UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _________________
Commission file number 001-37762
Yum China Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 81-2421743 |
(State or Other Jurisdiction of |
| (I.R.S. Employer |
Incorporation or Organization) |
| Identification No.) |
|
|
|
7100 Corporate Drive Plano, Texas 75024 United States of America |
| Yum China Building 20 Tian Yao Qiao Road Shanghai 200030 People’s Republic of China |
(Address, Including Zip Code, of Principal Executive Offices) (469) 980-2898 | ||
(Registrant’s Telephone Number, Including Area Code) | ||
Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | YUMC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☒ |
| Accelerated filer |
| ☐ |
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ |
|
|
|
| Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of October 30, 2019May 4, 2020 was 375,908,592376,432,999 shares.
Yum China Holdings, Inc.
INDEX
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
Condensed Consolidated Statements of Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions, except per share data)
|
| Quarter Ended |
|
| Year to Date Ended |
| Quarter Ended |
| |||||||||||||||||
Revenues |
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||||||
Company sales |
| $ | 2,097 |
|
| $ | 2,008 |
|
| $ | 6,112 |
|
| $ | 5,912 |
|
|
| $ | 1,548 |
|
| $ | 2,089 |
|
Franchise fees and income |
|
| 38 |
|
|
| 36 |
|
|
| 113 |
|
|
| 110 |
|
|
|
| 35 |
|
|
| 39 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 172 |
|
|
| 159 |
|
|
| 496 |
|
|
| 461 |
|
|
|
| 161 |
|
|
| 170 |
|
Other revenues |
|
| 12 |
|
|
| 9 |
|
|
| 26 |
|
|
| 18 |
|
|
|
| 10 |
|
|
| 6 |
|
Total revenues |
|
| 2,319 |
|
|
| 2,212 |
|
|
| 6,747 |
|
|
| 6,501 |
|
|
|
| 1,754 |
|
|
| 2,304 |
|
Costs and Expenses, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and paper |
|
| 651 |
|
|
| 610 |
|
|
| 1,896 |
|
|
| 1,775 |
|
|
|
| 495 |
|
|
| 638 |
|
Payroll and employee benefits |
|
| 455 |
|
|
| 430 |
|
|
| 1,371 |
|
|
| 1,296 |
|
|
|
| 394 |
|
|
| 466 |
|
Occupancy and other operating expenses |
|
| 619 |
|
|
| 615 |
|
|
| 1,804 |
|
|
| 1,841 |
|
|
|
| 494 |
|
|
| 599 |
|
Company restaurant expenses |
|
| 1,725 |
|
|
| 1,655 |
|
|
| 5,071 |
|
|
| 4,912 |
|
|
|
| 1,383 |
|
|
| 1,703 |
|
General and administrative expenses |
|
| 117 |
|
|
| 119 |
|
|
| 340 |
|
|
| 334 |
|
|
|
| 99 |
|
|
| 114 |
|
Franchise expenses |
|
| 19 |
|
|
| 18 |
|
|
| 55 |
|
|
| 55 |
|
|
|
| 17 |
|
|
| 20 |
|
Expenses for transactions with franchisees and unconsolidated affiliates |
|
| 167 |
|
|
| 156 |
|
|
| 488 |
|
|
| 454 |
|
|
|
| 156 |
|
|
| 167 |
|
Other operating costs and expenses |
|
| 9 |
|
|
| 6 |
|
|
| 20 |
|
|
| 17 |
|
|
|
| 10 |
|
|
| 5 |
|
Closures and impairment (income) expenses, net |
|
| (1 | ) |
|
| (1 | ) |
|
| 14 |
|
|
| 15 |
|
| ||||||||
Closures and impairment expenses, net |
|
| 8 |
|
|
| 11 |
| |||||||||||||||||
Other income, net |
|
| (17 | ) |
|
| (10 | ) |
|
| (48 | ) |
|
| (143 | ) |
|
|
| (16 | ) |
|
| (19 | ) |
Total costs and expenses, net |
|
| 2,019 |
|
|
| 1,943 |
|
|
| 5,940 |
|
|
| 5,644 |
|
|
|
| 1,657 |
|
|
| 2,001 |
|
Operating Profit |
|
| 300 |
|
|
| 269 |
|
|
| 807 |
|
|
| 857 |
|
|
|
| 97 |
|
|
| 303 |
|
Interest income, net |
|
| 10 |
|
|
| 10 |
|
|
| 29 |
|
|
| 28 |
|
|
|
| 9 |
|
|
| 9 |
|
Investment gain |
|
| 12 |
|
|
| — |
|
|
| 39 |
|
|
| — |
|
| ||||||||
Investment (loss) gain |
|
| (8 | ) |
|
| 10 |
| |||||||||||||||||
Income Before Income Taxes |
|
| 322 |
|
|
| 279 |
|
|
| 875 |
|
|
| 885 |
|
|
|
| 98 |
|
|
| 322 |
|
Income tax provision |
|
| (87 | ) |
|
| (67 | ) |
|
| (226 | ) |
|
| (227 | ) |
|
|
| (32 | ) |
|
| (93 | ) |
Net income – including noncontrolling interests |
|
| 235 |
|
|
| 212 |
|
|
| 649 |
|
|
| 658 |
|
|
|
| 66 |
|
|
| 229 |
|
Net income – noncontrolling interests |
|
| 12 |
|
|
| 9 |
|
|
| 26 |
|
|
| 24 |
|
|
|
| 4 |
|
|
| 7 |
|
Net Income – Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
| $ | 623 |
|
| $ | 634 |
|
|
| $ | 62 |
|
| $ | 222 |
|
Weighted-average common shares outstanding (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 377 |
|
|
| 384 |
|
|
| 378 |
|
|
| 386 |
|
|
|
| 376 |
|
|
| 379 |
|
Diluted |
|
| 388 |
|
|
| 394 |
|
|
| 389 |
|
|
| 398 |
|
|
|
| 386 |
|
|
| 388 |
|
Basic Earnings Per Common Share |
| $ | 0.59 |
|
| $ | 0.53 |
|
| $ | 1.65 |
|
| $ | 1.64 |
|
|
| $ | 0.16 |
|
| $ | 0.59 |
|
Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
| $ | 1.60 |
|
| $ | 1.59 |
|
|
| $ | 0.16 |
|
| $ | 0.57 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
| Quarter Ended |
|
| Year to Date Ended |
| Quarter Ended |
| |||||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
| 3/31/2020 |
|
| 3/31/2019 |
| ||||||||
Net income - including noncontrolling interests |
| $ | 235 |
|
| $ | 212 |
|
| $ | 649 |
|
| $ | 658 |
|
|
| $ | 66 |
|
| $ | 229 |
|
Other comprehensive income, net of tax of nil: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (96 | ) |
|
| (98 | ) |
|
| (95 | ) |
|
| (156 | ) |
|
|
| (42 | ) |
|
| 59 |
|
Comprehensive income - including noncontrolling interests |
|
| 139 |
|
|
| 114 |
|
|
| 554 |
|
|
| 502 |
|
|
|
| 24 |
|
|
| 288 |
|
Comprehensive income - noncontrolling interests |
|
| 8 |
|
|
| 6 |
|
|
| 23 |
|
|
| 19 |
|
|
|
| 2 |
|
|
| 10 |
|
Comprehensive Income - Yum China Holdings, Inc. |
| $ | 131 |
|
| $ | 108 |
|
| $ | 531 |
|
| $ | 483 |
|
|
| $ | 22 |
|
| $ | 278 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
| Year to Date Ended |
|
| Quarter Ended |
| ||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||||
Cash Flows – Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income – including noncontrolling interests |
| $ | 649 |
|
| $ | 658 |
|
| $ | 66 |
|
| $ | 229 |
|
Depreciation and amortization |
|
| 322 |
|
|
| 343 |
|
|
| 109 |
|
|
| 111 |
|
Amortization of operating lease right-of-use assets |
|
| 251 |
|
|
| — |
| ||||||||
Non-cash operating lease cost |
|
| 88 |
|
|
| 83 |
| ||||||||
Closures and impairment expenses |
|
| 14 |
|
|
| 15 |
|
|
| 8 |
|
|
| 11 |
|
Gain from re-measurement of equity interest upon acquisition |
|
| — |
|
|
| (98 | ) | ||||||||
Investment gain |
|
| (39 | ) |
|
| — |
| ||||||||
Investment loss (gain) |
|
| 8 |
|
|
| (10 | ) | ||||||||
Equity income from investments in unconsolidated affiliates |
|
| (56 | ) |
|
| (52 | ) |
|
| (20 | ) |
|
| (23 | ) |
Distributions of income received from unconsolidated affiliates |
|
| 50 |
|
|
| 51 |
|
|
| 8 |
|
|
| 28 |
|
Deferred income taxes |
|
| 12 |
|
|
| 46 |
|
|
| 2 |
|
|
| 6 |
|
Share-based compensation expense |
|
| 21 |
|
|
| 18 |
|
|
| 7 |
|
|
| 6 |
|
Changes in accounts receivable |
|
| (2 | ) |
|
| 2 |
|
|
| 9 |
|
|
| 5 |
|
Changes in inventories |
|
| (22 | ) |
|
| 14 |
|
|
| 57 |
|
|
| 34 |
|
Changes in prepaid expenses and other current assets |
|
| 7 |
|
|
| (13 | ) |
|
| 10 |
|
|
| (3 | ) |
Changes in accounts payable and other current liabilities |
|
| 118 |
|
|
| 184 |
|
|
| (192 | ) |
|
| (39 | ) |
Changes in income taxes payable |
|
| 32 |
|
|
| 41 |
|
|
| 5 |
|
|
| 24 |
|
Changes in non-current operating lease liabilities |
|
| (280 | ) |
|
| — |
|
|
| (102 | ) |
|
| (103 | ) |
Other, net |
|
| (32 | ) |
|
| (36 | ) |
|
| (3 | ) |
|
| (15 | ) |
Net Cash Provided by Operating Activities |
|
| 1,045 |
|
|
| 1,173 |
|
|
| 60 |
|
|
| 344 |
|
Cash Flows – Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending |
|
| (310 | ) |
|
| (359 | ) |
|
| (87 | ) |
|
| (110 | ) |
Purchases of short-term investments |
|
| (619 | ) |
|
| (513 | ) |
|
| (275 | ) |
|
| (235 | ) |
Maturities of short-term investments |
|
| 366 |
|
|
| 513 |
|
|
| 390 |
|
|
| 76 |
|
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (91 | ) | ||||||||
Investment in equity securities |
|
| — |
|
|
| (74 | ) | ||||||||
Prepayment for investment |
|
| (27 | ) |
|
| — |
| ||||||||
Other, net |
|
| 10 |
|
|
| (3 | ) |
|
| 1 |
|
|
| 2 |
|
Net Cash Used in Investing Activities |
|
| (553 | ) |
|
| (527 | ) | ||||||||
Net Cash Provided by (Used in) Investing Activities |
|
| 2 |
|
|
| (267 | ) | ||||||||
Cash Flows – Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term borrowings assumed from acquisition |
|
| — |
|
|
| (10 | ) | ||||||||
Repurchase of shares of common stock |
|
| (207 | ) |
|
| (161 | ) |
|
| (8 | ) |
|
| (68 | ) |
Cash dividends paid on common stock |
|
| (136 | ) |
|
| (115 | ) |
|
| (45 | ) |
|
| (46 | ) |
Dividends paid to noncontrolling interests |
|
| (25 | ) |
|
| (29 | ) | ||||||||
Other, net |
|
| — |
|
|
| (3 | ) |
|
| 1 |
|
|
| 1 |
|
Net Cash Used in Financing Activities |
|
| (368 | ) |
|
| (318 | ) |
|
| (52 | ) |
|
| (113 | ) |
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash |
|
| (26 | ) |
|
| (53 | ) |
|
| (8 | ) |
|
| 17 |
|
Net Increase in Cash, Cash Equivalents and Restricted Cash |
|
| 98 |
|
|
| 275 |
| ||||||||
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash |
|
| 2 |
|
|
| (19 | ) | ||||||||
Cash, Cash Equivalents and Restricted Cash - Beginning of Period |
|
| 1,266 |
|
|
| 1,059 |
|
|
| 1,055 |
|
|
| 1,266 |
|
Cash, Cash Equivalents and Restricted Cash - End of Period |
| $ | 1,364 |
|
| $ | 1,334 |
|
| $ | 1,057 |
|
| $ | 1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax |
|
| 185 |
|
|
| 157 |
|
|
| 25 |
|
|
| 53 |
|
Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
| ||||||||
Capital expenditures included in accounts payables and other current liabilities |
|
| 111 |
|
|
| 106 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets
Yum China Holdings, Inc.
(in US$ millions)
|
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
|
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,355 |
|
| $ | 1,266 |
|
| $ | 1,048 |
|
| $ | 1,046 |
|
Short-term investments |
|
| 364 |
|
|
| 122 |
|
|
| 490 |
|
|
| 611 |
|
Accounts receivable, net |
|
| 79 |
|
|
| 80 |
|
|
| 78 |
|
|
| 88 |
|
Inventories, net |
|
| 317 |
|
|
| 307 |
|
|
| 317 |
|
|
| 380 |
|
Prepaid expenses and other current assets |
|
| 141 |
|
|
| 177 |
|
|
| 112 |
|
|
| 134 |
|
Total Current Assets |
|
| 2,256 |
|
|
| 1,952 |
|
|
| 2,045 |
|
|
| 2,259 |
|
Property, plant and equipment, net |
|
| 1,506 |
|
|
| 1,615 |
|
|
| 1,500 |
|
|
| 1,594 |
|
Operating lease right-of-use assets |
|
| 1,893 |
|
|
| — |
|
|
| 1,899 |
|
|
| 1,985 |
|
Goodwill |
|
| 256 |
|
|
| 266 |
|
|
| 250 |
|
|
| 254 |
|
Intangible assets, net |
|
| 97 |
|
|
| 116 |
|
|
| 89 |
|
|
| 94 |
|
Deferred income taxes |
|
| 89 |
|
|
| 89 |
|
|
| 92 |
|
|
| 95 |
|
Investments in unconsolidated affiliates |
|
| 74 |
|
|
| 81 |
|
|
| 107 |
|
|
| 89 |
|
Other assets |
|
| 539 |
|
|
| 491 |
|
|
| 595 |
|
|
| 580 |
|
Total Assets |
| $ | 6,710 |
|
| $ | 4,610 |
|
| $ | 6,577 |
|
| $ | 6,950 |
|
|
|
|
|
|
|
|
|
| ||||||||
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities |
| $ | 1,566 |
|
| $ | 1,199 |
|
| $ | 1,434 |
|
| $ | 1,691 |
|
Income taxes payable |
|
| 82 |
|
|
| 54 |
|
|
| 49 |
|
|
| 45 |
|
Total Current Liabilities |
|
| 1,648 |
|
|
| 1,253 |
|
|
| 1,483 |
|
|
| 1,736 |
|
Non-current operating lease liabilities |
|
| 1,729 |
|
|
| — |
|
|
| 1,704 |
|
|
| 1,803 |
|
Non-current finance lease liabilities |
|
| 23 |
|
|
| 25 |
|
|
| 25 |
|
|
| 26 |
|
Other liabilities |
|
| 195 |
|
|
| 355 |
|
|
| 211 |
|
|
| 210 |
|
Total Liabilities |
|
| 3,595 |
|
|
| 1,633 |
|
|
| 3,423 |
|
|
| 3,775 |
|
|
|
|
|
|
|
|
|
| ||||||||
Redeemable Noncontrolling Interest |
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
| ||||||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 1,000 million shares authorized; 394 million shares and 392 million shares issued at September 30, 2019 and December 31, 2018, respectively; 376 million shares and 379 million shares outstanding at September 30, 2019 and December 31, 2018, respectively |
|
| 4 |
|
|
| 4 |
| ||||||||
Common stock, $0.01 par value; 1,000 million shares authorized; 396 million shares and 395 million shares issued at March 31, 2020 and December 31, 2019, respectively; 376 million shares and 376 million shares outstanding at March 31, 2020 and December 31, 2019, respectively |
|
| 4 |
|
|
| 4 |
| ||||||||
Treasury stock |
|
| (664 | ) |
|
| (460 | ) |
|
| (728 | ) |
|
| (721 | ) |
Additional paid-in capital |
|
| 2,423 |
|
|
| 2,402 |
|
|
| 2,434 |
|
|
| 2,427 |
|
Retained earnings |
|
| 1,371 |
|
|
| 944 |
|
|
| 1,433 |
|
|
| 1,416 |
|
Accumulated other comprehensive loss |
|
| (109 | ) |
|
| (17 | ) |
|
| (89 | ) |
|
| (49 | ) |
Total Equity – Yum China Holdings, Inc. |
|
| 3,025 |
|
|
| 2,873 |
| ||||||||
Total Yum China Holdings, Inc. Stockholders' Equity |
|
| 3,054 |
|
|
| 3,077 |
| ||||||||
Noncontrolling interests |
|
| 89 |
|
|
| 103 |
|
|
| 100 |
|
|
| 98 |
|
Total Equity |
|
| 3,114 |
|
|
| 2,976 |
|
|
| 3,154 |
|
|
| 3,175 |
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity |
| $ | 6,710 |
|
| $ | 4,610 |
|
| $ | 6,577 |
|
| $ | 6,950 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Tabular amounts in US$ millions)
Note 1 – Description of the Business
Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016. The Company separated from Yum! Brands, Inc. (“YUM” or the “Parent”) on October 31, 2016 (the “separation”), becoming an independent publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received 1 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, East Dawning, Little Sheep, Taco Bell and COFFii & JOY, East Dawning and Taco Bell concepts (collectively, the “Concepts”“concepts”). In connection with the separation of the Company in 2016 from YUM,its former parent company, YUM! Brands, Inc. (“YUM”), Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect subsidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of Yum China,the Company, entered into a 50-year master license agreement with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew, for the exclusive right to use and sub-licensesublicense the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Taiwan and Macau. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants.
We own the intellectual property of East Dawning, Little Sheep, and COFFii & JOY and East Dawning, and pay no license fee related to these Concepts.concepts.
The Company also owns a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider in China.
In addition, the Company started a new e-commerce business in 2017, offering a wide selection of products including electronics, home and kitchen accessories, fresh groceries, and other general merchandise to customers directly through the Company’s e-commerce platform.
Note 2 – Basis of Presentation
Our preparation of the accompanying Condensed Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We have prepared the Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of September 30, 2019,March 31, 2020 and our results of our operations, and comprehensive income for the quarters and years to date ended September 30, 2019 and 2018, and cash flows for the years to datequarters ended September 30, 2019March 31, 2020 and 2018.2019. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 27, 2019.2020.
Through the acquisition of Daojia, in 2017, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and has the obligationis 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.
During the first quarter of 2018, the Company completed the acquisition of an additional 36% equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), for cash consideration of approximately $98 million, increasing the Company’s equity interest to 83%, allowing the Company to consolidate the entity. The acquisition was considered immaterial. We began consolidating Wuxi KFC upon the completion of acquisition.
Recently Adopted Accounting Pronouncements
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,2016-13, LeasesFinancial Instruments – Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments (“(“ASU 2016-02” or “ASC 842”2016-13”), which increases transparencyrequires measurement and comparability among organizations by recognizing leaserecognition of expected versus incurred credit losses for financial assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.held. The FASB subsequently issued amendments to clarify the implementation guidance. The CompanyWe adopted these standards on January 1, 2019,2020 using athe modified retrospective method for leases that exist at, or are entered into after, January 1, 2019, and has not recast the comparative periods presented in the Condensed Consolidated Financial Statements. Additionally, we elected the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
Upon themethod. The adoption of ASC 842, the Company recognized right-of-use (“ROU”) assets and lease liabilities of approximately $2.0 billion and $2.2 billion, respectively, for operating leases of the land and/or buildingthis standard resulted in a change of our restaurants and office spaces based on the present value of lease payments over the lease term. In addition, an impairment charge of $60 million (net of relatedprovision policy primarily for accounts receivable, but such adoption did not have a material impact on deferred taxes and noncontrolling interests) on ROU assets arising from existing operating leases as of January 1, 2019 was recorded as an adjustmentour financial statements. See Note 3 for additional information related to retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease ROU assets been recognized at the time of impairment.our accounts receivable provision policy.
The following table summarizes the effect on the Consolidated Balance Sheet as a result of adopting ASC 842.
|
| December 31, 2018 |
|
| Effect of adoption |
|
| January 1, 2019 |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,266 |
|
|
|
|
|
| $ | 1,266 |
|
|
Short-term investments |
|
| 122 |
|
|
|
|
|
|
| 122 |
|
|
Accounts receivable, net |
|
| 80 |
|
|
|
|
|
|
| 80 |
|
|
Inventories, net |
|
| 307 |
|
|
|
|
|
|
| 307 |
|
|
Prepaid expenses and other current assets |
|
| 177 |
|
|
| (39 | ) | (a) |
| 138 |
|
|
Total Current Assets |
|
| 1,952 |
|
|
| (39 | ) |
|
| 1,913 |
|
|
Property, plant and equipment, net |
|
| 1,615 |
|
|
| (1 | ) |
|
| 1,614 |
|
|
Operating lease right-of-use assets |
|
| — |
|
|
| 1,997 |
| (b) |
| 1,997 |
|
|
Goodwill |
|
| 266 |
|
|
|
|
|
|
| 266 |
|
|
Intangible assets, net |
|
| 116 |
|
|
| (2 | ) | (c) |
| 114 |
|
|
Deferred income taxes |
|
| 89 |
|
|
| 19 |
| (d) |
| 108 |
|
|
Investments in unconsolidated affiliates |
|
| 81 |
|
|
| (1 | ) |
|
| 80 |
|
|
Other assets |
|
| 491 |
|
|
| (4 | ) | (c) |
| 487 |
|
|
Total Assets |
| $ | 4,610 |
|
| $ | 1,969 |
|
| $ | 6,579 |
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities |
| $ | 1,199 |
|
| $ | 320 |
| (e) | $ | 1,519 |
|
|
Income taxes payable |
|
| 54 |
|
|
|
|
|
|
| 54 |
|
|
Total Current Liabilities |
|
| 1,253 |
|
|
| 320 |
|
|
| 1,573 |
|
|
Non-current operating lease liabilities |
|
| — |
|
|
| 1,860 |
| (f) |
| 1,860 |
|
|
Non-current finance lease liabilities |
|
| 25 |
|
|
| — |
|
|
| 25 |
|
|
Other liabilities |
|
| 355 |
|
|
| (148 | ) | (g) |
| 207 |
|
|
Total Liabilities |
|
| 1,633 |
|
|
| 2,032 |
|
|
| 3,665 |
|
|
Redeemable Noncontrolling Interest |
|
| 1 |
|
|
|
|
|
|
| 1 |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| 4 |
|
|
|
|
|
|
| 4 |
|
|
Treasury stock |
|
| (460 | ) |
|
|
|
|
|
| (460 | ) |
|
Additional paid-in capital |
|
| 2,402 |
|
|
|
|
|
|
| 2,402 |
|
|
Retained earnings |
|
| 944 |
|
|
| (60 | ) | (h) |
| 884 |
|
|
Accumulated other comprehensive loss |
|
| (17 | ) |
|
|
|
|
|
| (17 | ) |
|
Total Equity – Yum China Holdings, Inc. |
|
| 2,873 |
|
|
| (60 | ) |
|
| 2,813 |
|
|
Noncontrolling interests |
|
| 103 |
|
|
| (3 | ) | (i) |
| 100 |
|
|
Total Equity |
|
| 2,976 |
|
|
| (63 | ) |
|
| 2,913 |
|
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity |
| $ | 4,610 |
|
| $ | 1,969 |
|
| $ | 6,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In FebruaryAugust 2018, the FASB issued ASU 2018-02,2018-13, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Fair Value Measurement (Topic 820): Disclosure Framework –changes to the Disclosure Requirements for Fair Value Measurement(“ (“ASU 2018-02”2018-13”). The new, which amends the fair value measurement guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for the Company from January 1, 2019, with early adoption permitted.by modifying disclosure requirements. We adopted the standard on January 1, 2019,2020, and such adoption did not have a material impact on our financial statements. See Note 11 for additional disclosure on fair value measurement.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. We adopted this standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.
In JuneNovember 2018, the FASB issued ASU 2018-07,2018-18, Compensation – Stock CompensationCollaborative Arrangements (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting808), Clarifying the Interaction between Topic 808 and Topic 606 (“(“ASU 2018-07”2018-18”). The new guidance largely aligns the accounting for share-based awards issued to employees and non-employees. Existing guidance for employee awards will apply to nonemployee share-based transactions with limited exceptions. The new guidance also, which clarifies that any share-based payment awards issued to customerstransactions in a collaborative arrangement should be evaluatedaccounted for under ASC 606,ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2018-07 (“ASC 606”) when the counterparty is effectivea customer for a distinct good or service. The amendment also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the Company from January 1, 2019, with early adoption permitted.counterparty is not a customer for that transaction. We adopted the standard on January 1, 2019,2020, and such adoption did not have a material impact on our financial statements.
Certain prior period items in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.
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 useeither used our dedicated riders or, in limited cases,the past, third-party aggregators’ delivery staff. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders arewere fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognizerecognized revenue, excluding delivery fees, when control of the food iswas transferred to the third-party aggregators’ delivery staff. The payment terms with respect to thesethose sales arewere short-term in nature. Starting in 2019, we use our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores.
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 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, and five or 10 years for Little Sheep.We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
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. 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 a certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer support and technology support services. Advertising services and other services provided are highly interrelated to the franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.
Loyalty Programs
Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns including an estimate of the breakage for points that members will never redeem. The Companyand reviews its breakagesuch estimates periodically based upon the latest available information regarding redemption and expiration patterns.patterns.
Disaggregation of Revenue
The following table presents revenue disaggregated by types of arrangements and segments:
|
| Quarter Ended 9/30/2019 |
|
| Quarter Ended 3/31/2020 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments(a) |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| ||||||||||||||
Company sales |
| $ | 1,546 |
|
| $ | 540 |
|
| $ | 11 |
|
| $ | — |
|
| $ | 2,097 |
|
| $ | — |
|
| $ | 2,097 |
|
| $ | 1,220 |
|
| $ | 322 |
|
| $ | 6 |
|
| $ | — |
|
| $ | 1,548 |
|
| $ | — |
|
| $ | 1,548 |
|
Franchise fees and income |
|
| 35 |
|
|
| 1 |
|
|
| 2 |
|
|
| — |
|
|
| 38 |
|
|
| — |
|
|
| 38 |
|
|
| 33 |
|
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| 35 |
|
|
| — |
|
|
| 35 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 16 |
|
|
| 1 |
|
|
| 8 |
|
|
| 147 |
|
|
| 172 |
|
|
| — |
|
|
| 172 |
|
|
| 16 |
|
|
| 1 |
|
|
| 5 |
|
|
| 139 |
|
|
| 161 |
|
|
| — |
|
|
| 161 |
|
Other revenues |
|
| 1 |
|
|
| — |
|
|
| 19 |
|
|
| 1 |
|
|
| 21 |
|
|
| (9 | ) |
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| 16 |
|
|
| 1 |
|
|
| 17 |
|
|
| (7 | ) |
|
| 10 |
|
Total revenues |
| $ | 1,598 |
|
| $ | 542 |
|
| $ | 40 |
|
| $ | 148 |
|
| $ | 2,328 |
|
| $ | (9 | ) |
| $ | 2,319 |
|
| $ | 1,269 |
|
| $ | 324 |
|
| $ | 28 |
|
| $ | 140 |
|
| $ | 1,761 |
|
| $ | (7 | ) |
| $ | 1,754 |
|
|
| Quarter Ended 9/30/2018 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments(a) |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 1,452 |
|
| $ | 548 |
|
| $ | 8 |
|
| $ | — |
|
| $ | 2,008 |
|
| $ | — |
|
| $ | 2,008 |
|
Franchise fees and income |
|
| 34 |
|
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| 36 |
|
|
| — |
|
|
| 36 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 15 |
|
|
| 1 |
|
|
| 7 |
|
|
| 136 |
|
|
| 159 |
|
|
| — |
|
|
| 159 |
|
Other revenues |
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 1 |
|
|
| 15 |
|
|
| (6 | ) |
|
| 9 |
|
Total revenues |
| $ | 1,501 |
|
| $ | 550 |
|
| $ | 30 |
|
| $ | 137 |
|
| $ | 2,218 |
|
| $ | (6 | ) |
| $ | 2,212 |
|
|
| Year to Date Ended 9/30/2019 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments(a) |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 4,495 |
|
| $ | 1,588 |
|
| $ | 29 |
|
| $ | — |
|
| $ | 6,112 |
|
| $ | — |
|
| $ | 6,112 |
|
Franchise fees and income |
|
| 104 |
|
|
| 3 |
|
|
| 6 |
|
|
| — |
|
|
| 113 |
|
|
| — |
|
|
| 113 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 48 |
|
|
| 3 |
|
|
| 20 |
|
|
| 425 |
|
|
| 496 |
|
|
| — |
|
|
| 496 |
|
Other revenues |
|
| 1 |
|
|
| 1 |
|
|
| 49 |
|
|
| 3 |
|
|
| 54 |
|
|
| (28 | ) |
|
| 26 |
|
Total revenues |
| $ | 4,648 |
|
| $ | 1,595 |
|
| $ | 104 |
|
| $ | 428 |
|
| $ | 6,775 |
|
| $ | (28 | ) |
| $ | 6,747 |
|
|
| Year to Date Ended 9/30/2018 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments(a) |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 4,248 |
|
| $ | 1,640 |
|
| $ | 24 |
|
| $ | — |
|
| $ | 5,912 |
|
| $ | — |
|
| $ | 5,912 |
|
Franchise fees and income |
|
| 104 |
|
|
| 2 |
|
|
| 4 |
|
|
| — |
|
|
| 110 |
|
|
| — |
|
|
| 110 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 47 |
|
|
| 1 |
|
|
| 18 |
|
|
| 395 |
|
|
| 461 |
|
|
| — |
|
|
| 461 |
|
Other revenues |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| 2 |
|
|
| 27 |
|
|
| (9 | ) |
|
| 18 |
|
Total revenues |
| $ | 4,399 |
|
| $ | 1,643 |
|
| $ | 71 |
|
| $ | 397 |
|
| $ | 6,510 |
|
| $ | (9 | ) |
| $ | 6,501 |
|
|
|
|
| Quarter Ended 3/31/2019 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All OtherSegments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 1,539 |
|
| $ | 541 |
|
| $ | 9 |
|
| $ | — |
|
| $ | 2,089 |
|
| $ | — |
|
| $ | 2,089 |
|
Franchise fees and income |
|
| 36 |
|
|
| 1 |
|
|
| 2 |
|
|
| — |
|
|
| 39 |
|
|
| — |
|
|
| 39 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 17 |
|
|
| 1 |
|
|
| 7 |
|
|
| 145 |
|
|
| 170 |
|
|
| — |
|
|
| 170 |
|
Other revenues |
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 1 |
|
|
| 15 |
|
|
| (9 | ) |
|
| 6 |
|
Total revenues |
| $ | 1,592 |
|
| $ | 543 |
|
| $ | 32 |
|
| $ | 146 |
|
| $ | 2,313 |
|
| $ | (9 | ) |
| $ | 2,304 |
|
Accounts Receivable
Accounts receivable mainly consist of trade receivables and royalties from franchisees and unconsolidated affiliates, and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Condensed Consolidated Balance Sheets. OurPrior to the adoption of ASC 326, our provision for uncollectible receivable balances iswas based upon pre-defined aging criteria or upon the occurrence of other events that indicateindicated that we may not collect the balance due. Additionally, we monitorUpon adoption of ASC 326 starting from January 1, 2020, our provision of credit losses for accounts receivable is based upon the financial conditioncurrent expected credit losses (“CECL”) model. The CECL model requires an estimate of our franchiseesthe credit losses expected over the life of accounts receivable since initial recognition, and record provisionsaccounts 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 estimated losses on receivables when we believe it is probable that our franchisees will be unable to make their required payments.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. Trade receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of March 31, 2020 and December 31, 2019, 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 trade receivables and dividend receivables were $43 million and $58 million as of March 31, 2020 and December 31, 2019, respectively.
Costs to Obtain Contracts
Costs to obtain contracts consist of upfront licensefranchise fees that we paid to YUM prior to the separation 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 expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets on the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company did 0t incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $9 million and $8 million at September 30, 2019both March 31, 2020 and December 31, 2018, respectively.2019.
Contract Liabilities
Contract liabilities at September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
Contract liabilities |
| 9/30/2019 |
|
| 12/31/2018 |
| ||
Deferred revenue related to prepaid stored-value products |
| $ | 80 |
|
| $ | 73 |
|
Deferred revenue related to customer loyalty programs |
|
| 24 |
|
|
| 17 |
|
Deferred revenue related to upfront fees |
|
| 36 |
|
|
| 37 |
|
Total |
| $ | 140 |
|
| $ | 127 |
|
Contract liabilities |
| 3/31/2020 |
|
| 12/31/2019 |
| ||
- Deferred revenue related to prepaid stored-value products |
| $ | 81 |
|
| $ | 86 |
|
- Deferred revenue related to upfront franchise fees |
|
| 39 |
|
|
| 39 |
|
- Deferred revenue related to customer loyalty programs |
|
| 27 |
|
|
| 24 |
|
- Deferred revenue related to privilege membership programs |
|
| 15 |
|
|
| 16 |
|
- Others |
|
| 3 |
|
|
| 3 |
|
Total |
| $ | 165 |
|
| $ | 168 |
|
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 on the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront franchise fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities on the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $35$38 million and $21$33 million for the quarterquarters ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $56 million and $39 million for the years to date ended September 30, 2019 and 2018, respectively. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the periods presented.
The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for the franchise right and other related services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to franchisees and unconsolidated affiliates based on a certain percentage of sales, as those sales occur.
Note 4 – Earnings Per Common Share (“EPS”)
The following table summarizes the components of basic and diluted EPS (in millions, except per share data):
|
| Quarter Ended |
|
| Year to Date Ended |
| |||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
|
| 9/30/2018 |
| ||||
Net Income – Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
| $ | 623 |
|
|
| $ | 634 |
|
Weighted-average common shares outstanding (for basic calculation) (a) |
|
| 377 |
|
|
| 384 |
|
|
| 378 |
|
|
|
| 386 |
|
Effect of dilutive share-based awards (a) |
|
| 7 |
|
|
| 9 |
|
|
| 8 |
|
|
|
| 10 |
|
Effect of dilutive warrants (b) |
|
| 4 |
|
|
| 1 |
|
|
| 3 |
|
|
|
| 2 |
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) |
|
| 388 |
|
|
| 394 |
|
|
| 389 |
|
|
|
| 398 |
|
Basic Earnings Per Common Share |
| $ | 0.59 |
|
| $ | 0.53 |
|
| $ | 1.65 |
|
|
| $ | 1.64 |
|
Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
| $ | 1.60 |
|
|
| $ | 1.59 |
|
Share-based awards excluded from the diluted EPS computation (c) |
|
| 2 |
|
|
| 10 |
|
|
| 2 |
|
|
|
| 4 |
|
|
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
Net Income – Yum China Holdings, Inc. |
| $ | 62 |
|
| $ | 222 |
|
Weighted-average common shares outstanding (for basic calculation)(a) |
|
| 376 |
|
|
| 379 |
|
Effect of dilutive share-based awards(a) |
|
| 6 |
|
|
| 7 |
|
Effect of dilutive warrants(b) |
|
| 4 |
|
|
| 2 |
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) |
|
| 386 |
|
|
| 388 |
|
Basic Earnings Per Common Share |
| $ | 0.16 |
|
| $ | 0.59 |
|
Diluted Earnings Per Common Share |
| $ | 0.16 |
|
| $ | 0.57 |
|
Share-based awards excluded from the diluted EPS computation(c) |
|
| 3 |
|
|
| 2 |
|
(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 |
(b) | Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors 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, 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 exceeds the applicable exercise price of the warrants. |
(c) |
|
Note 5 – Equity
Changes in Equity and Redeemable Noncontrolling Interest (in millions)
|
| 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 June 30, 2019 |
|
| 394 |
|
| $ | 4 |
|
| $ | 2,417 |
|
| $ | 1,193 |
|
| $ | (17 | ) |
|
| (17 | ) |
| $ | (600 | ) |
| $ | 81 |
|
| $ | 3,078 |
|
| $ | 1 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12 |
|
|
| 235 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (92 | ) |
|
|
|
|
|
|
|
|
|
| (4 | ) |
|
| (96 | ) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 139 |
|
|
|
|
|
Cash dividends declared ($0.12 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
| (64 | ) |
|
|
|
|
|
| (64 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
Balance at September 30, 2019 |
|
| 394 |
|
| $ | 4 |
|
| $ | 2,423 |
|
| $ | 1,371 |
|
| $ | (109 | ) |
|
| (18 | ) |
| $ | (664 | ) |
| $ | 89 |
|
| $ | 3,114 |
|
| $ | 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018 |
|
| 391 |
|
| $ | 4 |
|
| $ | 2,388 |
|
| $ | 751 |
|
| $ | 81 |
|
|
| (6 | ) |
| $ | (221 | ) |
| $ | 93 |
|
| $ | 3,096 |
|
| $ | 5 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9 |
|
|
| 212 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (95 | ) |
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (98 | ) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 114 |
|
|
|
|
|
Cash dividends declared ($0.1 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (38 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (38 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (94 | ) |
|
|
|
|
|
| (94 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5 |
|
|
|
|
| |
Balance at September 30, 2018 |
|
| 391 |
|
| $ | 4 |
|
| $ | 2,393 |
|
| $ | 916 |
|
| $ | (14 | ) |
|
| (9 | ) |
| $ | (315 | ) |
| $ | 99 |
|
| $ | 3,083 |
|
| $ | 5 |
|
|
| Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Common |
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Redeemable |
| ||||||||
|
| Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Treasury Stock |
|
| Noncontrolling |
|
| Total |
|
| Noncontrolling |
| ||||||||||||||||
|
| Shares* |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Shares* |
|
| Amount |
|
| Interests |
|
| Equity |
|
| Interest |
| ||||||||||
Balance at December 31, 2019 |
|
| 395 |
|
| $ | 4 |
|
| $ | 2,427 |
|
| $ | 1,416 |
|
| $ | (49 | ) |
|
| (19 | ) |
| $ | (721 | ) |
| $ | 98 |
|
| $ | 3,175 |
|
| $ | — |
|
Net Income |
|
|
|
|
|
|
| �� |
|
|
|
|
|
| 62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4 |
|
|
| 66 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (40 | ) |
|
|
|
|
|
|
|
|
|
| (2 | ) |
|
| (42 | ) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 24 |
|
|
|
|
|
Cash dividends declared ($0.12 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| (7 | ) |
|
|
|
|
|
| (7 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
|
|
|
Balance at March 31, 2020 |
|
| 396 |
|
| $ | 4 |
|
| $ | 2,434 |
|
| $ | 1,433 |
|
| $ | (89 | ) |
|
| (20 | ) |
| $ | (728 | ) |
| $ | 100 |
|
| $ | 3,154 |
|
| $ | — |
|
|
| Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Common |
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Redeemable |
| ||||||||
|
| Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Treasury Stock |
|
| Noncontrolling |
|
| Total |
|
| Noncontrolling |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| (Loss) Income |
|
| Shares |
|
| Amount |
|
| Interests |
|
| Equity |
|
| Interest |
| ||||||||||
Balance at December 31, 2018 |
|
| 392 |
|
| $ | 4 |
|
| $ | 2,402 |
|
| $ | 944 |
|
| $ | (17 | ) |
|
| (13 | ) |
| $ | (460 | ) |
| $ | 103 |
|
| $ | 2,976 |
|
| $ | 1 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 26 |
|
|
| 649 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (92 | ) |
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (95 | ) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 554 |
|
|
|
|
|
Cash dividends declared ($0.36 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (136 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (136 | ) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (34 | ) |
|
| (34 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
| (204 | ) |
|
|
|
|
|
| (204 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 2 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 21 |
|
|
|
|
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (60 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (63 | ) |
|
|
|
|
Balance at September 30, 2019 |
|
| 394 |
|
| $ | 4 |
|
| $ | 2,423 |
|
| $ | 1,371 |
|
| $ | (109 | ) |
|
| (18 | ) |
| $ | (664 | ) |
| $ | 89 |
|
| $ | 3,114 |
|
| $ | 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
|
| 389 |
|
| $ | 4 |
|
| $ | 2,375 |
|
| $ | 397 |
|
| $ | 137 |
|
|
| (4 | ) |
| $ | (148 | ) |
| $ | 77 |
|
| $ | 2,842 |
|
| $ | 5 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 24 |
|
|
| 658 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (151 | ) |
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
| (156 | ) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 502 |
|
|
|
|
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36 |
|
|
| 36 |
|
|
|
|
|
Cash dividends declared ($0.3 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (115 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (115 | ) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (33 | ) |
|
| (33 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
| (167 | ) |
|
|
|
|
|
| (167 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 2 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
| 18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18 |
|
|
|
|
| |
Balance at September 30, 2018 |
|
| 391 |
|
| $ | 4 |
|
| $ | 2,393 |
|
| $ | 916 |
|
| $ | (14 | ) |
|
| (9 | ) |
| $ | (315 | ) |
| $ | 99 |
|
| $ | 3,083 |
|
| $ | 5 |
|
|
| Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Common |
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Redeemable |
| ||||||||
|
| Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Treasury Stock |
|
| Noncontrolling |
|
| Total |
|
| Noncontrolling |
| ||||||||||||||||
|
| Shares* |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| (Loss) Income |
|
| Shares* |
|
| Amount |
|
| Interests |
|
| Equity |
|
| Interest |
| ||||||||||
Balance at December 31, 2018 |
|
| 392 |
|
| $ | 4 |
|
| $ | 2,402 |
|
| $ | 944 |
|
| $ | (17 | ) |
|
| (13 | ) |
| $ | (460 | ) |
| $ | 103 |
|
| $ | 2,976 |
|
| $ | 1 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
| 229 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 56 |
|
|
|
|
|
|
|
|
|
|
| 3 |
|
|
| 59 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 288 |
|
|
|
|
|
Cash dividends declared ($0.12 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (46 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (46 | ) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (34 | ) |
|
| (34 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2 | ) |
|
| (65 | ) |
|
|
|
|
|
| (65 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 2 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (60 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (63 | ) |
|
|
|
|
Balance at March 31, 2019 |
|
| 394 |
|
| $ | 4 |
|
| $ | 2,408 |
|
| $ | 1,060 |
|
| $ | 39 |
|
|
| (15 | ) |
| $ | (525 | ) |
| $ | 76 |
|
| $ | 3,062 |
|
| $ | 1 |
|
*: Shares may not to add due to rounding.
Share Repurchase Program
On February 7, 2017, we announced that ourOur Board of Directors has authorized a $300 million share repurchase program. On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million. On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4 billion.billion for our share repurchase program. The Company repurchased 4.90.2 million and 4.61.7 million shares of Yum China common stock at a total cost of $204$7 million and $167$65 million for the years to datequarters ended September 30,March 31, 2020 and 2019, and 2018, respectively. The total cost includes $2 million and $6 million to be settled subsequent to September 30,March 31, 2019, and 2018, respectively, for shares repurchased with trade dates on or prior to September 30, 2019 and 2018, respectively.March 31, 2019. As of September 30, 2019, $756March 31, 2020, $692 million remained available for future share repurchases under the authorization.
Note 6 – Items Affecting Comparability of Net Income and Cash Flows
GainImpact of COVID-19 Pandemic
The COVID-19 pandemic has significantly impacted the Company’s operations in the first quarter of 2020. The decrease in Operating profit for the quarter was mainly driven by same-store sales declines and temporary store closures resulting from Re-Measurementthe COVID-19 pandemic, and offset by one-time rent concessions of Equity Interest Upon Acquisition$14 million from landlords and a one-time government subsidy in the form of a reduction in social security contributions of $20 million. Operating profit for the quarter ended March 31, 2020 was $97 million, a decrease of 68% from the first quarter ended March 31, 2019.
Restaurant-level Impairment
In the first quarter of 2018,2020, we considered the Company completedadverse economic effects of the acquisitionCOVID-19 pandemic an impairment indicator, and performed an additional impairment evaluation for long-lived assets of Wuxi KFC.restaurants. As a result of the evaluation, we recorded a restaurant-level impairment charge of $9 million. In connection with the acquisition, the Companyfirst quarter of 2019, we also recognizedperformed an additional impairment evaluation as a gainresult of $98 million from the re-measurementadopting ASC 842 and recorded a restaurant-level impairment charge of our previously held 47% equity interest at fair value using discounted cash flow valuation approach and incorporating assumptions and estimates that were not observable in the market. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, which were based on internal projections, historical performance of stores and the business environment, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium. The gain was not allocated to any segment$12 million. See Note 11 for performance reporting purposes.additional information.
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 Hong Kong Stock Exchange in September 2018. The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. AsThe related unrealized loss of September 30, 2019, the fair value of the investment was $86 million. The$8 million and unrealized gain of $12 million and $39$10 million was included in Investment gain or loss in our Condensed Consolidated Statements of Income duringfor the quarterquarters ended March 31, 2020 and year to date ended September 30, 2019, respectively.
Transition Tax
The U.S. Treasury Department and Internal Revenue Service (“IRS”) released the final transition tax regulations in the first quarter of 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations that were released by the U.S. Treasury Department and the Internal Revenue Service (“IRS”) and became effective in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly. See Note 12 for additional information.
Partner PSU Awards
In February 2020, the Company’s Board of Directors approved new grants of SARs, RSUs and PSUs to employees under the Yum China Holdings, Inc. Long Term Incentive Plan (the “2016 Plan”). The awards will be earned based on their respective vesting terms, with PSUs subject to market conditions or performance conditions. A special award of PSUs (“Partner PSU Awards”) was granted to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These Partner 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. 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 of the Board 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 a share-based compensation cost associated with the Partner PSU Awards of $1 million for the quarter ended March 31, 2020.
Note 7 – Other Income, net
|
| Quarter Ended |
|
| Year to Date Ended |
|
| Quarter Ended |
| |||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||||||
Equity income from investments in unconsolidated affiliates |
| $ | 19 |
|
| $ | 17 |
|
| $ | 56 |
|
| $ | 52 |
|
| $ | 20 |
|
| $ | 23 |
|
Gain from re-measurement of equity interest upon acquisition(a) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 98 |
| ||||||||
Foreign exchange impact and other |
|
| (2 | ) |
|
| (7 | ) |
|
| (8 | ) |
|
| (7 | ) |
|
| (4 | ) |
|
| (4 | ) |
Other income, net |
| $ | 17 |
|
| $ | 10 |
|
| $ | 48 |
|
| $ | 143 |
|
| $ | 16 |
|
| $ | 19 |
|
|
|
Note 8 – Supplemental Balance Sheet Information
Accounts Receivable, net |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
Accounts receivable, gross |
| $ | 80 |
|
| $ | 81 |
|
| $ | 79 |
|
| $ | 89 |
|
Allowance for doubtful accounts |
|
| (1 | ) |
|
| (1 | ) |
|
| (1 | ) |
|
| (1 | ) |
Accounts receivable, net |
| $ | 79 |
|
| $ | 80 |
|
| $ | 78 |
|
| $ | 88 |
|
Prepaid Expenses and Other Current Assets |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
Receivables from payment processors and aggregators |
| $ | 32 |
|
| $ | 49 |
|
| $ | 20 |
|
| $ | 41 |
|
Prepaid rent |
|
| 1 |
|
|
| 2 |
| ||||||||
Dividends receivable from unconsolidated affiliates |
|
| 32 |
|
|
| 20 |
|
|
| — |
|
|
| 8 |
|
Prepaid rent |
|
| 1 |
|
|
| 42 |
| ||||||||
Other prepaid expenses and current assets |
|
| 76 |
|
|
| 66 |
|
|
| 91 |
|
|
| 83 |
|
Prepaid expenses and other current assets |
| $ | 141 |
|
| $ | 177 |
|
| $ | 112 |
|
| $ | 134 |
|
Property, Plant and Equipment |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
Buildings and improvements |
| $ | 2,099 |
|
| $ | 2,121 |
|
| $ | 2,174 |
|
| $ | 2,159 |
|
Finance leases, primarily buildings |
|
| 26 |
|
|
| 26 |
|
|
| 30 |
|
|
| 30 |
|
Machinery, equipment and construction in progress |
|
| 1,191 |
|
|
| 1,201 |
| ||||||||
Machinery and equipment, and construction in progress |
|
| 1,211 |
|
|
| 1,282 |
| ||||||||
Property, plant and equipment, gross |
|
| 3,316 |
|
|
| 3,348 |
|
|
| 3,415 |
|
|
| 3,471 |
|
Accumulated depreciation |
|
| (1,810 | ) |
|
| (1,733 | ) |
|
| (1,915 | ) |
|
| (1,877 | ) |
Property, plant and equipment, net |
| $ | 1,506 |
|
| $ | 1,615 |
|
| $ | 1,500 |
|
| $ | 1,594 |
|
Other Assets |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
VAT assets |
| $ | 232 |
|
| $ | 226 |
|
| $ | 241 |
|
| $ | 243 |
|
Land use right |
|
| 130 |
|
|
| 138 |
|
|
| 129 |
|
|
| 133 |
|
Investment in equity securities |
|
| 86 |
|
|
| 47 |
|
|
| 102 |
|
|
| 110 |
|
Long-term deposits |
|
| 69 |
|
|
| 64 |
|
|
| 73 |
|
|
| 71 |
|
Prepayment for investment(a) |
|
| 27 |
|
|
| — |
| ||||||||
Restricted cash |
|
| 9 |
|
|
| 9 |
| ||||||||
Costs to obtain contracts |
|
| 9 |
|
|
| 8 |
|
|
| 9 |
|
|
| 9 |
|
Restricted cash |
|
| 9 |
|
|
| — |
| ||||||||
Others |
|
| 4 |
|
|
| 8 |
|
|
| 5 |
|
|
| 5 |
|
Other Assets |
| $ | 539 |
|
| $ | 491 |
|
| $ | 595 |
|
| $ | 580 |
|
Accounts Payable and Other Current Liabilities |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
Accounts payable |
| $ | 563 |
|
| $ | 619 |
|
| $ | 466 |
|
| $ | 623 |
|
Operating leases liabilities |
|
| 360 |
|
|
| — |
|
|
| 403 |
|
|
| 382 |
|
Accrued compensation and benefits |
|
| 199 |
|
|
| 200 |
|
|
| 142 |
|
|
| 223 |
|
Contract liabilities |
|
| 133 |
|
|
| 135 |
| ||||||||
Accrued capital expenditures |
|
| 112 |
|
|
| 137 |
|
|
| 111 |
|
|
| 150 |
|
Contract liabilities |
|
| 110 |
|
|
| 96 |
| ||||||||
Accrued marketing expenses |
|
| 94 |
|
|
| 32 |
|
|
| 79 |
|
|
| 64 |
|
Other current liabilities |
|
| 128 |
|
|
| 115 |
|
|
| 100 |
|
|
| 114 |
|
Accounts payable and other current liabilities |
| $ | 1,566 |
|
| $ | 1,199 |
|
| $ | 1,434 |
|
| $ | 1,691 |
|
Other Liabilities |
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
Accrued income tax payable |
| $ | 67 |
|
| $ | 71 |
|
| $ | 70 |
|
| $ | 69 |
|
Deferred income tax liabilities |
|
| 58 |
|
|
| 65 |
|
|
| 66 |
|
|
| 67 |
|
Contract liabilities |
|
| 30 |
|
|
| 31 |
|
|
| 32 |
|
|
| 33 |
|
Deferred rental accrual |
|
| — |
|
|
| 144 |
| ||||||||
Other non-current liabilities |
|
| 40 |
|
|
| 44 |
|
|
| 43 |
|
|
| 41 |
|
Other liabilities |
| $ | 195 |
|
| $ | 355 |
|
| $ | 211 |
|
| $ | 210 |
|
Reconciliation of Cash, Cash equivalents, and Restricted Cash for Condensed Consolidated Statements of Cash Flows
|
| 9/30/2019 |
|
| 12/31/2018 |
| ||
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets |
| $ | 1,355 |
|
| $ | 1,266 |
|
Restricted cash included in Other assets (a) |
|
| 9 |
|
|
| — |
|
Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows |
| $ | 1,364 |
|
| $ | 1,266 |
|
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets |
| $ | 1,048 |
|
| $ | 1,046 |
|
Restricted cash included in Other assets(a) |
|
| 9 |
|
|
| 9 |
|
Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows |
| $ | 1,057 |
|
| $ | 1,055 |
|
(a) | Restricted cash included in Other assets within our Condensed Consolidated Balance Sheet represents amounts deposited into an escrow account pursuant to a definitive agreement entered into in August 2019 to acquire a controlling interest in the Huang Ji Huang group, a leading Chinese-style casual dining franchise business. |
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, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Goodwill, gross |
| $ | 648 |
|
| $ | 238 |
|
| $ | 19 |
|
| $ | 391 |
|
| $ | 645 |
|
| $ | 235 |
|
| $ | 19 |
|
| $ | 391 |
|
Accumulated impairment losses(a) |
|
| (382 | ) |
|
| — |
|
|
| — |
|
|
| (382 | ) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
Goodwill, net |
|
| 266 |
|
|
| 238 |
|
|
| 19 |
|
|
| 9 |
|
|
| 254 |
|
|
| 235 |
|
|
| 19 |
|
|
| — |
|
Effect of currency translation adjustment |
|
| (10 | ) |
|
| (9 | ) |
|
| (1 | ) |
|
| — |
|
|
| (4 | ) |
|
| (4 | ) |
|
| — |
|
|
| — |
|
Balance as of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance as of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Goodwill, gross |
|
| 638 |
|
|
| 229 |
|
|
| 18 |
|
|
| 391 |
|
|
| 641 |
|
|
| 231 |
|
|
| 19 |
|
|
| 391 |
|
Accumulated impairment losses(a) |
|
| (382 | ) |
|
| — |
|
|
| — |
|
|
| (382 | ) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
Goodwill, net |
| $ | 256 |
|
| $ | 229 |
|
| $ | 18 |
|
| $ | 9 |
|
| $ | 250 |
|
| $ | 231 |
|
| $ | 19 |
|
| $ | — |
|
(a) | Accumulated impairment losses represent goodwill impairment attributable to the Little Sheep |
Intangible assets, net as of September 30, 2019March 31, 2020 and December 31, 20182019 are as follows:
|
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Gross Carrying Amount(a) |
|
| Accumulated Amortization |
|
| Accumulated impairment losses |
|
| Net Carrying Amount |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Accumulated impairment losses |
|
| 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 |
| $ | 144 |
|
| $ | (108 | ) |
| $ | — |
|
| $ | 36 |
|
| $ | 150 |
|
| $ | (100 | ) |
| $ | — |
|
| $ | 50 |
|
| $ | 147 |
|
| $ | (115 | ) |
| $ | — |
|
| $ | 32 |
|
| $ | 148 |
|
| $ | (113 | ) |
| $ | — |
|
| $ | 35 |
|
Daojia platform |
|
| 16 |
|
|
| (3 | ) |
|
| (10 | ) |
|
| 3 |
|
|
| 16 |
|
|
| (3 | ) |
|
| (10 | ) |
|
| 3 |
|
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
Customer-related assets |
|
| 11 |
|
|
| (8 | ) |
|
| (2 | ) |
|
| 1 |
|
|
| 12 |
|
|
| (8 | ) |
|
| (2 | ) |
|
| 2 |
|
|
| 12 |
|
|
| (9 | ) |
|
| (2 | ) |
|
| 1 |
|
|
| 12 |
|
|
| (8 | ) |
|
| (2 | ) |
|
| 2 |
|
Others |
|
| 9 |
|
|
| (3 | ) |
|
| — |
|
|
| 6 |
|
|
| 17 |
|
|
| (9 | ) |
|
| — |
|
|
| 8 |
|
|
| 9 |
|
|
| (4 | ) |
|
| — |
|
|
| 5 |
|
|
| 9 |
|
|
| (4 | ) |
|
| — |
|
|
| 5 |
|
|
| $ | 180 |
|
| $ | (122 | ) |
| $ | (12 | ) |
| $ | 46 |
|
| $ | 195 |
|
| $ | (120 | ) |
| $ | (12 | ) |
| $ | 63 |
|
| $ | 184 |
|
| $ | (132 | ) |
| $ | (14 | ) |
| $ | 38 |
|
| $ | 185 |
|
| $ | (129 | ) |
| $ | (14 | ) |
| $ | 42 |
|
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Little Sheep trademark |
| $ | 51 |
|
| $ | — |
|
| $ | — |
|
| $ | 51 |
|
| $ | 53 |
|
| $ | — |
|
| $ | — |
|
| $ | 53 |
|
| $ | 51 |
|
| $ | — |
|
| $ | — |
|
| $ | 51 |
|
| $ | 52 |
|
| $ | — |
|
| $ | — |
|
| $ | 52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
| $ | 231 |
|
| $ | (122 | ) |
| $ | (12 | ) |
| $ | 97 |
|
| $ | 248 |
|
| $ | (120 | ) |
| $ | (12 | ) |
| $ | 116 |
|
| $ | 235 |
|
| $ | (132 | ) |
| $ | (14 | ) |
| $ | 89 |
|
| $ | 237 |
|
| $ | (129 | ) |
| $ | (14 | ) |
| $ | 94 |
|
(a) | Changes in gross carrying amount include |
(b) |
|
Amortization expense of definite-livedfinite-lived intangible assets was $3 million and $7$6 million for the quarters ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $13 million and $20 million for the years to date ended September 30, 2019 and 2018, respectively. As of September 30, 2019,March 31, 2020, expected amortization expense for the unamortized definite-lived intangible assets is approximately $3$9 million for the remainder of 2019, $12 million in 2020, $12 million in 2021, $12 million in 2022, and $3$2 million in 2023.2023 and $1 million in 2024.
Note 10 – Leases
As of September 30, 2019,March 31, 2020, we operated more than 8,900over 7,400 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 revenue;sales; or (iii) a percentage of the restaurant’s sales revenue.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.
Prior to the adoption of ASC 842, operating leases were not recognized on the balance sheet of the Company, but rent expenses were recognized on a straight-line basis over the lease term. Upon adoption, right-of-use assets and lease liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. This is consistent with the historical recognition of finance leases, which was unchanged upon adoption of ASC 842. Variable lease payments that do not depend on a rate or index are expensed as incurred. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with an initial term of 12 months or less; we recognize lease expense for these leases on a straight-line basis over the lease term. In addition, the Company has elected not to separate non-lease components (e.g., common area maintenance fees) from the lease components.
In limited cases, we subleasesub-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 revenue.sales. Income from subleasesub-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. The financial impact of ASC 842 on our accounting as a lessor was not significant.
Supplemental Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9/30/2019 |
|
| Account Classification |
| 3/31/2020 |
|
| 12/31/2019 |
|
| Account Classification | |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
| $ | 1,893 |
|
| Operating lease right-of-use assets |
| $ | 1,899 |
|
| $ | 1,985 |
|
| Operating lease right-of-use assets |
Finance lease right-of-use assets |
|
| 14 |
|
| Property, plant and equipment, net |
|
| 17 |
|
|
| 18 |
|
| Property, plant and equipment, net |
Total leased assets |
| $ | 1,907 |
|
|
|
| $ | 1,916 |
|
| $ | 2,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
| $ | 360 |
|
| Accounts payable and other current liabilities |
| $ | 403 |
|
| $ | 382 |
|
| Accounts payable and other current liabilities |
Finance lease liabilities |
|
| 1 |
|
| Accounts payable and other current liabilities |
|
| 2 |
|
|
| 2 |
|
| Accounts payable and other current liabilities |
Non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
| 1,729 |
|
| Non-current operating lease liabilities |
|
| 1,704 |
|
|
| 1,803 |
|
| Non-current operating lease liabilities |
Finance lease liabilities |
|
| 23 |
|
| Non-current finance lease liabilities |
|
| 25 |
|
|
| 26 |
|
| Non-current finance lease liabilities |
Total lease liabilities |
| $ | 2,113 |
|
|
|
| $ | 2,134 |
|
| $ | 2,213 |
|
|
|
Summary of Lease Cost |
| Quarter Ended |
|
| Year to Date Ended |
|
| Account Classification | ||
|
| 9/30/2019 |
|
| 9/30/2019 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 117 |
|
| $ | 351 |
|
| Occupancy and other operating expenses, G&A or Franchise expenses |
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
| — |
|
|
| 1 |
|
| Occupancy and other operating expenses |
Interest on lease liabilities |
|
| — |
|
|
| 1 |
|
| Interest expense, net |
Variable lease cost |
|
| 94 |
|
|
| 265 |
|
| Occupancy and other operating expenses or Franchise expenses |
Short-term lease cost |
|
| 3 |
|
|
| 8 |
|
| Occupancy and other operating expenses or G&A |
Sublease income |
|
| (7 | ) |
|
| (21 | ) |
| Franchise fees and income or Other revenues |
Total lease cost |
| $ | 207 |
|
| $ | 605 |
|
|
|
Supplemental Cash Flow Information |
| Quarter Ended |
|
| Year to Date Ended |
| ||
|
| 9/30/2019 |
|
| 9/30/2019 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 120 |
|
| $ | 361 |
|
Operating cash flows from finance leases |
|
| — |
|
|
| 1 |
|
Financing cash flows from finance leases |
|
| — |
|
|
| 1 |
|
Right-of-use assets obtained in exchange for new lease liabilities(a): |
|
|
|
|
|
|
|
|
Operating leases |
| $ | 98 |
|
| $ | 217 |
|
Finance leases |
|
| — |
|
|
| — |
|
Summary of Lease Cost |
| Quarter Ended |
|
|
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| Account Classification | ||
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 121 |
|
| $ | 117 |
|
| Occupancy and other operating expenses, G&A or Franchise expenses |
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
| 1 |
|
|
| — |
|
| Occupancy and other operating expenses |
Variable lease cost (a) |
|
| 49 |
|
|
| 91 |
|
| Occupancy and other operating expenses or Franchise expenses |
Short-term lease cost |
|
| 3 |
|
|
| 3 |
|
| Occupancy and other operating expenses or G&A |
Sub-lease income |
|
| (6 | ) |
|
| (7 | ) |
| Franchise fees and income or Other revenues |
Total lease cost |
| $ | 168 |
|
| $ | 204 |
|
|
|
(a) | In the first quarter of 2020, the Company was granted $14 million in lease concessions from landlords related to the effects of the COVID-19 pandemic. 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 |
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 107 |
|
| $ | 127 |
|
Financing cash flows from finance leases |
|
| 1 |
|
|
| — |
|
Right-of-use assets obtained in exchange for new lease liabilities(b): |
|
|
|
|
|
|
|
|
Operating leases |
| $ | 32 |
|
| $ | 57 |
|
Finance leases |
|
| — |
|
|
| (1 | ) |
(b) | This supplemental non-cash disclosure for right-of-use (“ROU”) assets obtained in exchange for new lease liabilities also includes |
|
| |||
| ||||
|
| |||
|
| |||
| ||||
|
|
| ||
|
|
|
|
| Quarter Ended |
| |||||
Lease Term and Discount Rate |
| 3/31/2020 |
|
| 3/31/2019 |
| ||
Weighted-average remaining lease term (years) |
|
|
|
|
|
|
|
|
Operating leases |
|
| 6.9 |
|
|
| 7.3 |
|
Finance leases |
|
| 11.3 |
|
|
| 12.0 |
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
Operating leases |
|
| 6.0 | % |
|
| 6.1 | % |
Finance leases |
|
| 5.9 | % |
|
| 5.7 | % |
Summary of Future Lease Payments and Lease Liabilities
Maturities of lease liabilities as of September 30, 2019March 31, 2020 were as follows:
|
| Amount of Operating Leases |
|
| Amount of Finance Leases |
|
| Total |
|
| Amount of Operating Leases |
|
| Amount of Finance Leases |
|
| Total |
| ||||||
Remainder of 2019 |
| $ | 133 |
|
| $ | 1 |
|
| $ | 134 |
| ||||||||||||
2020 |
|
| 458 |
|
|
| 3 |
|
|
| 461 |
| ||||||||||||
Remainder of 2020 |
| $ | 397 |
|
| $ | 3 |
|
| $ | 400 |
| ||||||||||||
2021 |
|
| 416 |
|
|
| 3 |
|
|
| 419 |
|
|
| 447 |
|
|
| 4 |
|
|
| 451 |
|
2022 |
|
| 358 |
|
|
| 3 |
|
|
| 361 |
|
|
| 388 |
|
|
| 3 |
|
|
| 391 |
|
2023 |
|
| 295 |
|
|
| 3 |
|
|
| 298 |
|
|
| 325 |
|
|
| 3 |
|
|
| 328 |
|
2024 |
|
| 261 |
|
|
| 3 |
|
|
| 264 |
| ||||||||||||
Thereafter |
|
| 931 |
|
|
| 21 |
|
|
| 952 |
|
|
| 771 |
|
|
| 21 |
|
|
| 792 |
|
Total undiscounted lease payment |
|
| 2,591 |
|
|
| 34 |
|
|
| 2,625 |
| ||||||||||||
Less: imputed interest (b) |
|
| 502 |
|
|
| 10 |
|
|
| 512 |
| ||||||||||||
Total lease payment |
|
| 2,589 |
|
|
| 37 |
|
|
| 2,626 |
| ||||||||||||
Less: imputed undiscounted interest(c) |
|
| 482 |
|
|
| 10 |
|
|
| 492 |
| ||||||||||||
Present value of lease liabilities |
| $ | 2,089 |
|
| $ | 24 |
|
| $ | 2,113 |
|
| $ | 2,107 |
|
| $ | 27 |
|
| $ | 2,134 |
|
| As |
As of September 30, 2019,March 31, 2020, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $121$109 million. These leases will commence between the fourthsecond quarter of 20192020 and 2023 with lease terms of 1 year to 20 years.
Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
|
| Commitments |
| |||||||||
|
| Amount of Operating Leases |
|
| Amount of Finance Leases |
|
| Total |
| |||
2019 |
| $ | 466 |
|
| $ | 3 |
|
| $ | 469 |
|
2020 |
|
| 440 |
|
|
| 3 |
|
|
| 443 |
|
2021 |
|
| 394 |
|
|
| 3 |
|
|
| 397 |
|
2022 |
|
| 336 |
|
|
| 3 |
|
|
| 339 |
|
2023 |
|
| 275 |
|
|
| 3 |
|
|
| 278 |
|
Thereafter |
|
| 864 |
|
|
| 22 |
|
|
| 886 |
|
|
| $ | 2,775 |
|
| $ | 37 |
|
| $ | 2,812 |
|
At December 31, 2018, the present value of minimum payments under finance leases was $27 million, after deducting imputed interest of $10 million. The current portion of finance lease obligations was $2 million as of December 31, 2018, and was classified in Accounts payable and other current liabilities.
Note 11 – Fair Value Measurementsand Disclosures
The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and lease liabilities, and the carrying values of these assets and liabilities generally approximate their fair value.value in general.
The Company accounts for its investment in the equity securities of Meituan at fair value, which is determined based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.
The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.value, respectively. NaN transfers among the levels within the fair value hierarchy occurred during the quarterquarters ended September 30,March 31, 2020 and 2019.
|
|
|
|
|
| Fair Value Measurement or Disclosure at September 30, 2019 |
| |||||||||||||
|
| Balance at September 30, 2019 |
|
| Level 1 |
|
|
|
| Level 2 |
|
|
|
| Level 3 |
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
| $ | 658 |
|
| $ | — |
|
|
|
| $ | 658 |
|
|
|
| $ | — |
|
Money market funds |
|
| 284 |
|
|
| 284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
| 942 |
|
|
| 284 |
|
|
|
|
| 658 |
|
|
|
|
| — |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 364 |
|
|
|
|
|
|
|
|
| 364 |
|
|
|
|
|
|
|
Total short-term investments |
|
| 364 |
|
|
| — |
|
|
|
|
| 364 |
|
|
|
|
| — |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities |
|
| 86 |
|
|
| 86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,392 |
|
| $ | 370 |
|
|
|
| $ | 1,022 |
|
|
|
| $ | — |
|
|
|
|
|
|
| Fair Value Measurement or Disclosure at December 31, 2018 |
|
|
|
|
|
| Fair Value Measurement or Disclosure at March 31, 2020 |
|
| ||||||||||||||||||||||||||
|
| Balance at December 31, 2018 |
|
| Level 1 |
|
|
|
| Level 2 |
|
|
|
| Level 3 |
|
| Balance at March 31, 2020 |
|
| Level 1 |
|
|
|
| Level 2 |
|
|
|
| Level 3 |
|
| ||||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
| $ | 570 |
|
| $ | — |
| $ | 570 |
| $ | — |
|
| $ | 440 |
|
| $ | — |
| $ | 440 |
| $ | — |
|
| ||||||||||||
Money market funds |
|
| 226 |
|
|
| 226 |
|
|
|
|
|
|
| 182 |
|
|
| 182 |
|
|
|
|
|
| ||||||||||||||||
Fixed rate debt securities(a) |
|
| 153 |
|
|
| 153 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total cash equivalents |
|
| 949 |
|
|
| 379 |
|
|
|
|
| 570 |
|
|
| — |
|
|
| 622 |
|
|
| 182 |
|
|
|
|
| 440 |
|
|
| — |
|
| ||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Time deposits |
|
| 122 |
|
|
|
|
|
|
| 122 |
|
|
|
|
|
|
| 440 |
|
|
|
|
| 440 |
|
|
|
| ||||||||||||
Fixed rate debt securities(a) |
|
| 50 |
|
|
|
|
|
|
| 50 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Total short-term investments |
|
| 122 |
|
|
| — |
|
|
| 122 |
|
|
| — |
|
|
| 490 |
|
|
| — |
|
|
| 490 |
|
|
| — |
|
| ||||||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Investment in equity securities |
|
| 47 |
|
|
| 47 |
|
|
|
|
|
|
|
|
|
|
| 102 |
|
|
| 102 |
|
|
|
|
|
|
|
|
|
| ||||||||
Total |
| $ | 1,118 |
|
| $ | 426 |
|
| $ | 692 |
|
| $ | — |
|
| $ | 1,214 |
|
| $ | 284 |
|
| $ | 930 |
|
| $ | — |
|
|
(a) | Classified as held-to-maturity investments and measured at amortized cost. |
|
|
|
|
|
| Fair Value Measurement or Disclosure at December 31, 2019 |
|
| |||||||||||||
|
| Balance at December 31, 2019 |
|
| Level 1 |
|
|
|
| Level 2 |
|
|
|
| Level 3 |
|
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
| $ | 407 |
|
|
|
|
|
|
|
| $ | 407 |
|
|
|
|
|
|
|
|
Money market funds |
|
| 331 |
|
|
| 331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
| 738 |
|
|
| 331 |
|
|
|
|
| 407 |
|
|
|
|
| — |
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 611 |
|
|
|
|
|
|
|
|
| 611 |
|
|
|
|
|
|
|
|
Total short-term investments |
|
| 611 |
|
|
|
|
|
|
|
|
| 611 |
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities |
|
| 110 |
|
|
| 110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,459 |
|
| $ | 441 |
|
|
|
| $ | 1,018 |
|
|
|
| $ | — |
|
|
Non-Recurring Fair Value Measurements
In addition, certain of the Company’s restaurant-level assets (including operating lease ROU assets, property, plant and equipment), goodwill and intangible assets, are measured at fair value based on Level 3unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.
In determining the determination of fair value of restaurant levelrestaurant-level assets, the Company considered the highest and best use of the assets and used unobservable inputs (Level 3), such as reasonable sales growth and margin improvement assumptions in generating after-taxfrom market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows orfrom operating restaurants and the price market participants would pay to subleasesub-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 other use.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 a result of adopting ASU 2018-13 in the first quarter of 2020, the following disclosure was included in relation to significant unobservable inputs used in the fair value measurement. As of March 31, 2020, 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 valued by 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 using Level 3based on unobservable inputs (Level 3) during the quarters ended March 31, 2020 and years to date ended September 30, 2019 and 2018.2019. 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 |
|
|
| |||||||||||
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Account Classification | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU impairment prior to the adoption of ASC 842(a) | $ | — |
|
| $ | — |
|
| $ | 82 |
|
| $ | — |
|
| Retained Earnings |
Incremental restaurant-level impairment upon adoption of ASC 842(b) |
| — |
|
|
| — |
|
| 12 |
|
|
| — |
|
| Closure and impairment expenses, net | |
Restaurant-level impairment(c) |
| — |
|
|
| — |
|
|
| 7 |
|
| 13 |
|
| Closure and impairment expenses, net | |
Total | $ | — |
|
| $ | — |
|
| $ | 101 |
|
| $ | 13 |
|
|
|
| Quarter Ended |
|
|
| |||||
| 3/31/2020 |
|
| 3/31/2019 |
|
| Account Classification | ||
Restaurant-level impairment(a) | $ | 9 |
|
| $ | 12 |
|
| Closure and impairment expenses, net |
ROU impairment prior to the adoption of ASC 842(b) |
| — |
|
|
| 82 |
|
| Retained Earnings |
Total | $ | 9 |
|
| $ | 94 |
|
|
|
(a) | Restaurant-level impairment charges are recorded in Closure and impairment expenses, net and resulted from our 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 economic effects of the COVID-19 pandemic an impairment indicator. We also performed an additional impairment evaluation upon adoption of ASC 842 in the first quarter of 2019. The remaining net book value of assets measured at fair value for the quarter ended March 31, 2020 was $29 million and the remaining net book value of assets measured at fair value for the quarter ended March 31, 2019 was insignificant. |
(b) | ROU impairment prior to the adoption of ASC 842 represents an impairment charge on operating lease ROU assets arising from existing operating leases as of January 1, 2019. After netting with the related impact on deferred taxes of $19 million and the impact on noncontrolling interests of $3 million, we recorded a cumulative adjustment of $60 million to retained earnings in accordance with the transition guidance for the new lease standard. For those restaurants under operating leases with full impairment on their long-lived assets (primarily property, plant and equipment) before January 1, 2019, an additional impairment charge would have been recorded before January 1, 2019 had the operating lease ROU assets been recognized at the time of impairment. |
|
|
|
|
Note 12 – Income Taxes
|
| Quarter Ended |
|
| Year to Date Ended |
|
| Quarter Ended |
| |||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||||||
Income tax provision |
| $ | 87 |
|
| $ | 67 |
|
| $ | 226 |
|
| $ | 227 |
|
| $ | 32 |
|
| $ | 93 |
|
Effective tax rate |
|
| 26.9 | % |
|
| 24.2 | % |
|
| 25.8 | % |
|
| 25.7 | % |
|
| 32.7 | % |
|
| 28.9 | % |
The higher effective tax rate for the quarter ended September 30, 2019March 31, 2020 was primarily due to additional accrued tax on Global Intangible Low Taxed Income (“GILTI”). The higher year to date effective tax rate was primarily due to an additional adjustmenta non-deductible loss in the first quarter of $8 million on transition tax pursuant to the Tax Act recorded2020, while non-taxable gain in the first quarter of 2019 and additional accrued tax on GILTI, offset by non-taxable gain related to theour investment in equity securities of Meituan.
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which included a broad range of tax reforms, including, but not limited to, the establishment of a flat corporate income tax rate of 21%, the elimination or reduction of certain business deductions and the imposition of tax on deemed repatriation of accumulated undistributed foreign earnings. The Tax Act impacted Yum China in two material aspects: (1) in general, all of the foreign-source dividends received by Yum China from its foreign subsidiaries are exempted from taxation starting from the tax year beginning after December 31, 2017 and (2) Yum China recorded additional income tax expense in the fourth quarter of 2017, including an estimated one-time transition tax on its deemed repatriation of accumulated undistributed foreign earnings and additional tax related to the revaluation of certain deferred tax assets.
We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made a reversal to provisional amount in the amount of $36 million for the transition tax recorded in 2017 accordingly.reforms. The U.S. Treasury Department and the IRS released the final transition tax regulations on January 15, 2019, which were published in the Federal Register and became effective on February 5,first quarter of 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.
The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income ("GILTIGILTI") earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred, and therefore included it in estimating the annual effective tax rate.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the quarter ended March 31, 2020, the CARES Act had no material tax impact on our Condensed Consolidated Financial Statements. We continue to monitor additional guidance issued by the U.S. Treasury Department, the IRS and others.
We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the STAChinese State Taxation Administration (“STA”) in China regarding our related party transactions for the period from 2006 to 2015. The information currently requested byexchanged with the tax authorities focuses on our franchise arrangement with YUM. To address the requests, weWe have submitted information 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 will depend upon further review of the information provided and 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. 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 13 –Segment Reporting
We have 2 reportable segments: KFC and Pizza Hut. Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, ourOur remaining 6 non-reportable operating segments, reflectingincluding the operations of Little Sheep, COFFii & JOY, East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and our e-commerce business, are combined and referred to as All Other Segments, as thosethese operating segments are insignificant both individually and in aggregate. Segment financial information for prior quarters has been recast to align with this change in segment reporting. There was no impact on the consolidated financial statements of the Company as a result of this change.
|
| Quarter Ended 9/30/2019 |
|
| Quarter Ended 3/31/2020 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| ||||||||||||||
Revenue from external customers |
| $ | 1,597 |
|
| $ | 542 |
|
| $ | 32 |
|
| $ | 148 |
|
|
| 2,319 |
|
| $ | — |
|
| $ | 2,319 |
|
| $ | 1,269 |
|
| $ | 324 |
|
| $ | 21 |
|
| $ | 140 |
|
|
| 1,754 |
|
| $ | — |
|
| $ | 1,754 |
|
Inter-segment revenue |
|
| 1 |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| 9 |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| (7 | ) |
|
| — |
|
Total |
| $ | 1,598 |
|
| $ | 542 |
|
| $ | 40 |
|
| $ | 148 |
|
| $ | 2,328 |
|
| $ | (9 | ) |
| $ | 2,319 |
|
| $ | 1,269 |
|
| $ | 324 |
|
| $ | 28 |
|
| $ | 140 |
|
| $ | 1,761 |
|
| $ | (7 | ) |
| $ | 1,754 |
|
|
| Quarter Ended 9/30/2018 |
|
| Quarter Ended 3/31/2019 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| ||||||||||||||
Revenue from external customers |
| $ | 1,501 |
|
| $ | 550 |
|
| $ | 24 |
|
| $ | 137 |
|
|
| 2,212 |
|
| $ | — |
|
| $ | 2,212 |
|
| $ | 1,592 |
|
| $ | 543 |
|
| $ | 23 |
|
| $ | 146 |
|
|
| 2,304 |
|
| $ | — |
|
| $ | 2,304 |
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
|
|
| (9 | ) |
|
| — |
|
Total |
| $ | 1,501 |
|
| $ | 550 |
|
| $ | 30 |
|
| $ | 137 |
|
| $ | 2,218 |
|
| $ | (6 | ) |
| $ | 2,212 |
|
| $ | 1,592 |
|
| $ | 543 |
|
| $ | 32 |
|
| $ | 146 |
|
| $ | 2,313 |
|
| $ | (9 | ) |
| $ | 2,304 |
|
|
| Quarter Ended |
| |||||
Operating Profit (Loss) |
| 3/31/2020 |
|
| 3/31/2019 |
| ||
KFC(b) |
| $ | 153 |
|
| $ | 288 |
|
Pizza Hut |
|
| (28 | ) |
|
| 50 |
|
All Other Segments |
|
| (10 | ) |
|
| (5 | ) |
Unallocated revenues from transactions with franchisees and unconsolidated affiliates(c) |
|
| 139 |
|
|
| 145 |
|
Unallocated Other revenues |
|
| 1 |
|
|
| 1 |
|
Unallocated expenses from transactions with franchisees and unconsolidated affiliates(c) |
|
| (135 | ) |
|
| (143 | ) |
Unallocated Other operating costs and expenses |
|
| (1 | ) |
|
| (1 | ) |
Unallocated and corporate G&A expenses |
|
| (21 | ) |
|
| (33 | ) |
Unallocated Other (loss) income |
|
| (1 | ) |
|
| 1 |
|
Operating Profit |
| $ | 97 |
|
| $ | 303 |
|
Interest income, net(a) |
|
| 9 |
|
|
| 9 |
|
Investment (loss) gain(a) |
|
| (8 | ) |
|
| 10 |
|
Income Before Income Taxes |
| $ | 98 |
|
| $ | 322 |
|
|
| Year to Date Ended 9/30/2019 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Revenue from external customers |
| $ | 4,647 |
|
| $ | 1,595 |
|
| $ | 77 |
|
| $ | 428 |
|
|
| 6,747 |
|
| $ | — |
|
| $ | 6,747 |
|
Inter-segment revenue |
|
| 1 |
|
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| 28 |
|
|
| (28 | ) |
|
| — |
|
Total |
| $ | 4,648 |
|
| $ | 1,595 |
|
| $ | 104 |
|
| $ | 428 |
|
| $ | 6,775 |
|
| $ | (28 | ) |
| $ | 6,747 |
|
|
| Quarter Ended |
| |||||
Impairment Charges |
| 3/31/2020 |
|
| 3/31/2019 |
| ||
KFC(d) |
| $ | 4 |
|
| $ | 8 |
|
Pizza Hut(d) |
|
| 6 |
|
|
| 5 |
|
All Other Segments(d) |
|
| 2 |
|
| $ | 1 |
|
|
| $ | 12 |
|
| $ | 14 |
|
|
| Year to Date Ended 9/30/2018 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Revenue from external customers |
| $ | 4,399 |
|
| $ | 1,643 |
|
| $ | 62 |
|
| $ | 397 |
|
|
| 6,501 |
|
| $ | — |
|
| $ | 6,501 |
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
|
|
| (9 | ) |
|
| — |
|
Total |
| $ | 4,399 |
|
| $ | 1,643 |
|
| $ | 71 |
|
| $ | 397 |
|
| $ | 6,510 |
|
| $ | (9 | ) |
| $ | 6,501 |
|
|
| Quarter Ended |
|
| Year to Date Ended |
| ||||||||||
Operating Profit |
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
| ||||
KFC(b) |
| $ | 295 |
|
| $ | 264 |
|
| $ | 788 |
|
| $ | 759 |
|
Pizza Hut |
|
| 38 |
|
|
| 53 |
|
|
| 117 |
|
|
| 106 |
|
All Other Segments |
|
| (2 | ) |
|
| (6 | ) |
|
| (12 | ) |
|
| (16 | ) |
Unallocated revenues from transactions with franchisees and unconsolidated affiliates(c) |
|
| 147 |
|
|
| 136 |
|
|
| 425 |
|
|
| 395 |
|
Unallocated Other revenues |
|
| 1 |
|
|
| 1 |
|
|
| 3 |
|
|
| 2 |
|
Unallocated expenses from transactions with franchisees and unconsolidated affiliates(c) |
|
| (145 | ) |
|
| (135 | ) |
|
| (421 | ) |
|
| (392 | ) |
Unallocated Other operating costs and expenses |
|
| (1 | ) |
|
| — |
|
|
| (3 | ) |
|
| (1 | ) |
Unallocated and corporate G&A expenses |
|
| (34 | ) |
|
| (42 | ) |
|
| (92 | ) |
|
| (94 | ) |
Unallocated Other income (loss)(d) |
|
| 1 |
|
|
| (2 | ) |
|
| 2 |
|
|
| 98 |
|
Operating Profit |
| $ | 300 |
|
| $ | 269 |
|
| $ | 807 |
|
| $ | 857 |
|
Interest income, net(a) |
|
| 10 |
|
|
| 10 |
|
|
| 29 |
|
|
| 28 |
|
Investment gain(a) |
|
| 12 |
|
|
| — |
|
|
| 39 |
|
|
| — |
|
Income Before Income Taxes |
| $ | 322 |
|
| $ | 279 |
|
| $ | 875 |
|
| $ | 885 |
|
|
| Quarter Ended |
|
| Year to Date Ended |
| ||||||||||
Impairment Charges |
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
| ||||
KFC(e) |
| $ | 1 |
|
| $ | 1 |
|
| $ | 13 |
|
| $ | 9 |
|
Pizza Hut(e) |
|
| 1 |
|
|
| 1 |
|
|
| 12 |
|
|
| 14 |
|
All Other Segments |
|
| — |
|
| $ | — |
|
| $ | 2 |
|
| $ | — |
|
|
| $ | 2 |
|
| $ | 2 |
|
| $ | 27 |
|
| $ | 23 |
|
|
| Total Assets |
|
| Total Assets |
| ||||||||||
|
| 9/30/2019 |
|
| 12/31/2018 |
|
| 3/31/2020 |
|
| 12/31/2019 |
| ||||
KFC |
| $ | 2,992 |
|
| $ | 1,745 |
|
| $ | 3,034 |
|
| $ | 3,160 |
|
Pizza Hut |
|
| 939 |
|
|
| 558 |
|
|
| 887 |
|
|
| 950 |
|
All Other Segments |
|
| 164 |
|
|
| 132 |
|
|
| 158 |
|
|
| 166 |
|
Corporate and Unallocated |
|
| 2,615 |
|
|
| 2,175 |
|
|
| 2,498 |
|
|
| 2,674 |
|
|
| $ | 6,710 |
|
| $ | 4,610 |
|
| $ | 6,577 |
|
| $ | 6,950 |
|
(a) | Amounts have not been allocated to any segment for performance reporting purposes. |
(b) | Includes equity income from investments in unconsolidated affiliates of |
(c) | Primarily includes revenues and associated expenses of transactions with franchisee 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 to restaurants, including franchisees and unconsolidated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are deemed corporate revenues and expenses in nature. |
(d) |
|
| Primarily includes store closure impairment charges, |
| Includes investments in unconsolidated affiliates. |
| Primarily includes cash and cash equivalents, short-term investments, investment in equity securities, and inventories that are centrally managed. |
Note 14 – Contingencies
Indemnification of China Tax on Indirect Transfers of Assets
In February 2015, the Chinese State Taxation Administration (“STA”)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, 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 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 September 30, 2019,March 31, 2020, guarantees on behalf of franchisees were immaterial and 0 guarantees were outstanding for unconsolidated affiliates.
Legal Proceedings
From time to time, theThe 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 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 15 – Subsequent Events
On October 29, 2019,Acquisition of a Controlling Interest in Huang Ji Huang
In April 2020, the Company announced thatcompleted the Boardacquisition of Directors declared a controlling interest in the Huang Ji Huang group, a leading Chinese-style casual dining franchise business, for cash dividendconsideration of $0.12 per share, payable asapproximately $185 million. Upon completion of the close of business on December 17, 2019 to stockholders of record asacquisition, the Company held a 93.3% interest in Huang Ji Huang group. Founded in 2004 and headquartered in Beijing, Huang Ji Huang has over 640 restaurants in China and internationally. The acquisition was considered immaterial. As of the closedate of businessthis filing, the Company has not yet completed the fair value assessment on November 26, 2019. the determination of identifiable assets acquired and the liabilities assumed in the acquisition.
Acquisition of Additional Interest in Unconsolidated Affiliate
In April 2020, the Company entered into a definitive agreement to acquire an additional 25% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”), for cash consideration of approximately $149 million. Upon closing of the acquisition in the second half of the year, subject to the satisfaction of closing conditions, the Company is expected to increase its equity interest to 72%, allowing the Company to consolidate Suzhou KFC. The total estimated cash dividend payable is approximately $45 million.acquisition was considered immaterial.
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, impacts of COVID-19, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases, our ability to pay dividends and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.
Introduction
Yum China Holdings, Inc. is the largest restaurant company in China in terms of system sales, with over 8,9009,200 restaurants as of September 30, 2019.March 31, 2020. Our growing restaurant base consists of China’s leading restaurant brands and concepts, primarily theour flagship KFC and Pizza Hut brands, as well as emerging brands such as Little Sheep, COFFii & JOY, East Dawning Little Sheep,and Taco Bell and COFFii & JOY. Following our separation from YUM, we obtainedBell. We have the exclusive right to operate and sub-licensesublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”), and we own the intellectual property of the East Dawning, Little Sheep, and COFFii & JOY and East Dawning concepts outright. We were the first major global restaurant brand when we enteredto enter China in 1987 and with over 30 years of operations, we have developed deep operating experience in the China market. We have since grown to become one of China’s largest restaurant developers with locations in over 1,3001,400 cities as of September 30, 2019.March 31, 2020. We believe that there is significant opportunity to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.
KFC is the leading and the largest quick-service restaurant (“QSR”) brand in the PRCChina in terms of system sales and number of restaurants.sales. As of September 30, 2019,March 31, 2020, KFC operated over 6,3006,600 restaurants in over 1,3001,400 cities across China. During the first quarter of 2018, the Company completed the acquisition of an additional 36% interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), increasing the equity interest to 83% and allowing the Company to consolidate the entity.
Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of system sales and number of restaurants. As of September 30, 2019,March 31, 2020, Pizza Hut operated over 2,200 restaurants in over 500 cities.
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 |
| • | 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 |
| • | 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 |
| • | In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share, 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, depreciation and amortization, and other items, including store impairment charges and Special Items. The Special Item for the |
All Note references in this MD&A refer to the Notes to the Condensed Consolidated 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.
Quarters and Years to Date Ended September 30,March 31, 2020 and 2019 and 2018
Results of Operations
Summary
The Company has two reportable segments: KFC and Pizza Hut. Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business becameOur remaining operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, our six non-reportable operating segments, reflectingincluding the operations of Little Sheep, East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in aggregate. Segment financial information for prior quarters has been recast to align with this change in segment reporting. There was no impact on the consolidated financial statements of the Company as a result of this change.aggregate. Additional details on our reportable operating segments are included in Note 13.
Quarterly highlights: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % Change |
| % Change |
| ||||||||||||||||||||||||||||
| System Sales(a) |
| Same-Store Sales(a) |
|
| Net New Units |
| Operating Profit (Reported) |
|
| Operating Profit (Ex F/X) |
| System Sales(a) |
|
| Same-Store Sales(a) |
|
| Net New Units |
| Operating Profit (Reported) |
|
| Operating Profit (Ex F/X) |
| |||||||
KFC | +10 |
| +3 |
|
| +9 |
| +12 |
|
| +16 |
|
| (15 | ) |
|
| (11 | ) |
| +10 |
|
| (47 | ) |
|
| (45 | ) | |||
Pizza Hut | +3 |
| +1 |
|
| +2 |
|
| (29 | ) |
|
| (30 | ) |
| (38 | ) |
|
| (31 | ) |
| +1 |
| NM |
|
| NM |
| |||
All Other Segments(b) | +9 |
|
| (10 | ) |
| +13 |
| +29 |
|
| +18 |
|
| (48 | ) |
|
| (30 | ) |
| +11 |
| NM |
|
| NM |
| ||||
Total | +8 |
| +2 |
|
| +7 |
| +11 |
|
| +14 |
|
| (20 | ) |
|
| (15 | ) |
| +7 |
|
| (68 | ) |
|
| (67 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Year to date highlights: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| % Change |
| ||||||||||||||||||||||||||||||
| System Sales(a) |
| Same-Store Sales(a) |
|
| Net New Units |
| Operating Profit (Reported) |
|
| Operating Profit (Ex F/X) |
| ||||||||||||||||||||
KFC | +11 |
| +4 |
|
| +9 |
| +4 |
|
| +10 |
| ||||||||||||||||||||
Pizza Hut | +3 |
| +1 |
|
| +2 |
| +9 |
|
| +14 |
| ||||||||||||||||||||
All Other Segments(b) | +7 |
|
| (11 | ) |
| +13 |
| +10 |
|
| +4 |
| |||||||||||||||||||
Total | +9 |
| +4 |
|
| +7 |
|
| (6 | ) |
|
| (1 | ) |
NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.
(a) | System sales and same-store sales percentages as shown in tables exclude the impact of F/X. 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 September 30, 2019,March 31, 2020, the Company operated over 8,9009,200 units, predominately KFC and Pizza Hut restaurants, which are the leading and largest QSR and CDR brand, respectively, in mainland China. GivenChina in terms of system sales. We believe that there is significant opportunity to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.
Starting in late January 2020, the COVID-19 pandemic has significantly impacted the Company’s operations in the first quarter of 2020. The first three weeks of January were strong, competitive position,but then the pandemic led to subsequent same-store sales declines of 40-50% compared to the comparable Chinese New Year holiday period in 2019. Approximately 35% of stores were closed by mid-February at the peak of the outbreak, with significant regional differences. For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a growing economysignificant portion of stores providing only delivery and a populationtakeaway services. As the quarter progressed, sales performance recovered gradually, with same-store sales down approximately 20% in late March. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. As of the end of April, approximately 1.4 billion99% of our stores in mainland China the Company has rapidly added KFC and Pizza Hut restaurants. were either partially or fully open. However, in April same-store sales were still down by more than 10%.
As compared to the thirdfirst quarter of 2018,2019, Company sales in the thirdfirst quarter of 2019 increased 4%2020 decreased 26%, or 8% if excluding the impact of F/X. Company sales for the year to date ended September 30, 2019 increased 3%, or 9%24% if excluding the impact of F/X. The quarter and year to date increasedecrease in Company sales for the quarter, excluding the impact of F/X, was driven by same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, partially offset by net unit growth and same-store sales growth.
The increasedecrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth,declines, temporary store closures, increased rider labor efficiencycosts due to higher delivery sales, and utilities savings,commodity inflation, partially offset by wagelabor efficiency, one-time reductions in social security contributions and commodity inflation, and higher promotion and product upgrade costs.
The year to date decrease in Operating profit, excluding the impact of F/X, was primarilylease concessions, lower G&A expenses mainly due to the negative impact from lapping a gain recognized from re-measurementtiming of our equity interest in Wuxi KFC upon acquisition in the first quarter of 2018, wagegovernment incentives received, and commodity inflation, higher promotion and product upgrade costs, and higher G&A expenses, partially offset by the positive impact from same-store sales growth, net unit growth and labor efficiency.utilities savings.
The Consolidated Results of Operations for the quarters and years to date ended September 30,March 31, 2020 and 2019 and 2018 are presented below:
|
| Quarter Ended |
|
| % B/(W) (a) |
| Year to Date Ended |
| % B/(W) (a) |
| Quarter Ended |
|
| % B/(W) (a) |
| ||||||||||||||||||||||||||||||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
| Ex F/X |
| 9/30/2019 |
| 9/30/2018 |
| Reported |
| Ex F/X |
| 3/31/2020 |
|
| 3/31/2019 |
|
| Reported |
| Ex F/X |
| ||||||||||||||||||||||||||||
Company sales |
| $ | 2,097 |
|
| $ | 2,008 |
|
|
| 4 |
|
|
|
| 8 |
|
|
| $ | 6,112 |
|
|
| $ | 5,912 |
|
|
|
| 3 |
|
|
|
| 9 |
|
|
| $ | 1,548 |
|
| $ | 2,089 |
|
|
| (26 | ) |
|
|
| (24 | ) |
|
|
Franchise fees and income |
|
| 38 |
|
|
| 36 |
|
|
| 7 |
|
|
|
| 10 |
|
|
|
| 113 |
|
|
|
| 110 |
|
|
|
| 3 |
|
|
|
| 9 |
|
|
|
| 35 |
|
|
| 39 |
|
|
| (10 | ) |
|
|
| (7 | ) |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 172 |
|
|
| 159 |
|
|
| 8 |
|
|
|
| 11 |
|
|
|
| 496 |
|
|
|
| 461 |
|
|
|
| 8 |
|
|
|
| 13 |
|
|
|
| 161 |
|
|
| 170 |
|
|
| (5 | ) |
|
|
| (2 | ) |
|
|
Other revenues |
|
| 12 |
|
|
| 9 |
|
|
| 39 |
|
|
|
| 43 |
|
|
|
| 26 |
|
|
|
| 18 |
|
|
|
| 45 |
|
|
|
| 51 |
|
|
|
| 10 |
|
|
| 6 |
|
|
| 70 |
|
|
|
| 78 |
|
|
|
Total revenues |
| $ | 2,319 |
|
| $ | 2,212 |
|
|
| 5 |
|
|
|
| 8 |
|
|
| $ | 6,747 |
|
|
| $ | 6,501 |
|
|
|
| 4 |
|
|
|
| 9 |
|
|
| $ | 1,754 |
|
| $ | 2,304 |
|
|
| (24 | ) |
|
|
| (21 | ) |
|
|
Restaurant profits |
| $ | 372 |
|
| $ | 353 |
|
|
| 5 |
|
|
|
| 9 |
|
|
| $ | 1,041 |
|
|
| $ | 1,000 |
|
|
|
| 4 |
|
|
|
| 10 |
|
| |||||||||||||||||||
Restaurant profit |
| $ | 165 |
|
| $ | 386 |
|
|
| (57 | ) |
|
|
| (56 | ) |
|
| ||||||||||||||||||||||||||||||||||||||
Restaurant Margin % |
|
| 17.7 | % |
|
| 17.6 | % |
|
| 0.1 |
| ppts. |
|
| 0.1 |
| ppts. |
|
| 17.0 | % |
|
|
| 16.9 | % |
|
|
| 0.1 |
| ppts. |
|
| 0.1 |
| ppts. |
|
| 10.7 | % |
|
| 18.5 | % |
|
| (7.8 | ) | ppts. |
|
| (7.8 | ) | ppts. |
|
Operating Profit |
| $ | 300 |
|
| $ | 269 |
|
|
| 11 |
|
|
|
| 14 |
|
|
| $ | 807 |
|
|
| $ | 857 |
|
|
|
| (6 | ) |
|
|
| (1 | ) |
|
| $ | 97 |
|
| $ | 303 |
|
|
| (68 | ) |
|
|
| (67 | ) |
|
|
Interest income, net |
|
| 10 |
|
|
| 10 |
|
|
| 6 |
|
|
|
| 9 |
|
|
|
| 29 |
|
|
|
| 28 |
|
|
|
| 4 |
|
|
|
| 10 |
|
|
|
| 9 |
|
|
| 9 |
|
|
| (7 | ) |
|
|
| (4 | ) |
|
|
Investment gain |
|
| 12 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
|
| 39 |
|
|
|
| — |
|
|
| NM |
|
|
| NM |
|
| |||||||||||||||||||||||
Investment (loss) gain |
|
| (8 | ) |
|
| 10 |
|
| NM |
|
|
| NM |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Income tax provision |
|
| (87 | ) |
|
| (67 | ) |
|
| (28 | ) |
|
|
| (31 | ) |
|
|
| (226 | ) |
|
|
| (227 | ) |
|
|
| 1 |
|
|
|
| (4 | ) |
|
|
| (32 | ) |
|
| (93 | ) |
|
| 65 |
|
|
|
| 65 |
|
|
|
Net Income - including noncontrolling interests |
|
| 235 |
|
|
| 212 |
|
|
| 11 |
|
|
|
| 14 |
|
|
|
| 649 |
|
|
|
| 658 |
|
|
|
| (1 | ) |
|
|
| 4 |
|
|
|
| 66 |
|
|
| 229 |
|
|
| (71 | ) |
|
|
| (70 | ) |
|
|
Net Income - noncontrolling interests |
|
| 12 |
|
|
| 9 |
|
|
| (26 | ) |
|
|
| (30 | ) |
|
|
| 26 |
|
|
|
| 24 |
|
|
|
| (6 | ) |
|
|
| (11 | ) |
|
|
| 4 |
|
|
| 7 |
|
|
| 36 |
|
|
|
| 35 |
|
|
|
Net Income - Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
|
| 11 |
|
|
|
| 14 |
|
|
| $ | 623 |
|
|
| $ | 634 |
|
|
|
| (2 | ) |
|
|
| 4 |
|
|
| $ | 62 |
|
| $ | 222 |
|
|
| (72 | ) |
|
|
| (71 | ) |
|
|
Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
|
| 14 |
|
|
|
| 16 |
|
|
| $ | 1.60 |
|
|
| $ | 1.59 |
|
|
|
| 1 |
|
|
|
| 6 |
|
|
| $ | 0.16 |
|
| $ | 0.57 |
|
|
| (72 | ) |
|
|
| (72 | ) |
|
|
Effective tax rate |
|
| 26.9 | % |
|
| 24.2 | % |
|
|
|
|
|
|
|
|
|
|
|
| 25.8 | % |
|
|
| 25.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| 32.7 | % |
|
| 28.9 | % |
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Profit |
| $ | 300 |
|
| $ | 269 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 807 |
|
|
| $ | 759 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 98 |
|
| $ | 303 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income - Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 631 |
|
|
| $ | 560 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 63 |
|
| $ | 230 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 1.62 |
|
|
| $ | 1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.16 |
|
| $ | 0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Effective Tax Rate |
|
| 26.9 | % |
|
| 24.2 | % |
|
|
|
|
|
|
|
|
|
|
|
| 24.9 | % |
|
|
| 25.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| 32.4 | % |
|
| 26.5 | % |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 407 |
|
| $ | 379 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,156 |
|
|
| $ | 1,125 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 219 |
|
| $ | 428 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Represents the period-over-period change in percentage. |
Performance Metrics
|
| Quarter Ended |
|
| Year to Date Ended | |||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
| 9/30/2018 | ||||||||
System Sales Growth |
|
| 5 | % |
|
| 2 | % |
|
| 3 | % |
|
|
| 9 | % |
|
System Sales Growth, excluding F/X |
|
| 8 | % |
|
| 4 | % |
|
| 9 | % |
|
|
| 4 | % |
|
Same-Store Sales Growth (Decline) |
|
| 2 | % |
|
| (1 | )% |
|
| 4 | % |
|
|
| — | % |
|
|
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
System Sales (Decline) Growth |
|
| (23 | )% |
|
| 3 | % |
System Sales (Decline) Growth, excluding F/X |
|
| (20 | )% |
|
| 9 | % |
Same-Store Sales (Decline) Growth |
|
| (15 | )% |
|
| 4 | % |
Unit Count |
| 9/30/2019 |
|
| 9/30/2018 |
|
| % Increase |
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| % Increase |
| ||||||
Company-owned |
|
| 7,171 |
|
|
| 6,711 |
|
|
| 7 |
|
|
| 7,432 |
|
|
| 6,974 |
|
|
| 7 |
|
Unconsolidated affiliates |
|
| 863 |
|
|
| 802 |
|
|
| 8 |
|
|
| 924 |
|
|
| 834 |
|
|
| 11 |
|
Franchisees |
|
| 883 |
|
|
| 800 |
|
|
| 10 |
|
|
| 939 |
|
|
| 845 |
|
|
| 11 |
|
|
|
| 8,917 |
|
|
| 8,313 |
|
|
| 7 |
|
|
| 9,295 |
|
|
| 8,653 |
|
|
| 7 |
|
Special Items
Special Items, along with the reconciliation of the most directly comparable GAAP financial measures to the adjusted financial measures, are presented below.
|
| Quarter Ended |
|
| Year to Date Ended |
|
| Quarter Ended |
| |||||||||||||||
Detail of Special Items |
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||||||
Gain from re-measurement of equity interest upon acquisition(a) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 98 |
| ||||||||
Share-based compensation expense for Partner PSU Awards(a) |
| $ | (1 | ) |
| $ | — |
| ||||||||||||||||
Special Items, Operating Profit |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 98 |
|
|
| (1 | ) |
|
| — |
|
Tax Expenses on Special Items(b) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24 | ) |
|
| — |
|
|
| — |
|
Impact from the Tax Act(c) |
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| (8 | ) |
Special items, net income – including noncontrolling interests |
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| 74 |
|
|
| (1 | ) |
|
| (8 | ) |
Special items, net income – noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Special Items, Net income – Yum China Holdings, Inc. |
| $ | — |
|
| $ | — |
|
| $ | (8 | ) |
| $ | 74 |
|
| $ | (1 | ) |
| $ | (8 | ) |
Weighted-average diluted shares outstanding (in millions) |
|
| 388 |
|
|
| 394 |
|
|
| 389 |
|
|
| 398 |
|
|
| 386 |
|
|
| 388 |
|
Special Items, Diluted Earnings Per Common Share |
| $ | — |
|
| $ | — |
|
| $ | (0.02 | ) |
| $ | 0.18 |
|
| $ | — |
|
| $ | (0.02 | ) |
Reconciliation of Operating Profit to Adjusted Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit |
| $ | 300 |
|
| $ | 269 |
|
| $ | 807 |
|
| $ | 857 |
|
| $ | 97 |
|
| $ | 303 |
|
Special Items, Operating Profit |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 98 |
|
|
| (1 | ) |
|
| — |
|
Adjusted Operating Profit |
| $ | 300 |
|
| $ | 269 |
|
| $ | 807 |
|
| $ | 759 |
|
| $ | 98 |
|
| $ | 303 |
|
Reconciliation of Net Income to Adjusted Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income - Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
| $ | 623 |
|
| $ | 634 |
|
| $ | 62 |
|
| $ | 222 |
|
Special Items, Net Income – Yum China Holdings, Inc. |
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| 74 |
|
|
| (1 | ) |
|
| (8 | ) |
Adjusted Net Income - Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
| $ | 631 |
|
| $ | 560 |
|
| $ | 63 |
|
| $ | 230 |
|
Reconciliation of EPS to Adjusted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share |
| $ | 0.59 |
|
| $ | 0.53 |
|
| $ | 1.65 |
|
| $ | 1.64 |
|
| $ | 0.16 |
|
| $ | 0.59 |
|
Special Items, Basic Earnings Per Common Share |
|
| — |
|
|
| — |
|
|
| (0.02 | ) |
|
| 0.19 |
|
|
| (0.01 | ) |
|
| (0.02 | ) |
Adjusted Basic Earnings Per Common Share |
| $ | 0.59 |
|
| $ | 0.53 |
|
| $ | 1.67 |
|
| $ | 1.45 |
|
| $ | 0.17 |
|
| $ | 0.61 |
|
Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
| $ | 1.60 |
|
| $ | 1.59 |
|
| $ | 0.16 |
|
| $ | 0.57 |
|
Special Items, Diluted Earnings Per Common Share |
|
| — |
|
|
| — |
|
|
| (0.02 | ) |
|
| 0.18 |
|
|
| — |
|
|
| (0.02 | ) |
Adjusted Diluted Earnings Per Common Share |
| $ | 0.58 |
|
| $ | 0.51 |
|
| $ | 1.62 |
|
| $ | 1.41 |
|
| $ | 0.16 |
|
| $ | 0.59 |
|
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (See Note 12) |
|
| 26.9 | % |
|
| 24.2 | % |
|
| 25.8 | % |
|
| 25.7 | % |
|
| 32.7 | % |
|
| 28.9 | % |
Impact on effective tax rate as a result of Special Items(b)(c) |
|
| — | % |
|
| — | % |
|
| 0.9 | % |
|
| (0.1 | )% |
|
| 0.3 | % |
|
| 2.4 | % |
Adjusted effective tax rate |
|
| 26.9 | % |
|
| 24.2 | % |
|
| 24.9 | % |
|
| 25.8 | % |
|
| 32.4 | % |
|
| 26.5 | % |
(a) |
|
(b) | The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate. |
(c) | We completed the evaluation of the impact on our transition tax computation based on the final regulations |
Adjusted EBITDA
Net income, along with the reconciliation to Adjusted EBITDA, is presented below.
|
| Quarter Ended |
|
| Year to Date Ended |
|
| Quarter Ended |
|
| |||||||||||||||
Reconciliation of Net Income to Adjusted EBITDA |
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| ||||||
Net Income — Yum China Holdings, Inc. |
| $ | 223 |
|
| $ | 203 |
|
| $ | 623 |
|
| $ | 634 |
|
| $ | 62 |
|
| $ | 222 |
|
|
Net Income — noncontrolling interests |
|
| 12 |
|
|
| 9 |
|
|
| 26 |
|
|
| 24 |
|
|
| 4 |
|
|
| 7 |
|
|
Income tax provision |
|
| 87 |
|
|
| 67 |
|
|
| 226 |
|
|
| 227 |
|
|
| 32 |
|
|
| 93 |
|
|
Interest income, net |
|
| (10 | ) |
|
| (10 | ) |
|
| (29 | ) |
|
| (28 | ) |
|
| (9 | ) |
|
| (9 | ) |
|
Investment gain |
|
| (12 | ) |
|
| — |
|
|
| (39 | ) |
|
| — |
| |||||||||
Investment loss (gain) |
|
| 8 |
|
|
| (10 | ) |
| ||||||||||||||||
Operating Profit |
|
| 300 |
|
|
| 269 |
|
|
| 807 |
|
|
| 857 |
|
|
| 97 |
|
|
| 303 |
|
|
Special Items, Operating Profit |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (98 | ) |
|
| 1 |
|
|
| — |
|
|
Adjusted Operating Profit |
|
| 300 |
|
|
| 269 |
|
|
| 807 |
|
|
| 759 |
|
|
| 98 |
|
|
| 303 |
|
|
Depreciation and amortization |
|
| 105 |
|
|
| 108 |
|
|
| 322 |
|
|
| 343 |
|
|
| 109 |
|
|
| 111 |
|
|
Store impairment charges |
|
| 2 |
|
|
| 2 |
|
|
| 27 |
|
|
| 23 |
|
|
| 12 |
|
|
| 14 |
|
|
Adjusted EBITDA |
| $ | 407 |
|
| $ | 379 |
|
| $ | 1,156 |
|
| $ | 1,125 |
|
| $ | 219 |
|
| $ | 428 |
|
|
Segment Results
KFC
|
| Quarter Ended |
| Year to Date Ended |
| Quarter Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
| % B/(W) |
| ||||||||||||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
| Ex F/X |
| 9/30/2019 |
| 9/30/2018 |
| Reported |
| Ex F/X |
| 3/31/2020 |
|
| 3/31/2019 |
|
| Reported |
| Ex F/X |
| ||||||||||||||||||||||||||||
Company sales |
| $ | 1,546 |
|
| $ | 1,452 |
|
|
| 6 |
|
|
|
| 10 |
|
|
| $ | 4,495 |
|
|
| $ | 4,248 |
|
|
|
| 6 |
|
|
|
| 11 |
|
|
| $ | 1,220 |
|
| $ | 1,539 |
|
|
| (21 | ) |
|
|
| (18 | ) |
|
|
Franchise fees and income |
|
| 35 |
|
|
| 34 |
|
|
| 4 |
|
|
|
| 8 |
|
|
|
| 104 |
|
|
|
| 104 |
|
|
|
| 1 |
|
|
|
| 7 |
|
|
|
| 33 |
|
|
| 36 |
|
|
| (8 | ) |
|
|
| (5 | ) |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 16 |
|
|
| 15 |
|
|
| 9 |
|
|
|
| 12 |
|
|
|
| 48 |
|
|
|
| 47 |
|
|
|
| 3 |
|
|
|
| 7 |
|
|
|
| 16 |
|
|
| 17 |
|
|
| (3 | ) |
|
|
| — |
|
|
|
Other revenues |
|
| 1 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
|
| 1 |
|
|
|
| — |
|
|
| NM |
|
|
| NM |
|
| |||||||||||||||||||||||
Total revenues |
| $ | 1,598 |
|
| $ | 1,501 |
|
|
| 6 |
|
|
|
| 10 |
|
|
| $ | 4,648 |
|
|
| $ | 4,399 |
|
|
|
| 6 |
|
|
|
| 11 |
|
|
| $ | 1,269 |
|
| $ | 1,592 |
|
|
| (20 | ) |
|
|
| (18 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
| $ | 311 |
|
| $ | 279 |
|
|
| 12 |
|
|
|
| 15 |
|
|
| $ | 845 |
|
|
| $ | 807 |
|
|
|
| 5 |
|
|
|
| 10 |
|
|
| $ | 166 |
|
| $ | 309 |
|
|
| (46 | ) |
|
|
| (44 | ) |
|
|
Restaurant margin % |
|
| 20.1 | % |
|
| 19.2 | % |
|
| 0.9 |
| ppts. |
|
| 0.9 |
| ppts. |
|
| 18.8 | % |
|
|
| 19.0 | % |
|
|
| (0.2 | ) | ppts. |
|
| (0.2 | ) | ppts. |
|
| 13.6 | % |
|
| 20.0 | % |
|
| (6.4 | ) | ppts. |
|
| (6.4 | ) | ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
| $ | 50 |
|
| $ | 44 |
|
|
| (16 | ) |
|
|
| (20 | ) |
|
| $ | 148 |
|
|
| $ | 135 |
|
|
|
| (10 | ) |
|
|
| (16 | ) |
|
| $ | 46 |
|
| $ | 49 |
|
|
| 5 |
|
|
|
| 2 |
|
|
|
Franchise expenses |
| $ | 18 |
|
| $ | 17 |
|
|
| (2 | ) |
|
|
| (6 | ) |
|
| $ | 53 |
|
|
| $ | 53 |
|
|
|
| — |
|
|
|
| (5 | ) |
|
| $ | 16 |
|
| $ | 19 |
|
|
| 12 |
|
|
|
| 10 |
|
|
|
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 16 |
|
| $ | 15 |
|
|
| (4 | ) |
|
|
| (7 | ) |
|
| $ | 48 |
|
|
| $ | 47 |
|
|
|
| (2 | ) |
|
|
| (6 | ) |
|
| $ | 16 |
|
| $ | 17 |
|
|
| 2 |
|
|
|
| (1 | ) |
|
|
Closures and impairment expenses, net |
| $ | — |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | 7 |
|
|
| $ | 6 |
|
|
|
| (7 | ) |
|
|
| (11 | ) |
|
| $ | 1 |
|
| $ | 7 |
|
|
| 86 |
|
|
|
| 85 |
|
|
| ||
Other income, net |
| $ | (16 | ) |
| $ | (12 | ) |
|
| 34 |
|
|
|
| 40 |
|
|
| $ | (46 | ) |
|
| $ | (42 | ) |
|
|
| 7 |
|
|
|
| 13 |
|
|
| $ | (17 | ) |
| $ | (18 | ) |
|
| (6 | ) |
|
|
| (3 | ) |
|
|
Operating Profit |
| $ | 295 |
|
| $ | 264 |
|
|
| 12 |
|
|
|
| 16 |
|
|
| $ | 788 |
|
|
| $ | 759 |
|
|
|
| 4 |
|
|
|
| 10 |
|
|
| $ | 153 |
|
| $ | 288 |
|
|
| (47 | ) |
|
|
| (45 | ) |
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
| ||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
| ||||
System Sales Growth |
|
| 6 | % |
|
| 4 | % |
|
| 5 | % |
|
| 11 | % |
System Sales Growth, excluding F/X |
|
| 10 | % |
|
| 6 | % |
|
| 11 | % |
|
| 6 | % |
Same-Store Sales Growth |
|
| 3 | % |
|
| 1 | % |
|
| 4 | % |
|
| 2 | % |
|
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
System Sales (Decline) Growth |
|
| (18 | )% |
|
| 5 | % |
System Sales (Decline) Growth, excluding F/X |
|
| (15 | )% |
|
| 11 | % |
Same-Store Sales (Decline) Growth |
|
| (11 | )% |
|
| 5 | % |
Unit Count |
| 9/30/2019 |
|
| 9/30/2018 |
|
| % Increase |
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| % Increase |
| ||||||
Company-owned |
|
| 4,925 |
|
|
| 4,500 |
|
|
| 9 |
|
|
| 5,174 |
|
|
| 4,732 |
|
|
| 9 |
|
Unconsolidated affiliates |
|
| 863 |
|
|
| 802 |
|
|
| 8 |
|
|
| 924 |
|
|
| 834 |
|
|
| 11 |
|
Franchisees |
|
| 536 |
|
|
| 498 |
|
|
| 8 |
|
|
| 563 |
|
|
| 512 |
|
|
| 10 |
|
|
|
| 6,324 |
|
|
| 5,800 |
|
|
| 9 |
|
|
| 6,661 |
|
|
| 6,078 |
|
|
| 10 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
| Quarter Ended |
|
| Quarter Ended |
| |||||||||||||||||||||||||||||||||||||||
Income (Expense) |
| 9/30/2018 |
|
|
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2019 |
|
| 3/31/2019 |
|
|
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 3/31/2020 |
| |||||||||||
Company sales |
| $ | 1,452 |
|
|
|
| $ | 104 |
|
| $ | 35 |
|
| $ | (45 | ) |
| $ | 1,546 |
|
| $ | 1,539 |
|
|
|
| $ | (110 | ) |
| $ | (169 | ) |
| $ | (40 | ) |
| $ | 1,220 |
| |
Cost of sales |
|
| (444 | ) |
|
|
| (34 | ) |
|
| (13 | ) |
|
| 14 |
|
|
| (477 | ) |
|
| (476 | ) |
|
|
|
| 31 |
|
|
| 40 |
|
|
| 13 |
|
|
| (392 | ) | ||
Cost of labor |
|
| (297 | ) |
|
|
| (21 | ) |
|
| (1 | ) |
|
| 8 |
|
|
| (311 | ) |
|
| (320 | ) |
|
|
|
| (2 | ) |
|
| 26 |
|
|
| 9 |
|
|
| (287 | ) | ||
Occupancy and other operating expenses |
|
| (432 | ) |
|
|
|
| (31 | ) |
|
| 3 |
|
|
| 13 |
|
|
| (447 | ) |
|
| (434 | ) |
|
|
|
| (2 | ) |
|
| 49 |
|
|
| 12 |
|
|
| (375 | ) | |
Restaurant profit |
| $ | 279 |
|
|
|
| $ | 18 |
|
| $ | 24 |
|
| $ | (10 | ) |
| $ | 311 |
|
| $ | 309 |
|
|
|
| $ | (83 | ) |
| $ | (54 | ) |
| $ | (6 | ) |
| $ | 166 |
|
|
| Year to Date Ended |
|
| |||||||||||||||||
Income (Expense) |
| 9/30/2018 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2019 |
|
| |||||
Company sales |
| $ | 4,248 |
|
| $ | 321 |
|
| $ | 167 |
|
| $ | (241 | ) |
| $ | 4,495 |
|
|
Cost of sales |
|
| (1,281 | ) |
|
| (105 | ) |
|
| (92 | ) |
|
| 75 |
|
|
| (1,403 | ) |
|
Cost of labor |
|
| (879 | ) |
|
| (67 | ) |
|
| (46 | ) |
|
| 50 |
|
|
| (942 | ) |
|
Occupancy and other operating expenses |
|
| (1,281 | ) |
|
| (95 | ) |
|
| 1 |
|
|
| 70 |
|
|
| (1,305 | ) |
|
Restaurant profit |
| $ | 807 |
|
| $ | 54 |
|
| $ | 30 |
|
| $ | (46 | ) |
| $ | 845 |
|
|
The increasedecrease in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by the same-store sales growth, net unit growth, labor efficiencydecline and utilities savings, partially offset by highertemporary store closures due to the impact of the COVID-19 pandemic, increased rider labor costs mainly due to wage inflation of 5%higher delivery sales, and commodity inflation of 3%.
The year to date increase in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth, lower depreciation expenses and lower advertising expenses,, partially offset by commodity inflation of 4%, higher labor costs mainly due to wage inflation of 6%efficiency, one-time reductions in social security contributions and higher promotion costs.lease concessions, and utility savings.
Franchise Fees and Income
The increasedecrease in Franchise fees and income for the quarter, excluding the impact of F/X, was primarily driven by net unit growth and same-store sales growthdecline and temporary closures of unconsolidated affiliates and franchisees.
The year to date increase in Franchise fees and income, excluding the impact of F/X, was primarily drivenrestaurants operated by same-store sales growth and net unit growth of unconsolidated affiliates and franchisees, partially offset by the impact of the acquisition of Wuxi KFC.net unit growth.
G&A Expenses
The quarter and year to date increasedecrease in G&A expenses excluding the impact of F/X, was primarily driven by higher compensation costs mainly due to merit increases and higher 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, partially offset by higher G&A expenses.
Pizza Hut
|
| Quarter Ended |
| Year to Date Ended | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| ||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
| Ex F/X |
| 9/30/2019 |
| 9/30/2018 |
| Reported |
| Ex F/X | ||||||||||||||||||||
Company sales |
| $ | 540 |
|
| $ | 548 |
|
|
| (1 | ) |
|
|
| 2 |
|
|
| $ | 1,588 |
|
|
| $ | 1,640 |
|
|
|
| (3 | ) |
|
|
| 2 |
|
|
Franchise fees and income |
|
| 1 |
|
|
| 1 |
|
| NM |
|
|
| NM |
|
|
|
| 3 |
|
|
|
| 2 |
|
|
|
| 68 |
|
|
|
| 77 |
|
| ||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 1 |
|
|
| 1 |
|
| NM |
|
|
| NM |
|
|
|
| 3 |
|
|
|
| 1 |
|
|
| NM |
|
|
| NM |
|
| ||||
Other revenues |
|
| — |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
|
| 1 |
|
|
|
| — |
|
|
| NM |
|
|
| NM |
|
| ||||
Total revenues |
| $ | 542 |
|
| $ | 550 |
|
|
| (1 | ) |
|
|
| 2 |
|
|
| $ | 1,595 |
|
|
| $ | 1,643 |
|
|
|
| (3 | ) |
|
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
| $ | 62 |
|
| $ | 76 |
|
|
| (18 | ) |
|
|
| (17 | ) |
|
| $ | 197 |
|
|
| $ | 193 |
|
|
|
| 2 |
|
|
|
| 7 |
|
|
Restaurant margin % |
|
| 11.4 | % |
|
| 13.8 | % |
|
| (2.4 | ) | ppts. |
|
| (2.4 | ) | ppts. |
|
| 12.4 | % |
|
|
| 11.8 | % |
|
|
| 0.6 |
| ppts. |
|
| 0.6 |
| ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
| $ | 25 |
|
| $ | 24 |
|
|
| (6 | ) |
|
|
| (10 | ) |
|
| $ | 76 |
|
|
| $ | 80 |
|
|
|
| 5 |
|
|
|
| (1 | ) |
|
Franchise expenses |
| $ | 1 |
|
| $ | 1 |
|
|
| (73 | ) |
|
|
| (81 | ) |
|
| $ | 2 |
|
|
| $ | 2 |
|
|
|
| (34 | ) |
|
|
| (42 | ) |
|
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 1 |
|
| $ | 1 |
|
| NM |
|
|
| NM |
|
|
| $ | 3 |
|
|
| $ | 1 |
|
|
| NM |
|
|
| NM |
|
| ||||
Closures and impairment (income) expenses, net |
| $ | (1 | ) |
| $ | (1 | ) |
|
| 77 |
|
|
|
| 78 |
|
|
| $ | 5 |
|
|
| $ | 9 |
|
|
|
| 38 |
|
|
|
| 35 |
|
|
Other income, net |
| $ | — |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | — |
|
|
| $ | (2 | ) |
|
| NM |
|
|
| NM |
|
| ||||
Operating Profit |
| $ | 38 |
|
| $ | 53 |
|
|
| (29 | ) |
|
|
| (30 | ) |
|
| $ | 117 |
|
|
| $ | 106 |
|
|
|
| 9 |
|
|
|
| 14 |
|
|
|
| Quarter Ended |
|
| Year to Date Ended | |||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
| 9/30/2018 | ||||||||
System Sales (Decline) Growth |
|
| — | % |
|
| (3 | )% |
|
| (2 | )% |
|
|
| 3 | % |
|
System Sales Growth (Decline), excluding F/X |
|
| 3 | % |
|
| (2 | )% |
|
| 3 | % |
|
|
| (1 | )% |
|
Same-Store Sales Growth (Decline) |
|
| 1 | % |
|
| (5 | )% |
|
| 1 | % |
|
|
| (5 | )% |
|
Unit Count |
| 9/30/2019 |
|
| 9/30/2018 |
|
| % Increase |
| |||
Company-owned |
|
| 2,165 |
|
|
| 2,180 |
|
|
| (1 | ) |
Franchisees |
|
| 90 |
|
|
| 35 |
|
| NM |
| |
|
|
| 2,255 |
|
|
| 2,215 |
|
|
| 2 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
| Quarter Ended |
| |||||||||||||||||
Income (Expense) | 9/30/2018 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2019 |
| |||||
Company sales | $ | 548 |
|
| $ | 1 |
|
| $ | 8 |
|
| $ | (17 | ) |
| $ | 540 |
|
Cost of sales |
| (163 | ) |
|
| (1 | ) |
|
| (12 | ) |
|
| 6 |
|
|
| (170 | ) |
Cost of labor |
| (130 | ) |
|
| (1 | ) |
|
| (14 | ) |
|
| 5 |
|
|
| (140 | ) |
Occupancy and other operating expenses |
| (179 | ) |
|
| 1 |
|
|
| 4 |
|
|
| 6 |
|
|
| (168 | ) |
Restaurant profit | $ | 76 |
|
| $ | — |
|
| $ | (14 | ) |
| $ | — |
|
| $ | 62 |
|
| Year to Date Ended |
|
| |||||||||||||||||
Income (Expense) | 9/30/2018 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2019 |
|
| |||||
Company sales | $ | 1,640 |
|
| $ | 12 |
|
| $ | 22 |
|
| $ | (86 | ) |
| $ | 1,588 |
|
|
Cost of sales |
| (486 | ) |
|
| (4 | ) |
|
| (21 | ) |
|
| 27 |
|
|
| (484 | ) |
|
Cost of labor |
| (410 | ) |
|
| (2 | ) |
|
| (31 | ) |
|
| 23 |
|
|
| (420 | ) |
|
Occupancy and other operating expenses |
| (551 | ) |
|
| 2 |
|
|
| 35 |
|
|
| 27 |
|
|
| (487 | ) |
|
Restaurant profit | $ | 193 |
|
| $ | 8 |
|
| $ | 5 |
|
| $ | (9 | ) |
| $ | 197 |
|
|
The increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth and store portfolio actions. The decrease in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by higher promotion costscost control measures to lower travel expenses and higher labor costs mainly attributable to wage inflation of 5%, partially offset by Company sales growth and commodity deflation of 3%.
The year to date increase in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales growth, store portfolio actions, labor efficiency, commodity deflation of 2% and utilities savings,government incentives received, partially offset by higher promotion costs and higher labor costs mainly attributable to wage inflation of 5%.
G&A Expenses
The quarter and year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs due to higher performance-based compensation, merit increases and lower government incentive received, partially offset by lower cost allocation associated with development activities.costs.
Operating Profit
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the decrease in restaurantRestaurant profit, partially offset by lower store impairment charges.
Pizza Hut
|
| Quarter Ended | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| ||||||
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| Reported |
| Ex F/X | ||||||||
Company sales |
| $ | 322 |
|
| $ | 541 |
|
|
| (41 | ) |
|
|
| (39 | ) |
|
Franchise fees and income |
|
| 1 |
|
|
| 1 |
|
|
| (1 | ) |
|
|
| 2 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
|
| 6 |
|
|
Total revenues |
| $ | 324 |
|
| $ | 543 |
|
|
| (40 | ) |
|
|
| (39 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
| $ | 1 |
|
| $ | 77 |
|
|
| (99 | ) |
|
|
| (99 | ) |
|
Restaurant margin % |
|
| 0.3 | % |
|
| 14.3 | % |
|
| (14.0 | ) | ppts. |
|
| (14.0 | ) | ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
| $ | 24 |
|
| $ | 24 |
|
|
| 3 |
|
|
|
| (1 | ) |
|
Franchise expenses |
| $ | 1 |
|
| $ | 1 |
|
|
| 2 |
|
|
|
| (1 | ) |
|
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 1 |
|
| $ | 1 |
|
|
| (23 | ) |
|
|
| (27 | ) |
|
Closures and impairment expenses, net |
| $ | 5 |
|
| $ | 3 |
|
|
| (48 | ) |
|
|
| (55 | ) |
|
Operating (Loss) Profit |
| $ | (28 | ) |
| $ | 50 |
|
| NM |
|
|
| NM |
|
|
|
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
System Sales (Decline) |
|
| (40 | )% |
|
| (3 | )% |
System Sales (Decline) Growth, excluding F/X |
|
| (38 | )% |
|
| 3 | % |
Same-Store Sales (Decline) Growth |
|
| (31 | )% |
|
| 1 | % |
Unit Count |
| 3/31/2020 |
|
| 3/31/2019 |
|
| % Increase (Decrease) |
| |||
Company-owned |
|
| 2,166 |
|
|
| 2,190 |
|
|
| (1 | ) |
Franchisees |
|
| 105 |
|
|
| 59 |
|
|
| 78 |
|
|
|
| 2,271 |
|
|
| 2,249 |
|
|
| 1 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
| Quarter Ended |
| |||||||||||||||||
Income (Expense) |
| 3/31/2019 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 3/31/2020 |
| |||||
Company sales |
| $ | 541 |
|
| $ | (68 | ) |
| $ | (141 | ) |
| $ | (10 | ) |
| $ | 322 |
|
Cost of sales |
|
| (159 | ) |
|
| 20 |
|
|
| 34 |
|
|
| 3 |
|
|
| (102 | ) |
Cost of labor |
|
| (143 | ) |
|
| 11 |
|
|
| 24 |
|
|
| 4 |
|
|
| (104 | ) |
Occupancy and other operating expenses |
|
| (162 | ) |
|
| 10 |
|
|
| 33 |
|
|
| 4 |
|
|
| (115 | ) |
Restaurant profit |
| $ | 77 |
|
| $ | (27 | ) |
| $ | (50 | ) |
| $ | 1 |
|
| $ | 1 |
|
The decrease in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, increased rider labor costs due to higher delivery sales, and commodity inflation of 4%, partially offset by labor efficiency, one-time reductions in social security contributions and lease concessions, and lower promotion costs.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by lower government incentives received and higher G&Acompensation costs, partially offset by cost control measures to lower travel expenses.
Operating (Loss) Profit
The year to date increase in Operating profit,loss for the quarter, excluding the impact of F/X, was primarily driven by the increasedecrease in restaurantRestaurant profit and lower closure andhigher store impairment expenses, net.charges.
All Other Segments
All Other Segments reflects the results of Little Sheep, COFFii & JOY, East Dawning, Little Sheep, Taco Bell, Daojia COFFii & JOY and our e-commerce business.
|
| Quarter Ended |
| Year to Date Ended |
|
|
| Quarter Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| ||||||||||||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
|
|
| Ex F/X |
|
|
| 9/30/2019 |
| 9/30/2018 |
| Reported |
|
|
| Ex F/X |
|
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| Reported |
|
|
| Ex F/X |
|
| ||||||||||||||||||||||
Company sales |
| $ | 11 |
|
| $ | 8 |
|
|
| 34 |
|
|
|
| 38 |
|
|
| $ | 29 |
|
|
| $ | 24 |
|
|
|
| 21 |
|
|
|
| 27 |
|
|
| $ | 6 |
|
| $ | 9 |
|
|
| (32 | ) |
|
|
| (30 | ) |
| ||||||
Franchise fees and income |
|
| 2 |
|
|
| 1 |
|
|
| 15 |
|
|
|
| 16 |
|
|
|
| 6 |
|
|
|
| 4 |
|
|
|
| 27 |
|
|
|
| 33 |
|
|
|
| 1 |
|
|
| 2 |
|
|
| (62 | ) |
|
|
| (62 | ) |
| ||||||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 8 |
|
|
| 7 |
|
|
| 10 |
|
|
|
| 11 |
|
|
|
| 20 |
|
|
|
| 18 |
|
|
|
| 11 |
|
|
|
| 16 |
|
|
|
| 5 |
|
|
| 7 |
|
|
| (36 | ) |
|
|
| (34 | ) |
| ||||||
Other revenues |
|
| 19 |
|
|
| 14 |
|
|
| 43 |
|
|
|
| 43 |
|
|
|
| 49 |
|
|
|
| 25 |
|
|
| NM |
|
|
| NM |
|
|
|
| 16 |
|
|
| 14 |
|
|
| 17 |
|
|
|
| 21 |
|
| ||||||||
Total revenues |
| $ | 40 |
|
| $ | 30 |
|
|
| 32 |
|
|
|
| 34 |
|
|
| $ | 104 |
|
|
| $ | 71 |
|
|
|
| 46 |
|
|
|
| 52 |
|
|
| $ | 28 |
|
| $ | 32 |
|
|
| (14 | ) |
|
|
| (11 | ) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Restaurant profit |
| $ | (1 | ) |
| $ | (1 | ) |
| NM |
|
|
| NM |
|
|
| $ | (2 | ) |
|
| $ | (1 | ) |
|
| NM |
|
|
| NM |
|
| ||||||||||||||||||||||||||||
Restaurant loss |
| $ | (3 | ) |
| $ | (1 | ) |
| NM |
|
|
| NM |
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Restaurant margin % |
|
| (6.6 | )% |
|
| 3.7 | % |
|
| (10.3 | ) | ppts. |
|
| (10.3 | ) | ppts. |
|
| (7.4 | )% |
|
|
| (0.5 | )% |
|
|
| (6.9 | ) | ppts. |
|
| (6.9 | ) | ppts. |
|
| (45.1 | )% |
|
| (5.6 | )% |
|
| (39.5 | ) | ppts. |
|
| (39.5 | ) | ppts. | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
G&A expenses |
| $ | 8 |
|
| $ | 9 |
|
|
| 6 |
|
|
|
| 5 |
|
|
| $ | 24 |
|
|
| $ | 25 |
|
|
|
| 3 |
|
|
|
| (1 | ) |
|
| $ | 8 |
|
| $ | 8 |
|
|
| 7 |
|
|
|
| 5 |
|
| ||||||
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 5 |
|
| $ | 5 |
|
|
| (4 | ) |
|
|
| (5 | ) |
|
| $ | 16 |
|
|
| $ | 14 |
|
|
|
| (16 | ) |
|
|
| (21 | ) |
|
| $ | 4 |
|
| $ | 6 |
|
|
| 44 |
|
|
|
| 42 |
|
| ||||||
Other operating costs and expenses |
| $ | 17 |
|
| $ | 13 |
|
|
| (38 | ) |
|
|
| (40 | ) |
|
| $ | 43 |
|
|
| $ | 24 |
|
|
|
| (84 | ) |
|
|
| (91 | ) |
|
| $ | 15 |
|
| $ | 12 |
|
|
| (30 | ) |
|
|
| (35 | ) |
| ||||||
Closures and impairment expenses, net |
| $ | — |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | 2 |
|
|
| $ | — |
|
|
| NM |
|
|
| NM |
|
|
| $ | 2 |
|
| $ | 1 |
|
| NM |
|
|
| NM |
|
| ||||||||||||
Operating Loss |
| $ | (2 | ) |
| $ | (6 | ) |
|
| 29 |
|
|
|
| 18 |
|
|
| $ | (12 | ) |
|
| $ | (16 | ) |
|
|
| 10 |
|
|
|
| 4 |
|
|
| $ | (10 | ) |
| $ | (5 | ) |
| NM |
|
|
| NM |
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
| ||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| 9/30/2019 |
|
| 9/30/2018 |
| ||||
Same-Store Sales Decline |
|
| (10 | )% |
|
| (5 | )% |
|
| (11 | )% |
|
| (6 | )% |
|
| Quarter Ended |
| |||||
|
| 3/31/2020 |
|
| 3/31/2019 |
| ||
Same-Store Sales Decline |
|
| (30 | )% |
|
| (15 | )% |
The quarter and year to date increasedecrease in Company sales for the quarter, excluding the impact of F/X, was primarily driven by highersame-store sales generated from our e-commerce businessdeclines and temporary store closures due to the launchimpact of the COFFii & JOY concept.COVID-19 pandemic.
The quarter and year to date increase in Other revenue and Other operating costs and expenses for the quarter, excluding the impact of F/X, was primarily driven by inter-segment revenue transactions generated from our e-commerce businessthe increase in demand of online orders of certain product categories (mainly fresh grocery products).
The increase in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by the increase in Restaurant loss and Daojia.higher store impairment charges.
Corporate and Unallocated
|
| Quarter Ended |
|
|
|
|
|
| Year to Date Ended |
|
|
|
| Quarter Ended |
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| |||||||||||||||||||||||||||||||||
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
|
| Ex F/X |
|
| 9/30/2019 |
|
| 9/30/2018 |
|
| Reported |
|
| Ex F/X |
|
|
|
| 3/31/2020 |
|
| 3/31/2019 |
|
| Reported |
|
| Ex F/X |
|
| ||||||||||||||||||||||||||||||
Revenues from transactions with franchisees and unconsolidated affiliates |
| $ | 147 |
|
| $ | 136 |
|
|
| 7 |
|
|
| 10 |
|
|
| 425 |
|
|
| 395 |
|
|
| 8 |
|
|
| 13 |
|
|
|
| $ | 139 |
|
| $ | 145 |
|
|
| (4 | ) |
|
| (1 | ) |
| ||||||||||||||||||
Other revenue |
|
| 1 |
|
|
| 1 |
|
| NM |
|
| NM |
|
|
| 3 |
|
|
| 2 |
|
|
| 70 |
|
|
| 79 |
|
|
|
|
| 1 |
|
|
| 1 |
|
|
| (34 | ) |
|
| (32 | ) |
| ||||||||||||||||||||
Expenses for transactions with franchisees and unconsolidated affiliates |
|
| 145 |
|
|
| 135 |
|
|
| (7 | ) |
|
| (10 | ) |
|
| 421 |
|
|
| 392 |
|
|
| (7 | ) |
|
| (13 | ) |
|
|
|
| 135 |
|
|
| 143 |
|
|
| 6 |
|
|
| 3 |
|
| ||||||||||||||||||
Other operating costs and expenses |
|
| 1 |
|
|
| — |
|
| NM |
|
| NM |
|
|
| 3 |
|
|
| 1 |
|
| NM |
|
| NM |
|
|
|
|
| 1 |
|
|
| 1 |
|
|
| (17 | ) |
|
| (21 | ) |
| ||||||||||||||||||||||
Corporate G&A expenses |
|
| 34 |
|
|
| 42 |
|
|
| 19 |
|
|
| 17 |
|
|
| 92 |
|
|
| 94 |
|
|
| 2 |
|
|
| (2 | ) |
|
|
|
| 21 |
|
|
| 33 |
|
|
| 36 |
|
|
| 35 |
|
| ||||||||||||||||||
Other unallocated income (losses) (See Note 13) |
|
| 1 |
|
|
| (2 | ) |
| NM |
|
| NM |
|
|
| 2 |
|
|
| 98 |
|
|
| (98 | ) |
|
| (98 | ) |
|
| |||||||||||||||||||||||||||||||||||||
Other unallocated (loss) income |
|
| (1 | ) |
|
| 1 |
|
| NM |
|
| NM |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income, net |
|
| 10 |
|
|
| 10 |
|
|
| 6 |
|
|
| 9 |
|
|
| 29 |
|
|
| 28 |
|
|
| 4 |
|
|
| 10 |
|
|
|
|
| 9 |
|
|
| 9 |
|
|
| (7 | ) |
|
| (4 | ) |
| ||||||||||||||||||
Investment gain |
|
| 12 |
|
|
| — |
|
| NM |
|
| NM |
|
|
| 39 |
|
|
| — |
|
| NM |
|
| NM |
|
|
| |||||||||||||||||||||||||||||||||||||||
Investment (loss) gain |
|
| (8 | ) |
|
| 10 |
|
| NM |
|
| NM |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision (See Note 12) |
|
| (87 | ) |
|
| (67 | ) |
|
| (28 | ) |
|
| (31 | ) |
|
| (226 | ) |
|
| (227 | ) |
|
| 1 |
|
|
| (4 | ) |
|
|
|
| (32 | ) |
|
| (93 | ) |
|
| 65 |
|
|
| 65 |
|
| ||||||||||||||||||
Effective tax rate (See Note 12) |
|
| 26.9 | % |
|
| 24.2 | % |
|
| (2.7 | )% |
|
| (2.7 | )% |
|
| 25.8 | % |
|
| 25.7 | % |
|
| (0.1 | )% |
|
| (0.1 | )% |
|
|
|
| 32.7 | % |
|
| 28.9 | % |
|
| (3.8 | )% |
|
| (3.8 | )% |
|
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
The increasedecrease in Revenues from transactions with franchisees and unconsolidated affiliates for the quarter, excluding the impact of F/X, was mainly driven by system sales growth of franchisees and unconsolidated affiliates.
The year to date increase in Revenues from transactions with franchisees and unconsolidated affiliates, excluding the impact of F/X, was mainly driven by system sales growthdecline of franchisees and unconsolidated affiliates, andpartially offset by an increase in the selling prices of food and paper products due to commodity inflation, partially offset by the impact from the acquisition of Wuxi KFC.inflation.
G&A Expenses
The changedecrease in Corporate G&A expenses for the quarter, and year to date, excluding the impact of F/X, was mainly driven by higher compensation costs and higher government incentives received.
Other Unallocated Income
The year to date decrease in Other unallocated income, excluding the impact of F/X, was primarily due to a gain of $98 million recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition in the first quarter of 2018.
Investment Gain (Loss)
The Investment gain or loss represents the unrealized gain or loss related to our investment in equity securities of Meituan Dianping (“Meituan”). See Note 6.
Income Tax Provision
Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%, withholding tax on repatriation of earnings outside of China and U.S. corporate income tax, if any. Our effective tax rate was 26.9%32.7% and 24.2%28.9% for the quarters ended September 30,March 31, 2020 and 2019, and 2018, respectively, and 25.8% and 25.7% for the years to date ended September 30, 2019 and 2018, respectively. The higher effective tax rate for the quarter ended September 30, 2019 was primarily due to additional accrued tax on GILTI. The higher year to date effective tax rate was primarily due to an additional adjustmenta non-deductible loss in the first quarter of $8 million on transition tax pursuant to the Tax Act recorded2020, while non-taxable gain in the first quarter of 2019 and additional accrued tax on GILTI, offset by non-taxable gain related to theour investment in equity securities of Meituan.
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 has significantly impacted the Company’s operations. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. As of the end of April, approximately 99% of our stores in China were either partially or fully open. However, in April, same-store sales were still down by more than 10%.
Management cannot ascertain the full impact of the COVID-19 pandemic on the Company’s operations, which depends on the evolving nature of the COVID-19 pandemic and governmental responses thereto, the economic recovery within China and globally, the impact on consumer behavior and other related factors. The Company expects that COVID-19 will have a material adverse impact on the Company’s results of operations, cash flows and financial condition for the full year 2020. For further information on the risks associated with the COVID-19 pandemic, see “Item 1A. Risk Factors.”
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing authorities with respect to income and non-income based taxes. 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 currently requested byexchanged with the tax authorities focuses on our franchise arrangement with YUM. To address the requests, weWe have submitted information 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 will depend upon further review of the information provided and 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. 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. VAT was imposed on goods and services at the rates of 17%, 13%, 11% and 6%. Input VAT would be creditable to the aforementioned 6% output VAT. Effective from July 1, 2017, the 13% VAT rate primarily applicable to certain agricultural products was reduced to 11%. Effective from May 1, 2018, theThe latest VAT rates imposed on our purchase of 17%materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% were lowered to 16% and 10%, respectively. Effective from April 1, 2019, the VAT rates of 16% and 10% were further lowered to 13% and 9%, respectively.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 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, on 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 ongiving 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 September 30, 2019,March 31, 2020, an input VAT credit asset of $232$241 million and payable of $7$2 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year from September 30, 2019.March 31, 2020. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year.
We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter.
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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 affect the Company’s business, results of operations, cash flows and financial condition, depending on the weakening or strengthening of RMB against the US$. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for a further discussion.
Consolidated Cash Flows
Our cash flows for the years to date ended September 30,March 31, 2020 and 2019 and 2018 were as follows:
Net cash provided by operating activities was $1,045$60 million in 20192020 as compared to $1,173$344 million in 2018.2019. The decrease was primarily driven by net income decrease and timing of payments for inventory.inventory along with other working capital changes.
Net cash provided by investing activities was $2 million in 2020 as compared to $267 million of net cash used in investing activities was $553 million in 2019 as compared to $527 million in 2018.2019. The increasechange is mainly due to higherthe net impact on cash outflow related toflow resulting from purchases and maturities of short-term investment activities in 2019, lapping cash outflow in 2018 related to the acquisition of Wuxi KFC and the investment in Meituan’s ordinary shares, and offset by lower capital expenditure in 2019.investments.
Net cash used in financing activities was $368$52 million in 20192020 as compared to $318$113 million in 2018.2019. The increasedecrease was primarily driven by an increasea decrease in the number of shares repurchased and cash dividends paid to stockholders in 2019.2020.
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.
Our ability to fund our future operations and capital needs will depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and to make capital expenditures, distributions to our stockholders and share repurchases as well as any acquisition or investment we may make. As a result of the COVID-19 pandemic, we have taken, and continue to take, certain actions to provide additional liquidity and flexibility, which include temporarily suspending our share repurchase program and, for the next two quarters, dividends, as well as increasing our credit facilities. We believe that our future cash from operations, together with our access to funds on hand and 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; |
| • | the liquidity of the overall capital markets; and |
| • | 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 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 additional 10% withholding tax levied by the Chinese tax authority, subject to any reduction or exemption set forth in relevant tax treaties or tax arrangements.
DividendsShare Repurchases and Share RepurchasesDividends
Our Board of Directors has authorized an aggregate of $1.4 billion underfor our 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. ForDuring the year to datequarters ended September 30,March 31, 2020 and 2019, the Company repurchased $204$7 million or 4.90.2 million and $65 million or 1.7 million shares of common stock, respectively, under the repurchase program. The Company repurchased $167 million, or 4.6 million shares, of common stock under the repurchase program for the year to date ended September 30, 2018.
For the quarters to date ended September 30,March 31, 2020 and 2019, and 2018, wethe Company paid cash dividends of approximately $45 million and $38$46 million, respectively, to our stockholders through quarterly dividend payments of $0.12 and $0.10 per share, respectively.share.
On October 29, 2019,Due to the Board of Directors declared a cash dividend of $0.12 per share, payable asunprecedented effects of the close of business on December 17, 2019 to stockholders of record as ofCOVID-19 pandemic and associated economic uncertainty, the close of business on November 26, 2019. The total estimated cash dividend payable is approximately $45 million.Company announced in April 2020 that it would temporarily suspend its share repurchases and, for the next two quarters, dividends.
Our ability to declare and pay any dividends on our stock may be restricted by 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 of 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.
Borrowing Capacity
As of September 30, 2019,March 31, 2020, the Company had credit facilities of RMB 2,9303,216 million (approximately $410$454 million), comprised of onshore credit facilities of RMB1,500RMB1,800 million (approximately $210$254 million) in aggregate and offshore credit facilities of $200 million in aggregate.
The credit facilities had remaining terms ofranging from less than one year or lessto three years as of September 30, 2019.March 31, 2020. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China, Loan Prime Rate (“LPR”) published by the National Interbank Funding Centre of the PRC or London Interbank Offered Rate (LIBOR)(“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. Some of the credit facilities contain covenants including,limiting, among other things, limitations on 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 September 30, 2019,March 31, 2020, we had outstanding bank guarantees of RMB 7686 million (approximately $11$12 million) to secure our lease payment to landlords for certain Company-owned restaurants. The borrowing capacity under the credit facilities waswere therefore reduced by the same amount, while there were no borrowings outstanding as of September 30, 2019.March 31, 2020.
Off-Balance Sheet Arrangements
See the Guarantees section of Note 14 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 June 2016,December 2019, the FASB issued ASU 2016-13,2019-12, Financial Instruments – Credit LossesIncome Tax (Topic 326): Measurement of Credit Losses on Financial Instruments740), Simplifying the Accounting for Income Taxes (“ASU 2016-13”2019-12”), which requires measurementsimplifies 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 expected versus incurred credit lossesdeferred tax liabilities for financial assets held. In November 2018,outside basis differences. The guidance also simplifies the FASB issuedaccounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments-Credit Losses to clarify the implementation guidance. ASU 2016-132019-12 is effective for the Company from January 1, 2020,2021, with early adoption permitted. The adoption of this standard may result in a change of our provision policy primarily for accounts receivable, but we do not expectWe are currently evaluating the impact the adoption of this standard towill have a material impact on our financial statements.
In August 2018,January 2020, the FASB issued ASU 2018-13,2020-01, Fair Value MeasurementInvestments—Equity Securities (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2018-13”2020-01”), which amendedclarifies the fair value measurement guidance by modifyinginteraction for equity securities under Topic 321 and investments accounted for under the disclosure requirements.equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2018-132020-01 is effective for the Company from January 1, 2020,2021, with early adoption permitted. We do not expectare currently evaluating the impact the adoption of this standard towill have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. ASU 2018-15 is effective for the Company from January 1, 2020, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18) (“ASU 2018-18”), which clarifies that transactions in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer for a distinct good or service. The amendment also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. ASU 2018-18 is effective for the Company from January 1, 2020, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our financial statements.
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan,” “could,” “target,” “predict,” “likely,” “should,” “forecast,” “outlook,” “model,” “continue,” “ongoing” or other similar terminology. Forward-looking statements are based on our expectations, estimates, assumptions or projections concerning future results or events as of the date of the filing of this Form 10-Q. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those statements. We cannot assure you that any of our assumptions are correct or any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the following:
| • | Risks related to our business and industry, such as (a) food safety and food-borne illness concerns, (b) significant failure to maintain effective quality control systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other |
| • | 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 trade relations between the United States and China, including the imposition of new or higher taxes on goods imported from the United States, (d) fluctuation in the value of the Chinese Renminbi, (e) limitations on our ability to utilize our cash balances effectively due to governmental control of currency conversion and payments of foreign currency, (f) changes in laws and regulations, (g) reliance on distributions by our operating subsidiaries in China to fund offshore cash requirements, (h) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (i) uncertainty regarding indirect transfers of equity interests and enhanced scrutiny by Chinese tax authorities, (j) difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us, (k) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (l) risk in relation to unexpected land acquisitions, building closures or demolitions, (m) potential fines for failure to comply with law, |
| • | Risks related to the separation and related transactions, such as (a) |
In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “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, 2018)2019 and this Form 10-Q) 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. While substantially all of our supply purchases are denominated in RMB, from time to 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 corresponding local currencies when practical, to minimize the related foreign currency exposure 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 September 30, 2019,March 31, 2020, the Company’s Operating profit would have decreased by approximately $29$10 million if the RMB weakened 10% relative to the US$. 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 risks associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors.
Investment Risk
In September 2018, we invested $74 million in Meituan’s ordinary shares. The equity investment is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 6 for further discussion on our investment in Meituan.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There were no changes with respect to the Company’s internal control over financial reporting during the quarter ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II – Other Information
Item 1. | Legal Proceedings |
Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated 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. ThereExcept as set forth below, 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, 2018,2019, which was filed with the SEC on February 27, 2019.2020.
Health concerns arising from outbreaks of viruses or other illnesses may have a material adverse effect on our business. We expect that the COVID-19 pandemic will have a material adverse impact on the Company’s results of operations, cash flows and financial condition for the full year 2020, and it could also have material adverse impacts for an extended period of time thereafter.
Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as the novel coronavirus (COVID-19), avian flu or African swine flu. Outbreaks of contagious illness occur from time to time around the world, including in China where virtually all of our restaurants are located. The occurrence of such an outbreak or other adverse public health developments could materially disrupt our business and operations, including if government authorities impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Furthermore, the risk of contracting viruses or other illnesses that may be transmitted through human contact could cause employees or guests to avoid gathering in public places or interacting with other people, which could materially and adversely affect restaurant guest traffic or our ability to adequately staff restaurants. An outbreak could also cause disruption in our supply chain and adversely impact our ability to ensure supplies to the stores and to provide safety measures to protect our employees and customers, which could materially and adversely affect our continuous operations. Our operating costs may also increase in view of the additional protective supplies and sanitation procedures that may be required to operate our business during an outbreak. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of effected countries. Any of the foregoing would severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition.
For example, the COVID-19 pandemic has adversely affected our results of operations, cash flows and financial condition for the first quarter of 2020, and it is expected to have continuing adverse effects for full year 2020. At the peak of the COVID-19 outbreak in China, we closed approximately 35% of our restaurants. For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. As of the end of April, approximately 99% of our stores in China were either partially or fully open. However, in April, same-store sales were still down by more than 10%. We expect an extended recovery period in China, and that the pace will be uneven across regions, dayparts and segments. We expect particularly acute impacts for business on weekends and holidays and, as a result of reduced traveling, in transportation hubs. It remains difficult to predict the full impact of the COVID-19 pandemic on the broader economy and how consumer behavior may change, and whether such change is temporary or permanent. Social distancing, telecommunicating and reductions in travel may become the new normal. These conditions could fundamentally impact the way we work and the services we provide, and could have continuing adverse effects on our results of operations, cash flows and financial condition beyond 2020. The extent to which our operations continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the possible reemergence and further spread of COVID-19 and the actions by the government authorities to contain the pandemic or treat its impact, among other things. Insurance may be unavailable to cover any losses we incur as a result of the pandemic. The COVID-19 pandemic also may have the effect of heightening other risks disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, such as, but not limited to, those related to supply chain management, labor shortage and cost, cybersecurity threats, as well as consumer perceptions of our brands.
Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may affect our business. Our operations could also be disrupted if any of our employees or employees of our business partners were suspected of having a contagious illness or susceptible to becoming infected with a contagious illness, since this could require us or our business partners to screen and/or quarantine some or all of such employees or disinfect our restaurant facilities.
With respect to the avian flu, public concern over an outbreak may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. This would likely result in lower revenues and profits. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact our profit margins and revenues.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On February 7, 2017, we announced that ourOur Board of Directors authorized a $300 million share repurchase program. On October 4, 2017, the Board of Directors increased Yum China’s share repurchase authorization from $300 million to an aggregate of $550 million. On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4 billion.billion for our share repurchase program, including its most recent increase in authorization on October 31, 2018. The authorizations do not have an expiration date. As a result of the COVID-19 pandemic impact, we have taken, and are continuing to take, certain actions to provide additional liquidity and flexibility, which include temporarily suspending our share repurchase program.
The following table provides information as of September 30, 2019March 31, 2020 with respect to shares of Yum China common stock repurchased by the Company during the quarter then ended:
Period |
| Total Number of Shares Repurchased (thousands) |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (thousands) |
|
| Approximate Dollar Value of Shares that May Yet Be Repurchased under the Plans or Programs (millions) |
| ||||
7/1/19-7/31/19 |
|
| 495 |
|
| $ | 44.45 |
|
|
| 495 |
|
| $ | 798 |
|
8/1/19-8/31/19 |
|
| 498 |
|
| $ | 44.09 |
|
|
| 498 |
|
| $ | 776 |
|
9/1/19-9/30/19 |
|
| 438 |
|
| $ | 45.69 |
|
|
| 438 |
|
| $ | 756 |
|
Total |
|
| 1,431 |
|
| $ | 44.70 |
|
|
| 1,431 |
|
| $ | 756 |
|
Period |
| Total Number of Shares Repurchased (thousands) |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (thousands) |
|
| Approximate Dollar Value of Shares that May Yet Be Repurchased under the Plans or Programs (millions) |
| ||||
1/1/20-1/31/20 |
|
| 127 |
|
| $ | 43.38 |
|
|
| 127 |
|
| $ | 693 |
|
2/1/20-2/29/20 |
|
| 36 |
|
| $ | 43.87 |
|
|
| 36 |
|
| $ | 692 |
|
3/1/20-3/31/20 |
|
| — |
|
|
|
|
|
|
| — |
|
| $ | 692 |
|
Total |
|
| 163 |
|
| $ | 43.49 |
|
|
| 163 |
|
| $ | 692 |
|
Item 6. | Exhibits |
Exhibit Number |
| Description of Exhibits |
|
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|
3.1 |
| |
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3.2 |
| |
| ||
10.1 |
| |
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10.2 |
| |
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10.3 |
| |
10.4 | ||
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31.1 |
| |
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31.2 |
| |
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32.1 |
| |
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32.2 |
| |
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101.INS |
| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document * |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document * |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document * |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document * |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document * |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document * |
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104 |
| Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document * |
* | Filed or furnished herewith. |
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Yum China Holdings, Inc. |
| (Registrant) |
Date: |
|
| /s/ Xueling Lu |
|
|
| Controller and Principal Accounting Officer |
|
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5248