(74
)

(78
)

Operating Loss

$
(8
)

$
(5
)

NM

NM

$
(8
)

$
(6
)

(81
)

(77
)

Operating Loss

The ~~decrease~~increase in ~~Company sales~~Operating loss for the quarter, excluding the impact of F/X, was primarily driven by ~~unit closures and refranchising.~~the increase of Operating loss from certain emerging brands, partially offset by increased Operating profit generated by Huang Ji Huang.

The ~~year-to-date~~year to date decrease in ~~Company sales,~~Operating loss, excluding the impact of F/X, was primarily driven by ~~unit closures, refranchising and same-store sales decline~~Operating profit generated by Huang Ji Huang consolidated since April 2020, partially offset by the increase of ~~8%.~~Operating loss from certain emerging brands.

Corporate &and 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
)%

	Quarter Ended												Year to Date Ended
							% B/(W)												% B/(W)
	6/30/2021			6/30/2020			Reported			Ex F/X			6/30/2021			6/30/2020			Reported			Ex F/X
Revenues from transactions with franchisees and unconsolidated affiliates	$	125		$	130			(3	)		(12	)	$	254		$	269			(6	)		(13	)
Other revenue	$	2		$	1			131			119		$	4		$	2			209			192
Expenses for transactions with franchisees and unconsolidated affiliates	$	123		$	135			8			17		$	252		$	270			6			14
Other operating costs and expenses	$	2		$	1			(200	)		(179	)	$	5		$	2			(172	)		(154	)
Corporate G&A expenses	$	40		$	37			(7	)		(2	)	$	81		$	58			(39	)		(32	)
Other unallocated expenses	$	2		$	2			15			17		$	2		$	3			45			45
Interest income, net	$	16		$	8			85			75		$	31		$	17			77			67
Investment gain (loss)	$	8		$	45			(83	)		(83	)	$	(4	)	$	37		NM			NM
Income tax provision (See Note 12)	$	(64	)	$	(45	)		(39	)		(29	)	$	(166	)	$	(77	)		(113	)		(100	)
Effective tax rate (See Note 12)		24.8	%		25.2	%		0.4	%		0.4	%		27.6	%		27.8	%		0.2	%		0.2	%

~~Corporate G&A Expenses~~

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

Revenues from transactions with franchisees and unconsolidated affiliates primarily include revenues derived from the Company’s central procurement model whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees and unconsolidated affiliates. The quarter and ~~year-to-date increases in G&A expenses~~,year to date decrease, excluding the impact of F/X, ~~resulted from~~was mainly due to the acquisition of Suzhou KFC, partially offset by increase in revenue driven by system sales growth of franchisees and unconsolidated affiliates.

G&A Expenses

The increase in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily due to higher compensation costs ~~partially attributable to hiring additional personnel to perform public company functions, as well as increased professional service fees.~~ and lapping one-time reductions in social security contributions in 2020, offset by the timing shift of government incentives received.

~~Interest Income, Net~~

The ~~quarter~~year to date increase in Corporate G&A expenses, excluding the impact of F/X, was primarily due to higher compensation costs and ~~year-to-date increases~~lapping one-time reductions in ~~interest income, net was driven~~social security contributions in 2020.

Investment Gain (Loss)

The Investment gain (loss) mainly relates to investment gain in Meituan, partially offset by ~~higher returns on larger balances of short-term investments and time deposits.~~our investment loss in Sunner. See Note 6 for additional information.

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. Our effective~~China and U.S. corporate income tax, ~~rate was 31.7% and 29.8% for the quarters ended August 31, 2017 and 2016, respectively, and 29.3% and 28.0% for the year to date ended August 31, 2017 and 2016, respectively.~~if any. The ~~higher~~lower effective tax rate for the quarter and year to date ended ~~August 31, 2017~~June 30, 2021 was primarily due to lower residual U.S. tax, offset by less tax benefit from equity income from investments in unconsolidated affiliates, and higher ~~costs~~estimated repatriation of ~~repatriating current year~~ earnings ~~into the U.S.~~outside of China subject to foreign withholding tax.

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

Impact of COVID-19 Pandemic

Starting in late January 2020, the COVID-19 pandemic significantly impacted the Company’s operations and financial results. While the lingering effects of the pandemic continue to impact our operations, the Company reported substantial year-over-year growth in the first half of 2021, as the prior year periods were significantly impacted by COVID-19. During the second quarter, same-store sales recovery was interrupted by the Delta variant outbreak in southern China, which started in late May. As we entered July, traffic and sales continued to be pressured by lingering effects of COVID-19, such as reduced travel, a shortened school holiday and regional outbreaks. The latest outbreak in Nanjing, the capital city of Jiangsu province and a key transportation hub, has spread to some provinces and is still evolving. Our operations may be further impacted by tightened public health measures and social distancing requirements.

While the impacts of COVID-19 are subsiding, the Company expects a full recovery of same-store sales to pre-COVID-19 levels to take time, and the unevenness of recovery to linger for several reasons. Public health measures and social distancing behaviors persist as occasional outbreaks remind people of the lingering risks. Dine-in traffic, as well as sales at our transportation locations, remains well below 2019 levels. Management at this time cannot ascertain the extent to which our operations will continue to be impacted by the COVID-19 pandemic, which depends largely on future developments that are uncertain, including resurgences and the actions by government authorities to contain the impact, the economic recovery within China and globally, the impact on consumer behavior and other related factors.

Tax Examination on Transfer Pricing

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

PRC Value-Added Tax (“VAT”)

Effective May 1, 2016, 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 replaced the 5% business tax (“BT”) previously applied to certain restaurant sales. Input VAT would be creditable to the aforementioned 6% output VAT. The latest VAT rates imposed on our purchase of materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services, 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~~giving consideration to the indefinite life of the input VAT credit assets as well as 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 31, 2017,~~June 30, 2021, an input VAT credit asset of ~~$120~~$272 million and payable of $3$5 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 31, 2017.~~June 30, 2021. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the ~~Company~~credit expected to ~~use the credit~~be used within one ~~year.~~year can be reasonably determined.

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~~years to date ended ~~August 31, 2017~~June 30, 2021 and ~~2016~~2020 were as follows:

Net cash provided by operating activities was ~~$987~~$773 million in ~~2017~~2021 as compared to ~~$824~~$452 million in ~~2016.~~2020. The increase was primarily driven by ~~higher Net Income and timing of payments for inventory.~~the increase in net income along with working capital changes.

Net cash used in investing activities was ~~$294~~$611 million in ~~2017~~2021 as compared to ~~$232~~$761 million in ~~2016.~~2020. The ~~increase~~decrease was ~~primarily driven~~mainly due to the net impact on cash flow resulting from purchases and maturities of short-term investments and less spending on acquisitions, partially offset by ~~acquisition of Daojia~~the investment in ~~2017, lapping cash proceeds generated from the sale of aircraft~~Sunner and the ~~impact from refranchising, which reduced net cash used~~increase in ~~2016.~~capital spending.

Net cash used in financing activities ~~of $142~~was $119 million in ~~2017 was mainly related~~2021 as compared to ~~share repurchases of $128 million and net cash used in financing activities of $249~~$59 million in ~~2016 mainly represented changes~~2020. The increase was primarily driven by dividends paid on common stock and to noncontrolling interests, partially offset by the decrease in ~~net investment by Parent.~~share repurchases.

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 global offering in September 2020 provided us with $2.2 billion in net proceeds.

Our ability to fund our future operations and capital needs will primarily 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 capital expenditures for accelerating store network expansion and ~~any distributions~~store remodeling, to step up investments in digitalization, automation and logistics infrastructure, to provide returns to our stockholders, as well as to explore opportunities for acquisitions or ~~share repurchases we may make.~~investments that build and support our ecosystem. We believe that our future cash from operations, together with our ~~access to~~ funds on hand and access to the capital markets, will provide adequate resources to fund these uses of cash, and that our existing cash, ~~and~~ net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months.

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

•

our financial performance;

•

our credit ratings;

~~our financial performance;~~

•

the liquidity of the overall capital markets; and

~~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.~~

•

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

There can be no assurance ~~particularly as a 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~~Share Repurchases and ~~Share Repurchases~~Dividends

~~On February 7, 2017, we announced that~~Our Board of Directors has authorized an aggregate of $1.4 billion for our ~~board of directors authorized a $300 million~~ share repurchase program. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. AsStarting in the second quarter of ~~August 31, 2017,~~2020, our share repurchases have been suspended due to the impacts of the COVID-19 pandemic. No shares were repurchased during the year to date ended June 30, 2021. During the year to date ended June 30, 2020, the Company ~~has~~ repurchased ~~$128~~$7 million or ~~3,355,696~~0.2 million shares of common stock under the repurchase program. On ~~October 4, 2017,~~July 28, 2021, the Board of Directors ~~increased Yum China’s existing~~approved the resumption of share ~~repurchase authorization from $300~~repurchases.

For the quarter ended June 30, 2021, the Company paid cash dividends of approximately $51 million to ~~an aggregate~~stockholders through a quarterly dividend payment of ~~$550~~$0.12 per share.

On July 28, 2021, the Board of Directors declared a cash dividend of $0.12 per share, payable on September 16, 2021, to stockholders of record as of the close of business on August 25, 2021. The total estimated cash dividend payable is approximately $51 million.

Our ability to declare and pay any dividends on our stock may be restricted by our earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the ~~board~~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 31, 2017,~~June 30, 2021, the Company had credit facilities of RMB3,591 million (approximately $556 million), comprised of onshore credit facilities of RMB2,300 million (approximately ~~$350~~$356 million) in ~~the~~aggregate and offshore credit facilities of $200 million in aggregate.

The credit facilities ~~have~~had remaining terms ranging from 1less than one year to ~~3 years.~~three years as of June 30, 2021. Each credit facility bears interest based on the ~~prevailing rate stipulated~~Loan Prime Rate (“LPR”) published by the ~~People’s Bank~~National Interbank Funding Centre of ~~China and contains financial covenants including, among other things, limitations on certain additional indebtedness and liens, and certain other transactions specified in~~ the ~~respective agreement.~~PRC or London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Administration. Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. ~~Interest on any outstanding borrowings is due at least monthly.~~Some of the credit facilities contain covenants limiting, among other things, certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sublimits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As of ~~August 31, 2017,~~June 30, 2021, we had outstanding bank guarantees of RMB 115 million (approximately $18 million) mainly to secure our lease payment to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the ~~full~~same amount, while there were no bank borrowings outstanding as of ~~borrowings was available to us under each facility.~~June 30, 2021.

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,~~August 2020, the FASB issued ASU ~~No. 2014-09,~~ ~~Revenue from~~ 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts ~~with Customers (Topic 606)~~ ~~(ASU 2014-09)~~in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), ~~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~~which eliminates two of the ~~effective date~~three models in ASC 470-20 that require separate accounting for embedded conversion features and eliminates some of the ~~new revenue standard. ASU 2014-09 is now effective~~conditions for ~~the Company~~equity classification in ~~our first quarter of fiscal 2018 with early adoption permitted~~ASC 815-40 for contracts in ~~the first quarter of 2017.~~an entity’s own equity. 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~~entities to use the ~~identification~~if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of ~~performance obligations and significant judgments~~share settlement for instruments that may be settled in ~~measurement and recognition~~.

~~In February 2016, the FASB issued~~cash or shares. 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 2016-022020-06 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 Losses (Topic 326)~~ (ASU 2016-13): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted beginning in the first quarter of 2019. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230)~~ (ASU 2016-15), which provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 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,January 1, 2022, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

In ~~October 2016,~~May 2021, the FASB issued ASU ~~No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers~~2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of ~~Assets Other Than Inventory~~ ~~(ASU 2016-16), which~~Freestanding Equity-Classified Written Call Options (“ASU 2021-04”).It requires issuers to account for a modification or exchange of freestanding equity-classified written call options that remain equity classified after the ~~recognition~~modification or exchange based on the economic substance of the ~~income tax consequences of an intra-entity transfer of an asset, other than inventory, when~~modification or exchange. ASU 2021-04 is effective for the ~~transfer occurs. The guidance will require a modified retrospective application~~Company from January 1, 2022, 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,~~July 2021, the FASB issued ASU ~~No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ ~~(ASU 2016-18), which~~2021-05, Lessors—Certain Leases with Variable Lease (“ASU 2021-05”).It requires lessors to classify leases as operating leases if they have variable lease payments that ~~entities show the changes in total cash, cash equivalents, restricted cash~~do not depend on an index or rate and ~~restricted cash equivalents in the statement of cash flows.~~would have selling losses if they were classified as sales-type or direct financing leases. ASU ~~2016-18~~2021-05 is effective for ~~fiscal years beginning after December 15, 2017, and interim periods within those fiscal years,~~the Company from January 1, 2022, 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) 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;

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, (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) reliance on distributions by our operating subsidiaries in China to fund offshore cash requirements, (g) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (h) uncertainty regarding indirect transfers of equity interests and enhanced scrutiny by Chinese tax authorities, (i) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (j) risk in relation to unexpected land acquisitions, building closures or demolitions, (k) potential fines for failure to comply with law and (l) 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 our business and industry, such as (a) food safety and foodborne illness concerns, (b) significant failure to maintain effective quality assurance systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, including the COVID-19 pandemic, (e) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (f) the fact that substantially all of our revenue is derived from our operations in China, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals, the potential cannibalization of existing sales by aggressive development and the possibility that new restaurants will not be profitable, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to COFFii & JOY and Lavazza may not be successful, (u) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (v) challenges and risks related to our e-commerce business, (w) our inability or failure to recognize, respond to and effectively manage the impact of social media, (x) failure to comply with anti-bribery or anti-corruption laws, (y) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (z) changes in consumer discretionary spending and general economic conditions, (aa) the fact that the restaurant industry in which we operate is highly competitive, (bb) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (cc) our inability to adequately protect the intellectual property we own or have the right to use, (dd) our licensor’s failure to protect its intellectual property, (ee) seasonality and certain major events in China, (ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (gg) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (hh) our strategic investments or acquisitions may be unsuccessful; (ii) our investment in technology and innovation may not generate the expected level of returns, (jj) fair value changes for our investment in equity securities and lower yields of our short-term

investments may adversely affect our financial condition and results of operations, and (kk) our operating results may be adversely affected by our investment in unconsolidated affiliates;

•

Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, (c) changes in political, business, economic and trade relations between the United States and China, (d) our audit reports are prepared by auditors who are not currently inspected by the Public Company Accounting Oversight Board and, as such, our stockholders are deprived of the benefits of such inspection and our common stock is subject to the risk of delisting from the New York Stock Exchange in the future, (e) fluctuation in the value of the Chinese Renminbi, (f) the fact that we face increasing focus on environmental sustainability issues, (g) limitations on our ability to utilize our cash balances effectively due to governmental control of currency conversion and payments of foreign currency and the Chinese Renminbi out of mainland China, (h) changes in the laws and regulations of China or noncompliance with applicable laws and regulations, (i) reliance on dividends and other distributions on equity paid by our principal subsidiaries in China to fund offshore cash requirements, (j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, (l) difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China against us, (m) the Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (n) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (o) risk in relation to unexpected land acquisitions, building closures or demolitions, (p) potential fines and other legal or administrative sanctions for failure to comply with Chinese regulations regarding our employee equity incentive plans and various employee benefit plans, (q) proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act, (r) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion, and (s) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions;

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 separation and related transactions, such as (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, (d) the indemnity provided by YUM to us with respect to certain liabilities in connection with the separation may be insufficient to insure us against the full amount of such liabilities, (e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, and (f) potential liabilities due to fraudulent transfer considerations;

•

General risks, such as (a) potential legal proceedings, (b) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (c) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (d) unforeseeable business interruptions, and (e) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC.

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.

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~~SEC (including the information set forth under the captions ~~“Forward-Looking Statements”~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016)~~2020) 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 31, 2017,~~June 30, 2021, the Company’s Operating ~~Profit~~profit would have decreased by approximately ~~$29~~$23 million if the RMB weakened 10% relative to the ~~U.S. dollar.~~US$. 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 Company sold 4.2 million of its ordinary shares of Meituan in the second quarter of 2020 for proceeds of approximately $54 million. In the first quarter of 2021, we invested $261 million to acquire a 5% equity interest in Sunner. Equity investment in Meituan is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. The investment in Sunner was recorded at fair value on a recurring basis before it became subject to equity method of accounting after the Company established significant influence over the operating and financial policies of Sunner in May 2021. See Note 6 for further discussion on our investments in Meituan and Sunner.

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~~during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial ~~reporting during the quarter ended August 31, 2017.~~

reporting.

PART II – Other ~~Information~~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,~~2020, which was filed with the SEC on ~~March 8, 2017.~~February 26, 2021.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~On February 7, 2017, we announced that~~

Our Board of Directors authorized an aggregate of $1.4 billion for our ~~board of directors authorized a $300 million~~ share repurchase ~~program. This~~program, including its most recent increase in authorization ~~does~~on October 31, 2018. The authorizations do not have an expiration date. ~~The following table provides information as~~As a result of ~~August 31, 2017 with respect to shares~~the COVID-19 pandemic impact, we suspended the share repurchases starting in the second quarter of ~~common stock repurchased by the Company under this authorization:~~2020.

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

No shares were repurchased during the quarter ended June 30, 2021. On ~~October 4, 2017,~~July 28, 2021, the Board of Directors ~~increased Yum China’s existing~~approved the resumption of share ~~repurchase authorization from $300 million to an aggregate of $550 million.~~repurchases.

Item 6.

E~~xhibits~~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)~~June 2, 2021).

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)~~June 2, 2021).

~~3.3~~		~~Certificate of Designations of Preferred Stock (incorporated by reference to Exhibit 3.1 to Yum China Holdings, Inc.’s Registration Statement on Form 8-A filed on October 27, 2016).~~

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

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

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

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

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101.SCH		Inline XBRL Taxonomy Extension Schema Document *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document *

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*	Filed or furnished herewith.

~~SIGNATURES~~

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~~August 6, ~~2017~~2021	/s/ ~~Jacky Lo~~Xueling Lu
		~~Chief Financial Officer,~~
		~~Treasurer,~~ Controller and Principal Accounting Officer

3650

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

	Identifiable Assets
	8/31/2017		12/31/2016
KFC^(c)	$	1,469	$	1,411
Pizza Hut		678		628
All Other Segments		141		160
Corporate^(d)		2,172		1,528
	$	4,460	$	3,727

	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	%

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

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