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, 2021March 31, 2022
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, Texas75024 United States of America | Yum China Building 20 Tian Yao Qiao Road Shanghai200030 People’s Republic of China |
(Address, Including Zip Code, of Principal Executive Offices)
(469) (469) 980-2898
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | YUMC | New York Stock Exchange |
9987 | The Stock Exchange of Hong Kong Limited |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☒ |
| Accelerated filer |
| ☐ | ||
|
|
|
| |||||
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of November 3, 2021May 2, 2022 was 428,126,907421,430,362 shares.
Yum China Holdings, Inc.
INDEX
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
|
|
Condensed Consolidated Statements of Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions, except per share data)
|
| Quarter Ended |
|
| Year to Date Ended |
| Quarter Ended |
| ||||||||||||||||||
Revenues |
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||||||
Company sales |
| $ | 2,310 |
|
| $ | 2,118 |
|
| $ | 6,874 |
|
| $ | 5,358 |
|
|
| $ | 2,548 |
| $ | 2,331 |
| ||
Franchise fees and income |
|
| 40 |
|
|
| 40 |
|
|
| 120 |
|
|
| 112 |
|
|
| 24 |
| 42 |
| ||||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 184 |
|
|
| 170 |
|
|
| 519 |
|
|
| 488 |
|
|
| 77 |
| 171 |
| ||||
Other revenues |
|
| 20 |
|
|
| 20 |
|
|
| 49 |
|
|
| 46 |
|
|
|
| 19 |
|
|
| 13 |
|
|
Total revenues |
|
| 2,554 |
|
|
| 2,348 |
|
|
| 7,562 |
|
|
| 6,004 |
|
|
|
| 2,668 |
|
|
| 2,557 |
|
|
Costs and Expenses, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Company restaurants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Food and paper |
|
| 743 |
|
|
| 660 |
|
|
| 2,133 |
|
|
| 1,711 |
|
|
| 792 |
| 704 |
| ||||
Payroll and employee benefits |
|
| 591 |
|
|
| 458 |
|
|
| 1,675 |
|
|
| 1,236 |
|
|
| 667 |
| 544 |
| ||||
Occupancy and other operating expenses |
|
| 694 |
|
|
| 606 |
|
|
| 1,995 |
|
|
| 1,621 |
|
|
|
| 738 |
|
|
| 648 |
|
|
Company restaurant expenses |
|
| 2,028 |
|
|
| 1,724 |
|
|
| 5,803 |
|
|
| 4,568 |
|
|
| 2,197 |
| 1,896 |
| ||||
General and administrative expenses |
|
| 142 |
|
|
| 127 |
|
|
| 408 |
|
|
| 339 |
|
|
| 151 |
| 130 |
| ||||
Franchise expenses |
|
| 17 |
|
|
| 17 |
|
|
| 50 |
|
|
| 50 |
|
|
| 10 |
| 17 |
| ||||
Expenses for transactions with franchisees and unconsolidated affiliates |
|
| 180 |
|
|
| 164 |
|
|
| 509 |
|
|
| 480 |
|
|
| 75 |
| 169 |
| ||||
Other operating costs and expenses |
|
| 17 |
|
|
| 15 |
|
|
| 41 |
|
|
| 38 |
|
|
| 17 |
| 11 |
| ||||
Closures and impairment expenses, net |
|
| 2 |
|
|
| 1 |
|
|
| 13 |
|
|
| 30 |
|
| |||||||||
Other income, net |
|
| (10 | ) |
|
| (256 | ) |
|
| (15 | ) |
|
| (282 | ) |
| |||||||||
Closures and impairment expenses (income), net |
| 2 |
| (2 | ) |
| ||||||||||||||||||||
Other expenses (income), net |
|
| 25 |
|
|
| (6 | ) |
| |||||||||||||||||
Total costs and expenses, net |
|
| 2,376 |
|
|
| 1,792 |
|
|
| 6,809 |
|
|
| 5,223 |
|
|
|
| 2,477 |
|
|
| 2,215 |
|
|
Operating Profit |
|
| 178 |
|
|
| 556 |
|
|
| 753 |
|
|
| 781 |
|
|
| 191 |
| 342 |
| ||||
Interest income, net |
|
| 16 |
|
|
| 11 |
|
|
| 47 |
|
|
| 28 |
|
|
| 12 |
| 15 |
| ||||
Investment (loss) gain |
|
| (39 | ) |
|
| 38 |
|
|
| (43 | ) |
|
| 75 |
|
| |||||||||
Income Before Income Taxes |
|
| 155 |
|
|
| 605 |
|
|
| 757 |
|
|
| 884 |
|
| |||||||||
Investment loss |
|
| (37 | ) |
|
| (12 | ) |
| |||||||||||||||||
Income Before Income Taxes and Equity in |
| 166 |
| 345 |
| |||||||||||||||||||||
Income tax provision |
|
| (44 | ) |
|
| (155 | ) |
|
| (210 | ) |
|
| (232 | ) |
|
| (55 | ) |
| (102 | ) |
| ||
Equity in net earnings (losses) from |
|
| (1 | ) |
|
| 0 |
|
| |||||||||||||||||
Net income – including noncontrolling interests |
|
| 111 |
|
|
| 450 |
|
|
| 547 |
|
|
| 652 |
|
|
| 110 |
| 243 |
| ||||
Net income – noncontrolling interests |
|
| 7 |
|
|
| 11 |
|
|
| 32 |
|
|
| 19 |
|
|
|
| 10 |
|
|
| 13 |
|
|
Net Income – Yum China Holdings, Inc. |
| $ | 104 |
|
| $ | 439 |
|
| $ | 515 |
|
| $ | 633 |
|
|
| $ | 100 |
|
| $ | 230 |
|
|
Weighted-average common shares outstanding (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Basic |
|
| 422 |
|
|
| 387 |
|
|
| 421 |
|
|
| 380 |
|
|
| 426 |
| 420 |
| ||||
Diluted |
|
| 435 |
|
|
| 400 |
|
|
| 435 |
|
|
| 391 |
|
|
| 430 |
| 434 |
| ||||
Basic Earnings Per Common Share |
| $ | 0.25 |
|
| $ | 1.13 |
|
| $ | 1.23 |
|
| $ | 1.67 |
|
|
| $ | 0.23 |
|
| $ | 0.55 |
|
|
Diluted Earnings Per Common Share |
| $ | 0.24 |
|
| $ | 1.10 |
|
| $ | 1.19 |
|
| $ | 1.62 |
|
|
| $ | 0.23 |
|
| $ | 0.53 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
| Quarter Ended |
|
| Year to Date Ended | ||||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 | ||||||
Net income - including noncontrolling interests |
| $ | 111 |
|
| $ | 450 |
|
| $ | 547 |
|
| $ | 652 |
|
|
Other comprehensive income, net of tax of nil: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 10 |
|
|
| 123 |
|
|
| 50 |
|
|
| 88 |
|
|
Comprehensive income - including noncontrolling interests |
|
| 121 |
|
|
| 573 |
|
|
| 597 |
|
|
| 740 |
|
|
Comprehensive income - noncontrolling interests |
|
| 9 |
|
|
| 17 |
|
|
| 36 |
|
|
| 23 |
|
|
Comprehensive Income - Yum China Holdings, Inc. |
| $ | 112 |
|
| $ | 556 |
|
| $ | 561 |
|
| $ | 717 |
|
|
|
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Net income – including noncontrolling interests |
| $ | 110 |
|
| $ | 243 |
|
|
Other comprehensive income (loss), net of tax of nil: |
|
|
|
|
|
|
| ||
Foreign currency translation adjustments |
|
| 13 |
|
|
| (18 | ) |
|
Comprehensive income – including noncontrolling interests |
|
| 123 |
|
|
| 225 |
|
|
Comprehensive income – noncontrolling interests |
|
| 12 |
|
|
| 12 |
|
|
Comprehensive Income – Yum China Holdings, Inc. |
| $ | 111 |
|
| $ | 213 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
| Year to Date Ended |
|
|
| Quarter Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||||
Cash Flows – Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income – including noncontrolling interests |
| $ | 547 |
|
| $ | 652 |
|
|
| $ | 110 |
| $ | 243 |
|
| |
Depreciation and amortization |
|
| 380 |
|
|
| 327 |
|
|
| 164 |
| 128 |
|
| |||
Non-cash operating lease cost |
|
| 310 |
|
|
| 270 |
|
|
| 120 |
| 101 |
|
| |||
Closures and impairment expenses |
|
| 13 |
|
|
| 30 |
|
| |||||||||
Gain from re-measurement of previously held equity interest |
|
| (10 | ) |
|
| (239 | ) |
| |||||||||
Investment loss (gain) |
|
| 43 |
|
|
| (75 | ) |
| |||||||||
Closures and impairment expenses (income) |
| 2 |
| (2 | ) |
| ||||||||||||
Investment loss |
| 37 |
| 12 |
|
| ||||||||||||
Equity income from investments in unconsolidated affiliates |
|
| (38 | ) |
|
| (51 | ) |
|
| 0 |
| (17 | ) |
| |||
Distributions of income received from unconsolidated affiliates |
|
| 21 |
|
|
| 25 |
|
|
| — |
| 11 |
|
| |||
Deferred income taxes |
|
| 17 |
|
|
| 73 |
|
|
| 1 |
| 15 |
|
| |||
Share-based compensation expense |
|
| 32 |
|
|
| 27 |
|
|
| 11 |
| 10 |
|
| |||
Changes in accounts receivable |
|
| 2 |
|
|
| (19 | ) |
|
| (2 | ) |
| (3 | ) |
| ||
Changes in inventories |
|
| 13 |
|
|
| 52 |
|
|
| 88 |
| 52 |
|
| |||
Changes in prepaid expenses and other current assets |
|
| — |
|
|
| 31 |
|
|
| 38 |
| 20 |
|
| |||
Changes in accounts payable and other current liabilities |
|
| 82 |
|
|
| 56 |
|
|
| (322 | ) |
| (175 | ) |
| ||
Changes in income taxes payable |
|
| (5 | ) |
|
| 62 |
|
|
| 26 |
| 51 |
|
| |||
Changes in non-current operating lease liabilities |
|
| (309 | ) |
|
| (292 | ) |
|
| (106 | ) |
| (104 | ) |
| ||
Other, net |
|
| (24 | ) |
|
| (30 | ) |
|
|
| 4 |
|
|
| (11 | ) |
|
Net Cash Provided by Operating Activities |
|
| 1,074 |
|
|
| 899 |
|
|
|
| 171 |
|
|
| 331 |
|
|
Cash Flows – Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Capital spending |
|
| (482 | ) |
|
| (284 | ) |
|
| (205 | ) |
| (165 | ) |
| ||
Purchases of short-term investments |
|
| (4,524 | ) |
|
| (2,859 | ) |
|
| (1,041 | ) |
| (1,180 | ) |
| ||
Purchases of long-term time deposits |
|
| (25 | ) |
|
| (57 | ) |
| |||||||||
Maturities of short-term investments |
|
| 4,544 |
|
|
| 1,066 |
|
|
| 1,281 |
| 1,258 |
|
| |||
Contribution to unconsolidated affiliates |
|
| — |
|
|
| (17 | ) |
| |||||||||
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (288 | ) |
|
|
| (23 | ) |
| — |
|
| |
Investment in equity securities |
|
| (261 | ) |
|
| — |
|
| |||||||||
Disposal of equity securities |
|
| — |
|
|
| 54 |
|
| |||||||||
Acquisition of equity investment |
| — |
| (261 | ) |
| ||||||||||||
Other, net |
|
| 5 |
|
|
| 52 |
|
|
|
| 1 |
|
|
| 1 |
|
|
Net Cash Used in Investing Activities |
|
| (743 | ) |
|
| (2,333 | ) |
| |||||||||
Net Cash Provided by (Used in) Investing Activities |
|
| 13 |
|
|
| (347 | ) |
| |||||||||
Cash Flows – Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock issuance proceeds, net of issuance costs |
|
| — |
|
|
| 2,203 |
|
| |||||||||
Repurchase of shares of common stock |
|
| (32 | ) |
|
| (8 | ) |
|
|
| (224 | ) |
| — |
|
| |
Cash dividends paid on common stock |
|
| (152 | ) |
|
| (45 | ) |
|
| (51 | ) |
| (50 | ) |
| ||
Dividends paid to noncontrolling interests |
|
| (22 | ) |
|
| (7 | ) |
|
| (17 | ) |
| (1 | ) |
| ||
Payment of acquisition related holdback |
|
| (8 | ) |
|
| — |
|
| |||||||||
Contribution from noncontrolling interests |
| 18 |
| — |
|
| ||||||||||||
Other, net |
|
| (6 | ) |
|
| 1 |
|
|
|
| — |
|
|
| (4 | ) |
|
Net Cash (Used in) Provided by Financing Activities |
|
| (220 | ) |
|
| 2,144 |
|
| |||||||||
Net Cash Used in Financing Activities |
|
| (274 | ) |
|
| (55 | ) |
| |||||||||
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash |
|
| 9 |
|
|
| 17 |
|
|
|
| 1 |
|
|
| (3 | ) |
|
Net Increase in Cash, Cash Equivalents and Restricted Cash |
|
| 120 |
|
|
| 727 |
|
| |||||||||
Cash, Cash Equivalents and Restricted Cash - Beginning of Period |
|
| 1,158 |
|
|
| 1,055 |
|
| |||||||||
Cash, Cash Equivalents and Restricted Cash - End of Period |
| $ | 1,278 |
|
| $ | 1,782 |
|
| |||||||||
Net Decrease in Cash, Cash Equivalents and Restricted Cash |
| (89 | ) |
| (74 | ) |
| |||||||||||
Cash, Cash Equivalents and Restricted Cash – Beginning of Period |
|
| 1,136 |
|
|
| 1,158 |
|
| |||||||||
Cash, Cash Equivalents and Restricted Cash – End of Period |
| $ | 1,047 |
|
| $ | 1,084 |
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Supplemental Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash paid for income tax |
|
| 210 |
|
|
| 105 |
|
|
|
| 23 |
|
|
| 40 |
|
|
Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures included in accounts payable and other current liabilities |
|
| 208 |
|
|
| 148 |
|
|
|
| 182 |
|
|
| 151 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Condensed Consolidated Balance Sheets
Yum China Holdings, Inc.
(in US$ millions)
|
| 9/30/2021 |
|
| 12/31/2020 |
|
|
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||||
|
| (Unaudited) |
|
|
|
|
|
|
| (Unaudited) |
|
|
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 1,278 |
|
| $ | 1,158 |
|
|
| $ | 1,047 |
| $ | 1,136 |
|
| |
Short-term investments |
|
| 3,099 |
|
|
| 3,105 |
|
|
| 2,622 |
| 2,860 |
|
| |||
Accounts receivable, net |
|
| 97 |
|
|
| 99 |
|
|
| 70 |
| 67 |
|
| |||
Inventories, net |
|
| 390 |
|
|
| 398 |
|
|
| 345 |
| 432 |
|
| |||
Prepaid expenses and other current assets |
|
| 218 |
|
|
| 176 |
|
|
|
| 182 |
|
|
| 221 |
|
|
Total Current Assets |
|
| 5,082 |
|
|
| 4,936 |
|
|
| 4,266 |
| 4,716 |
|
| |||
Property, plant and equipment, net |
|
| 1,910 |
|
|
| 1,765 |
|
|
| 2,231 |
| 2,251 |
|
| |||
Operating lease right-of-use assets |
|
| 2,287 |
|
|
| 2,164 |
|
|
| 2,546 |
| 2,612 |
|
| |||
Goodwill |
|
| 858 |
|
|
| 832 |
|
|
| 2,163 |
| 2,142 |
|
| |||
Intangible assets, net |
|
| 218 |
|
|
| 246 |
|
|
| 251 |
| 272 |
|
| |||
Investments in unconsolidated affiliates |
| 305 |
| 292 |
|
| ||||||||||||
Deferred income tax assets |
|
| 68 |
|
|
| 98 |
|
|
| 96 |
| 106 |
|
| |||
Investments in unconsolidated affiliates |
|
| 309 |
|
|
| 85 |
|
| |||||||||
Other assets |
|
| 774 |
|
|
| 749 |
|
|
|
| 781 |
|
|
| 832 |
|
|
Total Assets |
| $ | 11,506 |
|
| $ | 10,875 |
|
|
| $ | 12,639 |
|
| $ | 13,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable and other current liabilities |
| $ | 2,126 |
|
| $ | 1,995 |
|
|
| $ | 2,008 |
| $ | 2,332 |
|
| |
Income taxes payable |
|
| 68 |
|
|
| 72 |
|
|
|
| 77 |
|
|
| 51 |
|
|
Total Current Liabilities |
|
| 2,194 |
|
|
| 2,067 |
|
|
| 2,085 |
| 2,383 |
|
| |||
Non-current operating lease liabilities |
|
| 2,014 |
|
|
| 1,915 |
|
|
| 2,214 |
| 2,286 |
|
| |||
Non-current finance lease liabilities |
|
| 34 |
|
|
| 28 |
|
|
| 41 |
| 40 |
|
| |||
Deferred income tax liabilities |
|
| 217 |
|
|
| 227 |
|
|
| 418 |
| 425 |
|
| |||
Other liabilities |
|
| 170 |
|
|
| 167 |
|
|
|
| 173 |
|
|
| 167 |
|
|
Total Liabilities |
|
| 4,629 |
|
|
| 4,404 |
|
|
|
| 4,931 |
|
|
| 5,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Redeemable Noncontrolling Interest |
|
| 12 |
|
|
| 12 |
|
|
| 14 |
| 14 |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Common stock, $0.01 par value; 1,000 million shares authorized; 444 million shares and 440 million shares issued at September 30, 2021 and December 31, 2020, respectively; 424 million shares and 420 million shares outstanding at September 30, 2021 and December 31, 2020, respectively |
|
| 4 |
|
|
| 4 |
|
| |||||||||
Common stock, $0.01 par value; 1,000 million shares authorized; 449 million shares |
| 4 |
| 4 |
|
| ||||||||||||
Treasury stock |
|
| (762 | ) |
|
| (728 | ) |
|
| (1,035 | ) |
| (803 | ) |
| ||
Additional paid-in capital |
|
| 4,685 |
|
|
| 4,658 |
|
|
| 4,704 |
| 4,695 |
|
| |||
Retained earnings |
|
| 2,468 |
|
|
| 2,105 |
|
|
| 2,941 |
| 2,892 |
|
| |||
Accumulated other comprehensive income |
|
| 213 |
|
|
| 167 |
|
|
|
| 279 |
|
|
| 268 |
|
|
Total Yum China Holdings, Inc. Stockholders' Equity |
|
| 6,608 |
|
|
| 6,206 |
|
|
| 6,893 |
| 7,056 |
|
| |||
Noncontrolling interests |
|
| 257 |
|
|
| 253 |
|
|
|
| 801 |
|
|
| 852 |
|
|
Total Equity |
|
| 6,865 |
|
|
| 6,459 |
|
|
|
| 7,694 |
|
|
| 7,908 |
|
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity |
| $ | 11,506 |
|
| $ | 10,875 |
|
|
| $ | 12,639 |
|
| $ | 13,223 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Tabular amounts in US$ millions, except for number of shares and per share data)as otherwise noted)
Note 1 – Description of Business
Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016.2016.
The Company owns, franchises or has ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY East Dawning,and Taco Bell and Lavazza concepts (collectively, the “concepts”). In connection with the separation of the Company in 2016 from its former parent company, YUM! Brands, Inc. (“YUM”), a master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company, and YUM, through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019. Pursuant to the master license agreement, we are the exclusive licensee of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones as amended in April 2022, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew. In exchange, we pay a license fee to YUM equal to 3%3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Little Sheep, Huang Ji Huang and COFFii & JOY, and East Dawning, and pay no license fee related to these 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 2017, the Company started an e-commerce business 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.
In April 2020, the Company completed the acquisition of a 93.3% interest in the Huang Ji Huang group (“Huang Ji Huang”), a leading Chinese-style casual dining franchise business, for cash consideration of $185 million. Upon acquisition, Huang Ji Huang became an operating segment of the Company. The acquisition was considered immaterial. Following the acquisition, we established a Chinese dining business unit comprising our three Chinese dining brands, namely Little Sheep, Huang Ji Huang and East Dawning.
Also in AprilIn the second quarter of 2020, the Company partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world-renownedworld renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China. In September 2021, the Company and Lavazza Group entered into agreements for the previously formed joint venture (“Lavazza joint venture”) to accelerate the expansion of Lavazza coffee shops in China. Upon execution of these agreements, the Company controls and consolidates the joint venture with its 65%65% equity interest. The acquisition was considered immaterial.
In August 2020,During the fourth quarter of 2021, the Company completed the acquisitionits investment of an additional 25% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”), for cash consideration of $149 million.a Upon closing of the acquisition, the Company increased its equity interest to 72%, allowing the Company to consolidate Suzhou KFC. 28The acquisition was considered immaterial.
In September 2021, the Company entered into a definitive agreement to acquire a 28%% equity interest in Hangzhou Catering Service Group (“Hangzhou Catering”), for cash consideration of $255 million. Upon closing, the Company directly and indirectly holds an approximately $250 million. Hangzhou Catering holds a 45%60% equity interest in the Hangzhou KFC joint venture (“Hangzhou KFC”), of which the Company currently holds a 47% equity interest. We expect to complete the acquisition in the fourth quarter of 2021, subject to the satisfaction of customary closing conditions and regulatory approvals. Upon closing, the Company will control and consolidate Hangzhou KFC, whichthat operates over 700 KFC stores in and around Hangzhou, with an approximately 60% equity interest, directlyChina (“Hangzhou KFC”), allowing the Company to consolidate Hangzhou KFC. The acquisition was considered immaterial.
As part of our strategy to drive growth from off-premise occasions, we have also developed our own retail brand operations, SoulFun, since 2018, which sells ready meals such as steak, fried rice and indirectly.pasta through online and offline channels. The operating results of SoulFun are included in our e-commerce business operating segment.
The Company has 2 reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, East Dawning, Taco Bell, Lavazza,East Dawning, Daojia and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. East Dawning was severely impacted by the COVID-19 pandemic. As a result, the Company decided to wind down the operations of the brand in 2021. In the first quarter of 2022, the Company closed all 5 remaining East Dawning units in China. Additional details on our reportable operating segments are included in Note 13.14.
The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “YUMC”. On September 10, 2020, the Company completed a secondary listing of its common stock on the Main Board of the Hong Kong Stock Exchange (“HKEX”) under the stock code “9987”, in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted to US$$2.2 billion.
7
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, 2021,March 31, 2022, and our results of our operations, and comprehensive income for the quarters and years to date ended September 30, 2021 and 2020, and cash flows for the years to datequarters ended September 30, 2021March 31, 2022 and 2020.2021. 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 26, 2021.28, 2022.
Through the acquisition of Daojia, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and is entitled to substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.
The operating results of Huang Ji Huang, Suzhou KFC and the Lavazza joint venture and Hangzhou KFC’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition dates of April 8, 2020, August 3, 2020 and September 18, 2021, respectively.dates.
Certain comparative items in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.
Recently Adopted Accounting Pronouncements
In December 2019,August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, 2020-06, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40)(“ (“ASU 2019-12”2020-06”), which simplifieseliminates two of the three models in ASC 470-20 that require separate accounting for income taxes by eliminating certain exceptions toembedded conversion features and eliminates some of the guidanceconditions for equity classification in Topic 740 related to the approachASC 815-40 for intraperiod tax allocation, the methodology for calculating income taxescontracts in an interim period and the recognition of deferred tax liabilities for outside basis differences.entity’s own equity. The guidance also simplifiesrequires entities to use the accountingif-converted method for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-upall convertible instruments in the tax basisdiluted earnings per share calculation and generally requires them to include the effect of goodwill. share settlement for instruments that may be settled in cash or shares. We adopted thethis standard on January 1, 20212022, and such adoption did not have a material impact on our financial statements.
In January 2020,May 2021, the FASB issued ASU 2020-01,2021-04, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options) (“ASU 2020-01”2021-04”), which clarifies. It requires issuers to account for a modification or exchange of freestanding equity-classified written call options that remain equity-classified after the interaction between equity securities under Topic 321 and investments accounted for undermodification or exchange based on the equity method in Topic 323 andeconomic substance of the accounting for certain forward contracts and purchased options accounted for under Topic 815. modification or exchange. We adopted thethis standard on January 1, 2021 and such adoption did not have a material impact on our financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs (“ASU 2020-08”), which clarifies that an entity should reevaluate for each reporting period whether a callable debt security is within the scope of certain guidance in ASC 310-20 that was issued in ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. We adopted the standard on January 1, 20212022, and such adoption did not have a material impact on our financial statements.
In July 2021, the FASB issued ASU 2021-05, Lessors — Certain Leases with Variable Lease (“ASU 2021-05”). It requires lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type or direct financing leases. We adopted this standard on January 1, 2022, and such adoption did not have a material impact on our financial statements.
8
Note 3 – Business Acquisitions and Equity Investments
Consolidation of Hangzhou KFC and Equity Investment in Hangzhou Catering
During the fourth quarter of 2021, the Company completed its investment of a 28% equity interest in Hangzhou Catering for cash consideration of $255 million. Hangzhou Catering holds a 45% equity interest in Hangzhou KFC, of which the Company previously held a 47% equity interest. Along with the investment, the Company also obtained two additional seats on the board of directors of Hangzhou KFC. Upon completion of the transaction, the Company directly and indirectly holds an approximately 60% equity interest in Hangzhou KFC and has majority representation on its board of directors, and thus obtained control over Hangzhou KFC and started to consolidate its results from the acquisition date.
As a result of the acquisition of Hangzhou KFC, $66 million of the purchase price was allocated to the reacquired franchise right, which is amortized over the remaining franchise contract period of 1 year.
In addition to its equity interest in Hangzhou KFC, Hangzhou Catering operates approximately 60 Chinese dining restaurants under four time-honored brands and a food processing business. The Company applies the equity method of accounting to the 28% equity interest in Hangzhou Catering excluding the Hangzhou KFC business and classified this investment in Investment in unconsolidated affiliates based on its then fair value. The Company elected to report its share of Hangzhou Catering’s financial results with a one-quarter lag because its results are not available in time for the Company to record them in the concurrent period. In the first quarter of 2022, the Company's equity losses from Hangzhou Catering, net of taxes, was immaterial, which was included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income. As of March 31, 2022, the carrying amount of the Company’s equity method investment in Hangzhou Catering was $52 million, exceeding the Company’s interest in Hangzhou Catering’s underlying net assets by $30 million. Substantially all of this difference was attributable to its self-owned properties and impact of related deferred tax liabilities determined upon acquisition, which is being depreciated over a weighted average remaining useful life of 20 years.
Fujian Sunner Development Co., Ltd. (“Sunner”) Investment
In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange-listed company, for total consideration of approximately $261 million. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier.
The Company accounted for the equity securities at fair value based on their closing market price on each measurement date, with unrealized loss of $17 million recorded in Investment loss in our Condensed Consolidated Statements of Income for the quarter ended March 31, 2021, representing subsequent fair value changes during the quarter.
In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on Sunner's board, along with the Company being Sunner’s second largest shareholder, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment and reclassified this investment from Other assets to Investment in unconsolidated affiliates in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the first quarter of 2022, the Company's equity income from Sunner, net of taxes, was immaterial, which was included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income.
The Company purchased inventories of $92 million from Sunner for the quarter ended March 31, 2022, and the Company’s accounts payable and other current liabilities due to Sunner were $33 and $56 million as of March 31, 2022 and December 31, 2021, respectively.
As of March 31, 2022, the carrying amount of the Company’s investment in Sunner was $250 million, exceeding the Company���s interest in Sunner’s underlying net assets by $172 million. Of this basis difference, $20 million was related to finite-lived intangible assets determined upon acquisition, which are being amortized over estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of March 31, 2022, the market value of the Company’s investment in Sunner was $195 million based on its quoted closing price.
9
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 total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan.
The Company accounts for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.
A summary of pre-tax gains or losses on investment in equity securities of Meituan recognized, which was included in Investment loss in our Condensed Consolidated Statements of Income, is as follows:
|
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Unrealized (losses) gains recorded on equity securities still held |
| $ | (38 | ) |
| $ | 1 |
|
|
(Losses) gains recorded on equity securities |
| $ | (38 | ) |
| $ | 1 |
|
|
Note 34 – Revenue Recognition
The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from transactions with franchisees and unconsolidated affiliates.
Company Sales
Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we either used our dedicated riders or third-party aggregators’ delivery staff in the past. Starting in 2019, we use our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders are fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature. 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 KFC and Pizza Hut family privilege membership program offering members a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the benefits provided based on their relative standalone selling price and revenue is recognized when food or services are delivered or the benefits expire. In determining the relative standalone selling price of the benefits, the Company considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.
10
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.property. The franchise agreement term is generally 10 years for KFC and Pizza Hut, five or 10 years for Little Sheep and three or 10 years for Huang Ji Huang. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.
Revenues from Transactions with 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.affiliates that operate our concepts.
The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates that operate our concepts, and then sells and delivers them to the restaurants. In addition, the Company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees and unconsolidated affiliates.affiliates that operate our concepts. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees and unconsolidated affiliates.
For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.
Loyalty Programs
Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.
11
Disaggregation of Revenue
The following table presents revenue disaggregated by types of arrangements and segments:
|
| Quarter Ended 9/30/2021 |
|
|
| Quarter Ended 3/31/2022 |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
|
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| ||||||||||||||
Company sales |
| $ | 1,750 |
|
| $ | 546 |
|
| $ | 14 |
|
| $ | — |
|
| $ | 2,310 |
|
| $ | — |
|
| $ | 2,310 |
|
|
| $ | 1,991 |
| $ | 542 |
| $ | 15 |
| $ | — |
| $ | 2,548 |
| $ | — |
| $ | 2,548 |
| |||||||
Franchise fees and income |
|
| 32 |
|
|
| 2 |
|
|
| 6 |
|
|
| — |
|
|
| 40 |
|
|
| — |
|
|
| 40 |
|
|
| 16 |
|
|
| 2 |
|
|
| 6 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| 24 |
| ||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 17 |
|
|
| 2 |
|
|
| 26 |
|
|
| 139 |
|
|
| 184 |
|
|
| — |
|
|
| 184 |
|
|
| 8 |
|
|
| 1 |
|
|
| 11 |
|
|
| 57 |
|
|
| 77 |
|
|
| — |
|
|
| 77 |
| ||
Other revenues |
|
| 2 |
|
|
| 1 |
|
|
| 88 |
|
|
| 7 |
|
|
| 98 |
|
|
| (78 | ) |
|
| 20 |
|
|
|
| 2 |
|
|
| 2 |
|
|
| 131 |
|
|
| 10 |
|
|
| 145 |
|
|
| (126 | ) |
|
| 19 |
|
|
Total revenues |
| $ | 1,801 |
|
| $ | 551 |
|
| $ | 134 |
|
| $ | 146 |
|
| $ | 2,632 |
|
| $ | (78 | ) |
| $ | 2,554 |
|
|
| $ | 2,017 |
|
| $ | 547 |
|
| $ | 163 |
|
| $ | 67 |
|
| $ | 2,794 |
|
| $ | (126 | ) |
| $ | 2,668 |
|
|
|
| Quarter Ended 3/31/2021 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Company sales |
| $ | 1,783 |
|
| $ | 538 |
|
| $ | 10 |
|
| $ | — |
|
| $ | 2,331 |
|
| $ | — |
|
| $ | 2,331 |
|
|
Franchise fees and income |
|
| 33 |
|
|
| 2 |
|
|
| 7 |
|
|
| — |
|
|
| 42 |
|
|
| — |
|
|
| 42 |
|
|
Revenues from transactions |
|
| 15 |
|
|
| 1 |
|
|
| 26 |
|
|
| 129 |
|
|
| 171 |
|
|
| — |
|
|
| 171 |
|
|
Other revenues |
|
| 1 |
|
|
| — |
|
|
| 35 |
|
|
| 2 |
|
|
| 38 |
|
|
| (25 | ) |
|
| 13 |
|
|
Total revenues |
| $ | 1,832 |
|
| $ | 541 |
|
| $ | 78 |
|
| $ | 131 |
|
| $ | 2,582 |
|
| $ | (25 | ) |
| $ | 2,557 |
|
|
|
| Quarter Ended 9/30/2020 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Company sales |
| $ | 1,597 |
|
| $ | 508 |
|
| $ | 13 |
|
| $ | — |
|
| $ | 2,118 |
|
| $ | — |
|
| $ | 2,118 |
|
|
Franchise fees and income |
|
| 32 |
|
|
| 2 |
|
|
| 6 |
|
|
| — |
|
|
| 40 |
|
|
| — |
|
|
| 40 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 16 |
|
|
| 1 |
|
|
| 18 |
|
|
| 135 |
|
|
| 170 |
|
|
| — |
|
|
| 170 |
|
|
Other revenues |
|
| 1 |
|
|
| — |
|
|
| 36 |
|
|
| 2 |
|
|
| 39 |
|
|
| (19 | ) |
|
| 20 |
|
|
Total revenues |
| $ | 1,646 |
|
| $ | 511 |
|
| $ | 73 |
|
| $ | 137 |
|
| $ | 2,367 |
|
| $ | (19 | ) |
| $ | 2,348 |
|
|
|
| Year to Date Ended 9/30/2021 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 5,220 |
|
| $ | 1,617 |
|
| $ | 37 |
|
| $ | — |
|
| $ | 6,874 |
|
| $ | — |
|
| $ | 6,874 |
|
Franchise fees and income |
|
| 95 |
|
|
| 6 |
|
|
| 19 |
|
|
| — |
|
|
| 120 |
|
|
| — |
|
|
| 120 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 46 |
|
|
| 5 |
|
|
| 75 |
|
|
| 393 |
|
|
| 519 |
|
|
| — |
|
|
| 519 |
|
Other revenues |
|
| 6 |
|
|
| 2 |
|
|
| 187 |
|
|
| 11 |
|
|
| 206 |
|
|
| (157 | ) |
|
| 49 |
|
Total revenues |
| $ | 5,367 |
|
| $ | 1,630 |
|
| $ | 318 |
|
| $ | 404 |
|
| $ | 7,719 |
|
| $ | (157 | ) |
| $ | 7,562 |
|
|
| Year to Date Ended 9/30/2020 |
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated |
|
| Combined |
|
| Elimination |
|
| Consolidated |
| |||||||
Company sales |
| $ | 4,077 |
|
| $ | 1,252 |
|
| $ | 29 |
|
| $ | — |
|
| $ | 5,358 |
|
| $ | — |
|
| $ | 5,358 |
|
Franchise fees and income |
|
| 97 |
|
|
| 4 |
|
|
| 11 |
|
|
| — |
|
|
| 112 |
|
|
| — |
|
|
| 112 |
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 47 |
|
|
| 3 |
|
|
| 34 |
|
|
| 404 |
|
|
| 488 |
|
|
| — |
|
|
| 488 |
|
Other revenues |
|
| 1 |
|
|
| — |
|
|
| 77 |
|
|
| 4 |
|
|
| 82 |
|
|
| (36 | ) |
|
| 46 |
|
Total revenues |
| $ | 4,222 |
|
| $ | 1,259 |
|
| $ | 151 |
|
| $ | 408 |
|
| $ | 6,040 |
|
| $ | (36 | ) |
| $ | 6,004 |
|
Accounts Receivable
Accounts receivable primarily consist of trade receivables and royalties from franchisees, and unconsolidated affiliates, and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Condensed Consolidated Balance Sheets. Our provision of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Accounts receivable that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the ending balances of provision for accounts receivable were $2both $1 million and $1 million, respectively, and amounts of accounts receivable past due were immaterial. ReceivablesAccounts receivable due from unconsolidated affiliates including accounts receivable and dividend receivables, were $82 million and $50 millionboth insignificant as of September 30, 2021March 31, 2022 and December 31, 2020, respectively.2021.
Costs to Obtain Contracts
Costs to obtain contracts consist of upfront franchise 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 that operate our concepts, 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 0t0t incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $7$6 million and $9$7 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
12
Contract Liabilities
Contract liabilities at September 30, 2021March 31, 2022 and December 31, 20202021 were as follows:
Contract liabilities |
| 3/31/2022 |
|
| 12/31/2021 |
| ||
– Deferred revenue related to prepaid stored-value products |
| $ | 128 |
|
| $ | 134 |
|
– Deferred revenue related to upfront franchise fees |
|
| 31 |
|
|
| 30 |
|
– Deferred revenue related to customer loyalty programs |
|
| 26 |
|
|
| 25 |
|
– Deferred revenue related to privilege membership programs |
|
| 16 |
|
|
| 18 |
|
– Others |
|
| — |
|
|
| 1 |
|
Total |
| $ | 201 |
|
| $ | 208 |
|
Contract liabilities |
| 9/30/2021 |
|
| 12/31/2020 |
| ||
- Deferred revenue related to prepaid stored-value products |
| $ | 117 |
|
| $ | 117 |
|
- Deferred revenue related to upfront franchise fees |
|
| 45 |
|
|
| 38 |
|
- Deferred revenue related to customer loyalty programs |
|
| 26 |
|
|
| 23 |
|
- Deferred revenue related to privilege membership programs |
|
| 14 |
|
|
| 27 |
|
- Others |
|
| 1 |
|
|
| 1 |
|
Total |
| $ | 203 |
|
| $ | 206 |
|
Contract liabilities primarily consist of deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise fees. Deferred revenue related to prepaid stored-value products, privilege membership programs and customer loyalty programs is included in Accounts payable and other current liabilities in the 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 in the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $68$62 million and $61$71 million for the quarters ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $115 million and $82 million for the years to date ended September 30, 2021 and 2020, respectively.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.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 that operate our concepts based on a certain percentage of sales, as those sales occur.
Note 45 – Earnings Per Common Share (“EPS”)
The following table summarizes the components of basic and diluted EPS (in millions, except per share data):
|
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Net Income – Yum China Holdings, Inc. |
| $ | 100 |
|
| $ | 230 |
|
|
Weighted-average common shares outstanding (for basic calculation)(a) |
|
| 426 |
|
|
| 420 |
|
|
Effect of dilutive share-based awards(a) |
|
| 4 |
|
|
| 6 |
|
|
Effect of dilutive warrants(b) |
|
| — |
|
|
| 8 |
|
|
Weighted-average common and dilutive potential common shares outstanding |
|
| 430 |
|
|
| 434 |
|
|
Basic Earnings Per Common Share |
| $ | 0.23 |
|
| $ | 0.55 |
|
|
Diluted Earnings Per Common Share |
| $ | 0.23 |
|
| $ | 0.53 |
|
|
Share-based awards excluded from the diluted EPS computation(c) |
|
| 3 |
|
|
| 2 |
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
|
| |||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
|
| 9/30/2020 |
|
| ||||
Net Income – Yum China Holdings, Inc. |
| $ | 104 |
|
| $ | 439 |
|
| $ | 515 |
|
|
| $ | 633 |
|
|
Weighted-average common shares outstanding (for basic calculation)(a) |
|
| 422 |
|
|
| 387 |
|
|
| 421 |
|
|
|
| 380 |
|
|
Effect of dilutive share-based awards(a) |
|
| 6 |
|
|
| 7 |
|
|
| 6 |
|
|
|
| 6 |
|
|
Effect of dilutive warrants(b) |
|
| 7 |
|
|
| 6 |
|
|
| 8 |
|
|
|
| 5 |
|
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)(a) |
|
| 435 |
|
|
| 400 |
|
|
| 435 |
|
|
|
| 391 |
|
|
Basic Earnings Per Common Share |
| $ | 0.25 |
|
| $ | 1.13 |
|
| $ | 1.23 |
|
|
| $ | 1.67 |
|
|
Diluted Earnings Per Common Share |
| $ | 0.24 |
|
| $ | 1.10 |
|
| $ | 1.19 |
|
|
| $ | 1.62 |
|
|
Share-based awards excluded from the diluted EPS computation(c) |
|
| 2 |
|
|
| 3 |
|
|
| 2 |
|
|
|
| 3 |
|
|
13
|
|
|
|
|
|
Note 56 – 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, 2021 |
|
| 440 |
|
| $ | 4 |
|
| $ | 4,679 |
|
| $ | 2,415 |
|
| $ | 205 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 241 |
|
| $ | 6,816 |
|
| $ | 12 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
| 111 |
|
|
| — |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
| 2 |
|
|
| 10 |
|
|
| — |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 121 |
|
|
| — |
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
| 7 |
|
|
|
|
|
Cash dividends declared ($0.12 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (51 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (51 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
| (34 | ) |
|
|
|
|
|
| (34 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Exercise of the warrants |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
Balance at September 30, 2021 |
|
| 444 |
|
| $ | 4 |
|
| $ | 4,685 |
|
| $ | 2,468 |
|
| $ | 213 |
|
|
| (20 | ) |
| $ | (762 | ) |
| $ | 257 |
|
| $ | 6,865 |
|
| $ | 12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 |
|
| 397 |
|
| $ | 4 |
|
| $ | 2,444 |
|
| $ | 1,565 |
|
| $ | (82 | ) |
|
| (20 | ) |
| $ | (728 | ) |
| $ | 72 |
|
| $ | 3,275 |
|
| $ | 12 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
| 450 |
|
|
| — |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 117 |
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
| 123 |
|
|
| — |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 573 |
|
|
| — |
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 144 |
|
|
| 144 |
|
|
|
|
|
Issuance of common stock, net of issuance costs |
|
| 42 |
|
|
| — |
|
|
| 2,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,193 |
|
|
|
|
|
Exercise and vesting of share-based awards |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10 |
|
|
|
|
|
Balance at September 30, 2020 |
|
| 439 |
|
| $ | 4 |
|
| $ | 4,647 |
|
| $ | 2,004 |
|
| $ | 35 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 233 |
|
| $ | 6,195 |
|
| $ | 12 |
|
|
| Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Common |
|
| Additional |
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Redeemable |
| |||||||||||||
|
| Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Treasury Stock |
|
| Noncontrolling |
|
| Total |
|
| Noncontrolling |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Income (Loss) |
|
| Shares |
|
| Amount |
|
| Interests |
|
| Equity |
|
| Interest |
| ||||||||||
Balance at December 31, 2021 |
|
| 449 |
|
| $ | 4 |
|
| $ | 4,695 |
|
| $ | 2,892 |
|
| $ | 268 |
|
|
| (21 | ) |
| $ | (803 | ) |
| $ | 852 |
|
| $ | 7,908 |
|
| $ | 14 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
| 100 |
|
|
|
|
|
|
|
|
|
|
|
| 10 |
|
|
| 110 |
|
|
| — |
| ||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
|
|
|
|
|
|
| 2 |
|
|
| 13 |
|
|
| — |
| ||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 123 |
|
|
| — |
| ||||||||
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
| (51 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (51 | ) |
|
|
| ||||||||
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (81 | ) |
|
| (81 | ) |
|
|
| ||||||||
Contribution from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18 |
|
|
| 18 |
|
|
|
| ||||||||
Repurchase of shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
| (232 | ) |
|
|
|
|
| (232 | ) |
|
|
| |||||||
Exercise and vesting of share- |
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2 | ) |
|
|
| ||||||
Share-based compensation |
|
|
|
|
|
|
|
| 11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
|
| ||||||||
Balance at March 31, 2022 |
|
| 449 |
|
| $ | 4 |
|
| $ | 4,704 |
|
| $ | 2,941 |
|
| $ | 279 |
|
|
| (26 | ) |
| $ | (1,035 | ) |
| $ | 801 |
|
| $ | 7,694 |
|
| $ | 14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance at December 31, 2020 |
|
| 440 |
|
| $ | 4 |
|
| $ | 4,658 |
|
| $ | 2,105 |
|
| $ | 167 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 253 |
|
| $ | 6,459 |
|
| $ | 12 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
| 230 |
|
|
|
|
|
|
|
|
|
|
|
| 13 |
|
|
| 243 |
|
|
| — |
| ||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (17 | ) |
|
|
|
|
|
|
|
| (1 | ) |
|
| (18 | ) |
|
| — |
| ||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 225 |
|
|
| — |
| ||||||||
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
| (50 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (50 | ) |
|
|
| ||||||||
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (39 | ) |
|
| (39 | ) |
|
|
| ||||||||
Exercise and vesting of share- |
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4 | ) |
|
|
| ||||||
Share-based compensation |
|
|
|
|
|
|
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10 |
|
|
|
| ||||||||
Balance at March 31, 2021 |
|
| 440 |
|
| $ | 4 |
|
| $ | 4,664 |
|
| $ | 2,285 |
|
| $ | 150 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 226 |
|
| $ | 6,601 |
|
| $ | 12 |
|
|
| Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Common |
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Redeemable |
| ||||||||
|
| Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Treasury Stock |
|
| Noncontrolling |
|
| Total |
|
| Noncontrolling |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Income (Loss) |
|
| Shares* |
|
| Amount |
|
| Interests |
|
| Equity |
|
| Interest |
| ||||||||||
Balance at December 31, 2020 |
|
| 440 |
|
| $ | 4 |
|
| $ | 4,658 |
|
| $ | 2,105 |
|
| $ | 167 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 253 |
|
| $ | 6,459 |
|
| $ | 12 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 32 |
|
|
| 547 |
|
|
| — |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 46 |
|
|
|
|
|
|
|
|
|
|
| 4 |
|
|
| 50 |
|
|
| — |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 597 |
|
|
| — |
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
| 7 |
|
|
|
|
|
Cash dividends declared ($0.36 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (152 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (152 | ) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (39 | ) |
|
| (39 | ) |
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
| (34 | ) |
|
|
|
|
|
| (34 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 1 |
|
|
| — |
|
|
| (5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
|
|
|
Exercise of the warrants |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 32 |
|
|
|
|
|
Balance at September 30, 2021 |
|
| 444 |
|
| $ | 4 |
|
| $ | 4,685 |
|
| $ | 2,468 |
|
| $ | 213 |
|
|
| (20 | ) |
| $ | (762 | ) |
| $ | 257 |
|
| $ | 6,865 |
|
| $ | 12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
| 395 |
|
| $ | 4 |
|
| $ | 2,427 |
|
| $ | 1,416 |
|
| $ | (49 | ) |
|
| (19 | ) |
| $ | (721 | ) |
| $ | 98 |
|
| $ | 3,175 |
|
| $ | — |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 19 |
|
|
| 652 |
|
|
| — |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 84 |
|
|
|
|
|
|
|
|
|
|
| 4 |
|
|
| 88 |
|
|
| — |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 740 |
|
|
| — |
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 144 |
|
|
| 144 |
|
|
| 12 |
|
Cash dividends declared ($0.12 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45 | ) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (32 | ) |
|
| (32 | ) |
|
|
|
|
Issuance of common stock, net of issuance costs |
|
| 42 |
|
|
| — |
|
|
| 2,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,193 |
|
|
|
|
|
Repurchase of shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| (7 | ) |
|
|
|
|
|
| (7 | ) |
|
|
|
|
Exercise and vesting of share-based awards |
|
| 2 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
| 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 27 |
|
|
|
|
| |
Balance at September 30, 2020 |
|
| 439 |
|
| $ | 4 |
|
| $ | 4,647 |
|
| $ | 2,004 |
|
| $ | 35 |
|
|
| (20 | ) |
| $ | (728 | ) |
| $ | 233 |
|
| $ | 6,195 |
|
| $ | 12 |
|
*: Shares may not add due to rounding.
Share Repurchase Program
Our Board of Directors has authorized an aggregate of $1.4$2.4 billion for our share repurchase program.program, including its most recent increase in authorization in March 2022. The Company repurchased 0.6 million and 0.25 million shares of Yum China common stock at a total cost of $34 million and $7$232 million during the years to datequarter ended September 30, 2021March 31, 2022, and 2020, respectively.0 shares of Yum China common stock were repurchased for the quarter ended March 31, 2021. The total repurchase cost included $2$8 million settled subsequent to September 30, 2021,March 31, 2022, for shares repurchased with trade dates on and prior to September 30, 2021.March 31, 2022. As of September 30, 2021, $658March 31, 2022, $1,385 million remained available for future share repurchases under the authorization.
14
Note 67 – Items Affecting Comparability of Net Income
Impact of COVID-19 Pandemic
Starting in the first quarter of 2020, the COVID-19 pandemic significantly impacted the Company’s operations. The highly transmissible Omicron variant caused significant volatility in the Company’s business operations in the first quarter of 2022. After a relatively stable period in January and February, the situation rapidly deteriorated in March, resulting in a significant declinethe largest outbreak in China since COVID-19 first emerged in early 2020. Operating profit was $191 million and $342 million for the quarters ended March 31, 2022 and 2021, respectively. The decrease in Operating profit for the quarter was mainly driven by same-store sales declines and temporary store closures. The results of the third quarter of 2021 were significantly impacted by the Delta variant outbreak that started in late July. This regional outbreak was the most widely spread wave since the first quarter of 2020. Operating profit was $178 million and $556 million for the quarters ended September 30, 2021 and 2020, respectively, and $753 million and $781 million for the years to date ended September 30, 2021 and 2020, respectively. The decrease in Operating profit for the quarter ended September 30, 2021 was mainly due to sales deleveraging as well as lapping the impact of a $239 million gainclosures resulting from the re-measurement of our previously held equity interestCOVID-19 pandemic.
Fair Value Changes for Investment in Suzhou KFC in the third quarter of 2020 upon the acquisition, which is further described below. The decrease in Operating profit for the year to date ended September 30, 2021 was mainly due to lapping the re-measurement gain related to Suzhou KFC, offset by same-store sales growth.Equity Securities
Consolidation of Former Unconsolidated Affiliates
In April 2020, the Company and Lavazza Group established the Lavazza joint venture to explore and develop the Lavazza coffee shop concept in China, with ownership of a 65% and 35% equity interest, respectively. The Company accounted for the Lavazza joint venture under the equity method of accounting because Lavazza Group held substantive participating rights on certain significant financial and operating decisions. In September 2021, the Company and Lavazza Group entered into agreements for the joint venture, whereby substantive participating rights previously held by Lavazza Group were removed, and thus the Company obtained control over the joint venture and started to consolidate its results from the acquisition date.
In the third quarter of 2020, the Company completed the acquisition of an additional 25% equity interest2018, we invested in Suzhou KFC for cash consideration of $149 million, increasing our equity interest to 72%, and thus the Company obtained control over the joint venture and started to consolidate Suzhou KFC from the acquisition date.
As a result of the consolidation of the Lavazza joint venture and Suzhou KFC, the Company also recognized a gain of $10 million and $239 million, respectively, in the third quarter of 2021 and 2020, respectively, from the re-measurement of our previously held equity interest at fair value using a discounted cash flow valuation approach and incorporating assumptions and estimates that are Level 3 inputs. Key assumptions used in estimating future cash flows included projected revenue growth and costs and expenses, which were based on internal projections, store expansion plans, historical performance of stores of the brand, and the business environment, as well as the selection of an appropriate discount rate based on the weighted-average cost of capital which includes company-specific risk premium. The gain was recorded in Other income, net and not allocated to any segment for performance reporting purposes.
Additionally, as a result of the acquisition of Suzhou KFC, $61 million of the purchase price was allocated to intangible assets related to reacquired franchise rights, which are being amortized over the remaining franchise contract period of 2.4 years.
Fujian Sunner Development Co., Ltd. (“Sunner”) Investment
In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange listed company, for a total consideration of approximately $261 million. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier.
The Company accounted for the equity securities at fair value based on their closing market price on each measurement date, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.
In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being Sunner’s second largest shareholder, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment and reclassified this investment from Other assets to Investment in unconsolidated affiliates in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the third quarter of 2021, the Company’s equity income from Sunner was immaterial. The unrealized loss of $22 million was included in Investment gain or loss in our Condensed Consolidated Statements of Income for the year to date ended September 30, 2021, representing changes in fair value before the equity method of accounting was applied.
Since Sunner became the Company’s unconsolidated affiliate in May 2021, the Company purchased inventories of $125 million and $198 million from Sunner during the quarter and year to date ended September 30, 2021, respectively, and the Company’s accounts payable and other current liabilities due to Sunner were $57 million as of September 30, 2021.
As of September 30, 2021, the Company’s investment in Sunner was stated at the carrying amount of $244 million, which was $168 million higher than the Company’s interest in Sunner’s underlying net assets. Of this basis difference, $20 million was related to finite-lived intangible assets which are being amortized over estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of September 30, 2021, the market value of the Company’s investment in Sunner was $209 million based on its quoted closing price.
Meituan Dianping (“Meituan”) Investment
In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan for proceeds of approximately $54 million, and realized a $17 million pre-tax gain which was recognized during the holding period.
The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituanwhich is determined based on the closing market price for the shares at the end of each reporting period. Theperiod, with subsequent fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.
A summary of pre-tax gains or losses on investment in equity securities of Meituan recognized, which was included in Investment gain or losschanges recorded in our Condensed Consolidated Statements of Income, is as follows:
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Unrealized (losses) gains recorded on equity securities still held as of the end of the period |
| $ | (41 | ) |
| $ | 38 |
|
| $ | (27 | ) |
| $ | 76 |
|
|
Losses recorded on equity securities sold during the period |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
(Losses) gains recorded on equity securities |
| $ | (41 | ) |
| $ | 38 |
|
| $ | (27 | ) |
| $ | 75 |
|
|
Store Impairment Charges
Income. We recorded store impairment chargesrelated pre-tax loss of $4$38 million and $23related pre-tax gain of $1 million for the quarters ended March 31, 2022 and 2021, respectively.
In the first quarter of 2021, we invested in a 5% equity interest in Sunner. The investment in Sunner was recorded at fair value based on its closing market price on each measurement date before it became subject to the equity method of accounting when the Company established significant influence over the operating and financial policies of Sunner in May 2021. We recorded related pre-tax loss of $17 million for the quarter and year to date ended September 30,March 31, 2021, respectively, and $3 million and $39 million forrepresenting changes in fair value during the quarter and year to date ended September 30, 2020, respectively. The decrease in store impairment charges for the year to date ended September 30, 2021 is due to additional impairment evaluation in the first quarter of 2020. quarter.
See Note 113 for additional information.information on our investment in Meituan and Sunner.
Note 78 – Other Income,Expenses (Income), net
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Equity income from investments in unconsolidated affiliates |
| $ | 10 |
|
| $ | 17 |
|
| $ | 37 |
|
| $ | 51 |
|
|
Gain from re-measurement of previously held equity interest(a) |
|
| 10 |
|
|
| 239 |
|
|
| 10 |
|
|
| 239 |
|
|
Amortization of reacquired franchise rights(b) |
|
| (10 | ) |
|
| (7 | ) |
|
| (29 | ) |
|
| (13 | ) |
|
Derecognition of indemnification assets related to Daojia(c) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
Foreign exchange impact and other |
|
| — |
|
|
| 7 |
|
|
| (3 | ) |
|
| 8 |
|
|
Other income, net |
| $ | 10 |
|
| $ | 256 |
|
| $ | 15 |
|
| $ | 282 |
|
|
|
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Equity income from investments in unconsolidated affiliates(a) |
| $ | — |
|
| $ | (17 | ) |
|
Amortization of reacquired franchise rights(b) |
|
| 26 |
|
|
| 9 |
|
|
Foreign exchange impact and others |
|
| (1 | ) |
|
| 2 |
|
|
Other expenses (income), net |
| $ | 25 |
|
| $ | (6 | ) |
|
|
|
15
|
|
|
|
Note 89 – Supplemental Balance Sheet Information
Accounts Receivable, net |
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
Accounts receivable, gross |
| $ | 99 |
|
| $ | 100 |
|
|
Allowance for doubtful accounts |
|
| (2 | ) |
|
| (1 | ) |
|
Accounts receivable, net |
| $ | 97 |
|
| $ | 99 |
|
|
Prepaid Expenses and Other Current Assets |
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
Receivables from payment processors and aggregators |
| $ | 35 |
|
| $ | 47 |
|
|
Dividends receivable from unconsolidated affiliates |
|
| 44 |
|
|
| 10 |
|
|
Other prepaid expenses and current assets |
|
| 139 |
|
|
| 119 |
|
|
Prepaid expenses and other current assets |
| $ | 218 |
|
| $ | 176 |
|
|
Accounts Receivable, net |
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
Accounts receivable, gross |
| $ | 71 |
|
| $ | 68 |
|
|
Allowance for doubtful accounts |
|
| (1 | ) |
|
| (1 | ) |
|
Accounts receivable, net |
| $ | 70 |
|
| $ | 67 |
|
|
Property, Plant and Equipment |
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
Buildings and improvements |
| $ | 2,518 |
|
| $ | 2,367 |
|
|
Finance leases, primarily buildings |
|
| 44 |
|
|
| 36 |
|
|
Machinery and equipment, and construction in progress |
|
| 1,651 |
|
|
| 1,490 |
|
|
Property, plant and equipment, gross |
|
| 4,213 |
|
|
| 3,893 |
|
|
Accumulated depreciation |
|
| (2,303 | ) |
|
| (2,128 | ) |
|
Property, plant and equipment, net |
| $ | 1,910 |
|
| $ | 1,765 |
|
|
Prepaid Expenses and Other Current Assets |
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
Receivables from payment processors and aggregators |
| $ | 28 |
|
| $ | 45 |
|
|
Other prepaid expenses and current assets |
|
| 154 |
|
|
| 176 |
|
|
Prepaid expenses and other current assets |
| $ | 182 |
|
| $ | 221 |
|
|
Other Assets |
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
VAT assets |
| $ | 281 |
|
| $ | 270 |
|
|
Land use right |
|
| 138 |
|
|
| 140 |
|
|
Investment in equity securities |
|
| 133 |
|
|
| 160 |
|
|
Long-term deposits |
|
| 93 |
|
|
| 83 |
|
|
Investment in long-term time deposits(a) |
|
| 88 |
|
|
| 61 |
|
|
Costs to obtain contracts |
|
| 7 |
|
|
| 9 |
|
|
Others |
|
| 34 |
|
|
| 26 |
|
|
Other Assets |
| $ | 774 |
|
| $ | 749 |
|
|
Property, Plant and Equipment |
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
Buildings and improvements |
| $ | 2,776 |
|
| $ | 2,695 |
|
|
Finance leases, primarily buildings |
|
| 55 |
|
|
| 52 |
|
|
Machinery and equipment, and construction in progress |
|
| 1,864 |
|
|
| 1,878 |
|
|
Property, plant and equipment, gross |
|
| 4,695 |
|
|
| 4,625 |
|
|
Accumulated depreciation |
|
| (2,464 | ) |
|
| (2,374 | ) |
|
Property, plant and equipment, net |
| $ | 2,231 |
|
| $ | 2,251 |
|
|
Accounts Payable and Other Current Liabilities |
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
Accounts payable |
| $ | 756 |
|
| $ | 708 |
|
|
Operating lease liabilities |
|
| 455 |
|
|
| 448 |
|
|
Accrued compensation and benefits |
|
| 257 |
|
|
| 238 |
|
|
Contract liabilities |
|
| 166 |
|
|
| 175 |
|
|
Accrued capital expenditures |
|
| 208 |
|
|
| 203 |
|
|
Accrued marketing expenses |
|
| 100 |
|
|
| 73 |
|
|
Other current liabilities |
|
| 184 |
|
|
| 150 |
|
|
Accounts payable and other current liabilities |
| $ | 2,126 |
|
| $ | 1,995 |
|
|
Other Assets |
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
VAT assets |
| $ | 324 |
|
| $ | 322 |
|
|
Land use right |
|
| 137 |
|
|
| 138 |
|
|
Long-term deposits |
|
| 101 |
|
|
| 101 |
|
|
Investment in long-term time deposits(a) |
|
| 91 |
|
|
| 90 |
|
|
Investment in equity securities |
|
| 84 |
|
|
| 122 |
|
|
Costs to obtain contracts |
|
| 6 |
|
|
| 7 |
|
|
Others |
|
| 38 |
|
|
| 52 |
|
|
Other Assets |
| $ | 781 |
|
| $ | 832 |
|
|
Accounts Payable and Other Current Liabilities |
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
Accounts payable |
| $ | 592 |
|
| $ | 830 |
|
|
Operating lease liabilities |
|
| 497 |
|
|
| 508 |
|
|
Accrued compensation and benefits |
|
| 217 |
|
|
| 283 |
|
|
Accrued capital expenditures |
|
| 182 |
|
|
| 269 |
|
|
Contract liabilities |
|
| 174 |
|
|
| 182 |
|
|
Dividends payable |
|
| 117 |
|
|
| 38 |
|
|
Accrued marketing expenses |
|
| 86 |
|
|
| 71 |
|
|
Other current liabilities |
|
| 143 |
|
|
| 151 |
|
|
Accounts payable and other current liabilities |
| $ | 2,008 |
|
| $ | 2,332 |
|
|
Other Liabilities |
| 9/30/2021 |
|
| 12/31/2020 |
|
|
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||||
Accrued income tax payable |
| $ | 54 |
|
| $ | 66 |
|
|
| $ | 61 |
|
| $ | 56 |
| |
Contract liabilities |
|
| 37 |
|
|
| 31 |
|
|
| 27 |
| 26 |
| ||||
Other non-current liabilities |
|
| 79 |
|
|
| 70 |
|
|
|
| 85 |
|
|
| 85 |
|
|
Other liabilities |
| $ | 170 |
|
| $ | 167 |
|
|
| $ | 173 |
|
| $ | 167 |
|
|
|
|
16
Note 910 – Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
|
| Total |
|
| KFC |
|
| Pizza Hut |
|
| All Other |
|
| ||||
Balance as of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill, gross |
| $ | 2,533 |
|
| $ | 2,040 |
|
| $ | 20 |
|
| $ | 473 |
|
|
Accumulated impairment losses (a) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
|
Goodwill, net |
|
| 2,142 |
|
|
| 2,040 |
|
|
| 20 |
|
|
| 82 |
|
|
Goodwill acquired(b) |
|
| 16 |
|
|
| 15 |
|
|
| 1 |
|
|
| — |
|
|
Effect of currency translation adjustment |
|
| 5 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
Balance as of March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill, gross |
|
| 2,554 |
|
|
| 2,060 |
|
|
| 21 |
|
|
| 473 |
|
|
Accumulated impairment losses (a) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
|
Goodwill, net |
| $ | 2,163 |
|
| $ | 2,060 |
|
| $ | 21 |
|
| $ | 82 |
|
|
|
| Total Company |
|
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| ||||
Balance as of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross |
| $ | 1,223 |
|
| $ | 748 |
|
| $ | 20 |
|
| $ | 455 |
|
|
Accumulated impairment losses(a) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
|
Goodwill, net |
|
| 832 |
|
|
| 748 |
|
|
| 20 |
|
|
| 64 |
|
|
Goodwill acquired(b) |
|
| 15 |
|
|
| — |
|
|
| — |
|
|
| 15 |
|
|
Effect of currency translation adjustment |
|
| 11 |
|
|
| 10 |
|
|
| — |
|
|
| 1 |
|
|
Balance as of September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross |
|
| 1,249 |
|
|
| 758 |
|
|
| 20 |
|
|
| 471 |
|
|
Accumulated impairment losses(a) |
|
| (391 | ) |
|
| — |
|
|
| — |
|
|
| (391 | ) |
|
Goodwill, net |
| $ | 858 |
|
| $ | 758 |
|
| $ | 20 |
|
| $ | 80 |
|
|
(b) Goodwill acquired resulted from the acquisition of restaurants from our existing franchisees. The acquisition is considered immaterial.
|
|
|
|
Intangible assets, net as of September 30, 2021March 31, 2022 and December 31, 20202021 are as follows:
|
| 3/31/2022 |
|
| 12/31/2021 |
| ||||||||||||||||||||||||||
|
| Gross |
|
| Accumulated |
|
| Accumulated Impairment Losses(b) |
|
| Net Carrying Amount |
|
| Gross |
|
| Accumulated |
|
| Accumulated Impairment Losses(b) |
|
| Net Carrying Amount |
| ||||||||
Finite-lived intangible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Reacquired franchise |
| $ | 300 |
|
| $ | (217 | ) |
| $ | — |
|
| $ | 83 |
|
| $ | 295 |
|
| $ | (191 | ) |
| $ | — |
|
| $ | 104 |
|
Huang Ji Huang franchise |
|
| 23 |
|
|
| (2 | ) |
|
| — |
|
|
| 21 |
|
|
| 23 |
|
|
| (2 | ) |
|
| — |
|
|
| 21 |
|
Daojia platform |
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
Customer-related assets |
|
| 12 |
|
|
| (9 | ) |
|
| (2 | ) |
|
| 1 |
|
|
| 12 |
|
|
| (9 | ) |
|
| (2 | ) |
|
| 1 |
|
Others |
|
| 10 |
|
|
| (5 | ) |
|
| — |
|
|
| 5 |
|
|
| 10 |
|
|
| (5 | ) |
|
| — |
|
|
| 5 |
|
|
| $ | 361 |
|
| $ | (237 | ) |
| $ | (14 | ) |
| $ | 110 |
|
| $ | 356 |
|
| $ | (211 | ) |
| $ | (14 | ) |
| $ | 131 |
|
Indefinite-lived intangible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Little Sheep trademark |
| $ | 57 |
|
| $ | — |
|
| $ | — |
|
| $ | 57 |
|
| $ | 57 |
|
| $ | — |
|
| $ | — |
|
| $ | 57 |
|
Huang Ji Huang trademark |
|
| 84 |
|
|
| — |
|
|
| — |
|
|
| 84 |
|
|
| 84 |
|
|
| — |
|
|
| — |
|
|
| 84 |
|
|
| $ | 141 |
|
| $ | — |
|
| $ | — |
|
| $ | 141 |
|
| $ | 141 |
|
| $ | — |
|
| $ | — |
|
| $ | 141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total intangible assets |
| $ | 502 |
|
| $ | (237 | ) |
| $ | (14 | ) |
| $ | 251 |
|
| $ | 497 |
|
| $ | (211 | ) |
| $ | (14 | ) |
| $ | 272 |
|
|
| 9/30/2021 |
|
| 12/31/2020 |
| ||||||||||||||||||||||||||
|
| 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 |
| ||||||||
Finite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired franchise rights |
| $ | 225 |
|
| $ | (173 | ) |
| $ | — |
|
| $ | 52 |
|
| $ | 223 |
|
| $ | (144 | ) |
| $ | — |
|
| $ | 79 |
|
Huang Ji Huang franchise related assets |
|
| 23 |
|
|
| (2 | ) |
|
| — |
|
|
| 21 |
|
|
| 23 |
|
|
| (1 | ) |
|
| — |
|
|
| 22 |
|
Daojia platform |
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
|
| 16 |
|
|
| (4 | ) |
|
| (12 | ) |
|
| — |
|
Customer-related assets |
|
| 12 |
|
|
| (9 | ) |
|
| (2 | ) |
|
| 1 |
|
|
| 12 |
|
|
| (8 | ) |
|
| (2 | ) |
|
| 2 |
|
Others |
|
| 9 |
|
|
| (4 | ) |
|
| — |
|
|
| 5 |
|
|
| 9 |
|
|
| (4 | ) |
|
| — |
|
|
| 5 |
|
|
| $ | 285 |
|
| $ | (192 | ) |
| $ | (14 | ) |
| $ | 79 |
|
| $ | 283 |
|
| $ | (161 | ) |
| $ | (14 | ) |
| $ | 108 |
|
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Little Sheep trademark |
| $ | 56 |
|
| $ | — |
|
| $ | — |
|
| $ | 56 |
|
| $ | 56 |
|
| $ | — |
|
| $ | — |
|
| $ | 56 |
|
Huang Ji Huang trademark |
|
| 83 |
|
|
| — |
|
|
| — |
|
|
| 83 |
|
|
| 82 |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
|
| $ | 139 |
|
| $ | — |
|
| $ | — |
|
| $ | 139 |
|
| $ | 138 |
|
| $ | — |
|
| $ | — |
|
| $ | 138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
| $ | 424 |
|
| $ | (192 | ) |
| $ | (14 | ) |
| $ | 218 |
|
| $ | 421 |
|
| $ | (161 | ) |
| $ | (14 | ) |
| $ | 246 |
|
(b) Accumulated impairment losses represent impairment charges on intangible assets acquired from Daojia primarily attributable to the Daojia platform.
|
|
|
|
Amortization expense of finite-lived intangible assets was $10$26 million and $8$10 million for the quarters ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $31 million and $14 million for the years to date ended September 30, 2021 and 2020, respectively. As of September 30, 2021,March 31, 2022, expected amortization expense for the unamortized finite-lived intangible assets is approximately $10$78 million for the remainder of 2021, $41 million in 2022, $4$4 million in 2023, $2and $2 million in each of 2024, 2025 and $2 million2026. Increase in 2025.amortization expenses for finite-lived intangible assets in 2022 primarily relates to reacquired franchise rights resulting from the acquisition of Hangzhou KFC (Note 3).
17
Note 1011 – Leases
As of September 30, 2021,March 31, 2022, we operatedleased over 8,90010,300 properties in China for our Company-owned restaurants, leasing the underlying land and/or building.restaurants. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years.years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue,revenues, respectively, within our Condensed Consolidated Statements of Income.
Supplemental Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| 9/30/2021 |
|
| 12/31/2020 |
|
| Account Classification |
| 3/31/2022 |
|
| 12/31/2021 |
|
| Account Classification | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease right-of-use assets |
| $ | 2,287 |
|
| $ | 2,164 |
|
| Operating lease right-of-use assets |
| $ | 2,546 |
| $ | 2,612 |
| Operating lease right-of-use assets | ||
Finance lease right-of-use assets |
|
| 26 |
|
|
| 20 |
|
| Property, plant and equipment, net |
|
| 35 |
|
|
| 33 |
|
| Property, plant and equipment, net |
Total leased assets |
| $ | 2,313 |
|
| $ | 2,184 |
|
|
|
| $ | 2,581 |
|
| $ | 2,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease liabilities |
| $ | 455 |
|
| $ | 448 |
|
| Accounts payable and other current liabilities |
| $ | 497 |
| $ | 508 |
| Accounts payable and other current liabilities | ||
Finance lease liabilities |
|
| 3 |
|
|
| 2 |
|
| Accounts payable and other current liabilities |
| 4 |
| 3 |
| Accounts payable and other current liabilities | ||||
Non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease liabilities |
|
| 2,014 |
|
|
| 1,915 |
|
| Non-current operating lease liabilities |
| 2,214 |
| 2,286 |
| Non-current operating lease liabilities | ||||
Finance lease liabilities |
|
| 34 |
|
|
| 28 |
|
| Non-current finance lease liabilities |
|
| 41 |
|
|
| 40 |
|
| Non-current finance lease liabilities |
Total lease liabilities |
| $ | 2,506 |
|
| $ | 2,393 |
|
|
|
| $ | 2,756 |
|
| $ | 2,837 |
|
|
|
Summary of Lease Cost |
| Quarter Ended |
|
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| Account Classification | ||
|
|
|
|
|
|
|
|
| ||
Operating lease cost |
| $ | 157 |
|
| $ | 136 |
|
| Occupancy and other operating expenses, |
Finance lease cost |
|
|
|
|
|
|
|
| ||
Amortization of leased assets |
|
| 1 |
|
|
| 1 |
|
| Occupancy and other operating expenses |
Variable lease cost(a) |
|
| 96 |
|
|
| 95 |
|
| Occupancy and other operating expenses |
Short-term lease cost |
|
| 3 |
|
|
| 2 |
|
| Occupancy and other operating expenses |
Sub-lease income |
|
| (6 | ) |
|
| (8 | ) |
| Franchise fees and income or Other revenues |
Total lease cost |
| $ | 251 |
|
| $ | 226 |
|
|
|
18
Summary of Lease Cost |
| Quarter Ended |
|
| Year to Date Ended |
|
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Account Classification | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 140 |
|
| $ | 124 |
|
| $ | 414 |
|
| $ | 365 |
|
| Occupancy and other operating expenses, G&A or Franchise expenses |
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| 1 |
|
| Occupancy and other operating expenses |
Interest on lease liabilities |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
| Interest expense, net |
Variable lease cost (a) |
|
| 91 |
|
|
| 84 |
|
|
| 273 |
|
|
| 188 |
|
| Occupancy and other operating expenses or Franchise expenses |
Short-term lease cost |
|
| 3 |
|
|
| 3 |
|
|
| 8 |
|
|
| 8 |
|
| Occupancy and other operating expenses or G&A |
Sub-lease income |
|
| (6 | ) |
|
| (6 | ) |
|
| (20 | ) |
|
| (18 | ) |
| Franchise fees and income or Other revenues |
Total lease cost |
| $ | 229 |
|
| $ | 205 |
|
| $ | 678 |
|
| $ | 545 |
|
|
|
Supplemental Cash Flow Information |
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
| ||
Operating cash flows from operating leases |
| $ | 155 |
|
| $ | 144 |
|
|
Operating cash flows from finance leases |
|
| 1 |
|
|
| — |
|
|
Financing cash flows from finance leases |
|
| 1 |
|
|
| 1 |
|
|
Right-of-use assets obtained in exchange for new lease liabilities(b): |
|
|
|
|
|
|
| ||
Operating leases |
| $ | 28 |
|
| $ | 78 |
|
|
Finance leases |
|
| 3 |
|
|
| — |
|
|
|
|
Supplemental Cash Flow Information |
| Year to Date Ended |
|
| |||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 423 |
|
| $ | 353 |
|
|
Operating cash flows from finance leases |
|
| 1 |
|
|
| 1 |
|
|
Financing cash flows from finance leases |
|
| 2 |
|
|
| 1 |
|
|
Right-of-use assets obtained in exchange for new lease liabilities(b): |
|
|
|
|
|
|
|
|
|
Operating leases |
| $ | 394 |
|
| $ | 193 |
|
|
Finance leases |
|
| 7 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate |
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||
Weighted-average remaining lease term (years) |
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 7.0 |
|
|
| 6.9 |
|
|
Finance leases |
|
| 11.2 |
|
|
| 10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 5.7 | % |
|
| 5.9 | % |
|
Finance leases |
|
| 5.6 | % |
|
| 5.8 | % |
|
Summary of Future Lease Payments and Lease Liabilities
Maturities of lease liabilities as of September 30, 2021March 31, 2022 were as follows:
|
| Amount of |
|
| Amount of |
|
| Total |
| |||
Remainder of 2022 |
| $ | 484 |
|
| $ | 5 |
|
| $ | 489 |
|
2023 |
|
| 548 |
|
|
| 6 |
|
|
| 554 |
|
2024 |
|
| 480 |
|
|
| 6 |
|
|
| 486 |
|
2025 |
|
| 406 |
|
|
| 5 |
|
|
| 411 |
|
2026 |
|
| 345 |
|
|
| 5 |
|
|
| 350 |
|
Thereafter |
|
| 1,015 |
|
|
| 34 |
|
|
| 1,049 |
|
Total undiscounted lease payment |
|
| 3,278 |
|
|
| 61 |
|
|
| 3,339 |
|
Less: imputed interest(c) |
|
| 567 |
|
|
| 16 |
|
|
| 583 |
|
Present value of lease liabilities |
| $ | 2,711 |
|
| $ | 45 |
|
| $ | 2,756 |
|
|
| Amount of Operating Leases |
|
| Amount of Finance Leases |
|
| Total |
| |||
Remainder of 2021 |
| $ | 174 |
|
| $ | 1 |
|
| $ | 175 |
|
2022 |
|
| 537 |
|
|
| 5 |
|
|
| 542 |
|
2023 |
|
| 476 |
|
|
| 5 |
|
|
| 481 |
|
2024 |
|
| 407 |
|
|
| 5 |
|
|
| 412 |
|
2025 |
|
| 342 |
|
|
| 4 |
|
|
| 346 |
|
Thereafter |
|
| 1,071 |
|
|
| 30 |
|
|
| 1,101 |
|
Total undiscounted lease payment |
|
| 3,007 |
|
|
| 50 |
|
|
| 3,057 |
|
Less: imputed interest(c) |
|
| 538 |
|
|
| 13 |
|
|
| 551 |
|
Present value of lease liabilities |
| $ | 2,469 |
|
| $ | 37 |
|
| $ | 2,506 |
|
|
|
As of September 30, 2021,March 31, 2022, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $192$168 million. These leases will commence between the fourthsecond quarter of 20212022 and 20232026 with lease terms of 1 year to 20 years.
Note 1112 – Fair Value Measurements and Disclosures
The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, long-term time deposits, accounts receivable, accounts payable and lease liabilities, and the carrying values of these assets and liabilities approximate their fair value in general.
The Company accounts for its investment in equity securities of Meituan at fair value, which is determined based on the respective closing market price for the securitiesshares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.
19
The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, long-term time deposits and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. NaN transfers among the levels within the fair value hierarchy occurred during the quarters ended March 31, 2022 and years to date ended September 30, 20212021.
|
|
|
|
| Fair Value Measurement or Disclosure |
| ||||||||||
|
| Balance at |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 41 |
|
| $ | 41 |
|
|
|
|
|
|
| ||
Fixed income debt securities(a) |
|
| 100 |
|
|
|
|
|
| 100 |
|
|
|
| ||
Total cash equivalents |
|
| 141 |
|
|
| 41 |
|
|
| 100 |
|
|
| — |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time deposits |
|
| 1,530 |
|
|
|
|
|
| 1,530 |
|
|
|
| ||
Fixed income debt securities(a) |
|
| 950 |
|
|
|
|
|
| 950 |
|
|
|
| ||
Structured deposits |
|
| 142 |
|
|
|
|
|
| 142 |
|
|
|
| ||
Total short-term investments |
|
| 2,622 |
|
|
| — |
|
|
| 2,622 |
|
|
| — |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment in equity securities |
|
| 84 |
|
|
| 84 |
|
|
|
|
|
|
| ||
Long-term time deposits |
|
| 91 |
|
|
|
|
|
| 91 |
|
|
|
| ||
Total |
| $ | 2,938 |
|
| $ | 125 |
|
| $ | 2,813 |
|
| $ | — |
|
|
|
|
|
| Fair Value Measurement or Disclosure |
|
| ||||||||||
|
| Balance at |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time deposits |
| $ | 321 |
|
|
|
|
| $ | 321 |
|
|
|
|
| ||
Money market funds |
|
| 45 |
|
|
| 45 |
|
|
|
|
|
|
|
| ||
Fixed income debt securities(a) |
|
| 163 |
|
|
| 63 |
|
|
| 100 |
|
|
|
|
| |
Total cash equivalents |
|
| 529 |
|
|
| 108 |
|
|
| 421 |
|
|
| — |
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time deposits |
|
| 1,726 |
|
|
|
|
|
| 1,726 |
|
|
|
|
| ||
Fixed income debt securities(a) |
|
| 1,055 |
|
|
|
|
|
| 1,055 |
|
|
|
|
| ||
Variable return investments |
|
| 79 |
|
|
| 79 |
|
|
|
|
|
|
|
| ||
Total short-term investments |
|
| 2,860 |
|
|
| 79 |
|
|
| 2,781 |
|
|
| — |
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment in equity securities |
|
| 122 |
|
|
| 122 |
|
|
|
|
|
|
|
| ||
Long-term time deposits |
|
| 90 |
|
|
|
|
|
| 90 |
|
|
|
|
| ||
Total |
| $ | 3,601 |
|
| $ | 309 |
|
| $ | 3,292 |
|
| $ | — |
|
|
|
|
|
|
|
| Fair Value Measurement or Disclosure at September 30, 2021 |
| |||||||||||||
|
| Balance at September 30, 2021 |
|
| Level 1 |
|
|
|
| Level 2 |
|
|
|
| Level 3 |
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
| $ | 386 |
|
|
|
|
|
|
|
| $ | 386 |
|
|
|
|
|
|
|
Money market funds |
|
| 28 |
|
|
| 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income debt securities(a) |
|
| 178 |
|
|
| 78 |
|
|
|
|
| 100 |
|
|
|
|
|
|
|
Total cash equivalents |
|
| 592 |
|
|
| 106 |
|
|
|
|
| 486 |
|
|
|
|
| — |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 2,087 |
|
|
|
|
|
|
|
|
| 2,087 |
|
|
|
|
|
|
|
Fixed income debt securities(a) |
|
| 806 |
|
|
|
|
|
|
|
|
| 806 |
|
|
|
|
|
|
|
Structured deposits(b) |
|
| 78 |
|
|
|
|
|
|
|
|
| 78 |
|
|
|
|
|
|
|
Variable return investments |
|
| 128 |
|
|
| 128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
| 3,099 |
|
|
| 128 |
|
|
|
|
| 2,971 |
|
|
|
|
| — |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities |
|
| 133 |
|
|
| 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term time deposits |
|
| 88 |
|
|
|
|
|
|
|
|
| 88 |
|
|
|
|
|
|
|
Total |
| $ | 3,912 |
|
| $ | 367 |
|
|
|
| $ | 3,545 |
|
|
|
| $ | — |
|
|
|
|
|
|
| Fair Value Measurement or Disclosure at December 31, 2020 |
|
| |||||||||
|
| Balance at December 31, 2020 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
| $ | 601 |
|
|
|
|
|
| $ | 601 |
|
|
|
|
|
|
Fixed income debt securities(a) |
|
| 207 |
|
|
| 207 |
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
| 808 |
|
|
| 207 |
|
|
| 601 |
|
|
| — |
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 2,165 |
|
|
|
|
|
|
| 2,165 |
|
|
|
|
|
|
Fixed income debt securities(a) |
|
| 784 |
|
|
| 104 |
|
|
| 680 |
|
|
|
|
|
|
Variable return investments |
|
| 156 |
|
|
| 156 |
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
| 3,105 |
|
|
| 260 |
|
|
| 2,845 |
|
|
| — |
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities |
|
| 160 |
|
|
| 160 |
|
|
|
|
|
|
|
|
|
|
Long-term time deposits |
|
| 61 |
|
|
|
|
|
|
| 61 |
|
|
|
|
|
|
Total |
| $ | 4,134 |
|
| $ | 627 |
|
| $ | 3,507 |
|
| $ | — |
|
|
|
|
|
|
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 unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.
In determiningWe review long-lived assets of restaurants semi-annually for impairment, or whenever events or changes in circumstances indicate that the fair valuecarrying amount of a restaurant may not be recoverable. We recorded restaurant-level assets, the Company considered the highestimpairment of NaN for both quarters ended March 31, 2022 and best use of the assets from market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows from operating restaurants and the price market participants would pay to sub-lease the ROU assets and acquire remaining restaurants assets, even if that use differs from the current use by the Company. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make, such as sales growth, and include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The discount rate used in the fair value calculation is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar restaurant and the related long-lived assets. In situations where the highest and best use of restaurant-level assets are represented by sub-leasing the operating lease ROU assets and acquiring remaining restaurant assets, the Company continues to use these assets in operating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts.
As of each relevant measurement date, the fair value of restaurant-level assets, if determined to be impaired, are primarily represented by the price market participant would pay to sub-lease the operating lease ROU assets and acquire remaining restaurants assets, which reflects the highest and best use of the assets. Significant unobservable inputs used in the fair value measurement include market rental prices, which were determined with the assistance of an independent valuation specialist. The direct comparison approach is used as the valuation technique by assuming sub-lease of each of these properties in its existing state with vacant possession. By making reference to lease transactions as available in the relevant market, comparable properties in close proximity have been selected and adjustments have been made to account for the difference in factors such as location and property size.
The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters and years to date ended September 30, 2021, and 2020. These amounts excludeexcluding fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-endquarter-end dates.
20
Note 13 – Income Taxes
|
| Quarter Ended |
|
| Year to Date Ended |
|
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Account Classification | ||||
Restaurant-level impairment(a) |
| $ | — |
|
| $ | — |
|
| $ | 13 |
|
| $ | 30 |
|
| Closure and impairment expenses, net |
Total |
| $ | — |
|
| $ | — |
|
| $ | 13 |
|
| $ | 30 |
|
|
|
|
| Quarter Ended |
|
| |||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Income tax provision |
| $ | 55 |
|
| $ | 102 |
|
|
Effective tax rate |
|
| 33.1 | % |
|
| 29.6 | % |
|
|
|
Note 12 – Income Taxes
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Income tax provision |
| $ | 44 |
|
| $ | 155 |
|
| $ | 210 |
|
| $ | 232 |
|
|
Effective tax rate |
|
| 28.3 | % |
|
| 25.6 | % |
|
| 27.7 | % |
|
| 26.3 | % |
|
The higher effective tax rate for the quarter ended September 30, 2021 was primarily dueMarch 31, 2022 as compared to the impact from our investment in equity securities of Meituan, higher planned repatriation of earnings outside of China subject to foreign withholding tax, and increased valuation allowance for certain underperforming subsidiaries.
The higher effective tax rate for theprior year to date ended September 30, 2021 was primarily due to higher planned repatriationimpact of earnings outside of China subject to foreign withholding tax increased valuation allowance for certain underperforming subsidiariesdue to lower pre-tax income and less tax benefit onfrom equity income from investments in unconsolidated affiliates, partially offset by lower residual U.S. tax.affiliates.
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which included a broad range of tax reforms. The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income (“(“GILTI”) earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred, and therefore included it in estimating the annual effective tax rate.
We are subject to reviews, examinations and audits by Chinese tax authorities, the Internal Revenue Service and other tax authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the Chinese State Taxation Administration (“STA”) in China regarding our related party transactions for the period from 2006 to 2015. The information and views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment and decision of the STA will depend upon further review of the information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore, it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.
Note 1314 –Segment Reporting
We have 2 reportable segments: KFC and Pizza Hut. Our remaining non-reportable operating segments, including the operations of Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, East Dawning, Taco Bell, Lavazza,East Dawning, Daojia and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in aggregate.
|
| Quarter Ended 9/30/2021 |
|
|
| Quarter Ended 3/31/2022 |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
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 |
| $ | 1,801 |
|
| $ | 551 |
|
| $ | 59 |
|
| $ | 143 |
|
| $ | 2,554 |
|
| $ | — |
|
| $ | 2,554 |
|
|
| $ | 2,017 |
|
| $ | 547 |
|
| $ | 41 |
|
| $ | 63 |
|
| $ | 2,668 |
|
| $ | — |
|
| $ | 2,668 |
| |
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 75 |
|
|
| 3 |
|
|
| 78 |
|
|
| (78 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 122 |
|
|
| 4 |
|
|
| 126 |
|
|
| (126 | ) |
|
| — |
| ||
Total |
| $ | 1,801 |
|
| $ | 551 |
|
| $ | 134 |
|
| $ | 146 |
|
| $ | 2,632 |
|
| $ | (78 | ) |
| $ | 2,554 |
|
|
| $ | 2,017 |
|
| $ | 547 |
|
| $ | 163 |
|
| $ | 67 |
|
| $ | 2,794 |
|
| $ | (126 | ) |
| $ | 2,668 |
|
|
|
| Quarter Ended 3/31/2021 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Revenue from external |
| $ | 1,832 |
|
| $ | 541 |
|
| $ | 53 |
|
| $ | 131 |
|
| $ | 2,557 |
|
| $ | — |
|
| $ | 2,557 |
|
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| 25 |
|
|
| (25 | ) |
|
| — |
|
|
Total |
| $ | 1,832 |
|
| $ | 541 |
|
| $ | 78 |
|
| $ | 131 |
|
| $ | 2,582 |
|
| $ | (25 | ) |
| $ | 2,557 |
|
|
21
|
| Quarter Ended |
|
| |||||
Operating Profit (Loss) |
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
KFC(b) |
| $ | 220 |
|
| $ | 327 |
|
|
Pizza Hut |
|
| 30 |
|
|
| 60 |
|
|
All Other Segments |
|
| (17 | ) |
|
| (3 | ) |
|
Unallocated revenues from transactions with |
|
| 57 |
|
|
| 129 |
|
|
Unallocated Other revenues |
|
| 10 |
|
|
| 2 |
|
|
Unallocated expenses from transactions with |
|
| (57 | ) |
|
| (129 | ) |
|
Unallocated Other operating costs and expenses |
|
| (9 | ) |
|
| (3 | ) |
|
Unallocated and corporate G&A expenses |
|
| (44 | ) |
|
| (41 | ) |
|
Unallocated Other income, net |
|
| 1 |
|
|
| — |
|
|
Operating Profit |
| $ | 191 |
|
| $ | 342 |
|
|
Interest income, net(a) |
|
| 12 |
|
|
| 15 |
|
|
Investment loss(a) |
|
| (37 | ) |
|
| (12 | ) |
|
Income Before Income Taxes and Equity in |
| $ | 166 |
|
| $ | 345 |
|
|
|
| Quarter Ended |
|
| |||||
Impairment Charges |
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
KFC(d) |
| $ | 5 |
|
| $ | 2 |
|
|
Pizza Hut(d) |
|
| 1 |
|
|
| 1 |
|
|
All Other Segments(d) |
|
| 2 |
|
|
| — |
|
|
|
| $ | 8 |
|
| $ | 3 |
|
|
|
| Total Assets |
|
| |||||
|
| 3/31/2022 |
|
| 12/31/2021 |
|
| ||
KFC |
| $ | 5,976 |
|
| $ | 6,072 |
|
|
Pizza Hut |
|
| 944 |
|
|
| 972 |
|
|
All Other Segments |
|
| 454 |
|
|
| 454 |
|
|
Corporate and Unallocated(e) |
|
| 5,265 |
|
|
| 5,725 |
|
|
|
| $ | 12,639 |
|
| $ | 13,223 |
|
|
22
|
| Quarter Ended 9/30/2020 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Revenue from external customers |
| $ | 1,646 |
|
| $ | 511 |
|
| $ | 54 |
|
| $ | 137 |
|
| $ | 2,348 |
|
| $ | — |
|
| $ | 2,348 |
|
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 19 |
|
|
| — |
|
|
| 19 |
|
|
| (19 | ) |
|
| — |
|
|
Total |
| $ | 1,646 |
|
| $ | 511 |
|
| $ | 73 |
|
| $ | 137 |
|
| $ | 2,367 |
|
| $ | (19 | ) |
| $ | 2,348 |
|
|
|
| Year to Date Ended 9/30/2021 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Revenue from external customers |
| $ | 5,367 |
|
| $ | 1,630 |
|
| $ | 164 |
|
| $ | 401 |
|
| $ | 7,562 |
|
| $ | — |
|
| $ | 7,562 |
|
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 154 |
|
|
| 3 |
|
|
| 157 |
|
|
| (157 | ) |
|
| — |
|
|
Total |
| $ | 5,367 |
|
| $ | 1,630 |
|
| $ | 318 |
|
| $ | 404 |
|
| $ | 7,719 |
|
| $ | (157 | ) |
| $ | 7,562 |
|
|
|
| Year to Date Ended 9/30/2020 |
|
| |||||||||||||||||||||||||
Revenues |
| KFC |
|
| Pizza Hut |
|
| All Other Segments |
|
| Corporate and Unallocated(a) |
|
| Combined |
|
| Elimination |
|
| Consolidated |
|
| |||||||
Revenue from external customers |
| $ | 4,222 |
|
| $ | 1,259 |
|
| $ | 115 |
|
| $ | 408 |
|
| $ | 6,004 |
|
| $ | — |
|
| $ | 6,004 |
|
|
Inter-segment revenue |
|
| — |
|
|
| — |
|
|
| 36 |
|
|
| — |
|
|
| 36 |
|
|
| (36 | ) |
|
| — |
|
|
Total |
| $ | 4,222 |
|
| $ | 1,259 |
|
| $ | 151 |
|
| $ | 408 |
|
| $ | 6,040 |
|
| $ | (36 | ) |
| $ | 6,004 |
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
Operating Profit (Loss) |
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
KFC(b) |
| $ | 196 |
|
| $ | 286 |
|
| $ | 763 |
|
| $ | 598 |
|
|
Pizza Hut |
|
| 18 |
|
|
| 61 |
|
|
| 117 |
|
|
| 48 |
|
|
All Other Segments |
|
| (6 | ) |
|
| 2 |
|
|
| (15 | ) |
|
| (10 | ) |
|
Unallocated revenues from transactions with franchisees and unconsolidated affiliates(c) |
|
| 139 |
|
|
| 135 |
|
|
| 393 |
|
|
| 404 |
|
|
Unallocated Other revenues |
|
| 7 |
|
|
| 2 |
|
|
| 11 |
|
|
| 4 |
|
|
Unallocated expenses from transactions with franchisees and unconsolidated affiliates(c) |
|
| (138 | ) |
|
| (134 | ) |
|
| (390 | ) |
|
| (404 | ) |
|
Unallocated Other operating costs and expenses |
|
| (5 | ) |
|
| (1 | ) |
|
| (10 | ) |
|
| (3 | ) |
|
Unallocated and corporate G&A expenses |
|
| (42 | ) |
|
| (42 | ) |
|
| (123 | ) |
|
| (100 | ) |
|
Unallocated Other income, net(d) |
|
| 9 |
|
|
| 247 |
|
|
| 7 |
|
|
| 244 |
|
|
Operating Profit |
| $ | 178 |
|
| $ | 556 |
|
| $ | 753 |
|
| $ | 781 |
|
|
Interest income, net(a) |
|
| 16 |
|
|
| 11 |
|
|
| 47 |
|
|
| 28 |
|
|
Investment (loss) gain(a) |
|
| (39 | ) |
|
| 38 |
|
|
| (43 | ) |
|
| 75 |
|
|
Income Before Income Taxes |
| $ | 155 |
|
| $ | 605 |
|
| $ | 757 |
|
| $ | 884 |
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
Impairment Charges |
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
KFC(e) |
| $ | 3 |
|
| $ | 1 |
|
| $ | 14 |
|
| $ | 17 |
|
|
Pizza Hut(e) |
|
| 1 |
|
|
| 1 |
|
|
| 8 |
|
|
| 18 |
|
|
All Other Segments(e) |
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| 4 |
|
|
|
| $ | 4 |
|
| $ | 3 |
|
| $ | 23 |
|
| $ | 39 |
|
|
|
| Total Assets |
|
| |||||
|
| 9/30/2021 |
|
| 12/31/2020 |
|
| ||
KFC(f) |
| $ | 4,314 |
|
| $ | 4,084 |
|
|
Pizza Hut |
|
| 920 |
|
|
| 906 |
|
|
All Other Segments |
|
| 427 |
|
|
| 378 |
|
|
Corporate and Unallocated(g) |
|
| 5,845 |
|
|
| 5,507 |
|
|
|
| $ | 11,506 |
|
| $ | 10,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1415 – Contingencies
Indemnification of China Tax on Indirect Transfers of Assets
In February 2015, the 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%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 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%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.franchisees. As of September 30, 2021, March 31, 2022, 0 guarantees were outstanding for unconsolidated affiliates and franchisees.
Legal Proceedings
The Company is subject to various lawsuits covering a variety of 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 1516 – Subsequent Events
Cash Dividend
On October 27, 2021,May 3, 2022, the Company announced that the Board of Directors declared a cash dividend of $0.12$0.12 per share on Yum China's common stock, payable as of the close of business on December 16, 2021,June 21, 2022, to stockholders of record as of the close of business on November 24, 2021.May 31, 2022. Total estimated cash dividend payable is approximately $51$51 million.
Amendment to Master License Agreement
On April 15, 2022, the Company and YUM, through their respective subsidiaries, entered into an amendment to the master license agreement to amend the development milestones for the Taco Bell brand. The Company has committed to expanding the Taco Bell store network to at least 100 stores by the end of 2022 and at least 225 stores by the end of 2025, with certain investment support from YUM. Subject to achieving these milestones, the Company will have the exclusive right to operate and sublicense the Taco Bell brand in China for 50 years.
23
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 and dividends, and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.
Introduction
Yum China Holdings, Inc. is the largest restaurant company in China in terms of system sales, with over 11,00012,000 restaurants covering over 1,6001,700 cities primarily in China as of September 30, 2021.March 31, 2022. Our growing restaurant base consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY East Dawning,and Taco Bell and Lavazza.Bell. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Macau and Taiwan, and own the intellectual property of the Little Sheep, Huang Ji Huang and COFFii & JOY and East Dawning concepts outright. We also established a joint venture with Luigi Lavazza S.p.A. (“Lavazza Group”), the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee shop concept in China. KFC was the first major global restaurant brand to enter China as early as 1987. With more than 30 years of operations, we have developed extensive operating experience in the China market. We have since grown to become the largest restaurant company in China in terms of system sales. We believe that there are significant opportunities 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 China in terms of system sales. As of September 30, 2021,March 31, 2022, KFC operated over 7,9008,400 restaurants in over 1,6001,700 cities across China. During the fourth quarter ended September 30, 2020,of2021, the Company completed the acquisition of an additional 25%a 28% equity interest in Hangzhou Catering Service Group (“Hangzhou Catering”), which holds a 45% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou,Hangzhou, China (“SuzhouHangzhou KFC”), increasing our equity interest to 72%approximately 60% directly and indirectly, and allowing the Company to consolidate the entity.Hangzhou KFC.
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, 2021,March 31, 2022, Pizza Hut operated over 2,5002,600 restaurants in over 500600 cities.
In the second quarter of 2020, the Company partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China. In September 2021, the Company and Lavazza Group entered into agreements for the previously formed joint venture (“Lavazza joint venture”) to accelerate the expansion of Lavazza coffee shops in China. Upon execution of these agreements, the Company controls and consolidates the joint venture with its 65% equity interest.
On April 15, 2022, the Company and YUM, through their respective subsidiaries, entered into an amendment to the master license agreement to amend the development milestones for the Taco Bell brand. The Company has committed to expanding the Taco Bell store network to at least 100 stores by the end of 2022 and at least 225 stores by the end of 2025, with certain investment support from YUM. Subject to achieving these milestones, the Company will have the exclusive right to operate and sublicense the Taco Bell brand in China for 50 years.
The Company’s common stock is listed on the NYSE under the symbol “YUMC”. On September 10, 2020, the Company completed its secondary listing on the Main Board of the HKEX under the stock code “9987”, in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted to US$2.2 billion.
Overview
We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company’s performance. Throughout this MD&A, we discuss the following performance metrics:
• The Company provides certain percentage changes excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. 24 • System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at an average rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth. • Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year, excluding the period during which stores are temporarily closed. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, including stores temporarily closed, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores. • Company sales represent revenues from Company-owned restaurants. Company Restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. Within the Company sales and Restaurant profit analysis, Store Portfolio Actions represent the net impact of new-unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation. |
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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 Ended March 31, 2022 and Years to Date Ended September 30, 2021 and 2020
Results of Operations
Summary
The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, East Dawning, Taco Bell, Lavazza,East Dawning, Daojia and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Additional details on our reportable operating segments are included in Note 13.14.
Quarterly highlights: |
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| % Change |
| % Change |
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| System Sales(a) |
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| Same-Store Sales(a) |
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| Net New Units |
| Operating Profit (Reported) |
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| Operating Profit (Ex F/X) |
| System Sales(a) |
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| Same-Store Sales(a) |
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| Net New Units |
| Operating Profit |
| Operating Profit |
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KFC | +1 |
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| (8 | ) |
| +14 |
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| (31 | ) |
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| (36 | ) |
| (4 | ) |
| (9 | ) |
| +14 |
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| (33 | ) |
| (34 | ) | |||
Pizza Hut | +1 |
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| (5 | ) |
| +10 |
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| (69 | ) |
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| (71 | ) |
| (1 | ) |
| (5 | ) |
| +12 |
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| (50 | ) |
| (51 | ) | |||
All Other Segments(b) |
| (5 | ) |
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| (9 | ) |
| +6 |
| NM |
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| NM |
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| (14 | ) |
| (15 | ) |
| +3 |
| NM |
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| NM |
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Total | +1 |
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| (7 | ) |
| +12 |
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| (68 | ) |
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| (70 | ) |
| (4 | ) |
| (8 | ) |
| +13 |
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| (44 | ) |
| (45 | ) | |||
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Year to date highlights: |
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| % Change |
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| System Sales(a) |
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| Same-Store Sales(a) |
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| Net New Units |
| Operating Profit (Reported) |
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| Operating Profit (Ex F/X) |
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KFC | +12 |
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| - |
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| +14 |
| +27 |
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| +18 |
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Pizza Hut | +20 |
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| +11 |
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| +10 |
| +141 |
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| +124 |
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All Other Segments(b) | +51 |
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| +3 |
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| +6 |
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| (45 | ) |
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| (32 | ) | |||||||||||||||||||
Total | +15 |
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| +2 |
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| +12 |
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| (4 | ) |
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| (11 | ) |
25
NM refers to not meaningful.
(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.
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As of September 30, 2021,March 31, 2022, the Company operated 11,415over 12,000 units, predominately KFC and Pizza Hut restaurants, which are the leading and largest QSR and CDR brands, respectively, in mainland China in terms of system sales. We believe that there are significant opportunities to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.
The Company’s third quarter results were significantly impacted byhighly transmissible Omicron variant caused significant volatility in the Delta variant outbreak that startedCompany's business operations in late July. This regional outbreak was the most widely spread wave since the first quarter of 2020. Strict public health measures were implemented across2022. After a relatively stable period in January and February, the country, including closures of many tourist locations. These actions led to fewer social activities, substantially lower travel volume, and cancelled holiday trips. However, we sustained Company sales growthsituation rapidly deteriorated in March, resulting in the third quarter, with new unit openingslargest outbreak in China since COVID-19 first emerged in early 2020. In March 2022, over 1,700 of our stores, on average, were temporarily closed or offered only takeaway and delivery services. Same-store sales in March decreased by more than offsetting same-store sales declines.20%. As a result, the Company incurred an operating loss in March.
As compared to the thirdfirst quarter of 2020,2021, Company sales in the thirdfirst quarter of 20212022 increased 9%, or 2%7% excluding the impact of F/X. Company sales for the year to date ended September 30, 2021 increased 28%, or 19% excluding the impact of F/X. The increase in Company sales for the quarter, excluding the impact of F/X, was attributable to net unit growth of 24% in Company-owned stores including the acquisition of SuzhouHangzhou KFC, partially offset by same-store sales decline. decline of 8% and substantially more The yeartemporary store closures due to date increase in Company sales, excluding the impact of F/X, was attributable to net unit growth including the acquisition of Suzhou KFC, fewer temporary store closures and same-store sales growth.COVID-19 pandemic.
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by lapping the non-cash gain recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition in the third quarter of 2020, same-store sales decline, higher promotion costs, temporary store closures due to the impact of the COVID-19 pandemic, wage inflation of 5%, increased rider cost associated with thea rise of approximately five percentage points in delivery volume, higher packaging costs and lower temporary relief provided by landlords and government agencies, partially offset by favorable commodity prices.
The year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by lapping the non-cash gain recognizedsales mix from the re-measurementprior year period due to more severe outbreaks and commodity inflation of our previously held equity interest in Suzhou KFC at fair value upon acquisition in the third quarter of 2020, lower temporary relief provided by landlords and government agencies, higher promotion costs, wage inflation and higher compensation costs,1%, partially offset by the increase in Company sales, favorable commodity pricesacquisition of Hangzhou KFC and lower store impairment charges..
26
The Consolidated Results of Operations for the quarters ended March 31, 2022 and years to date ended September 30, 2021 and 2020 are presented below:
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| Quarter Ended |
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| % B/(W) (a) | |||||||||||||
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| 3/31/2022 |
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| 3/31/2021 |
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| Reported |
| Ex F/X | ||||||||
Company sales |
| $ | 2,548 |
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| $ | 2,331 |
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| 9 |
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| 7 |
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Franchise fees and income |
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| 24 |
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| 42 |
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| (42 | ) |
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| (44 | ) |
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Revenues from transactions with |
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| 77 |
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| 171 |
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| (55 | ) |
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| (56 | ) |
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Other revenues |
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| 19 |
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| 13 |
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|
| 46 |
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| 43 |
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Total revenues |
| $ | 2,668 |
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| $ | 2,557 |
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| 4 |
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| 2 |
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Restaurant profit |
| $ | 351 |
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| $ | 435 |
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| (20 | ) |
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| (21 | ) |
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Restaurant Margin % |
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| 13.8 | % |
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| 18.7 | % |
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| (4.9 | ) | ppts. |
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| (4.9 | ) | ppts. |
Operating Profit |
| $ | 191 |
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| $ | 342 |
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| (44 | ) |
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| (45 | ) |
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Interest income, net |
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| 12 |
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| 15 |
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| (19 | ) |
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| (20 | ) |
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Investment loss |
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| (37 | ) |
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| (12 | ) |
| NM |
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| NM |
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Income tax provision |
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| (55 | ) |
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| (102 | ) |
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| 46 |
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| 47 |
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Equity in net earnings (losses) from |
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| (1 | ) |
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| — |
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| NM |
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| NM |
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Net Income – including noncontrolling interests |
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| 110 |
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| 243 |
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| (55 | ) |
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| (56 | ) |
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Net Income – noncontrolling interests |
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| 10 |
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| 13 |
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| 21 |
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| 23 |
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Net Income – Yum China Holdings, Inc. |
| $ | 100 |
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| $ | 230 |
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| (57 | ) |
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| (58 | ) |
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Diluted Earnings Per Common Share |
| $ | 0.23 |
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| $ | 0.53 |
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| (57 | ) |
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| (57 | ) |
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Effective tax rate |
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| 33.1 | % |
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| 29.6 | % |
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Supplementary information |
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Adjusted Operating Profit |
| $ | 193 |
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| $ | 345 |
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Adjusted Net Income – Yum China Holdings, Inc. |
| $ | 102 |
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| $ | 233 |
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Adjusted Diluted Earnings Per Common Share |
| $ | 0.24 |
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| $ | 0.54 |
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Adjusted Effective Tax Rate |
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| 32.7 | % |
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| 29.3 | % |
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Adjusted EBITDA |
| $ | 365 |
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| $ | 476 |
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| Quarter Ended |
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| % B/(W) (a) |
| Year to Date Ended |
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| % B/(W) (a) | ||||||||||||||||||||||||||
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| 9/30/2021 |
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| 9/30/2020 |
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| Reported |
| Ex F/X |
| 9/30/2021 |
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| 9/30/2020 |
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| Reported |
| Ex F/X | ||||||||||||||||
Company sales |
| $ | 2,310 |
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| $ | 2,118 |
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| 9 |
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| 2 |
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| $ | 6,874 |
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| $ | 5,358 |
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| 28 |
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| 19 |
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Franchise fees and income |
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| 40 |
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| 40 |
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| - |
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| (7 | ) |
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| 120 |
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| 112 |
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| 7 |
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| (1 | ) |
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Revenues from transactions with franchisees and unconsolidated affiliates |
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| 184 |
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| 170 |
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| 8 |
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| 1 |
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| 519 |
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| 488 |
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| 7 |
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| (1 | ) |
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Other revenues |
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| 20 |
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| 20 |
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| 2 |
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| (4 | ) |
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| 49 |
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| 46 |
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| 7 |
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| (1 | ) |
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Total revenues |
| $ | 2,554 |
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| $ | 2,348 |
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| 9 |
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| 2 |
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| $ | 7,562 |
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| $ | 6,004 |
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| 26 |
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| 17 |
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Restaurant profit |
| $ | 282 |
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| $ | 394 |
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| (29 | ) |
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| (33 | ) |
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| $ | 1,071 |
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| $ | 790 |
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| 36 |
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| 26 |
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Restaurant Margin % |
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| 12.2 | % |
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| 18.6 | % |
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| (6.4 | ) | ppts. |
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| (6.4 | ) | ppts. |
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| 15.6 | % |
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| 14.7 | % |
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| 0.9 |
| ppts. |
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| 0.9 |
| ppts. |
Operating Profit |
| $ | 178 |
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| $ | 556 |
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| (68 | ) |
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| (70 | ) |
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| $ | 753 |
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| $ | 781 |
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| (4 | ) |
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| (11 | ) |
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Interest income, net |
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| 16 |
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| 11 |
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| 58 |
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| 51 |
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| 47 |
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| 28 |
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| 69 |
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| 61 |
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Investment (loss) gain |
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| (39 | ) |
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| 38 |
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| NM |
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| NM |
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| (43 | ) |
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| 75 |
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| NM |
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| NM |
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Income tax provision |
|
| (44 | ) |
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| (155 | ) |
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| 72 |
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| 73 |
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|
| (210 | ) |
|
| (232 | ) |
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| 10 |
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| 15 |
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Net Income - including noncontrolling interests |
|
| 111 |
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|
| 450 |
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| (75 | ) |
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| (78 | ) |
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| 547 |
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| 652 |
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| (16 | ) |
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| (23 | ) |
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Net Income - noncontrolling interests |
|
| 7 |
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| 11 |
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| 31 |
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| 36 |
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| 32 |
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|
| 19 |
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|
| (73 | ) |
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| (61 | ) |
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Net Income - Yum China Holdings, Inc. |
| $ | 104 |
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| $ | 439 |
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|
| (76 | ) |
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| (79 | ) |
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| $ | 515 |
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| $ | 633 |
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| (19 | ) |
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| (26 | ) |
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Diluted Earnings Per Common Share |
| $ | 0.24 |
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| $ | 1.10 |
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| (78 | ) |
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| (81 | ) |
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| $ | 1.19 |
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| $ | 1.62 |
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| (27 | ) |
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| (33 | ) |
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Effective tax rate |
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| 28.3 | % |
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| 25.6 | % |
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| 27.7 | % |
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| 26.3 | % |
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Supplementary information - Non-GAAP Measures(b) |
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Adjusted Operating Profit |
| $ | 168 |
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| $ | 320 |
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| $ | 750 |
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| $ | 550 |
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Adjusted Net Income - Yum China Holdings, Inc. |
| $ | 96 |
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| $ | 263 |
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| $ | 514 |
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| $ | 462 |
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Adjusted Diluted Earnings Per Common Share |
| $ | 0.22 |
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| $ | 0.66 |
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| $ | 1.18 |
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| $ | 1.18 |
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Adjusted Effective Tax Rate |
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| 28.8 | % |
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| 25.7 | % |
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| 27.6 | % |
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| 26.4 | % |
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Adjusted EBITDA |
| $ | 300 |
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| $ | 436 |
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| $ | 1,153 |
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| $ | 916 |
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Performance Metrics
Quarter Ended 3/31/2022 | ||||||
% Change | ||||||
System Sales Decline | (2 | )% | ||||
System Sales Decline, excluding F/X | (4 | )% | ||||
Same-Store Sales Decline | (8 | )% |
Unit Count |
| 3/31/2022 |
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| 3/31/2021 |
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| % Increase |
| |||
Company-owned(a) |
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| 10,385 |
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| 8,371 |
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| 24 |
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Unconsolidated affiliates(a) |
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| — |
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| 709 |
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| (100 | ) |
Franchisees |
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| 1,732 |
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| 1,645 |
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| 5 |
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| 12,117 |
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| 10,725 |
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| 13 |
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| Quarter Ended |
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| Year to Date Ended |
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| 9/30/2021 |
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| 9/30/2020 |
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| 9/30/2021 |
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| 9/30/2020 |
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System Sales Growth (Decline) |
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| 8 | % |
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| 3 | % |
|
| 24 | % |
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| (9 | )% |
System Sales Growth (Decline), excluding F/X |
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| 1 | % |
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| 1 | % |
|
| 15 | % |
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| (8 | )% |
Same-Store Sales (Decline) Growth |
|
| (7 | )% |
|
| (6 | )% |
|
| 2 | % |
|
| (11 | )% |
Unit Count |
| 9/30/2021 |
|
| 9/30/2020 |
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| % Increase |
| |||
Company-owned |
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| 8,938 |
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|
| 7,922 |
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| 13 |
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Unconsolidated affiliates |
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| 762 |
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| 666 |
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|
| 14 |
|
Franchisees |
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| 1,715 |
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| 1,562 |
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|
| 10 |
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| 11,415 |
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| 10,150 |
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| 12 |
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27
Non-GAAP Measures
In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share (“EPS”), Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for equity in net earnings (losses) from equity method investments, income tax, interest income, net, investment gain or loss, certain non-cash expenses, consisting of depreciation and amortization as well as store impairment charges and Special Items.
The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures.
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| Quarter Ended |
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| |||||
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| 3/31/2022 |
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| 3/31/2021 |
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| ||
Non-GAAP Reconciliations |
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Reconciliation of Operating Profit to Adjusted Operating Profit |
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|
|
|
|
|
| ||
Operating Profit |
| $ | 191 |
|
| $ | 342 |
|
|
Special Items, Operating Profit |
|
| (2 | ) |
|
| (3 | ) |
|
Adjusted Operating Profit |
| $ | 193 |
|
| $ | 345 |
|
|
Reconciliation of Net Income to Adjusted Net Income |
|
|
|
|
|
|
| ||
Net Income – Yum China Holdings, Inc. |
| $ | 100 |
|
| $ | 230 |
|
|
Special Items, Net Income – Yum China Holdings, Inc. |
|
| (2 | ) |
|
| (3 | ) |
|
Adjusted Net Income – Yum China Holdings, Inc. |
| $ | 102 |
|
| $ | 233 |
|
|
Reconciliation of EPS to Adjusted EPS |
|
|
|
|
|
|
| ||
Basic Earnings Per Common Share |
| $ | 0.23 |
|
| $ | 0.55 |
|
|
Special Items, Basic Earnings Per Common Share |
|
| (0.01 | ) |
|
| — |
|
|
Adjusted Basic Earnings Per Common Share |
| $ | 0.24 |
|
| $ | 0.55 |
|
|
Diluted Earnings Per Common Share |
| $ | 0.23 |
|
| $ | 0.53 |
|
|
Special Items, Diluted Earnings Per Common Share |
|
| (0.01 | ) |
|
| (0.01 | ) |
|
Adjusted Diluted Earnings Per Common Share |
| $ | 0.24 |
|
| $ | 0.54 |
|
|
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate |
|
|
|
|
|
|
| ||
Effective tax rate (See Note 13) |
|
| 33.1 | % |
|
| 29.6 | % |
|
Impact on effective tax rate as a result of Special Items |
|
| 0.4 | % |
|
| 0.3 | % |
|
Adjusted effective tax rate |
|
| 32.7 | % |
|
| 29.3 | % |
|
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Non-GAAP Reconciliations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Profit to Adjusted Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit |
| $ | 178 |
|
| $ | 556 |
|
| $ | 753 |
|
| $ | 781 |
|
|
Special Items, Operating Profit |
|
| 10 |
|
|
| 236 |
|
|
| 3 |
|
|
| 231 |
|
|
Adjusted Operating Profit |
| $ | 168 |
|
| $ | 320 |
|
| $ | 750 |
|
| $ | 550 |
|
|
Reconciliation of Net Income to Adjusted Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income - Yum China Holdings, Inc. |
| $ | 104 |
|
| $ | 439 |
|
| $ | 515 |
|
| $ | 633 |
|
|
Special Items, Net Income – Yum China Holdings, Inc. |
|
| 8 |
|
|
| 176 |
|
|
| 1 |
|
|
| 171 |
|
|
Adjusted Net Income - Yum China Holdings, Inc. |
| $ | 96 |
|
| $ | 263 |
|
| $ | 514 |
|
| $ | 462 |
|
|
Reconciliation of EPS to Adjusted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share |
| $ | 0.25 |
|
| $ | 1.13 |
|
| $ | 1.23 |
|
| $ | 1.67 |
|
|
Special Items, Basic Earnings Per Common Share |
|
| 0.02 |
|
|
| 0.45 |
|
|
| 0.01 |
|
|
| 0.46 |
|
|
Adjusted Basic Earnings Per Common Share |
| $ | 0.23 |
|
| $ | 0.68 |
|
| $ | 1.22 |
|
| $ | 1.21 |
|
|
Diluted Earnings Per Common Share |
| $ | 0.24 |
|
| $ | 1.10 |
|
| $ | 1.19 |
|
| $ | 1.62 |
|
|
Special Items, Diluted Earnings Per Common Share |
|
| 0.02 |
|
|
| 0.44 |
|
|
| 0.01 |
|
|
| 0.44 |
|
|
Adjusted Diluted Earnings Per Common Share |
| $ | 0.22 |
|
| $ | 0.66 |
|
| $ | 1.18 |
|
| $ | 1.18 |
|
|
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (See Note 12) |
|
| 28.3 | % |
|
| 25.6 | % |
|
| 27.7 | % |
|
| 26.3 | % |
|
Impact on effective tax rate as a result of Special Items |
|
| (0.5 | )% |
|
| (0.1 | )% |
|
| 0.1 | % |
|
| (0.1 | )% |
|
Adjusted effective tax rate |
|
| 28.8 | % |
|
| 25.7 | % |
|
| 27.6 | % |
|
| 26.4 | % |
|
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 |
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
|
| 3/31/2022 |
|
| 3/31/2021 |
| |||||||
Net Income — Yum China Holdings, Inc. |
| $ | 104 |
|
| $ | 439 |
|
| $ | 515 |
|
| $ | 633 |
|
| |||||||||
Net Income — noncontrolling interests |
|
| 7 |
|
|
| 11 |
|
|
| 32 |
|
|
| 19 |
|
| |||||||||
Net Income – Yum China Holdings, Inc. |
| $ | 100 |
| $ | 230 |
|
| ||||||||||||||||||
Net Income – noncontrolling interests |
| 10 |
| 13 |
| |||||||||||||||||||||
Equity in net (earnings) losses from equity method investments |
| 1 |
| — |
| |||||||||||||||||||||
Income tax provision |
|
| 44 |
|
|
| 155 |
|
|
| 210 |
|
|
| 232 |
|
|
| 55 |
| 102 |
| ||||
Interest income, net |
|
| (16 | ) |
|
| (11 | ) |
|
| (47 | ) |
|
| (28 | ) |
|
| (12 | ) |
| (15 | ) |
| ||
Investment loss (gain) |
|
| 39 |
|
|
| (38 | ) |
|
| 43 |
|
|
| (75 | ) |
| |||||||||
Investment loss |
| 37 |
| 12 |
|
| ||||||||||||||||||||
Operating Profit |
|
| 178 |
|
|
| 556 |
|
|
| 753 |
|
|
| 781 |
|
|
|
| 191 |
|
|
| 342 |
|
|
Special Items, Operating Profit |
|
| (10 | ) |
|
| (236 | ) |
|
| (3 | ) |
|
| (231 | ) |
|
|
| 2 |
|
|
| 3 |
|
|
Adjusted Operating Profit |
|
| 168 |
|
|
| 320 |
|
|
| 750 |
|
|
| 550 |
|
|
| 193 |
| 345 |
|
| |||
Depreciation and amortization |
|
| 128 |
|
|
| 113 |
|
|
| 380 |
|
|
| 327 |
|
|
| 164 |
| 128 |
|
| |||
Store impairment charges |
|
| 4 |
|
|
| 3 |
|
|
| 23 |
|
|
| 39 |
|
|
|
| 8 |
|
|
| 3 |
|
|
Adjusted EBITDA |
| $ | 300 |
|
| $ | 436 |
|
| $ | 1,153 |
|
| $ | 916 |
|
|
| $ | 365 |
|
| $ | 476 |
|
|
28
Details of Special Items are presented below:
|
| Quarter Ended |
|
| |||||
Details of Special Items |
| 3/31/2022 |
|
| 3/31/2021 |
|
| ||
Share-based compensation expense for Partner PSU Awards(1) |
| $ | (2 | ) |
| $ | (3 | ) |
|
Special Items, Operating Profit |
|
| (2 | ) |
|
| (3 | ) |
|
Tax Expenses on Special Items(2) |
|
| — |
|
|
| — |
|
|
Special items, net income – including noncontrolling interests |
|
| (2 | ) |
|
| (3 | ) |
|
Special items, net income – noncontrolling interests |
|
| — |
|
|
| — |
|
|
Special Items, Net Income – Yum China Holdings, Inc. |
| $ | (2 | ) |
| $ | (3 | ) |
|
Weighted-average diluted shares outstanding (in millions) |
|
| 430 |
|
|
| 434 |
|
|
Special Items, Diluted Earnings Per Common Share |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
|
|
| Quarter Ended |
|
| Year to Date Ended |
| |||||||||||
Details of Special Items |
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Gain from re-measurement of previously held equity interest(1) |
| $ | 10 |
|
| $ | 239 |
|
| $ | 10 |
|
| $ | 239 |
|
|
Share-based compensation expense for Partner PSU Awards(2) |
|
| — |
|
|
| (3 | ) |
|
| (7 | ) |
|
| (5 | ) |
|
Derecognition of indemnification assets related to Daojia(3) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
Special Items, Operating Profit |
|
| 10 |
|
|
| 236 |
|
|
| 3 |
|
|
| 231 |
|
|
Tax Expenses on Special Items(4) |
|
| (2 | ) |
|
| (60 | ) |
|
| (2 | ) |
|
| (60 | ) |
|
Special items, net income – including noncontrolling interests |
|
| 8 |
|
|
| 176 |
|
|
| 1 |
|
|
| 171 |
|
|
Special items, net income – noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
Special Items, Net income – Yum China Holdings, Inc. |
| $ | 8 |
|
| $ | 176 |
|
| $ | 1 |
|
| $ | 171 |
|
|
Weighted-average diluted shares outstanding (in millions) |
|
| 435 |
|
|
| 400 |
|
|
| 435 |
|
|
| 391 |
|
|
Special Items, Diluted Earnings Per Common Share |
| $ | 0.02 |
|
| $ | 0.44 |
|
| $ | 0.01 |
|
| $ | 0.44 |
|
|
|
|
(2) In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address
increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant similar special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized share-based compensation costexpenses of nil$2 million and $7$3 million associated with the Partner PSU Awards for the quarterquarters ended March 31, 2022 and year to date ended September 30, 2021, respectively, and $3 million and $5 million for the quarter and year to date ended September 30, 2020, respectively.
(3) In the quarter ended June 30, 2020, the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right pursuant to the purchase agreement expired.
(4) The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate.
The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation and amortization, store impairment charges and Special Items. Store impairment charges included as an adjustment item in Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants, and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If these restaurant-level assets were not impaired, depreciation of the assets would have been recorded and included in EBITDA. Therefore, store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants. The Company believes that investors and analystanalysts may find it useful in measuring operating performance without regard to such non-cash item.
These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these adjusted measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.
29
Segment Results
KFC
|
| Quarter Ended |
| ||||||||||||||||
|
|
|
|
|
|
|
| % B/(W) |
| ||||||||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| Reported |
| Ex F/X |
| ||||||||
Company sales |
| $ | 1,991 |
|
| $ | 1,783 |
|
|
| 12 |
|
|
|
| 9 |
|
|
|
Franchise fees and income |
|
| 16 |
|
|
| 33 |
|
|
| (51 | ) |
|
|
| (52 | ) |
|
|
Revenues from transactions with |
|
| 8 |
|
|
| 15 |
|
|
| (47 | ) |
|
|
| (48 | ) |
|
|
Other revenues |
|
| 2 |
|
|
| 1 |
|
|
| 53 |
|
|
|
| 49 |
|
|
|
Total revenues |
| $ | 2,017 |
|
| $ | 1,832 |
|
|
| 10 |
|
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restaurant profit |
| $ | 302 |
|
| $ | 355 |
|
|
| (15 | ) |
|
|
| (17 | ) |
|
|
Restaurant margin % |
|
| 15.2 | % |
|
| 19.9 | % |
|
| (4.7 | ) | ppts. |
|
| (4.7 | ) | ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
G&A expenses |
| $ | 65 |
|
| $ | 55 |
|
|
| (20 | ) |
|
|
| (17 | ) |
|
|
Franchise expenses |
| $ | 9 |
|
| $ | 16 |
|
|
| 47 |
|
|
|
| 48 |
|
|
|
Expenses for transactions with |
| $ | 8 |
|
| $ | 15 |
|
|
| 50 |
|
|
|
| 51 |
|
|
|
Other operating costs and expenses |
| $ | 1 |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| ||
Closures and impairment (income) expenses, net |
| $ | (1 | ) |
| $ | — |
|
| NM |
|
|
| NM |
|
|
| ||
Other expenses (income), net |
| $ | 26 |
|
| $ | (9 | ) |
| NM |
|
|
| NM |
|
|
| ||
Operating Profit |
| $ | 220 |
|
| $ | 327 |
|
|
| (33 | ) |
|
|
| (34 | ) |
|
|
Quarter Ended 3/31/2022 | ||||||
% Change | ||||||
System Sales Decline | (2 | )% | ||||
System Sales Decline, excluding F/X | (4 | )% | ||||
Same-Store Sales Decline | (9 | )% |
Unit Count |
| 3/31/2022 |
|
| 3/31/2021 |
|
| % Increase |
| |||
Company-owned(a) |
|
| 7,668 |
|
|
| 6,030 |
|
|
| 27 |
|
Unconsolidated affiliates(a) |
|
| — |
|
|
| 704 |
|
|
| (100 | ) |
Franchisees |
|
| 773 |
|
|
| 639 |
|
|
| 21 |
|
|
|
| 8,441 |
|
|
| 7,373 |
|
|
| 14 |
|
|
| Quarter Ended |
| Year to Date Ended |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
| % B/(W) |
| ||||||||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
| ||||||||||||||||
Company sales |
| $ | 1,750 |
|
| $ | 1,597 |
|
|
| 10 |
|
|
|
| 3 |
|
|
| $ | 5,220 |
|
| $ | 4,077 |
|
|
| 28 |
|
|
|
| 19 |
|
|
|
Franchise fees and income |
|
| 32 |
|
|
| 32 |
|
|
| - |
|
|
|
| (7 | ) |
|
|
| 95 |
|
|
| 97 |
|
|
| (2 | ) |
|
|
| (9 | ) |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 17 |
|
|
| 16 |
|
|
| 1 |
|
|
|
| (6 | ) |
|
|
| 46 |
|
|
| 47 |
|
|
| (3 | ) |
|
|
| (11 | ) |
|
|
Other revenues |
|
| 2 |
|
|
| 1 |
|
| NM |
|
|
| NM |
|
|
|
| 6 |
|
|
| 1 |
|
| NM |
|
|
| NM |
|
|
| ||||
Total revenues |
| $ | 1,801 |
|
| $ | 1,646 |
|
|
| 9 |
|
|
|
| 2 |
|
|
| $ | 5,367 |
|
| $ | 4,222 |
|
|
| 27 |
|
|
|
| 18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
| $ | 238 |
|
| $ | 310 |
|
|
| (23 | ) |
|
|
| (28 | ) |
|
| $ | 877 |
|
| $ | 659 |
|
|
| 33 |
|
|
|
| 23 |
|
|
|
Restaurant margin % |
|
| 13.6 | % |
|
| 19.4 | % |
|
| (5.8 | ) | ppts. |
|
| (5.8 | ) | ppts. |
|
| 16.8 | % |
|
| 16.2 | % |
|
| 0.6 |
| ppts. |
|
| 0.6 |
| ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
| $ | 62 |
|
| $ | 50 |
|
|
| (25 | ) |
|
|
| (17 | ) |
|
| $ | 175 |
|
| $ | 138 |
|
|
| (27 | ) |
|
|
| (18 | ) |
|
|
Franchise expenses |
| $ | 16 |
|
| $ | 16 |
|
|
| 2 |
|
|
|
| 8 |
|
|
| $ | 47 |
|
| $ | 48 |
|
|
| 2 |
|
|
|
| 10 |
|
|
|
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 16 |
|
| $ | 16 |
|
|
| 1 |
|
|
|
| 7 |
|
|
| $ | 45 |
|
| $ | 47 |
|
|
| 5 |
|
|
|
| 12 |
|
|
|
Other operating costs and expenses |
| $ | 2 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
| $ | 3 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
| ||||
Closures and impairment expenses, net |
| $ | 1 |
|
| $ | 1 |
|
| NM |
|
|
| NM |
|
|
| $ | 7 |
|
| $ | 12 |
|
|
| 33 |
|
|
|
| 39 |
|
|
| ||
Other income, net |
| $ | (4 | ) |
| $ | (10 | ) |
|
| (65 | ) |
|
|
| (68 | ) |
|
| $ | (16 | ) |
| $ | (39 | ) |
|
| (60 | ) |
|
|
| (63 | ) |
|
|
Operating Profit |
| $ | 196 |
|
| $ | 286 |
|
|
| (31 | ) |
|
|
| (36 | ) |
|
| $ | 763 |
|
| $ | 598 |
|
|
| 27 |
|
|
|
| 18 |
|
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
| |||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
System Sales Growth (Decline) |
|
| 8 | % |
|
| 1 | % |
|
| 21 | % |
|
| (9 | )% |
|
System Sales Growth (Decline), excluding F/X |
|
| 1 | % |
|
| (1 | )% |
|
| 12 | % |
|
| (7 | )% |
|
Same-Store Sales Decline |
|
| (8 | )% |
|
| (6 | )% |
|
| - |
|
|
| (9 | )% |
|
Unit Count |
| 9/30/2021 |
|
| 9/30/2020 |
|
| % Increase |
| |||
Company-owned |
|
| 6,450 |
|
|
| 5,672 |
|
|
| 14 |
|
Unconsolidated affiliates |
|
| 762 |
|
|
| 663 |
|
|
| 15 |
|
Franchisees |
|
| 696 |
|
|
| 590 |
|
|
| 18 |
|
|
|
| 7,908 |
|
|
| 6,925 |
|
|
| 14 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
| Quarter Ended |
|
| Quarter Ended |
|
| ||||||||||||||||||||||||||||||||||||
Income (Expense) |
| 9/30/2020 |
|
|
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2021 |
|
| 3/31/2021 |
|
| Store |
|
| Other |
|
| F/X |
|
| 3/31/2022 |
|
| ||||||||||
Company sales |
| $ | 1,597 |
|
|
|
| $ | 171 |
|
| $ | (127 | ) |
| $ | 109 |
|
| $ | 1,750 |
|
| $ | 1,783 |
| $ | 326 |
| $ | (158 | ) |
| $ | 40 |
| $ | 1,991 |
| ||||
Cost of sales |
|
| (504 | ) |
| (55 | ) |
|
| 28 |
|
|
| (36 | ) |
|
| (567 | ) |
|
| (540 | ) |
| (102 | ) |
| 34 |
| (13 | ) |
| (621 | ) |
| ||||||||
Cost of labor |
|
| (330 | ) |
| (47 | ) |
|
| (21 | ) |
|
| (27 | ) |
|
| (425 | ) |
|
| (398 | ) |
| (90 | ) |
| (3 | ) |
| (10 | ) |
| (501 | ) |
| |||||||
Occupancy and other operating expenses |
|
| (453 | ) |
|
| (48 | ) |
|
| 15 |
|
|
| (34 | ) |
|
| (520 | ) |
|
| (490 | ) |
|
| (95 | ) |
|
| 29 |
|
|
| (11 | ) |
|
| (567 | ) |
| ||
Restaurant profit |
| $ | 310 |
|
| $ | 21 |
|
| $ | (105 | ) |
| $ | 12 |
|
| $ | 238 |
|
| $ | 355 |
|
| $ | 39 |
|
| $ | (98 | ) |
| $ | 6 |
|
| $ | 302 |
|
|
|
| Year to Date Ended |
|
| |||||||||||||||||
Income (Expense) |
| 9/30/2020 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2021 |
|
| |||||
Company sales |
| $ | 4,077 |
|
| $ | 752 |
|
| $ | 4 |
|
| $ | 387 |
|
| $ | 5,220 |
|
|
Cost of sales |
|
| (1,315 | ) |
|
| (239 | ) |
|
| 46 |
|
|
| (121 | ) |
|
| (1,629 | ) |
|
Cost of labor |
|
| (888 | ) |
|
| (165 | ) |
|
| (71 | ) |
|
| (90 | ) |
|
| (1,214 | ) |
|
Occupancy and other operating expenses |
|
| (1,215 | ) |
|
| (179 | ) |
|
| 6 |
|
|
| (112 | ) |
|
| (1,500 | ) |
|
Restaurant profit |
| $ | 659 |
|
| $ | 169 |
|
| $ | (15 | ) |
| $ | 64 |
|
| $ | 877 |
|
|
30
The increase in Company sales for the quarter,, excluding the impact of F/X, was attributable toprimarily driven by net unit growth including the acquisition of SuzhouHangzhou KFC, partially offset bysame-store sales decline.decline and temporary store closures due to the impact of the COVID-19 pandemic. The decrease in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline, higher promotion costs, wage inflation of 5%, higher packaging costs, increased rider cost associated with the rise in delivery volume and lower temporary relief provided by landlords and government agencies, partially offset by net unit growth including the acquisition of Suzhou KFC and favorable commodity prices.
The year to date increase in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by net unit growth including the acquisition of Suzhou KFC, favorable commodity prices, same-store sales growth and fewer temporary store closures, partially offset by lower temporary relief provided by landlords and government agencies, higher promotion costs, wage inflation of 4%, increased rider cost associated with thea rise of approximately six percentage points in delivery volumesales mixfrom the prior year period due to more severe outbreaks and higher packaging costs.commodity inflation of 2%, partially offset by the increase in Company sales.
Franchise Fees and IncomeIncome/Revenues from Transactions with Franchisees and Unconsolidated Affiliates
The decrease in Franchise fees and income and Revenues from transactions with franchisees and unconsolidated affiliates for the quarter, excluding the impact of F/X, was primarily driven by the acquisition of SuzhouHangzhou KFC and same-store sales decline, partially offset by the net unit growth.in December 2021.
The year to date decrease in Franchise fees and income, excluding the impact of F/X, was primarily driven by the acquisition of Suzhou KFC, partially offset by the net unit growth and fewer temporary store closures.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs.
The year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs, the acquisition of SuzhouHangzhou KFC in December 2021 and lapping one-time reductions in social security contributions in 2020.merit increases.
Operating Profit
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and higher G&A expenses.profit.
The year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower store impairment charges, partially offset by higher G&A expenses.
Pizza Hut
|
| Quarter Ended |
| Year to Date Ended |
|
| Quarter Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| |||||||||||||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| Reported |
| Ex F/X |
| ||||||||||||||||||||||||
Company sales |
| $ | 546 |
|
| $ | 508 |
|
|
| 7 |
|
|
|
| - |
|
|
| $ | 1,617 |
|
| $ | 1,252 |
|
|
| 29 |
|
|
|
| 19 |
|
|
|
| $ | 542 |
| $ | 538 |
| 1 |
| (1 | ) |
| |||||||
Franchise fees and income |
|
| 2 |
|
|
| 2 |
|
|
| 20 |
|
|
|
| 12 |
|
|
|
| 6 |
|
|
| 4 |
|
|
| 41 |
|
|
|
| 31 |
|
|
|
| 2 |
| 2 |
| 7 |
| 5 |
| ||||||||||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 2 |
|
|
| 1 |
|
|
| 55 |
|
|
|
| 44 |
|
|
|
| 5 |
|
|
| 3 |
|
|
| 72 |
|
|
|
| 59 |
|
|
|
| 1 |
| 1 |
| (28 | ) |
| (29 | ) |
| ||||||||
Other revenues |
|
| 1 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
|
| 2 |
|
|
| — |
|
| NM |
|
|
| NM |
|
|
|
|
| 2 |
|
|
| — |
|
| NM |
|
| NM |
|
| ||||||||
Total revenues |
| $ | 551 |
|
| $ | 511 |
|
|
| 8 |
|
|
|
| 1 |
|
|
| $ | 1,630 |
|
| $ | 1,259 |
|
|
| 29 |
|
|
|
| 20 |
|
|
|
| $ | 547 |
|
| $ | 541 |
|
|
| 1 |
| (1 | ) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Restaurant profit |
| $ | 44 |
|
| $ | 84 |
|
|
| (47 | ) |
|
|
| (51 | ) |
|
| $ | 196 |
|
| $ | 132 |
|
|
| 48 |
|
|
|
| 37 |
|
|
|
| $ | 58 |
| $ | 82 |
| (29 | ) |
| (31 | ) |
| ||||||
Restaurant margin % |
|
| 8.2 | % |
|
| 16.7 | % |
|
| (8.5 | ) | ppts. |
|
| (8.5 | ) | ppts. |
|
| 12.2 | % |
|
| 10.6 | % |
|
| 1.6 |
| ppts. |
|
| 1.6 |
| ppts. |
|
| 10.7 | % |
|
| 15.3 | % |
|
| (4.6 | ) | ppts. |
| (4.6 | ) | ppts. |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
G&A expenses |
| $ | 27 |
|
| $ | 24 |
|
|
| (14 | ) |
|
|
| (6 | ) |
|
| $ | 80 |
|
| $ | 71 |
|
|
| (13 | ) |
|
|
| (4 | ) |
|
|
| $ | 29 |
| $ | 25 |
| (15 | ) |
| (13 | ) |
| ||||||
Franchise expenses |
| $ | 1 |
|
| $ | 1 |
|
|
| (29 | ) |
|
|
| (20 | ) |
|
| $ | 3 |
|
| $ | 2 |
|
|
| (33 | ) |
|
|
| (23 | ) |
|
|
| $ | 1 |
| $ | 1 |
| (5 | ) |
| (3 | ) |
| ||||||
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 2 |
|
| $ | 1 |
|
|
| (46 | ) |
|
|
| (36 | ) |
|
| $ | 5 |
|
| $ | 3 |
|
|
| (63 | ) |
|
|
| (51 | ) |
|
|
| $ | 1 |
| $ | 1 |
| 29 |
| 30 |
| ||||||||
Other operating costs and expenses |
| $ | 1 |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | 1 |
|
| $ | — |
|
|
| (12 | ) |
|
|
| (3 | ) |
|
|
| $ | 1 |
| $ | — |
| NM |
|
| NM |
|
| ||||||||
Closures and impairment expenses, net |
| $ | — |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | 3 |
|
| $ | 15 |
|
|
| 81 |
|
|
|
| 83 |
|
|
| |||||||||||||||||||||
Closures and impairment expenses (income), net |
| $ | 1 |
| $ | (2 | ) |
| NM |
|
| NM |
|
| ||||||||||||||||||||||||||||||||||||||||||
Operating Profit |
| $ | 18 |
|
| $ | 61 |
|
|
| (69 | ) |
|
|
| (71 | ) |
|
| $ | 117 |
|
| $ | 48 |
|
|
| 141 |
|
|
|
| 124 |
|
|
|
| $ | 30 |
| $ | 60 |
| (50 | ) |
| (51 | ) |
|
|
| Quarter Ended |
|
| Year to Date Ended |
|
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
System Sales Growth (Decline) |
|
| 8 | % |
|
| (5 | )% |
|
| 30 | % |
|
| (20 | )% |
|
System Sales Growth (Decline), excluding F/X |
|
| 1 | % |
|
| (6 | )% |
|
| 20 | % |
|
| (19 | )% |
|
Same-Store Sales (Decline) Growth |
|
| (5 | )% |
|
| (7 | )% |
|
| 11 | % |
|
| (16 | )% |
|
Quarter Ended 3/31/2022 | |||||
% Change | |||||
System Sales Growth | 1 | % | |||
System Sales Decline, excluding F/X | (1 | )% | |||
Same-Store Sales Decline | (5 | )% |
Unit Count |
| 9/30/2021 |
|
| 9/30/2020 |
|
| % Increase |
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| % Increase |
| ||||||
Company-owned |
|
| 2,369 |
|
|
| 2,155 |
|
|
| 10 |
|
| 2,543 |
| 2,255 |
| 13 |
| |||||
Franchisees |
|
| 134 |
|
|
| 122 |
|
|
| 10 |
|
|
| 136 |
|
|
| 127 |
|
|
| 7 |
|
|
|
| 2,503 |
|
|
| 2,277 |
|
|
| 10 |
|
|
| 2,679 |
|
|
| 2,382 |
|
|
| 12 |
|
31
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
| Quarter Ended |
| Quarter Ended |
| ||||||||||||||||||||||||||||||||||
Income (Expense) |
| 9/30/2020 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2021 |
| 3/31/2021 |
|
| Store |
|
| Other |
|
| F/X |
|
| 3/31/2022 |
| ||||||||||
Company sales |
| $ | 508 |
|
| $ | 29 |
|
| $ | (25 | ) |
| $ | 34 |
|
| $ | 546 |
| $ | 538 |
|
| $ | 18 |
| $ | (25 | ) |
| $ | 11 |
| $ | 542 |
| ||
Cost of sales |
|
| (152 | ) |
|
| (9 | ) |
|
| - |
|
|
| (12 | ) |
|
| (173 | ) |
| (160 | ) |
|
| (5 | ) |
| 3 |
| (4 | ) |
| (166 | ) | ||||
Cost of labor |
|
| (124 | ) |
|
| (9 | ) |
|
| (17 | ) |
|
| (11 | ) |
|
| (161 | ) |
| (143 | ) |
|
| (9 | ) |
| (2 | ) |
| (3 | ) |
| (157 | ) | |||
Occupancy and other operating expenses |
|
| (148 | ) |
|
| (9 | ) |
|
| (1 | ) |
|
| (10 | ) |
|
| (168 | ) |
| (153 | ) |
|
| (9 | ) |
|
| 4 |
|
|
| (3 | ) |
|
| (161 | ) |
Restaurant profit |
| $ | 84 |
|
| $ | 2 |
|
| $ | (43 | ) |
| $ | 1 |
|
| $ | 44 |
| $ | 82 |
|
| $ | (5 | ) |
| $ | (20 | ) |
| $ | 1 |
|
| $ | 58 |
|
|
| Year to Date Ended |
|
| |||||||||||||||||
Income (Expense) |
| 9/30/2020 |
|
| Store Portfolio Actions |
|
| Other |
|
| F/X |
|
| 9/30/2021 |
|
| |||||
Company sales |
| $ | 1,252 |
|
| $ | 103 |
|
| $ | 141 |
|
| $ | 121 |
|
| $ | 1,617 |
|
|
Cost of sales |
|
| (388 | ) |
|
| (31 | ) |
|
| (37 | ) |
|
| (37 | ) |
|
| (493 | ) |
|
Cost of labor |
|
| (339 | ) |
|
| (25 | ) |
|
| (52 | ) |
|
| (34 | ) |
|
| (450 | ) |
|
Occupancy and other operating expenses |
|
| (393 | ) |
|
| (25 | ) |
|
| (24 | ) |
|
| (36 | ) |
|
| (478 | ) |
|
Restaurant profit |
| $ | 132 |
|
| $ | 22 |
|
| $ | 28 |
|
| $ | 14 |
|
| $ | 196 |
|
|
The slight increasedecrease in Company sales for the quarter, excluding the impact of F/X,, was attributableprimarily 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, partially offset bysame-store sales decline.growth. The decrease in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline, wage inflation of 8%, increased rider cost associated with the rise in delivery volume, higher promotion costs, lower temporary relief provided by landlords and government agencies and higher packaging costs, partially offset by favorable commodity prices.
The year to date increasedecrease in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales growth, favorable commodity prices and fewer temporary store closures, partially offset by lower temporary relief provided by landlords and government agencies, wage inflation of 5% and higher promotion costs.6%.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs.merit increases.
The year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs and lapping one-time reductions in social security contributions in 2020.
Operating Profit
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and higher G&A expenses.profit.
The year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower store impairment charges, partially offset by higher G&A expenses.
All Other Segments
All Other Segments reflects the results of Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, East Dawning, Taco Bell, Lavazza,East Dawning, Daojia and our e-commerce business.
|
| Quarter Ended |
| Year to Date Ended |
|
|
|
| Quarter Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
| |||||||||||||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
| Ex F/X |
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| Reported |
| Ex F/X |
| ||||||||||||||||||||||||
Company sales |
| $ | 14 |
|
| $ | 13 |
|
|
| 7 |
|
|
|
| 1 |
|
|
| $ | 37 |
|
| $ | 29 |
|
|
| 27 |
|
|
|
| 18 |
|
|
|
| $ | 15 |
|
| $ | 10 |
|
|
| 38 |
| 35 |
|
| ||||
Franchise fees and income |
|
| 6 |
|
|
| 6 |
|
|
| (3 | ) |
|
|
| (9 | ) |
|
|
| 19 |
|
|
| 11 |
|
|
| 71 |
|
|
|
| 58 |
|
|
|
| 6 |
|
|
| 7 |
|
|
| (11 | ) |
| (13 | ) |
|
| |||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
| 26 |
|
|
| 18 |
|
|
| 47 |
|
|
|
| 38 |
|
|
|
| 75 |
|
|
| 34 |
|
| NM |
|
|
| NM |
|
|
|
| 11 |
|
|
| 26 |
|
|
| (59 | ) |
| (60 | ) |
|
| |||||
Other revenues |
|
| 88 |
|
|
| 36 |
|
| NM |
|
|
| NM |
|
|
|
| 187 |
|
|
| 77 |
|
| NM |
|
|
| NM |
|
|
|
|
| 131 |
|
|
| 35 |
|
| NM |
|
| NM |
|
|
| |||||||
Total revenues |
| $ | 134 |
|
| $ | 73 |
|
|
| 84 |
|
|
|
| 73 |
|
|
| $ | 318 |
|
| $ | 151 |
|
| NM |
|
|
| NM |
|
|
|
| $ | 163 |
|
| $ | 78 |
|
| NM |
|
| NM |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Restaurant loss |
| $ | — |
|
| $ | — |
|
| NM |
|
|
| NM |
|
|
| $ | (3 | ) |
| $ | (3 | ) |
|
| (35 | ) |
|
|
| (25 | ) |
|
|
| $ | (7 | ) |
| $ | (2 | ) |
| NM |
|
| NM |
|
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| |||||
Restaurant margin % |
|
| (9.5 | )% |
|
| (0.4 | )% |
|
| (9.1 | ) | ppts. |
|
| (9.1 | ) | ppts. |
|
| (10.0 | )% |
|
| (9.4 | )% |
|
| (0.6 | ) | ppts. |
|
| (0.6 | ) | ppts. |
|
| (50.9 | )% |
|
| (13.3 | )% |
|
| (37.6 | ) | ppts. |
| (37.6 | ) | ppts. |
| ||
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| |||||||
G&A expenses |
| $ | 11 |
|
| $ | 11 |
|
|
| 2 |
|
|
|
| 8 |
|
|
| $ | 30 |
|
| $ | 30 |
|
|
| - |
|
|
|
| 7 |
|
|
|
| $ | 13 |
|
| $ | 9 |
|
|
| (37 | ) |
| (34 | ) |
|
| ||
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 24 |
|
| $ | 13 |
|
|
| (79 | ) |
|
|
| (69 | ) |
|
| $ | 69 |
|
| $ | 26 |
|
| NM |
|
|
| NM |
|
|
|
| $ | 9 |
|
| $ | 24 |
|
|
| 61 |
| 62 |
|
| ||||||
Other operating costs and expenses |
| $ | 87 |
|
| $ | 33 |
|
| NM |
|
|
| NM |
|
|
| $ | 183 |
|
| $ | 69 |
|
| NM |
|
|
| NM |
|
|
|
| $ | 134 |
|
| $ | 33 |
|
| NM |
|
| NM |
|
|
| |||||||
Closures and impairment expenses, net |
| $ | 1 |
|
| $ | — |
|
|
| (81 | ) |
|
|
| (68 | ) |
|
| $ | 3 |
|
| $ | 3 |
|
|
| 40 |
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|
|
| 45 |
|
|
|
| $ | 2 |
|
| $ | — |
|
| NM |
|
| NM |
|
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| |||
Other expenses, net |
| $ | 3 |
|
| $ | 1 |
|
| NM |
|
|
| NM |
|
|
| $ | 8 |
|
| $ | 1 |
|
| NM |
|
|
| NM |
|
|
|
| $ | — |
|
| $ | 3 |
|
| NM |
|
| NM |
|
|
| |||||||
Operating (Loss) Profit |
| $ | (6 | ) |
| $ | 2 |
|
| NM |
|
|
| NM |
|
|
| $ | (15 | ) |
| $ | (10 | ) |
|
| (45 | ) |
|
|
| (32 | ) |
|
| |||||||||||||||||||||
Operating Loss |
| $ | (17 | ) |
| $ | (3 | ) |
| NM |
|
| NM |
|
|
|
|
| Quarter Ended |
|
| Year to Date Ended |
| |||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| ||||
Same-Store Sales (Decline) Growth |
|
| (9 | )% |
|
| (16 | )% |
|
| 3 | % |
|
| (24 | )% |
|
Quarter Ended 3/31/2022 | |||||
% Change | |||||
Same-Store Sales Decline | (15 | )% |
32
Total Revenues
The increase in Total revenues of all other segments for the quarter, excluding the impact of F/X, was primarily driven by the revenue generated by our delivery team for services provided to KFC and Pizza Hut restaurants.
The year to date increase in Total revenues of all other segments, excluding the impact of F/X, was primarily driven by theinter-segment revenue generated by our delivery team for services provided to KFC and Pizza Hut restaurants and the consolidation of Huang Ji Huang.the Lavazza joint venture.
Restaurant Loss
The increase in Restaurant loss for the quarter, excluding the impact of F/X, was primarily driven by the consolidation of the Lavazza joint venture.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by the consolidation of the Lavazza joint venture.
Operating (Loss) ProfitLoss
The increase in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by the increase of Operating loss from certain emerging brands, partially offset by Operating profit generated by Huang Ji Huang..
The year to date increase in Operating loss, excluding the impact of F/X, was primarily driven by the increase of Operating loss from certain emerging brands, partially offset by Operating profit generated by Huang Ji Huang consolidated since April 2020.
Corporate and Unallocated
|
| Quarter Ended |
|
| Year to Date Ended |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| % B/(W) |
|
|
|
|
|
|
|
|
|
| % B/(W) |
| ||||||||||
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
|
| Ex F/X |
|
| 9/30/2021 |
|
| 9/30/2020 |
|
| Reported |
|
| Ex F/X |
| ||||||||
Revenues from transactions with franchisees and unconsolidated affiliates |
| $ | 139 |
|
| $ | 135 |
|
|
| 3 |
|
|
| (4 | ) |
| $ | 393 |
|
| $ | 404 |
|
|
| (3 | ) |
|
| (10 | ) |
Other revenue |
| $ | 7 |
|
| $ | 2 |
|
| NM |
|
| NM |
|
| $ | 11 |
|
| $ | 4 |
|
| NM |
|
| NM |
| ||||
Expenses for transactions with franchisees and unconsolidated affiliates |
| $ | 138 |
|
| $ | 134 |
|
|
| (3 | ) |
|
| 4 |
|
| $ | 390 |
|
| $ | 404 |
|
|
| 3 |
|
|
| 11 |
|
Other operating costs and expenses |
| $ | 5 |
|
| $ | 1 |
|
| NM |
|
| NM |
|
| $ | 10 |
|
| $ | 3 |
|
| NM |
|
| NM |
| ||||
Corporate G&A expenses |
| $ | 42 |
|
| $ | 42 |
|
|
| (1 | ) |
|
| 3 |
|
| $ | 123 |
|
| $ | 100 |
|
|
| (23 | ) |
|
| (17 | ) |
Other unallocated income, net |
| $ | (9 | ) |
| $ | (247 | ) |
|
| (96 | ) |
|
| (96 | ) |
| $ | (7 | ) |
| $ | (244 | ) |
|
| (97 | ) |
|
| (97 | ) |
Interest income, net |
| $ | 16 |
|
| $ | 11 |
|
|
| 58 |
|
|
| 51 |
|
| $ | 47 |
|
| $ | 28 |
|
|
| 69 |
|
|
| 61 |
|
Investment (loss) gain |
| $ | (39 | ) |
| $ | 38 |
|
| NM |
|
| NM |
|
| $ | (43 | ) |
| $ | 75 |
|
| NM |
|
| NM |
| ||||
Income tax provision (See Note 12) |
| $ | (44 | ) |
| $ | (155 | ) |
|
| 72 |
|
|
| 73 |
|
| $ | (210 | ) |
| $ | (232 | ) |
|
| 10 |
|
|
| 15 |
|
Effective tax rate (See Note 12) |
|
| 28.3 | % |
|
| 25.6 | % |
|
| (2.7 | )% |
|
| (2.7 | )% |
|
| 27.7 | % |
|
| 26.3 | % |
|
| (1.4 | )% |
|
| (1.4 | )% |
|
| Quarter Ended |
|
| |||||||||||||
|
|
|
|
|
|
|
| % B/(W) |
|
| |||||||
|
| 3/31/2022 |
|
| 3/31/2021 |
|
| Reported |
|
| Ex F/X |
|
| ||||
Revenues from transactions with |
| $ | 57 |
|
| $ | 129 |
|
|
| (55 | ) |
|
| (56 | ) |
|
Other revenues |
| $ | 10 |
|
| $ | 2 |
|
| NM |
|
| NM |
|
| ||
Expenses for transactions with |
| $ | 57 |
|
| $ | 129 |
|
|
| 55 |
|
|
| 56 |
|
|
Other operating costs and expenses |
| $ | 9 |
|
| $ | 3 |
|
| NM |
|
| NM |
|
| ||
Corporate G&A expenses |
| $ | 44 |
|
| $ | 41 |
|
|
| (7 | ) |
|
| (5 | ) |
|
Other unallocated income, net |
| $ | (1 | ) |
| $ | — |
|
| NM |
|
| NM |
|
| ||
Interest income, net |
| $ | 12 |
|
| $ | 15 |
|
|
| (19 | ) |
|
| (20 | ) |
|
Investment loss |
| $ | (37 | ) |
| $ | (12 | ) |
| NM |
|
| NM |
|
| ||
Income tax provision (See Note 13) |
| $ | (55 | ) |
| $ | (102 | ) |
|
| 46 |
|
|
| 47 |
|
|
Equity in net earnings (losses) from |
| $ | (1 | ) |
| $ | — |
|
| NM |
|
| NM |
|
| ||
Effective tax rate (See Note 13) |
|
| 33.1 | % |
|
| 29.6 | % |
|
| (3.5 | )% |
|
| (3.5 | )% |
|
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
Revenues from transactions with franchisees and unconsolidated affiliates primarily include revenues derived from the Company’s central procurement model whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees and unconsolidated affiliates.affiliates that operate our concepts. The decrease for the quarter and year to date decrease,, excluding the impact of F/X, was mainly due to the acquisition of SuzhouHangzhou KFC partially offset byin December 2021.
Other Revenues/Operating Costs and Expenses
The increase in revenueOther revenues/operating costs and expenses for the quarter, excluding the impact of F/X, was mainly driven by system sales growth of franchiseeslogistics and unconsolidated affiliates.warehousing services provided to third parties.
G&A Expenses
The decreaseincrease in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily due to the decrease of share-based compensation expense for Partner PSU awards, partially offset by merit increases.
33
Investment Loss
The year to date increase in Corporate G&A expenses, excludinginvestment loss for the impact of F/X, was primarily due to higher compensation costs and lapping one-time reductions in social security contributions in 2020.
Other Unallocated Income, net
The quarters and years to date Other unallocated income in 2021 and 2020 mainly included the gain recorded from the re-measurement of our previously held equity interest in connection with the consolidation of the Lavazza joint venture and Suzhou KFC, respectively. See Note 6 for additional information.
Investment (Loss) Gain
The Investment (loss) gainquarter mainly relates to the changedecline in the fair value of our investment in Meituan, as well as our unrealizedpartially offset by lapping the investment loss from our investment in Sunner.Sunner recognized in the first quarter of 2021. See Note 67 for additional information.
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. The higher effective tax rate for the quarter ended September 30, 2021 was primarily dueMarch 31, 2022 as compared to the impact from our investment in equity securities of Meituan, higher planned repatriation of earnings outside of China subject to foreign withholding tax and increased valuation allowance for certain underperforming subsidiaries. The higher effective tax rate for theprior year to date ended September 30, 2021 was primarily due to higher planned repatriationimpact of earnings outside of China subject to foreign withholding tax increased valuation allowance for certain underperforming subsidiariesdue to lower pre-tax income and less tax benefit from equity income from investments in unconsolidated affiliates, partially offset by lower residual U.S. tax.affiliates.
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 and financial results. The results of third quarter of 2021 were significantly impacted by the Deltahighly transmissible Omicron variant outbreak that startedcaused significant volatility in late July. This regional outbreak was the most widely spread wave sinceour business operations in the first quarter of 2022. After a relatively stable period in January and February, the situation rapidly deteriorated in March, resulting in the largest outbreak in China since COVID-19 first emerged in early 2020. StrictAs a result, the Company incurred an operating loss in March 2022. Looking into the second quarter of 2022, the situation is even more challenging. Many cities across large swaths of China have been fully or partially locked down for weeks or even months, including several economically important regions, such as Shanghai. Drastic public health measures were implemented acrossare being stepped up nationwide, in line with the country, including closuresstrict enforcement of many tourist locations. These actions led to fewerthe “dynamic zero-COVID” policy, resulting in further reductions of social activities, substantially lower travel volume, and cancelled holiday trips.
Going intoconsumption. In April, over 3,000 of our stores, on average, were either temporarily closed or offered only takeaway and delivery services, of which approximately 50% of the fourth quarter, strict public health measures remain in effect nationwide. Continuing effects of COVID-19 persist, such as fewer social activities, cautious consumer spending and subdued travel volume. With the latest regional outbreaks resurging across approximately 20 provinces and rigorous preventative health measures remaining in force across the country, the Company continues to expect the recovery of same-store sales to take time, with a nonlinear and uneven path.stores were temporarily closed. Same-store sales are gradually recovering but remain belowin April decreased by more than 20%. Unless conditions significantly improve in May and June, we expect to incur an operating loss in the prior year and pre-COVID-19 levels, since overall dine-in volume as well as traffic at transportation hubs are still second quarter of 2022.
significantly impacted.
Management at this time cannot ascertain the extent to which our operations will continue to be impacted by the COVID-19 pandemic, which depends largely on future developments that are highly uncertain and cannot be accurately predicted, including resurgences and further spread of existing or new COVID-19 variants, the actions by government authorities to contain or treat its impact, the impact, changes in consumer behavior,availability and effectiveness of vaccines, the economic recovery within China and globally, the impact on consumer behavior and other related factors. The Company expects that further developments related to the COVID-19 pandemic may continue to have a material and extended adverse impact on the Company’s results of operations, as well as the Company’s cash flows and financial condition.
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, the Internal Revenue Service and other tax authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information and views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment and decision of the STA will depend upon further review of the information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.
Evolving Regulatory Landscape in China
Our business is subject to a complex and rapidly evolving set of laws and regulations in the U.S., China and elsewhere. In recent months, new laws, regulations and decisions have passed, and active proposals are being considered in China, in a variety of areas, including, for example, data security, privacy and cybersecurity,
indicating heightened scrutiny and tightened regulation by the authorities in these areas which can have a material impact on our business.
The PRC Data Security Law, which took effect on September 1, 2021, imposes data security and privacy obligations on entities and individuals carrying out data activities (including activities outside of the PRC), requires a national security review of data activities that may affect national security, and imposes restrictions on data transmissions. In addition, many specific requirements of the PRC Personal Information Protection Law, which took effect on November 1, 2021, and sets out the regulatory framework for handling and protection of personal information and transmission of personal information, remain to be clarified by the Cyberspace Administration of China and other regulatory authorities.34
The Company expects that data security, privacy and cybersecurity will continue to be a focus of the regulators in China, and that the regulatory requirements will continue to evolve. Complying with any additional or new regulatory requirements may impose significant burdens and costs on our operations, or require us to alter certain aspects of our business practices, and could adversely affect our business operations and financial results.
PRC Value-Added Tax (“VAT”)
Effective May 1, 2016, a 6% output VAT replaced the 5% business tax (“BT”) previously applied to certain restaurant sales. Input VAT would be creditable to the aforementioned 6% output VAT. The latest VAT rates imposed on our purchase of materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services, mainly including construction, transportation and leasing. However, the impact on our operating results is not expected to be significant.
Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity 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, giving consideration to the indefinite life of the input VAT credit assets as well as its forecasted operating results and capital spending, which inherently includes significant assumptions that are subject to change.
As of September 30, 2021,March 31, 2022, an input VAT credit asset of $281$324 million and payable of $6$3 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year from September 30, 2021.March 31, 2022. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the credit expected to be used within one year can be reasonably determined.
We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter.
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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 further discussion.
Condensed Consolidated Cash Flows
Our cash flows for the years to datequarters ended September 30,March 31, 2022 and 2021 and 2020 were as follows:
Net cash provided by operating activities was $1,074$171 million in 20212022 as compared to $899$331 million in 2020.2021. The increasedecrease was primarily driven by the increasedecrease in net income, excluding the non-cash gain of $239 million recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition in 2020, along with working capital changes.
Net cash provided by investing activities was $13 million in 2022 as compared to net cash used in investing activities was $743 of $347 million in 2021 as compared to $2,333 million in 2020.2021. The decreasechange was mainly due to lapping the impact of $261 million cash consideration for the acquisition of equity investment in Sunner in 2021 and net impact on cash flow resulting from purchases and maturities of short-term investments and less spending on acquisition of businesses, partially offset by the investment in Sunner and the increase in capital spending. .
Net cash used in financing activities was $220$274 million in 20212022 as compared to net cash provided by financing activities of $2,144$55 million in 2020.2021. The changeincrease was primarily due to lapping the impact resumption of share repurchases starting in the third quarter of 2021 andof $2.2 billion in proceeds raised from issuance of common stock in connection with our global offering and secondary listing on the Main Board of HKEX in September 2020, the increase in dividends paid on common stock and to noncontrolling interests andmainly due to the increase in share repurchases in the year to date ended September 30, 2021.acquisition of Hangzhou KFC.
35
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores, our franchise operations and dividend payments from our unconsolidated affiliates. Our global offering in September 2020 provided us with $2.2 billion in net proceeds.
Our ability to fund our future operations and capital needs will primarily depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and capital expenditures for accelerating store network expansion and store remodeling, to step up investments in digitalization, automation and logistics infrastructure, to provide returns to our stockholders, as well as to explore opportunities for acquisitions or investments that build and support our ecosystem. We believe that our future cash from operations, together with our funds on hand and access to the capital markets, will provide adequate resources to fund these uses of cash, and that our existing cash, 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.
Share Repurchases and Dividends
OurIn March 2022, our Board of Directors has authorizedincreased the share repurchase authorization by $1 billion to an aggregate of $1.4 billion for our share repurchase program.$2.4 billion. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. Starting in the second quarter of 2020 through July 2021, our share repurchases were suspended due to the impactsimpact of the COVID-19 pandemic. During the years to datequarter ended September 30, 2021 and 2020,March 31, 2022, the Company repurchased $34$232 million or 0.6 million shares and $7 million or 0.25.0 million shares of common stock respectively,under the repurchase program.
For the quarterquarters ended September 30,March 31, 2022 and 2021, the Company paid cash dividends of approximately $51 million and $50 million, respectively, to stockholders through a quarterly dividend payment of $0.12 per share.
On October 27, 2021,May 3, 2022, the Board of Directors declared a cash dividend of $0.12 per share, payable on December 16, 2021,June 21, 2022, to stockholders of record as of the close of business on November 24, 2021.May 31, 2022. The total estimated cash dividend payable is approximately $51 million.
Our ability to declare and pay any dividends on our stock may be restricted by our earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the Board 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.
36
Borrowing Capacity
As of September 30, 2021,March 31, 2022, the Company had credit facilities of RMB3,589RMB3,468 million (approximately $557$547 million), comprised of onshore credit facilities of RMB2,300RMB2,200 million (approximately $357$347 million) in aggregate and offshore credit facilities of $200 million in aggregate.
The credit facilities had remaining terms ranging from less than one year to threetwo years as of September 30, 2021.March 31, 2022. Each credit facility bears interest based on the Loan Prime Rate (“LPR”) published by the National Interbank Funding Centre of the PRC or London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Administration. Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facilities contain covenants limiting, among other things, certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sublimits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As of September 30, 2021,March 31, 2022, we had outstanding bank guarantees of RMB 142181 million (approximately $22$28 million) mainly to secure our lease paymentpayments to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the same amount, while there were no bank borrowings outstanding as of September 30, 2021.March 31, 2022.
Off-Balance Sheet Arrangements
See the Guarantees section of Note 1415 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 August 2020,October 2021, the FASB issued ASU 2020-06, Debt—Debt2021-08, Business Combinations (Topic 805) — Accounting for Contract Assets and Contract Liabilities from Contracts with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)Customers (“ASU 2020-06”2021-08”), which eliminates two of the three models. It requires issuers to apply ASC 606 Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in ASC 470-20 that require separate accounting for embedded conversion features and eliminates some of the conditions for equity classification in ASC 815-40 for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of share settlement for instruments that may be settled in cash or shares.a business combination. ASU 2020-062021-08 is effective for the Company from January 1, 2022,2023, with early adoption permitted. We are currently evaluating the impact the adoption of this standard willmay have on our financial statements.
In MayNovember 2021, the FASB issued ASU 2021-04, 2021-10, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options Government Assistance (Topic 832)— Disclosures by Business Entities about Government Assistance (“ASU 2021-04”2021-10”).It requires issuers to account for a modification or exchange of freestanding equity-classified written call options that remain equity classified aftermake annual disclosures about government assistance, including the modification or exchange based on the economic substancenature of the modification or exchange.transaction, the related accounting policy, the financial statement line items affected and the amounts applicable to each financial statement line item, as well as any significant terms and conditions, including commitments and contingencies. We will adopt ASU 2021-042021-10 in the fourth quarter of 2022, and do not expect the adoption of this standard will have a material impact on our financial statements.
In March 2022, the FASB issued ASU 2022-01Fair Value Hedging—Portfolio Layer Method (“ASU 2022-01”), which allows entities to expand their use of the portfolio layer method for fair value hedges of interest rate risk. Under the guidance, entities can hedge all financial assets under the portfolio layer method and designate multiple hedged layers within a single closed portfolio. The guidance also clarifies the accounting for fair value hedge basis adjustments in portfolio layer hedges and how these adjustments should be disclosed. ASU 2022-01 is effective for the Company from January 1, 2022,2023 with early adoption permitted. We are currently evaluating the impact the adoption of this standard willmay have on our financial statements.
In July 2021,March 2022, the FASB issued ASU 2021-05, Lessors—Certain Leases with Variable Lease 2022-02(“ASU 2021-05”). ItFinancial Instrument—Credit Losses (“ASU 2022-02”), amending ASC 310 to eliminate the recognition and measurement guidance for a troubled debt restructuring for creditors that have adopted ASC 326 and requiring them to make enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The guidance also requires lessorsentities to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type or direct financing leases.present gross write-offs by year of origination in their vintage disclosures. ASU 2021-052022-02 is effective for the Company from January 1, 2022,2023 with early adoption permitted. We are currently evaluating the impact the adoption of this standard willmay have on our financial statements.
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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,” “aim,” “commit,” “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 foodborne illness concerns, (b) significant failure to maintain effective quality assurance systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, including the COVID-19 pandemic, (e) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (f) the fact that substantially all of our revenue is derived from our operations in China, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals, the potential cannibalization of existing sales by aggressive development and the possibility that new restaurants will not be profitable, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to Lavazza and COFFii & JOY may not be successful, (u) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (v) challenges and risks related to our new retail and e-commerce businesses, (w) our inability or failure to recognize, respond to and effectively manage the impact of social media, (x) failure to comply with anti-bribery or anti-corruption laws, (y) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (z) changes in consumer discretionary spending and general economic conditions, (aa) the fact that the restaurant industry in which we operate is highly competitive, (bb) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (cc) our inability to adequately protect the intellectual property we own or have the right to use, (dd) our licensor’s failure to protect its intellectual property, (ee) seasonality and certain major events in China, (ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (gg) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (hh) our strategic investments or acquisitions may be unsuccessful; (ii) our investment in technology and innovation may not generate the expected level of returns, (jj) fair value changes for our investment in equity securities and lower yields of our short-term investments may adversely affect our financial condition and results of operations, and (kk) our operating results may be adversely affected by our investment in unconsolidated affiliates; • Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, (c) audit reports included in our annual reports are prepared by auditors who are not currently inspected by the Public Company Accounting Oversight Board and, as such, our stockholders are deprived of the benefits of such inspection and our common stock is subject to the risk of delisting from the New York Stock Exchange in the future, (d) changes in political, business, economic and trade relations between the United States and China, (e) fluctuation in the value of the Chinese Renminbi, (f) the fact that we face increasing focus on environmental sustainability issues, (g) limitations on our ability to utilize our cash balances effectively due to governmental control of currency conversion and payments of foreign currency and the Chinese Renminbi out of mainland China, (h) changes in the laws and regulations of China or noncompliance with applicable laws and regulations, (i) reliance on dividends and other distributions on equity paid by our principal subsidiaries in China to fund offshore cash requirements, (j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, (l) difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China against us, 38 (m) the Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (n) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (o) risk in relation to unexpected land acquisitions, building closures or demolitions, (p) potential fines and other legal or administrative sanctions for failure to comply with Chinese regulations regarding our employee equity incentive plans and various employee benefit plans, (q) proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act, (r) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion, and (s) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions; • Risks related to the separation and related transactions, such as (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, (d) the indemnity provided by YUM to us with respect to certain liabilities in connection with the separation may be insufficient to insure us against the full amount of such liabilities, (e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, and (f) potential liabilities due to fraudulent transfer considerations; • General risks, such as (a) potential legal proceedings, (b) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (c) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (d) unforeseeable business interruptions, and (e) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC. |
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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 SEC (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, 2020)2021) 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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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, 2021,March 31, 2022, the Company’s Operating profit would have decreased by approximately $17$18 million if the RMB weakened 10% relative to the US$. 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 8.4 million of Meituan’s ordinary shares. The Company sold 4.2 million of its ordinary shares of Meituan in the second quarter of 2020 for proceeds of approximately $54 million. In the first quarter of 2021, we invested $261 million to acquire a 5% equity interest in Sunner. Equity investment in Meituan is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. The investment in Sunner was recorded at fair value on a recurring basis before it became subject to equity method of accounting after the Company established significant influence over the operating and financial policies of Sunner in May 2021. See Note 63 for further discussion on our investmentsinvestment in Meituan and Sunner.Meituan.
Item 4. Controls and Procedures |
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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, 2021March 31, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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PART II – Other Information
Item 1. Legal Proceedings
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Information regarding legal proceedings is incorporated by reference from Note 1415 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.
Item 1A. Risk Factors
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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, 2020,2021, which was filed with the SEC on February 26,28, 2022.
Health concerns arising from outbreaks of viruses or other illnesses may have a material adverse effect on our business. The COVID-19 pandemic has had, and may continue to have, adverse effects on our results of operations, cash flows and financial condition.
Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as 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 in China 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 the ability to adequately staff restaurants. An outbreak could also cause disruption in our supply chain, increase our raw material costs, increase operational complexity and adversely impact our ability 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 as a result of taking precautionary measures to protect the health and wellbeing of our customers and employees during an outbreak. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of affected countries. Any of the foregoing within China 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, starting in the first quarter of 2020, the COVID-19 pandemic significantly impacted the Company’s operations, resulting in a significant decline in Operating profit mainly driven by same-store sales declines and temporary store closures. At the peak of the COVID-19 outbreak in China in 2020, approximately 35% of our restaurants were closed. Our operations and financial results of second half of 2021 were also significantly affected by multiple waves of Delta-variant outbreaks, spreading to nearly all provinces in China. In the first quarter of 2022, the highly transmissible Omicron variant caused significant volatility in our business operations. After a relatively stable period in January and February, the situation rapidly deteriorated in March 2022, resulting in the largest outbreak since COVID-19 first emerged in early 2020. Compared to the first quarter of 2020, the outbreaks were more severe, in terms of case counts, duration and geographical coverage, and restrictive measures were tighter during the first quarter of 2022. The Company incurred an operating loss in March 2022.
Looking into the second quarter of 2022, the situation has been even more challenging. Many cities across large swaths of China have been fully or partially locked down for weeks or even months, including several economically important regions, such as Shanghai. Drastic public health measures are being stepped up nationwide, in line with the strict enforcement of the “dynamic zero-COVID” policy, resulting in further reductions of social activities, travel and consumption. In April, over 3,000 of our stores, on average, were either temporarily closed or offered only take away and delivery service, of which approximately 50% of the stores were temporarily closed. Same-store sales in April decreased by more than 20%. Unless conditions significantly improve in May and June, we expect to incur an operating loss in the second quarter of 2022.
We expect that our operations will continue to be impacted by the COVID-19 pandemic, including outbreaks caused by existing or new COVID-19 variants and the actions taken by governmental authorities, such as regional lockdowns, measures restricting travel and large gatherings, and recommendations against dining out. 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
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condition after the pandemic subsides. 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 resurgences and further spread of existing or new COVID-19 variants, the actions by the government authorities to contain the pandemic or treat its impact, the availability and effectiveness of vaccines, the economic recovery within China and globally, the impact on consumer behavior and other related factors. Our insurance policy does not 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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.
The audit reports included in our annual reports on Form 10-K are prepared by auditors who are not currently inspected by the Public Company Accounting Oversight Board and, as such, our stockholders are deprived of the benefits of such inspection and our common stock is subject to delisting from the New York Stock Exchange in the future.
As an auditor of companies that are publicly traded in the United States and a firm registered with the Public Company Accounting Oversight Board (“PCAOB”), our independent registered public accounting firm is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because substantially all of our operations are conducted within China, our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual reports on Form 10-K is located in China. The PCAOB is currently unable to conduct full inspections in China or review audit documentation located within China without the approval of Chinese authorities, which has not been granted. Accordingly, the PCAOB has not inspected our independent registered public accounting firm or reviewed documentation related to the audit of our financial statements.
Inspections of other auditors conducted by the PCAOB outside of China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from evaluating our auditor’s audits and its quality control procedures. As a result, our stockholders do not have the benefit of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of our financial statements.
On December 18, 2020, the Holding Foreign Companies Accountable Act (the “Act”) was signed into law. The Act requires the SEC to prohibit the securities of any “covered issuer,” including the Company, from being traded on any of the U.S. securities exchanges, including the New York Stock Exchange, or traded “over-the-counter,” if the auditor of the covered issuer’s financial statements is not subject to PCAOB inspection for three consecutive years, beginning in 2021. On December 2, 2021, the SEC adopted final rules implementing the Act, pursuant to which the SEC will implement the trading prohibition as soon as practicable after the covered issuer has been conclusively identified as a “Commission-Identified Issuer” for three consecutive years. In March 2022, the Company was conclusively identified as a Commission-Identified Issuer by the SEC.
On June 22, 2021, the U.S. Senate passed a bill which, if also passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the Act from three years to two (the “Senate Proposed Act Amendment”). On February 4, 2022, the U.S. House of Representatives passed a larger bill containing provisions identical to the Senate Proposed Act Amendment which, if also passed by the U.S. Senate and signed into law, would have the same effect (the “House Proposed Act Amendment”).
Unless the Act is amended to exclude the Company or the PCAOB is able to conduct a full inspection of our independent registered public accounting firm’s audit documentation related to their audit reports during the required timeframe, which is subject to a variety of factors outside our control including the approval of Chinese authorities, then our common stock will be delisted from the New York Stock Exchange in early 2024 or, if the House Proposed Act Amendment or Senate Proposed Act Amendment becomes law, in early 2023. Such delisting would limit the liquidity of our common stock and our access to U.S. capital markets, and as a result the market price of our common stock could be materially adversely affected.
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On April 2, 2022, the China Securities Regulatory Commission (the “CSRC”) proposed revisions to the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing (Draft for Comments) (the “Draft Provisions”). The Draft Provisions outline obligations of issuers listed in overseas markets with operations in China when they provide information involving state secrets or sensitive information to their securities service providers (e.g., auditors) and overseas regulators. In addition, under the Draft Provisions, such issuers will also be required to report to the CSRC and other PRC authorities before accepting any investigation or inspection by overseas regulators. The Draft Provisions have not yet been adopted, and it remains unclear whether any material changes will be made to the Draft Provisions before adoption, or how such measures and provisions will be enacted, interpreted or implemented and how they will affect us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Our Board of Directors authorized an aggregate of $1.4$2.4 billion for our share repurchase program, including its most recent increase in authorization on October 31, 2018.in March 2022. The authorizations do not have an expiration date. As a result of the COVID-19 pandemic impact, we suspended the share repurchases starting in the second quarter of 2020. On July 28, 2021, the Board of Directors approved the resumption of share repurchases.
The following table provides information as of September 30, 2021March 31, 2022 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) |
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| Average Price Paid Per Share |
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| Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (thousands) |
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| Approximate Dollar Value of Shares that May Yet Be Repurchased under the Plans or Programs (millions) |
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7/1/21-7/31/21 |
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| — |
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| NA |
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| — |
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| $ | 692 |
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8/1/21-8/31/21 |
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| 186 |
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| $ | 60.45 |
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| 186 |
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| $ | 680 |
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9/1/21-9/30/21 |
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| 388 |
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| $ | 57.65 |
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| 388 |
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| $ | 658 |
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Total |
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| 574 |
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| $ | 58.56 |
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| 574 |
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| $ | 658 |
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Period |
| Total Number of |
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| Average Price Paid |
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| Total Number of Shares |
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| Approximate Dollar |
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1/1/22-1/31/22 |
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| 1,692 |
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| $ | 47.29 |
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| 1,692 |
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| $ | 537 |
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2/1/22-2/28/22 |
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| 1,291 |
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| $ | 49.58 |
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| 1,291 |
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| $ | 473 |
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3/1/22-3/31/22 |
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| 1,999 |
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| $ | 44.02 |
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| 1,999 |
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| $ | 1,385 |
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Total |
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| 4,982 |
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| $ | 46.57 |
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| 4,982 |
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| $ | 1,385 |
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Item 6. Exhibits
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.
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