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YUMC Yum China

Filed: 6 May 21, 6:00am

 

 

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 March 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _________________

 

Commission file number 001-37762

 

 

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

81-2421743

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

7100 Corporate Drive

Plano, Texas 75024

United States of America

 

Yum China Building

20 Tian Yao Qiao Road

Shanghai  200030

People’s Republic of China

 

(Address, Including Zip Code, of Principal Executive Offices)

(469) 980-2898

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

YUMC

  New York Stock Exchange

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 May 3, 2021 was 420,598,687 shares.

 

 


 

 

Yum China Holdings, Inc.

INDEX

 

 

 

Page

 

 

No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Income – Quarters Ended March 31, 2021 and 2020 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Quarters Ended March 31, 2021 and 2020 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Quarters Ended March 31, 2021 and 2020 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2021 (Unaudited) and December 31, 2020

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

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

28

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

 

Item 4 – Controls and Procedures

46

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

47

 

 

 

 

Item 1A – Risk Factors

47

 

 

 

 

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

47

 

 

 

 

Item 6 – Exhibits

48

 

 

 

 

Signatures

49

 

 

2


 

 

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

 

 

Revenues

 

3/31/2021

 

 

3/31/2020

 

 

Company sales

 

$

2,331

 

 

$

1,548

 

 

Franchise fees and income

 

 

42

 

 

 

35

 

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

 

 

171

 

 

 

161

 

 

Other revenues

 

 

13

 

 

 

10

 

 

Total revenues

 

 

2,557

 

 

 

1,754

 

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

Food and paper

 

 

704

 

 

 

495

 

 

Payroll and employee benefits

 

 

544

 

 

 

394

 

 

Occupancy and other operating expenses

 

 

648

 

 

 

494

 

 

Company restaurant expenses

 

 

1,896

 

 

 

1,383

 

 

General and administrative expenses

 

 

130

 

 

 

99

 

 

Franchise expenses

 

 

17

 

 

 

17

 

 

Expenses for transactions with

   franchisees and unconsolidated affiliates

 

 

169

 

 

 

156

 

 

Other operating costs and expenses

 

 

11

 

 

 

10

 

 

Closures and impairment (income) expenses, net

 

 

(2

)

 

 

8

 

 

Other income, net

 

 

(6

)

 

 

(16

)

 

Total costs and expenses, net

 

 

2,215

 

 

 

1,657

 

 

Operating Profit

 

 

342

 

 

 

97

 

 

Interest income, net

 

 

15

 

 

 

9

 

 

Investment loss

 

 

(12

)

 

 

(8

)

 

Income Before Income Taxes

 

 

345

 

 

 

98

 

 

Income tax provision

 

 

(102

)

 

 

(32

)

 

Net income – including noncontrolling interests

 

 

243

 

 

 

66

 

 

Net income – noncontrolling interests

 

 

13

 

 

 

4

 

 

Net Income – Yum China Holdings, Inc.

 

$

230

 

 

$

62

 

 

Weighted-average common shares outstanding (in millions):

 

 

 

 

 

 

 

 

 

Basic

 

 

420

 

 

 

376

 

 

Diluted

 

 

434

 

 

 

386

 

 

Basic Earnings Per Common Share

 

$

0.55

 

 

$

0.16

 

 

Diluted Earnings Per Common Share

 

$

0.53

 

 

$

0.16

 

 

 

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

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Net income - including noncontrolling interests

 

$

243

 

 

$

66

 

 

Other comprehensive loss, net of tax of nil:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(18

)

 

 

(42

)

 

Comprehensive income - including noncontrolling interests

 

 

225

 

 

 

24

 

 

Comprehensive income - noncontrolling interests

 

 

12

 

 

 

2

 

 

Comprehensive Income - Yum China Holdings, Inc.

 

$

213

 

 

$

22

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Cash Flows – Operating Activities

 

 

 

 

 

 

 

 

 

Net income – including noncontrolling interests

 

$

243

 

 

$

66

 

 

Depreciation and amortization

 

 

128

 

 

 

109

 

 

Non-cash operating lease cost

 

 

101

 

 

 

88

 

 

Closures and impairment (income) expenses

 

 

(2

)

 

 

8

 

 

Investment loss

 

 

12

 

 

 

8

 

 

Equity income from investments in unconsolidated affiliates

 

 

(17

)

 

 

(20

)

 

Distributions of income received from unconsolidated affiliates

 

 

11

 

 

 

8

 

 

Deferred income taxes

 

 

15

 

 

 

2

 

 

Share-based compensation expense

 

 

10

 

 

 

7

 

 

Changes in accounts receivable

 

 

(3

)

 

 

9

 

 

Changes in inventories

 

 

52

 

 

 

57

 

 

Changes in prepaid expenses and other current assets

 

 

20

 

 

 

10

 

 

Changes in accounts payable and other current liabilities

 

 

(175

)

 

 

(192

)

 

Changes in income taxes payable

 

 

51

 

 

 

5

 

 

Changes in non-current operating lease liabilities

 

 

(104

)

 

 

(102

)

 

Other, net

 

 

(11

)

 

 

(3

)

 

Net Cash Provided by Operating Activities

 

 

331

 

 

 

60

 

 

Cash Flows – Investing Activities

 

 

 

 

 

 

 

 

 

Capital spending

 

 

(165

)

 

 

(87

)

 

Purchases of short-term investments

 

 

(1,180

)

 

 

(275

)

 

Maturities of short-term investments

 

 

1,258

 

 

 

390

 

 

Prepayment for investment

 

 

 

 

 

(27

)

 

Investment in equity securities

 

 

(261

)

 

 

 

 

Other, net

 

 

1

 

 

 

1

 

 

Net Cash (Used in) Provided by Investing Activities

 

 

(347

)

 

 

2

 

 

Cash Flows – Financing Activities

 

 

 

 

 

 

 

 

 

Repurchase of shares of common stock

 

 

 

 

 

(8

)

 

Cash dividends paid on common stock

 

 

(50

)

 

 

(45

)

 

Dividends paid to noncontrolling interests

 

 

(1

)

 

 

 

 

Other, net

 

 

(4

)

 

 

1

 

 

Net Cash  Used in Financing Activities

 

 

(55

)

 

 

(52

)

 

Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash

 

 

(3

)

 

 

(8

)

 

Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash

 

 

(74

)

 

 

2

 

 

Cash, Cash Equivalents and Restricted Cash - Beginning of Period

 

 

1,158

 

 

 

1,055

 

 

Cash, Cash Equivalents and Restricted Cash - End of Period

 

$

1,084

 

 

$

1,057

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

 

Cash paid for income tax

 

 

40

 

 

 

25

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payables and other current liabilities

 

 

151

 

 

 

111

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


 

 

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

3/31/2021

 

 

12/31/2020

 

 

 

 

(Unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,084

 

 

$

1,158

 

 

Short-term investments

 

 

3,026

 

 

 

3,105

 

 

Accounts receivable, net

 

 

102

 

 

 

99

 

 

Inventories, net

 

 

345

 

 

 

398

 

 

Prepaid expenses and other current assets

 

 

199

 

 

 

176

 

 

Total Current Assets

 

 

4,756

 

 

 

4,936

 

 

Property, plant and equipment, net

 

 

1,749

 

 

 

1,765

 

 

Operating lease right-of-use assets

 

 

2,140

 

 

 

2,164

 

 

Goodwill

 

 

829

 

 

 

832

 

 

Intangible assets, net

 

 

234

 

 

 

246

 

 

Deferred income tax assets

 

 

83

 

 

 

98

 

 

Investments in unconsolidated affiliates

 

 

48

 

 

 

85

 

 

Other assets

 

 

998

 

 

 

749

 

 

Total Assets

 

$

10,837

 

 

$

10,875

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

1,800

 

 

$

1,995

 

 

Income taxes payable

 

 

122

 

 

 

72

 

 

Total Current Liabilities

 

 

1,922

 

 

 

2,067

 

 

Non-current operating lease liabilities

 

 

1,882

 

 

 

1,915

 

 

Non-current finance lease liabilities

 

 

28

 

 

 

28

 

 

Deferred income tax liabilities

 

 

227

 

 

 

227

 

 

Other liabilities

 

 

165

 

 

 

167

 

 

Total Liabilities

 

 

4,224

 

 

 

4,404

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 million shares authorized; 440 million shares and 440 million shares issued at March 31, 2021 and December 31, 2020, respectively; 420 million shares and 420 million shares outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

4

 

 

 

4

 

 

Treasury stock

 

 

(728

)

 

 

(728

)

 

Additional paid-in capital

 

 

4,664

 

 

 

4,658

 

 

Retained earnings

 

 

2,285

 

 

 

2,105

 

 

Accumulated other comprehensive income

 

 

150

 

 

 

167

 

 

Total Yum China Holdings, Inc. Stockholders' Equity

 

 

6,375

 

 

 

6,206

 

 

Noncontrolling interests

 

 

226

 

 

 

253

 

 

Total Equity

 

 

6,601

 

 

 

6,459

 

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

10,837

 

 

$

10,875

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Tabular amounts in US$ millions)

 

 

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.

 

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, COFFii & JOY, East Dawning, 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, 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 with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Little Sheep, Huang Ji Huang, 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. 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 April 2020, the Company partnered with Lavazza Group, the world-renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China.

 

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

 

The Company has 2 reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, Huang Ji Huang, COFFii & JOY, East Dawning, Taco Bell, Lavazza, 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.

 

7


 

 

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.

 

 

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 March 31, 2021, results of our operations, comprehensive income and cash flows for the quarters ended March 31, 2021 and 2020. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated 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.

 

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 results of Huang Ji Huang and Suzhou KFC’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition dates of April 8, 2020 and August 3, 2020, respectively.

 

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

 

8


 

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

 

 

 

Note 3 – Revenue Recognition

 

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

 

Company Sales

 

Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we either used our dedicated riders or third-party aggregators’ delivery staff in the past. 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.

 

9


 

 

We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

 

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

 

Franchise Fees and Income

 

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

 

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

 

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

 

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

 

10


 

 

For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.

 

Loyalty Programs

 

Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.

 

Disaggregation of Revenue

 

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

 

 

 

Quarter Ended 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 with franchisees and unconsolidated affiliates

 

 

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 3/31/2020

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Company sales

 

$

1,220

 

 

$

322

 

 

$

6

 

 

$

 

 

$

1,548

 

 

$

 

 

$

1,548

 

 

Franchise fees and income

 

 

33

 

 

 

1

 

 

 

1

 

 

 

 

 

 

35

 

 

 

 

 

 

35

 

 

Revenues from transactions with franchisees and unconsolidated affiliates

 

 

16

 

 

 

1

 

 

 

5

 

 

 

139

 

 

 

161

 

 

 

 

 

 

161

 

 

Other revenues

 

 

 

 

 

 

 

 

16

 

 

 

1

 

 

 

17

 

 

 

(7

)

 

 

10

 

 

Total revenues

 

$

1,269

 

 

$

324

 

 

$

28

 

 

$

140

 

 

$

1,761

 

 

$

(7

)

 

$

1,754

 

 

 

11


 

 

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 March 31, 2021 and December 31, 2020, the ending balances of provision for accounts receivable were $2 million and $1 million, respectively, and amounts of accounts receivable past due were immaterial. Receivables due from unconsolidated affiliates, including accounts receivable and dividend receivables, were $96 million and $50 million as of March 31, 2021 and December 31, 2020, respectively.

 

Costs to Obtain Contracts

 

Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to the separation in relation to initial fees or renewal fees we received from franchisees and unconsolidated affiliates, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets on the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company did 0t incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $8 million and $9 million at March 31, 2021 and December 31, 2020, respectively.

 

Contract Liabilities

 

Contract liabilities at March 31, 2021 and December 31, 2020 were as follows: 

 

Contract liabilities

 

3/31/2021

 

 

12/31/2020

 

- Deferred revenue related to prepaid stored-value products

 

$

117

 

 

$

117

 

- Deferred revenue related to upfront franchise fees

 

 

39

 

 

 

38

 

- Deferred revenue related to customer loyalty programs

 

 

26

 

 

 

23

 

- Deferred revenue related to privilege membership programs

 

 

21

 

 

 

27

 

- Others

 

 

1

 

 

 

1

 

Total

 

$

204

 

 

$

206

 

 

12


 

 

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 $71 million and $38 million for the quarters ended March 31, 2021 and 2020, respectively. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the periods presented.

 

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

 

 

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

 

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

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Net Income – Yum China Holdings, Inc.

 

$

230

 

 

$

62

 

 

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

 

 

420

 

 

 

376

 

 

Effect of dilutive share-based awards(a)

 

 

6

 

 

 

6

 

 

Effect of dilutive warrants(b)

 

 

8

 

 

 

4

 

 

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

 

 

434

 

 

 

386

 

 

Basic Earnings Per Common Share

 

$

0.55

 

 

$

0.16

 

 

Diluted Earnings Per Common Share

 

$

0.53

 

 

$

0.16

 

 

Share-based awards excluded from the diluted EPS computation(c)

 

 

2

 

 

 

3

 

 

 

(a)

As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of common shares outstanding. The incremental shares arising from outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect. In September 2020, 41,910,700 common shares were issued as a result of the Company’s global offering and secondary listing on the HKEX and they were included in the calculated weighted-average common shares outstanding.

13


 

 

(b)

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

 

(c)

These outstanding stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) were excluded from the computation of diluted EPS because to do so would have been antidilutive for the quarters presented, or because certain PSUs are contingently issuable based on the achievement of performance and market conditions, which have not been met as of March 31, 2021 and 2020.

 

 

 

Note 5 – Equity

 

Changes in Equity and Redeemable Noncontrolling Interest (in millions)

 

 

 

Yum China Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Noncontrolling

 

 

Total

 

 

Noncontrolling

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Shares*

 

 

Amount

 

 

Interests

 

 

Equity

 

 

Interest

 

Balance at December 31, 2020

 

 

440

 

 

$

4

 

 

$

4,658

 

 

$

2,105

 

 

$

167

 

 

 

(20

)

 

$

(728

)

 

$

253

 

 

$

6,459

 

 

$

12

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

243

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(18

)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

225

 

 

 

 

Cash dividends declared

   ($0.12 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(39

)

 

 

(39

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at  December 31, 2019

 

 

395

 

 

$

4

 

 

$

2,427

 

 

$

1,416

 

 

$

(49

)

 

 

(19

)

 

$

(721

)

 

$

98

 

 

$

3,175

 

 

$

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

66

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(42

)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

 

Cash dividends declared

   ($0.12 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

Repurchase of shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

(7

)

 

 

 

 

Exercise and vesting of share-based awards

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

Balance at March 31, 2020

 

 

396

 

 

$

4

 

 

$

2,434

 

 

$

1,433

 

 

$

(89

)

 

 

(20

)

 

$

(728

)

 

$

100

 

 

$

3,154

 

 

$

 

 

*: Shares may not add due to rounding.

14


 

 

 

Share Repurchase Program

 

Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program. The Company suspended the share repurchase starting in the second quarter of 2020. NaN shares of Yum China common stock were repurchased for the quarter ended March 31, 2021 and 0.2 million shares at a total cost of $7 million were repurchased for the quarter ended March 31, 2020. As of March 31, 2021, $692 million remained available for future share repurchases under the authorization.   

 

 

Note 6 – Items Affecting Comparability of Net Income

 

Impact of COVID-19 Pandemic

 

Starting in the first quarter of 2020, the COVID-19 pandemic has 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. While the lingering effects of the pandemic continue to impact our operations, the Company reported substantial year-over-year growth in the first quarter of 2021, as the Company began to lap prior year periods that were impacted by COVID-19. Operating profit for the quarters ended March 31, 2021 and 2020 was $342 million and $97 million, respectively.

 

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 with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Sunner is determined based on the closing market price for the shares at the end of each reporting period. The related unrealized loss of $17 million was included in Investment loss in our Condensed Consolidated Statements of Income for the quarter ended March 31, 2021.

 

Meituan Dianping (“Meituan”) Investment

 

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

 

The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax. The related unrealized gain of $1 million and unrealized loss of $8 million was included in Investment gain or loss in our Condensed Consolidated Statements of Income for the quarters ended March 31, 2021 and 2020, respectively.

 

15


 

 

Store Impairment Charges

 

We recorded store impairment charges of $3 million and $12 million for the quarters ended March 31, 2021 and 2020, respectively. In the first quarter of 2020, we considered the adverse economic effects of the COVID-19 pandemic an impairment indicator, and performed an additional impairment evaluation for long-lived assets of restaurants. As a result of the evaluation, we recorded a restaurant-level impairment charge of $9 million in the first quarter of 2020. See Note 11 for additional information.

 

 

 

 

 

Note 7 – Other Income, net

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Equity income from investments in unconsolidated affiliates

 

$

17

 

 

$

20

 

 

Amortization of reacquired franchise right(a)

 

 

(9

)

 

 

(3

)

 

Foreign exchange impact and other

 

 

(2

)

 

 

(1

)

 

Other income, net

 

$

6

 

 

$

16

 

 

 

(a)

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

 

 

Note 8 – Supplemental Balance Sheet Information

 

Accounts Receivable, net

 

3/31/2021

 

 

12/31/2020

 

 

Accounts receivable, gross

 

$

104

 

 

$

100

 

 

Allowance for doubtful accounts

 

 

(2

)

 

 

(1

)

 

Accounts receivable, net

 

$

102

 

 

$

99

 

 

 

Prepaid Expenses and Other Current Assets

 

3/31/2021

 

 

12/31/2020

 

 

Receivables from payment processors and aggregators

 

$

23

 

 

$

47

 

 

Dividends receivable from unconsolidated affiliates

 

 

54

 

 

 

10

 

 

Other prepaid expenses and current assets

 

 

122

 

 

 

119

 

 

Prepaid expenses and other current assets

 

$

199

 

 

$

176

 

 

 

Property, Plant and Equipment

 

3/31/2021

 

 

12/31/2020

 

 

Buildings and improvements

 

$

2,424

 

 

$

2,367

 

 

Finance leases, primarily buildings

 

 

37

 

 

 

36

 

 

Machinery and equipment, and construction in progress

 

 

1,473

 

 

 

1,490

 

 

Property, plant and equipment, gross

 

 

3,934

 

 

 

3,893

 

 

Accumulated depreciation

 

 

(2,185

)

 

 

(2,128

)

 

Property, plant and equipment, net

 

$

1,749

 

 

$

1,765

 

 

16


 

 

 

Other Assets

 

3/31/2021

 

 

12/31/2020

 

 

VAT assets

 

$

271

 

 

$

270

 

 

Land use right

 

 

138

 

 

 

140

 

 

Investment in equity securities(a)

 

 

405

 

 

 

160

 

 

Long-term deposits

 

 

87

 

 

 

83

 

 

Investment in long-term time deposits(b)

 

 

63

 

 

 

61

 

 

Costs to obtain contracts

 

 

8

 

 

 

9

 

 

Others

 

 

26

 

 

 

26

 

 

Other Assets

 

$

998

 

 

$

749

 

 

 

Accounts Payable and Other Current Liabilities

 

3/31/2021

 

 

12/31/2020

 

 

Accounts payable

 

$

571

 

 

$

708

 

 

Operating leases liabilities

 

 

440

 

 

 

448

 

 

Accrued compensation and benefits

 

 

197

 

 

 

238

 

 

Contract liabilities

 

 

172

 

 

 

175

 

 

Accrued capital expenditures

 

 

151

 

 

 

203

 

 

Accrued marketing expenses

 

 

94

 

 

 

73

 

 

Other current liabilities

 

 

175

 

 

 

150

 

 

Accounts payable and other current liabilities

 

$

1,800

 

 

$

1,995

 

 

 

Other Liabilities

 

3/31/2021

 

 

12/31/2020

 

 

Accrued income tax payable

 

$

63

 

 

$

66

 

 

Contract liabilities

 

 

32

 

 

 

31

 

 

Other non-current liabilities

 

 

70

 

 

 

70

 

 

Other liabilities

 

$

165

 

 

$

167

 

 

 

(a)

Increase in investment in equity securities balance as of March 31, 2021 primarily resulted from investment in equity securities of Sunner in the first quarter of 2021. See Note 6 for additional information.

 

(b)

As of March 31, 2021 and December 31, 2020, the Company had $63 million and $61 million invested in long-term time deposits, bearing a fixed interest rate with original maturity of three years. The asset is restricted for use in order to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements.

 

17


 

 

 

 

Note 9 – Goodwill and Intangible Assets

 

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

 

 

 

Total

Company

 

 

KFC

 

 

Pizza Hut

 

 

All Other

Segments

 

 

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

 

 

Effect of currency translation adjustment

 

 

(3

)

 

 

(3

)

 

 

 

 

 

 

 

Balance as of March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

 

1,220

 

 

 

745

 

 

 

20

 

 

 

455

 

 

Accumulated impairment losses(a)

 

 

(391

)

 

 

 

 

 

 

 

 

(391

)

 

Goodwill, net

 

$

829

 

 

$

745

 

 

$

20

 

 

$

64

 

 

 

(a)

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

 

Intangible assets, net as of March 31, 2021 and December 31, 2020 are as follows:

 

 

 

3/31/2021

 

 

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

 

$

222

 

 

$

(153

)

 

$

 

 

$

69

 

 

$

223

 

 

$

(144

)

 

$

 

 

$

79

 

Huang Ji Huang franchise related assets

 

 

23

 

 

 

(1

)

 

 

 

 

 

22

 

 

 

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

 

 

 

$

282

 

 

$

(171

)

 

$

(14

)

 

$

97

 

 

$

283

 

 

$

(161

)

 

$

(14

)

 

$

108

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Little Sheep trademark

 

$

55

 

 

$

 

 

$

 

 

$

55

 

 

$

56

 

 

$

 

 

$

 

 

$

56

 

Huang Ji Huang trademark

 

 

82

 

 

 

 

 

 

 

 

 

82

 

 

 

82

 

 

 

 

 

 

 

 

 

82

 

 

 

$

137

 

 

$

 

 

$

 

 

$

137

 

 

$

138

 

 

$

 

 

$

 

 

$

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

419

 

 

$

(171

)

 

$

(14

)

 

$

234

 

 

$

421

 

 

$

(161

)

 

$

(14

)

 

$

246

 

 

(a)

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

 

(b)

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

18


 

 

Amortization expense of finite-lived intangible assets was $10 million and $3 million for the quarters ended March 31, 2021 and 2020, respectively. As of March 31, 2021, expected amortization expense for the unamortized finite-lived intangible assets is approximately $31 million for the remainder of 2021, $41 million in 2022, $4 million in 2023, $2 million in 2024 and $2 million in 2025.

 

 

Note 10 – Leases

 

As of March 31, 2021, we operated over 8,300 Company-owned restaurants, leasing the underlying land and/or building. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

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

 

Supplemental Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

3/31/2021

 

 

12/31/2020

 

 

Account Classification

Assets

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

2,140

 

 

$

2,164

 

 

Operating lease right-of-use assets

Finance lease right-of-use assets

 

 

20

 

 

 

20

 

 

Property, plant and equipment, net

Total leased assets

 

$

2,160

 

 

$

2,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

$

440

 

 

$

448

 

 

Accounts payable and other current liabilities

Finance lease liabilities

 

 

2

 

 

 

2

 

 

Accounts payable and other current liabilities

Non-current

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

1,882

 

 

 

1,915

 

 

Non-current operating lease liabilities

Finance lease liabilities

 

 

28

 

 

 

28

 

 

Non-current finance lease liabilities

Total lease liabilities

 

$

2,352

 

 

$

2,393

 

 

 

 

19


 

 

 

Summary of Lease Cost

 

Quarter Ended

 

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Account Classification

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

136

 

 

$

121

 

 

Occupancy and other operating expenses, G&A or Franchise expenses

Finance lease cost

 

 

 

 

 

 

 

 

 

 

   Amortization of leased assets

 

 

1

 

 

 

1

 

 

Occupancy and other operating expenses

Variable lease cost (a)

 

 

95

 

 

 

49

 

 

Occupancy and other operating expenses or Franchise expenses

Short-term lease cost

 

 

2

 

 

 

3

 

 

Occupancy and other operating expenses or G&A

Sub-lease income

 

 

(8

)

 

 

(6

)

 

Franchise fees and income or Other revenues

Total lease cost

 

$

226

 

 

$

168

 

 

 

 

(a)

In the first quarter of 2021 and 2020, the Company was granted $5 million and $14 million, respectively, in lease concessions from landlords related to the effects of the COVID-19 pandemic. The lease concessions were primarily in the form of rent reduction over the period of time when the Company’s restaurant business was adversely impacted. The Company applied the interpretive guidance in a FASB staff Q&A document issued in April 2020 and elected: (1) not to evaluate whether a concession received in response to the COVID-19 pandemic is a lease modification and (2) to assume such concession was contemplated as part of the existing lease contract with no contract modification. Such concession was recognized as negative variable lease cost in the period the concession was granted.

 

Supplemental Cash Flow Information

 

Quarter Ended

 

 

 

3/31/2021

 

 

3/31/2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

144

 

 

107

 

Financing cash flows from finance leases

 

 

1

 

 

1

 

Right-of-use assets obtained in exchange for new lease liabilities(b):

 

 

 

 

 

 

 

Operating leases

 

 

78

 

 

32

 

 

(b)

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

 

 

 

 

 

 

 

 

 

 

 

 

Lease Term and Discount Rate

 

3/31/2021

 

 

3/31/2020

 

 

 

Weighted-average remaining lease term (years)

 

 

 

 

 

 

 

 

 

 

   Operating leases

 

 

6.9

 

 

 

6.9

 

 

 

   Finance leases

 

 

10.9

 

 

 

11.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

   Operating leases

 

 

5.8

%

 

 

6.0

%

 

 

   Finance leases

 

 

5.8

%

 

 

5.9

%

 

 

 

20


 

 

Summary of Future Lease Payments and Lease Liabilities

 

Maturities of lease liabilities as of March 31, 2021 were as follows:

 

 

 

Amount of

Operating Leases

 

 

Amount of

Finance Leases

 

 

Total

 

Remainder of 2021

 

$

434

 

 

$

3

 

 

$

437

 

2022

 

 

484

 

 

 

4

 

 

 

488

 

2023

 

 

420

 

 

 

4

 

 

 

424

 

2024

 

 

354

 

 

 

4

 

 

 

358

 

2025

 

 

293

 

 

 

4

 

 

 

297

 

Thereafter

 

 

854

 

 

 

22

 

 

 

876

 

Total undiscounted lease payment

 

 

2,839

 

 

 

41

 

 

 

2,880

 

Less: imputed interest(c)

 

 

517

 

 

 

11

 

 

 

528

 

Present value of lease liabilities

 

$

2,322

 

 

$

30

 

 

$

2,352

 

 

(c)

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

 

As of March 31, 2021, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $164 million. These leases will commence between the second quarter of 2021 and 2023 with lease terms of 1 year to 20 years.

 

 

Note 11 – 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 the equity securities of Meituan and Sunner at fair value, which is determined based on the respective closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.

 

The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, 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, 2021 and 2020.

21


 

 

 

 

 

 

 

 

Fair Value Measurement or Disclosure

at March 31, 2021

 

 

 

Balance at

March 31, 2021

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

410

 

 

 

 

 

 

$

410

 

 

 

 

 

Fixed income debt securities(a)

 

 

70

 

 

 

 

 

 

 

70

 

 

 

 

 

Total cash equivalents

 

 

480

 

 

 

 

 

 

480

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

2,058

 

 

 

 

 

 

 

2,058

 

 

 

 

 

Fixed income debt securities(a)

 

 

800

 

 

 

 

 

 

 

800

 

 

 

 

 

Structured deposits(b)

 

 

168

 

 

 

 

 

 

 

168

 

 

 

 

 

Total short-term investments

 

 

3,026

 

 

 

 

 

 

3,026

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in equity securities

 

 

405

 

 

 

405

 

 

 

 

 

 

 

 

 

Long-term time deposits

 

 

63

 

 

 

 

 

 

 

63

 

 

 

 

 

Total

 

$

3,974

 

 

$

405

 

 

$

3,569

 

 

$

 

 

 

 

 

 

 

 

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

 

 

$

 

22


 

 

 

(a)

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

 

(b)

Represented certain structured deposits invested in the first quarter of 2021. These investments are principal-protected and provide returns in the form of both fixed and variable interests. Such variable interest rates indexed to gold prices or foreign exchange rates are considered embedded derivatives and bifurcated from host contracts, and measured at fair value on a recurring basis. The fair value change of the embedded derivatives is recorded in Investment gain or loss in our Condensed Consolidated Statements of Income. The remaining host contracts to receive guaranteed principal and fixed interest are measured at amortized cost, with accretion of interest recorded in Interest income in our Condensed Consolidated Statements of Income. As of March 31, 2021, the fair value of embedded derivatives included in Short-term investments was immaterial.

 

Non-Recurring Fair Value Measurements

 

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

 

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

 

The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters ended March 31, 2021 and 2020. These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-end dates.

 

 

 

Quarter Ended

 

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Account Classification

Restaurant-level impairment(a)

 

$

 

 

$

9

 

 

Closure and impairment expenses, net

Total

 

$

 

 

$

9

 

 

 

 

23


 

 

(a)

Restaurant-level impairment charges are recorded in Closures and impairment expenses, net and resulted primarily from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. We performed an additional impairment evaluation in the first quarter of 2020, considering the adverse effects of the COVID-19 pandemic as an impairment indicator. The fair value of assets as of the relevant measurement date, after considering the impairment charges recorded during the quarter ended March 31, 2020, was $29 million.  

 

 

Note 12 – Income Taxes

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Income tax provision

 

$

102

 

 

$

32

 

 

Effective tax rate

 

 

29.6

%

 

 

32.7

%

 

 

The lower effective tax rate for the quarter ended March 31, 2021 was primarily due to impact from our investment in equity securities of Meituan, and lower estimated repatriation of earnings outside of China subject to foreign withholding tax.

 

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.

24


 

 

 

Note 13 –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, COFFii & JOY, East Dawning, Taco Bell, Lavazza, 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 3/31/2021

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

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

 

 

 

 

 

Quarter Ended 3/31/2020

 

 

Revenues

 

KFC

 

 

Pizza Hut

 

 

All Other Segments

 

 

Corporate and Unallocated(a)

 

 

Combined

 

 

Elimination

 

 

Consolidated

 

 

Revenue from external

   customers

 

$

1,269

 

 

$

324

 

 

$

21

 

 

$

140

 

 

 

1,754

 

 

$

 

 

$

1,754

 

 

Inter-segment revenue

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

7

 

 

 

(7

)

 

 

 

 

Total

 

$

1,269

 

 

$

324

 

 

$

28

 

 

$

140

 

 

$

1,761

 

 

$

(7

)

 

$

1,754

 

 

 

 

 

 

 

Quarter Ended

 

 

Operating Profit (Loss)

 

3/31/2021

 

 

3/31/2020

 

 

KFC(b)

 

$

327

 

 

$

153

 

 

Pizza Hut

 

 

60

 

 

 

(28

)

 

All Other Segments

 

 

(3

)

 

 

(10

)

 

Unallocated revenues from transactions with

   franchisees and unconsolidated affiliates(c)

 

 

129

 

 

 

139

 

 

Unallocated Other revenues

 

 

2

 

 

 

1

 

 

Unallocated expenses from transactions with

   franchisees and unconsolidated affiliates(c)

 

 

(129

)

 

 

(135

)

 

Unallocated Other operating costs and expenses

 

 

(3

)

 

 

(1

)

 

Unallocated and corporate G&A expenses

 

 

(41

)

 

 

(21

)

 

Unallocated Other expenses

 

 

 

 

 

(1

)

 

Operating Profit

 

$

342

 

 

$

97

 

 

Interest income, net(a)

 

 

15

 

 

 

9

 

 

Investment loss(a)

 

 

(12

)

 

 

(8

)

 

Income Before Income Taxes

 

$

345

 

 

$

98

 

 

 

 

 

Quarter Ended

 

 

Impairment Charges

 

3/31/2021

 

 

3/31/2020

 

 

KFC(d)

 

$

2

 

 

$

4

 

 

Pizza Hut(d)

 

 

1

 

 

 

6

 

 

All Other Segments(d)

 

 

 

 

 

2

 

 

 

 

$

3

 

 

$

12

 

 

25


 

 

 

 

 

Total Assets

 

 

 

 

3/31/2021

 

 

12/31/2020

 

 

KFC(e)

 

$

4,056

 

 

$

4,084

 

 

Pizza Hut

 

 

888

 

 

 

906

 

 

All Other Segments

 

 

379

 

 

 

378

 

 

Corporate and Unallocated(f)

 

 

5,514

 

 

 

5,507

 

 

 

 

$

10,837

 

 

$

10,875

 

 

 

(a)

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

(b)

Includes equity income from investments in unconsolidated affiliates of $19 million and $20 million for the quarters ended March 31, 2021 and 2020, respectively.

(c)

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

(d)

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

 

(e)

Includes investments in unconsolidated affiliates.

 

(f)

Primarily includes cash and cash equivalents, short-term investments, investment in equity securities, long-term time deposits and inventories that are centrally managed. 

 

 

Note 14 – 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%.

 

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% 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.

 

26


 

 

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

 

Guarantees for Franchisees and Unconsolidated Affiliates

 

From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of March 31, 2021, 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 15 – Subsequent Events

 

On April 27, 2021, the Company announced that the Board of Directors declared a cash dividend of $0.12 per share on Yum China's common stock, payable as of the close of business on June 18, 2021, to stockholders of record as of the close of business on May 25, 2021. Total estimated cash dividend payable is approximately $50 million.

 

 

27


 

 

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 10,725 restaurants covering over 1,500 cities primarily in China as of March 31, 2021. 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, COFFii & JOY, East Dawning, Taco Bell and Lavazza. 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, COFFii & JOY and East Dawning concepts outright. We also established a joint venture with Lavazza Group, the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee shop concept in China. KFC was the first major global restaurant brand 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 March 31, 2021, KFC operated over 7,300 restaurants in over 1,500 cities across China. During the quarter ended September 30, 2020, the Company completed the acquisition of an additional 25% interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China (“Suzhou KFC”), increasing our equity interest to 72% and allowing the Company to consolidate the entity.

 

Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of system sales and number of restaurants. As of March 31, 2021, Pizza Hut operated over 2,300 restaurants in over 500 cities.

 

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.

 

28


 

 

 

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 a 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.

 

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.

 

29


 

 

Quarters Ended March 31, 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, COFFii & JOY, East Dawning, Taco Bell, Lavazza, 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.

 

Quarterly highlights:

 

 

 

 

 

 

 

 

 

 

% Change

 

System Sales(a)

 

Same-Store Sales(a)

 

Net New Units

 

Operating Profit

(Reported)

 

Operating Profit

(Ex F/X)

KFC

+24

 

+5

 

+11

 

+113

 

+99

Pizza Hut

+57

 

+38

 

+5

 

NM

 

NM

All Other Segments(b)

NM

 

+14

 

+167

 

+74

 

+76

Total

+34

 

+10

 

+15

 

+250

 

+227

 

 

 

 

 

 

 

 

 

 

 

 

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.  

 

As of March 31, 2021, the Company operated 10,725 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 reported substantial year-over-year growth in the first quarter of 2021, as the Company began to lap prior year periods that were impacted by COVID-19. Operating results improved sequentially in the last three quarters of 2020 and the first quarter of 2021, although sales continued to be impacted by reduced traffic at transportation and tourist locations, regional resurgences, and other lingering effects of the COVID-19 pandemic.

 

As compared to the first quarter of 2020, Company sales in the first quarter of 2021 increased 51%, or 40% excluding the impact of F/X. Company sales for the quarter, excluding the impact of F/X, were affected by net unit growth including the acquisition of Suzhou KFC, same-store sales growth and substantially fewer temporary store closures.

 

The increase in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Company sales, commodity deflation of 7% and higher productivity, partially offset by increased value promotions, lower temporary relief provided by landlords and government agencies, wage inflation and an increase in G&A expenses due to the timing shift of government incentives received.

 

 

30


 

 

The Consolidated Results of Operations for the quarters ended March 31, 2021 and 2020 are presented below:

 

 

 

Quarter Ended

 

 

% B/(W) (a)

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Reported

 

Ex F/X

 

Company sales

 

$

2,331

 

 

$

1,548

 

 

 

51

 

 

 

 

40

 

 

 

Franchise fees and income

 

 

42

 

 

 

35

 

 

 

17

 

 

 

 

9

 

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

171

 

 

 

161

 

 

 

6

 

 

 

 

(1

)

 

 

Other revenues

 

 

13

 

 

 

10

 

 

 

29

 

 

 

 

20

 

 

 

Total revenues

 

$

2,557

 

 

$

1,754

 

 

 

46

 

 

 

 

36

 

 

 

Restaurant profit

 

$

435

 

 

$

165

 

 

 

164

 

 

 

 

147

 

 

 

Restaurant Margin %

 

 

18.7

%

 

 

10.7

%

 

 

8.0

 

ppts.

 

 

8.0

 

ppts.

 

Operating Profit

 

$

342

 

 

$

97

 

 

 

250

 

 

 

 

227

 

 

 

Interest income, net

 

 

15

 

 

 

9

 

 

 

68

 

 

 

 

61

 

 

 

Investment loss

 

 

(12

)

 

 

(8

)

 

 

(42

)

 

 

 

(42

)

 

 

Income tax provision

 

 

(102

)

 

 

(32

)

 

 

(218

)

 

 

 

(202

)

 

 

Net Income - including

    noncontrolling interests

 

 

243

 

 

 

66

 

 

 

268

 

 

 

 

240

 

 

 

Net Income

   - noncontrolling interests

 

 

13

 

 

 

4

 

 

 

206

 

 

 

 

186

 

 

 

Net Income

   - Yum China Holdings, Inc.

 

$

230

 

 

$

62

 

 

 

272

 

 

 

 

244

 

 

 

Diluted Earnings Per Common Share

 

$

0.53

 

 

$

0.16

 

 

 

231

 

 

 

 

206

 

 

 

Effective tax rate

 

 

29.6

%

 

 

32.7

%

 

 

 

 

 

 

 

 

 

 

 

Supplementary information

   - Non-GAAP Measures(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Profit

 

$

345

 

 

$

98

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income -

    Yum China Holdings, Inc.

 

$

233

 

 

$

63

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Diluted Earnings

    Per Common Share

 

$

0.54

 

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Effective Tax Rate

 

 

29.3

%

 

 

32.4

%

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

476

 

 

$

219

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Represents the period-over-period change in percentage.

 

(b)

See “Non-GAAP Measures” below for definitions and reconciliations of the most directly comparable GAAP financial measures to the non-GAAP measures.

 

Performance Metrics

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

System Sales Growth (Decline)

 

 

44

%

 

 

(23

)%

 

System Sales Growth (Decline), excluding F/X

 

 

34

%

 

 

(20

)%

 

Same-Store Sales Growth (Decline)

 

 

10

%

 

 

(15

)%

 

 

31


 

 

Unit Count

 

3/31/2021

 

 

3/31/2020

 

 

% Increase

(Decrease)

 

Company-owned(a)

 

 

8,371

 

 

 

7,432

 

 

 

13

 

Unconsolidated affiliates(a)

 

 

709

 

 

 

924

 

 

 

(23

)

Franchisees(b)

 

 

1,645

 

 

 

939

 

 

 

75

 

 

 

 

10,725

 

 

 

9,295

 

 

 

15

 

 

(a)

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

 

(b)

Increase in franchise stores primarily resulted from the acquisition of Huang Ji Huang.

 

Non-GAAP Measures

 

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

 

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

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Non-GAAP Reconciliations

 

 

 

 

 

 

 

 

 

Reconciliation of Operating Profit to Adjusted Operating Profit

 

 

 

 

 

 

 

 

 

Operating Profit

 

$

342

 

 

$

97

 

 

Special Items, Operating Profit

 

 

(3

)

 

 

(1

)

 

Adjusted Operating Profit

 

$

345

 

 

$

98

 

 

Reconciliation of Net Income to Adjusted Net Income

 

 

 

 

 

 

 

 

 

Net Income - Yum China Holdings, Inc.

 

$

230

 

 

$

62

 

 

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

 

 

(3

)

 

 

(1

)

 

Adjusted Net Income - Yum China Holdings, Inc.

 

$

233

 

 

$

63

 

 

Reconciliation of EPS to Adjusted EPS

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.55

 

 

$

0.16

 

 

Special Items, Basic Earnings Per Common Share

 

 

 

 

 

(0.01

)

 

Adjusted Basic Earnings Per Common Share

 

$

0.55

 

 

$

0.17

 

 

Diluted Earnings Per Common Share

 

$

0.53

 

 

$

0.16

 

 

Special Items, Diluted Earnings Per Common Share

 

 

(0.01

)

 

 

 

 

Adjusted Diluted Earnings Per Common Share

 

$

0.54

 

 

$

0.16

 

 

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

 

 

 

 

 

 

 

 

 

Effective tax rate (See Note 12)

 

 

29.6

%

 

 

32.7

%

 

Impact on effective tax rate as a result of Special Items

 

 

0.3

%

 

 

0.3

%

 

Adjusted effective tax rate

 

 

29.3

%

 

 

32.4

%

 

 

32


 

 

 

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

 

 

 

Quarter Ended

 

 

Reconciliation of Net Income to Adjusted EBITDA

 

3/31/2021

 

 

3/31/2020

 

 

Net Income — Yum China Holdings, Inc.

 

$

230

 

 

$

62

 

 

Net Income — noncontrolling interests

 

 

13

 

 

 

4

 

 

Income tax provision

 

 

102

 

 

 

32

 

 

Interest income, net

 

 

(15

)

 

 

(9

)

 

Investment loss

 

 

12

 

 

 

8

 

 

Operating Profit

 

 

342

 

 

 

97

 

 

Special Items, Operating Profit

 

 

3

 

 

 

1

 

 

Adjusted Operating Profit

 

 

345

 

 

 

98

 

 

Depreciation and amortization

 

 

128

 

 

 

109

 

 

Store impairment charges

 

 

3

 

 

 

12

 

 

Adjusted EBITDA

 

$

476

 

 

$

219

 

 

 

 

Details of Special Items are presented below:

 

 

 

Quarter Ended

 

 

Details of Special Items

 

3/31/2021

 

 

3/31/2020

 

 

Share-based compensation expense for Partner PSU Awards(1)

 

 

(3

)

 

 

(1

)

 

Special Items, Operating Profit

 

 

(3

)

 

 

(1

)

 

Tax Expenses on Special Items(2)

 

 

 

 

 

 

 

Special items, net income – including noncontrolling interests

 

 

(3

)

 

 

(1

)

 

Special items, net income – noncontrolling interests

 

 

 

 

 

 

 

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

 

$

(3

)

 

$

(1

)

 

Weighted-average diluted shares outstanding (in millions)

 

 

434

 

 

 

386

 

 

Special Items, Diluted Earnings Per Common Share

 

$

(0.01

)

 

$

 

 

 

(1)

In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant similar special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized share-based compensation cost of $3 million and $1 million associated with the Partner PSU Awards for the quarters ended March 31, 2021 and 2020, respectively.

 

(2)

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

 

33


 

 

The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation and amortization, store impairment charges, and Special Items. Store impairment charges included as an adjustment item in Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants, and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If these restaurant-level assets were not impaired, depreciation of the assets would have been recorded and included in EBITDA. Therefore, store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants. The Company believes that investors and analyst may find it useful in measuring operating performance without regard to such non-cash item.

 

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

 

Segment Results

 

KFC

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Reported

 

Ex F/X

 

Company sales

 

$

1,783

 

 

$

1,220

 

 

 

46

 

 

 

 

36

 

 

 

Franchise fees and income

 

 

33

 

 

 

33

 

 

 

(2

)

 

 

 

(9

)

 

 

Revenues from transactions

    with franchisees and

    unconsolidated affiliates

 

 

15

 

 

 

16

 

 

 

(6

)

 

 

 

(12

)

 

 

Other revenues

 

 

1

 

 

 

 

 

NM

 

 

 

NM

 

 

 

Total revenues

 

$

1,832

 

 

$

1,269

 

 

 

44

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant profit

 

$

355

 

 

$

166

 

 

 

113

 

 

 

 

99

 

 

 

Restaurant margin %

 

 

19.9

%

 

 

13.6

%

 

 

6.3

 

ppts.

 

 

6.3

 

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

55

 

 

$

46

 

 

 

(19

)

 

 

 

(11

)

 

 

Franchise expenses

 

$

16

 

 

$

16

 

 

 

3

 

 

 

 

10

 

 

 

Expenses for transactions

    with franchisees and

    unconsolidated affiliates

 

$

15

 

 

$

16

 

 

 

7

 

 

 

 

13

 

 

 

Closures and impairment

    expenses, net

 

$

 

 

$

1

 

 

NM

 

 

 

NM

 

 

 

Other income, net

 

$

(9

)

 

$

(17

)

 

 

(45

)

 

 

 

(49

)

 

 

Operating Profit

 

$

327

 

 

$

153

 

 

 

113

 

 

 

 

99

 

 

 

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

System Sales Growth (Decline)

 

 

33

%

 

 

(18

)%

 

System Sales Growth (Decline), excluding F/X

 

 

24

%

 

 

(15

)%

 

Same-Store Sales Growth (Decline)

 

 

5

%

 

 

(11

)%

 

34


 

 

 

Unit Count

 

3/31/2021

 

 

3/31/2020

 

 

% Increase

(Decrease)

 

Company-owned(a)

 

 

6,030

 

 

 

5,174

 

 

 

17

 

Unconsolidated affiliates(a)

 

 

704

 

 

 

924

 

 

 

(24

)

Franchisees

 

 

639

 

 

 

563

 

 

 

13

 

 

 

 

7,373

 

 

 

6,661

 

 

 

11

 

 

(a)

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

Company Sales and Restaurant Profit

 

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

 

 

 

Quarter Ended

 

 

Income (Expense)

 

3/31/2020

 

 

 

 

Store

Portfolio

Actions

 

 

Other

 

 

F/X

 

 

3/31/2021

 

 

Company sales

 

$

1,220

 

 

 

 

$

359

 

 

$

77

 

 

$

127

 

 

$

1,783

 

 

Cost of sales

 

 

(392

)

 

 

 

 

(111

)

 

 

1

 

 

 

(38

)

 

 

(540

)

 

Cost of labor

 

 

(287

)

 

 

 

 

(66

)

 

 

(18

)

 

 

(27

)

 

 

(398

)

 

Occupancy and other

   operating expenses

 

 

(375

)

 

 

 

 

(74

)

 

 

(6

)

 

 

(35

)

 

 

(490

)

 

Restaurant profit

 

$

166

 

 

 

 

$

108

 

 

$

54

 

 

$

27

 

 

$

355

 

 

 

 

The increase in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by fewer temporary store closures, same-store sales growth, net unit growth including the acquisition of Suzhou KFC, commodity deflation of 7% and higher productivity, partially offset by increased value promotions, lower temporary relief provided by landlords and government agencies and wage inflation of 2%.

 

Franchise Fees and Income

 

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

 

G&A Expenses

 

The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by lapping one-time reductions in social security contributions in the first quarter of 2020 and merit increases.

 

Operating Profit

 

The increase in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit.

 

35


 

 

Pizza Hut

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Reported

 

Ex F/X

 

Company sales

 

$

538

 

 

$

322

 

 

 

67

 

 

 

 

56

 

 

 

Franchise fees and income

 

 

2

 

 

 

1

 

 

 

90

 

 

 

 

77

 

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

1

 

 

 

1

 

 

 

91

 

 

 

 

77

 

 

 

Total revenues

 

$

541

 

 

$

324

 

 

 

67

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant profit

 

$

82

 

 

$

1

 

 

NM

 

 

 

NM

 

 

 

Restaurant margin %

 

 

15.3

%

 

 

0.3

%

 

 

15.0

 

ppts.

 

 

15.0

 

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

25

 

 

$

24

 

 

 

(6

)

 

 

 

2

 

 

 

Franchise expenses

 

$

1

 

 

$

1

 

 

 

(38

)

 

 

 

(28

)

 

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

$

1

 

 

$

1

 

 

 

(75

)

 

 

 

(63

)

 

 

Closures and impairment

   expenses, net

 

$

(2

)

 

$

5

 

 

NM

 

 

 

NM

 

 

 

Operating Profit

 

$

60

 

 

$

(28

)

 

NM

 

 

 

NM

 

 

 

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

System Sales Growth (Decline)

 

 

68

%

 

 

(40

)%

 

System Sales Growth (Decline), excluding F/X

 

 

57

%

 

 

(38

)%

 

Same-Store Sales Growth (Decline)

 

 

38

%

 

 

(31

)%

 

 

Unit Count

 

3/31/2021

 

 

3/31/2020

 

 

% Increase

 

Company-owned

 

 

2,255

 

 

 

2,166

 

 

 

4

 

Franchisees

 

 

127

 

 

 

105

 

 

 

21

 

 

 

 

2,382

 

 

 

2,271

 

 

 

5

 

 

Company Sales and Restaurant Profit

 

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

 

 

 

Quarter Ended

 

Income (Expense)

 

3/31/2020

 

 

Store 

Portfolio 

Actions

 

 

Other

 

 

F/X

 

 

3/31/2021

 

Company sales

 

$

322

 

 

$

53

 

 

$

126

 

 

$

37

 

 

$

538

 

Cost of sales

 

 

(102

)

 

 

(15

)

 

 

(32

)

 

 

(11

)

 

 

(160

)

Cost of labor

 

 

(104

)

 

 

(10

)

 

 

(18

)

 

 

(11

)

 

 

(143

)

Occupancy and other

   operating expenses

 

 

(115

)

 

 

(11

)

 

 

(17

)

 

 

(10

)

 

 

(153

)

Restaurant profit

 

$

1

 

 

$

17

 

 

$

59

 

 

$

5

 

 

$

82

 

 

 

36


 

 

The increase in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, fewer temporary store closures, commodity deflation of 5% and higher productivity, partially offset by increased value promotions, lower temporary relief provided by landlords and government agencies and wage inflation of 3%.

 

Operating Profit

 

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

 

All Other Segments

 

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

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Reported

 

 

 

Ex F/X

 

 

 

Company sales

 

$

10

 

 

$

6

 

 

 

76

 

 

 

 

63

 

 

 

Franchise fees and income

 

 

7

 

 

 

1

 

 

NM

 

 

 

NM

 

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

 

26

 

 

 

5

 

 

NM

 

 

 

NM

 

 

 

Other revenues

 

 

35

 

 

 

16

 

 

NM

 

 

 

NM

 

 

 

Total revenues

 

$

78

 

 

$

28

 

 

NM

 

 

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant loss

 

$

(2

)

 

$

(3

)

 

 

50

 

 

 

 

54

 

 

 

Restaurant margin %

 

 

(13.3

)%

 

 

(46.9

)%

 

 

33.6

 

ppts.

 

 

33.6

 

ppts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&A expenses

 

$

9

 

 

$

8

 

 

 

(22

)

 

 

 

(13

)

 

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

$

24

 

 

$

4

 

 

NM

 

 

 

NM

 

 

 

Other operating costs

   and expenses

 

$

33

 

 

$

15

 

 

NM

 

 

 

NM

 

 

 

Closures and impairment

   expenses, net

 

$

 

 

$

2

 

 

 

100

 

 

 

 

100

 

 

 

Other expenses, net

 

$

3

 

 

$

 

 

NM

 

 

 

NM

 

 

 

Operating Loss

 

$

(3

)

 

$

(10

)

 

 

74

 

 

 

 

76

 

 

 

 

 

 

Quarter Ended

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Same-Store Sales Growth (Decline)

 

 

14

%

 

 

(30

)%

 

 

 

Total Revenues

 

The increase in Total revenues for the quarter, excluding the impact of F/X, was primarily driven by the revenue generated from our delivery team and the consolidation of Huang Ji Huang.

 

37


 

 

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 Huang Ji Huang.

 

Operating Loss

 

The decrease in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by Operating profit generated by Huang Ji Huang and the improvement in operating results of our other operating segments.

 

Corporate and Unallocated

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

 

% B/(W)

 

 

 

 

3/31/2021

 

 

3/31/2020

 

 

Reported

 

 

Ex F/X

 

 

Revenues from transactions

   with franchisees and

   unconsolidated affiliates

 

$

129

 

 

$

139

 

 

 

(8

)

 

 

(14

)

 

Other revenue

 

$

2

 

 

$

1

 

 

NM

 

 

NM

 

 

Expenses for transactions

   with franchisees and

   unconsolidated affiliates

 

$

129

 

 

$

135

 

 

 

5

 

 

 

11

 

 

Other operating

   costs and expenses

 

$

3

 

 

$

1

 

 

NM

 

 

NM

 

 

Corporate G&A expenses

 

$

41

 

 

$

21

 

 

 

(94

)

 

 

(84

)

 

Other unallocated expenses

 

$

 

 

$

(1

)

 

 

96

 

 

 

95

 

 

Interest income, net

 

$

15

 

 

$

9

 

 

 

68

 

 

 

61

 

 

Investment loss

 

$

(12

)

 

$

(8

)

 

 

(42

)

 

 

(42

)

 

Income tax provision

  (See Note 12)

 

$

(102

)

 

$

(32

)

 

 

(218

)

 

 

(202

)

 

Effective tax rate

  (See Note 12)

 

 

29.6

%

 

 

32.7

%

 

 

3.1

%

 

 

3.1

%

 

 

 

 

Revenues from Transactions with Franchisees and Unconsolidated Affiliates

 

Revenues from transactions with franchisees and unconsolidated affiliates primarily include revenues derived from the Company’s central procurement model whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees and unconsolidated affiliates. The decrease for the quarter, excluding the impact of F/X, was mainly due to the acquisition of Suzhou KFC.

 

G&A Expenses

 

The increase in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily due to the timing shift of government incentives received and higher compensation costs.

 

Investment Loss

 

The Investment loss mainly relates to our investment in equity securities of Sunner partially offset by investment gain in Meituan. See Note 6 for additional information.

38


 

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 lower effective tax rate for the quarter ended March 31, 2021 was primarily due to impact from our investment in equity securities of Meituan and lower estimated repatriation of earnings outside of China subject to foreign withholding tax.

 

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

 

Impact of COVID-19 Pandemic

 

Starting in late January 2020, the COVID-19 pandemic has significantly impacted the Company’s operations and financial results. While the lingering effects of the pandemic continue to impact our operations, the Company reported substantial year-over-year growth in the first quarter of 2021, as we began to lap prior year periods that were impacted by COVID-19. Sales in the first quarter of 2021 were impacted by regional resurgences of COVID-19 before the Chinese New Year and tightened public health measures across China.

 

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

 

Tax Examination on Transfer Pricing

 

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

 

PRC Value-Added Tax (“VAT”)

 

Effective May 1, 2016, 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.

 

39


 

 

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 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 March 31, 2021, an input VAT credit asset of $271 million and payable of $4 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the 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 March 31, 2021. 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.

 

Consolidated Cash Flows

 

Our cash flows for the quarters ended March 31, 2021 and 2020 were as follows:

 

Net cash provided by operating activities was $331 million in 2021 as compared to $60 million in 2020. The increase was primarily driven by the increase in net income along with the working capital changes.

 

Net cash used in investing activities was $347 million in 2021 as compared to $2 million net cash provided by investing activities in 2020. The change is mainly due to cash consideration for the acquisition of a 5% equity interest in Sunner and higher capital expenditure.

 

Net cash used in financing activities was $55 million in 2021, remaining relatively flat as compared to $52 million in 2020.

 

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.

40


 

 

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

 

Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. Starting in the second quarter of 2020, our share repurchases have been suspended due to the impacts of the COVID-19 pandemic. No shares were repurchased during the quarter ended March 31, 2021. During the quarter ended March 31, 2020, the Company repurchased $7 million or 0.2 million shares of common stock under the repurchase program.

 

For the quarters ended March 31, 2021 and 2020, the Company paid cash dividends of approximately $50 million and $45 million, respectively, to stockholders through quarterly dividend payments of $0.12 per share.

 

On April 27, 2021, the Board of Directors declared a cash dividend of $0.12 per share, payable on June 18, 2021, to stockholders of record as of the close of business on May 25, 2021. The total estimated cash dividend payable is approximately $50 million.

 

41


 

 

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.

 

Borrowing Capacity

 

As of March 31, 2021, the Company had credit facilities of RMB3,611 million (approximately $551 million), comprised of onshore credit facilities of RMB2,300 million (approximately $351 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 three years as of March 31, 2021. 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 March 31, 2021, we had outstanding bank guarantees of RMB 112 million (approximately $17 million) mainly to secure our lease payment 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 March 31, 2021.

 

Off-Balance Sheet Arrangements

 

See the Guarantees section of Note 14 for discussion of our off-balance sheet arrangements.

 

New Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

See Note 2 for details of recently adopted accounting pronouncements.

 

New Accounting Pronouncements Not Yet Adopted

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which eliminates two of the three models 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. ASU 2020-06 is effective for the Company from January 1, 2022, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will 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,” “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 COFFii & JOY and Lavazza may not be successful, (u) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (v) challenges and risks related to our e-commerce business, (w) our inability or failure to recognize, respond to and effectively manage the impact of social media, (x) failure to comply with anti-bribery or anti-corruption laws, (y) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (z) changes in consumer discretionary spending and general economic conditions, (aa) the fact that the restaurant industry in which we operate is highly competitive, (bb) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (cc) our inability to adequately protect the intellectual property we own or have the right to use, (dd) our licensor’s failure to protect its intellectual property, (ee) seasonality and certain major events in China, (ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (gg) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (hh) our strategic investments or acquisitions may be unsuccessful; (ii) our investment in technology and innovation may not generate the expected level of returns, (jj) fair value changes for our investment in equity securities and lower yields of our short-term investments may adversely affect our financial condition and results of operations, and (kk) our operating results may be adversely affected by our investment in unconsolidated affiliates;

 

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

 

 

Risks related to the separation and related transactions, such as (a) 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.

 

44


 

 

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) 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.

 

45


 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Rate Risk

 

Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. While substantially all of our supply purchases are denominated in RMB, from time to time, we enter into agreements at predetermined exchange rates with third parties to purchase certain amount of goods and services sourced overseas and make payments in the corresponding local currencies when practical, to minimize the related foreign currency exposure with immaterial impact on our financial statements.  

 

As substantially all of the Company’s assets are located in China, the Company is exposed to movements in the RMB foreign currency exchange rate. For the quarter ended March 31, 2021, the Company’s Operating profit would have decreased by approximately $32 million if the RMB weakened 10% relative to the US$. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices.

 

Commodity Price Risk

 

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

 

Investment Risk

 

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

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by 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 March 31, 2021 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.

 

Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.

 

Item 1A.

Risk Factors

 

We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. 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, which was filed with the SEC on February 26, 2021.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Our Board of Directors authorized an aggregate of $1.4 billion for our share repurchase program, including its most recent increase in authorization on October 31, 2018. The authorizations do not have an expiration date. As a result of the COVID-19 pandemic impact, we have taken, and are continuing to take, certain actions to provide additional liquidity and flexibility, which include suspending our share repurchase program.

 

No shares were repurchased during the quarter ended March 31, 2021.

 

 

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Item 6.

Exhibits

 

Exhibit

Number

 

Description of Exhibits

 

 

 

    3.1

 

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

 

 

 

    3.2

 

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

 

 

 

  31.1

 

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

 

 

 

  31.2

 

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

 

 

 

  32.1

 

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

 

 

 

  32.2

 

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

 

 

 

101.INS

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document *

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document  *

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document  *

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document  *

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document  *

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document  *

 

 

 

104

 

Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document  *

 

*

Filed or furnished herewith.

48


 

 

SIGNATURES

 

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

 

 

Yum China Holdings, Inc.

 

(Registrant)

 

Date:

 

May 6, 2021

/s/  Xueling Lu

 

 

 

Controller and Principal Accounting Officer

 

 

 

 

 

 

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