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, 2018
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) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☒ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☐ (Do not check if a small reporting company) |
|
Smaller reporting company |
|
☐ |
|
|
|
|
Emerging growth company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of April 26, 2018 was 386,080,418 shares.
INDEX
2
PART I – FINANCI AL INFORMATION
Condensed Consolidated Statements of Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions, except for per share data)
|
|
Quarter Ended |
||||||||
Revenues |
|
3/31/2018 |
|
3/31/2017 |
||||||
Company sales |
|
$ |
2,016 |
|
|
|
$ |
1,738 |
|
|
Franchise fees and income |
|
|
40 |
|
|
|
|
36 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
|
161 |
|
|
|
|
147 |
|
|
Other revenues |
|
|
4 |
|
|
|
|
5 |
|
|
Total revenues |
|
|
2,221 |
|
|
|
|
1,926 |
|
|
Costs and Expenses, Net |
|
|
|
|
|
|
|
|
|
|
Company restaurants |
|
|
|
|
|
|
|
|
|
|
Food and paper |
|
|
594 |
|
|
|
|
486 |
|
|
Payroll and employee benefits |
|
|
442 |
|
|
|
|
368 |
|
|
Occupancy and other operating expenses |
|
|
619 |
|
|
|
|
530 |
|
|
Company restaurant expenses |
|
|
1,655 |
|
|
|
|
1,384 |
|
|
General and administrative expenses |
|
|
114 |
|
|
|
|
98 |
|
|
Franchise expenses |
|
|
20 |
|
|
|
|
18 |
|
|
Expenses for transactions with franchisees and unconsolidated affiliates |
|
|
160 |
|
|
|
|
147 |
|
|
Other operating costs |
|
|
4 |
|
|
|
|
3 |
|
|
Other income, net |
|
|
(127 |
) |
|
|
|
(20 |
) |
|
Total costs and expenses, net |
|
|
1,826 |
|
|
|
|
1,630 |
|
|
Operating Profit |
|
|
395 |
|
|
|
|
296 |
|
|
Interest income, net |
|
|
8 |
|
|
|
|
4 |
|
|
Income Before Income Taxes |
|
|
403 |
|
|
|
|
300 |
|
|
Income tax provision |
|
|
(107 |
) |
|
|
|
(90 |
) |
|
Net income – including noncontrolling interests |
|
|
296 |
|
|
|
|
210 |
|
|
Net income – noncontrolling interests |
|
|
8 |
|
|
|
|
6 |
|
|
Net Income – Yum China Holdings, Inc. |
|
$ |
288 |
|
|
|
$ |
204 |
|
|
Weighted-average common shares outstanding (in millions): |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
386 |
|
|
|
|
388 |
|
|
Diluted |
|
|
401 |
|
|
|
|
395 |
|
|
Basic Earnings Per Common Share |
|
$ |
0.75 |
|
|
|
$ |
0.53 |
|
|
Diluted Earnings Per Common Share |
|
$ |
0.72 |
|
|
|
$ |
0.52 |
|
|
Cash Dividends Declared Per Common Share |
|
$ |
0.10 |
|
|
|
$ |
— |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statements o f Comprehensive Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
|
|
|
|
|
|
|
|
|
|
|
Net income - including noncontrolling interests |
|
$ |
296 |
|
|
|
$ |
210 |
|
|
Other comprehensive income, net of tax of nil: |
|
|
|
|
|
|
|
|
|
|
Foreign currency gains arising during the period |
|
|
90 |
|
|
|
|
15 |
|
|
Comprehensive income - including noncontrolling interests |
|
|
386 |
|
|
|
|
225 |
|
|
Comprehensive income - noncontrolling interests |
|
|
11 |
|
|
|
|
7 |
|
|
Comprehensive Income - Yum China Holdings, Inc. |
|
$ |
375 |
|
|
|
$ |
218 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Condensed Consolidated Stateme nts of Cash Flows (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
Cash Flows – Operating Activities |
|
|
|
|
|
|
|
|
|
|
Net income – including noncontrolling interests |
|
$ |
296 |
|
|
|
$ |
210 |
|
|
Depreciation and amortization |
|
|
118 |
|
|
|
|
96 |
|
|
Gain from re-measurement of equity interest upon acquisition |
|
|
(98 |
) |
|
|
|
— |
|
|
Deferred income taxes |
|
|
23 |
|
|
|
|
(1 |
) |
|
Equity income from investments in unconsolidated affiliates |
|
|
(23 |
) |
|
|
|
(21 |
) |
|
Distributions received from unconsolidated affiliates |
|
|
36 |
|
|
|
|
27 |
|
|
Share-based compensation |
|
|
6 |
|
|
|
|
5 |
|
|
Changes in accounts receivable |
|
|
11 |
|
|
|
|
14 |
|
|
Changes in inventories |
|
|
48 |
|
|
|
|
26 |
|
|
Changes in prepaid expenses and other current assets |
|
|
(7 |
) |
|
|
|
4 |
|
|
Changes in accounts payable and other current liabilities |
|
|
85 |
|
|
|
|
(63 |
) |
|
Changes in income taxes payable |
|
|
63 |
|
|
|
|
58 |
|
|
Other, net |
|
|
(7 |
) |
|
|
|
(19 |
) |
|
Net Cash Provided by Operating Activities |
|
|
551 |
|
|
|
|
336 |
|
|
Cash Flows – Investing Activities |
|
|
|
|
|
|
|
|
|
|
Capital spending |
|
|
(111 |
) |
|
|
|
(112 |
) |
|
Purchases of short-term investments |
|
|
(160 |
) |
|
|
|
(100 |
) |
|
Maturities of short-term investments |
|
|
93 |
|
|
|
|
— |
|
|
Proceeds from refranchising of restaurants |
|
|
1 |
|
|
|
|
2 |
|
|
Acquisition of business, net of cash acquired |
|
|
(88 |
) |
|
|
|
— |
|
|
Other, net |
|
|
(2 |
) |
|
|
|
(1 |
) |
|
Net Cash Used in Investing Activities |
|
|
(267 |
) |
|
|
|
(211 |
) |
|
Cash Flows – Financing Activities |
|
|
|
|
|
|
|
|
|
|
Payment of capital lease obligation |
|
|
— |
|
|
|
|
(1 |
) |
|
Payment of short-term borrowings assumed from acquisition |
|
|
(10 |
) |
|
|
|
— |
|
|
Cash dividends paid |
|
|
(39 |
) |
|
|
|
— |
|
|
Other, net |
|
|
(2 |
) |
|
|
|
(10 |
) |
|
Net Cash Used in Financing Activities |
|
|
(51 |
) |
|
|
|
(11 |
) |
|
Effect of Exchange Rates on Cash and Cash Equivalents |
|
|
26 |
|
|
|
|
4 |
|
|
Net Increase in Cash and Cash Equivalents |
|
|
259 |
|
|
|
|
118 |
|
|
Cash and Cash Equivalents - Beginning of Period |
|
|
1,059 |
|
|
|
|
885 |
|
|
Cash and Cash Equivalents - End of Period |
|
$ |
1,318 |
|
|
|
$ |
1,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax |
|
|
20 |
|
|
|
|
31 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Condensed Co nsolidated Balance Sheets (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
|
|
3/31/2018 |
|
12/31/2017 |
||||||
ASSETS |
|
|
|
|
|
|
|
|||
Current Assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,318 |
|
|
|
$ |
1,059 |
|
|
Short-term investments |
|
|
276 |
|
|
|
|
205 |
|
|
Accounts receivable, net |
|
|
63 |
|
|
|
|
81 |
|
|
Inventories, net |
|
|
261 |
|
|
|
|
297 |
|
|
Prepaid expenses and other current assets |
|
|
203 |
|
|
|
|
160 |
|
|
Total Current Assets |
|
|
2,121 |
|
|
|
|
1,802 |
|
|
Property, plant and equipment, net |
|
|
1,755 |
|
|
|
|
1,691 |
|
|
Goodwill |
|
|
291 |
|
|
|
|
108 |
|
|
Intangible assets, net |
|
|
161 |
|
|
|
|
101 |
|
|
Investments in unconsolidated affiliates |
|
|
44 |
|
|
|
|
95 |
|
|
Other assets |
|
|
412 |
|
|
|
|
385 |
|
|
Deferred income taxes |
|
|
110 |
|
|
|
|
105 |
|
|
Total Assets |
|
$ |
4,894 |
|
|
|
$ |
4,287 |
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY |
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities |
|
$ |
1,114 |
|
|
|
$ |
985 |
|
|
Income taxes payable |
|
|
106 |
|
|
|
|
39 |
|
|
Total Current Liabilities |
|
|
1,220 |
|
|
|
|
1,024 |
|
|
Capital lease obligations |
|
|
29 |
|
|
|
|
28 |
|
|
Other liabilities and deferred credits |
|
|
442 |
|
|
|
|
388 |
|
|
Total Liabilities |
|
|
1,691 |
|
|
|
|
1,440 |
|
|
Redeemable Noncontrolling Interest |
|
|
5 |
|
|
|
|
5 |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 1,000 million shares authorized; 390 million shares and 389 million shares issued at March 31, 2018 and December 31, 2017, respectively; 386 million shares and 385 million shares outstanding at March 31, 2018 and December 31, 2017, respectively |
|
|
4 |
|
|
|
|
4 |
|
|
Treasury stock |
|
|
(148 |
) |
|
|
|
(148 |
) |
|
Additional paid-in capital |
|
|
2,381 |
|
|
|
|
2,375 |
|
|
Retained earnings |
|
|
646 |
|
|
|
|
397 |
|
|
Accumulated other comprehensive income |
|
|
224 |
|
|
|
|
137 |
|
|
Total Equity – Yum China Holdings, Inc. |
|
|
3,107 |
|
|
|
|
2,765 |
|
|
Noncontrolling interests |
|
|
91 |
|
|
|
|
77 |
|
|
Total Equity |
|
|
3,198 |
|
|
|
|
2,842 |
|
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity |
|
$ |
4,894 |
|
|
|
$ |
4,287 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Notes to Condensed Consolidated F inancial Statements (Unaudited)
(Tabular amounts in US$ millions)
Note 1 – Description of the Business
Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016. The Company separated from Yum! Brands, Inc. (“YUM” or the “Parent”) on October 31, 2016 (the “separation”), becoming an independent publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016.
The Company owns, franchises or has an ownership in entities that own and operate restaurants under the KFC, Pizza Hut, East Dawning, Little Sheep and Taco Bell concepts (collectively, the “Concepts”). In connection with the separation of the Company from YUM, Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect subsidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of Yum China, entered into a 50-year master license agreement with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew, for the exclusive right to use and sub-license the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China, excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”). In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the East Dawning and Little Sheep intellectual property 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.
Note 2 – Basis of Presentation
In connection with our separation from YUM, the direct and indirect equity interests of all of our operating subsidiaries and intermediate holding companies were transferred from YUM to Yum China, when Yum China was still one of YUM’s subsidiaries, through a series of transactions, which were completed in August 2016. The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM.
For periods prior to October 31, 2016, the combined financial statements of YUM’s China businesses and operations when Yum China was a wholly-owned subsidiary of YUM are referred to as Condensed Combined Financial Statements. For periods subsequent to October 31, 2016, the consolidated financial statements of the Company as a separate publicly traded company following its separation from YUM are referred to as Condensed Consolidated Financial Statements.
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, 2018, and the results of our operations, comprehensive income and cash flows for the quarters ended March 31, 2018 and 2017. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Consolidated and Combined Financial Statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 27, 2018.
7
Through the acquisition of Daojia during the second quarter of 2017 , the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary re lationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb substantially all of the profits and all of the expected losses of the VIE . The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.
During the quarter ended March 31, 2018, the Company completed the acquisition of an additional 36% equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), for cash consideration of approximately $98 million, increasing the Company’s equity interest to 83%, allowing the Company to consolidate the entity. The acquisition was considered immaterial. We began consolidating Wuxi KFC upon the completion of acquisition during the quarter ended March 31, 2018.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), or ASC 606, to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries. The standard allows for either a full retrospective or modified retrospective transition method. In March, April and May 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU No. 2016-04, Liabilities-Extinguishments of liabilities (Subtopic 450-20): Revenue of Breakage for Certain Prepaid Stored-Value Products (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-04”), ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”) and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The Company adopted these standards during the quarter ended March 31, 2018 and applied the full retrospective approach.
The new standard did not have an impact on our recognition of revenue from Company-owned restaurants or our recognition of continuing fees from franchisees and unconsolidated affiliates, however it changed the way we account for upfront fees. Upfront fees, such as initial and renewal fees from franchisees and unconsolidated affiliates, were previously recognized as revenue when we performed substantially all initial services required by the franchise agreement, generally upon the opening of a store or when a renewal agreement with a franchisee became effective. We now recognize the upfront fees from franchisees and unconsolidated affiliates as revenue over the term of each franchise agreement as the franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with the new standard. Any unamortized portion of fees received is accounted for as a contract liability.
The new standard also had an impact on certain transactions we entered into with franchisees and unconsolidated affiliates, such as sales of food and paper products and advertising services. These transactions were previously either not included or presented on a net basis in our statements of income or cash flows based on industry-specific guidance included in previous accounting guidance, which was superseded by the new standard. Under the new standard, we consider ourselves the principal in these arrangements as we have the ability to control a promised good or service before transferring that good or service to the customer. Therefore we include such transactions in revenues and expenses on the Condensed Consolidated Statements of Income with no significant impact to Net income.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), which provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2016-15 during the quarter ended March 31, 2018, and such adoption did not have a material impact on our financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted ASU 2016-16 during the quarter ended March 31, 2018, and such adoption did not have a material impact on our financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that entities show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 during the quarter ended March 31, 2018, and such adoption did not have a material impact on our financial statements.
8
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. We adopted ASU 2017-01 during the quarter ended March 31, 2018, and such adoption did not have a material impact on our financial statements.
Certain comparative items in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.
Our fiscal year ends on December 31. Effective at the beginning of fiscal year 2018, the Company changed its fiscal calendar from two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter, to four three-month quarters ending on March 31, June 30, September 30 and December 31 of each year. The change was made to align with how management now measures performance internally and to facilitate the comparability of our results with peers using calendar quarters. Quarterly results of all prior financial periods presented have been recast as if they had been reported under our new fiscal calendar.
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 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.
Franchise Fees and Income
Franchise fees and income primarily include upfront fees, such as initial fees and renewal fees, and continuing fees. We have determined that the services we provide in exchange for upfront fees and continuing fees are highly interrelated with the franchise right. We recognize upfront fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with ASC 606. The franchise agreement term is generally 10 years for KFC and Pizza Hut, and five or 10 years for Little Sheep. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
Revenues from transactions with franchisees and unconsolidated affiliates consist primarily of sales of food and paper products, advertising services and other services provided to franchisees and unconsolidated affiliates.
The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates, and then sells and delivers them to the restaurants. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on 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.
9
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 sub stantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer support and technology support services. Advertising services and oth er services provided are highly interrelated to franchise right so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation and 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 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. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns, including an estimate of the breakage for points that members will never redeem. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.
Accounts Receivable
Accounts receivable mainly consist of trade receivables and royalties from franchisees and unconsolidated affiliates and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Condensed Consolidated Balance Sheets. Our provision for uncollectible receivable balances is based upon pre-defined aging criteria or upon the occurrence of other events that indicate that we may not collect the balance due. Additionally, we monitor the financial condition of our franchisees and record provisions for estimated losses on receivables when we believe it probable that our franchisees will be unable to make their required payments. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Trade receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts.
Costs to Obtain Contracts
Costs to obtain contracts represent the portion of upfront license 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. They meet the requirements to be capitalized as the Company expects to generate future economic benefits from such costs incurred, which allow us to enter into franchise agreements and collect fees. Such costs to obtain contracts are included in Other assets on the Condensed Consolidated Balance Sheets and are amortized over the term of the franchise agreement. Subsequent to the separation, we are no longer required to pay YUM any upfront fees that we receive from franchisees and unconsolidated affiliates. The Company did not incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $10 million and $12 million at March 31, 2018 and December 31, 2017, respectively.
Contract Liabilities
Contract liabilities at March 31, 2018 and December 31, 2017 were as follows:
Contract liabilities |
|
3/31/2018 |
|
12/31/2017 |
||||||
- Deferred revenue related to prepaid stored-value products |
|
$ |
52 |
|
|
|
$ |
50 |
|
|
- Deferred revenue related to customer loyalty programs |
|
|
21 |
|
|
|
|
16 |
|
|
- Deferred revenue related to upfront fees |
|
|
39 |
|
|
|
|
39 |
|
|
Total |
|
$ |
112 |
|
|
|
$ |
105 |
|
|
Contract liabilities consist of deferred revenue related to prepaid stored-value products, customer loyalty programs and upfront fees. Deferred revenue related to prepaid stored-value products and customer loyalty programs is included in Accounts payable and other
10
current liabilities on the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront fees that we expect to recognize as reve nue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities and deferred credits on the Condensed Consolidated Balance Sheets. Revenue recognized in the quarter ended M arch 31, 2018 that was included in the contract liability balance at the beginning of the period amounted to $19 million. Changes in contract liability balances were not materially impacted by business acquisition , change in estimate of transaction price o r 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 franchise right and other related services . The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to franchisees and unconsolidated affiliates based on certain percentage of sales, as those sales occur.
Note 4 – Earnings Per Common Share (“EPS”)
The following table summarizes the components of basic and diluted earnings per share (in millions, except for per share data):
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
Net Income – Yum China Holdings, Inc. |
|
$ |
288 |
|
|
|
$ |
204 |
|
|
Weighted-average common shares outstanding (for basic calculation) (a) |
|
|
386 |
|
|
|
|
388 |
|
|
Effect of dilutive share-based employee compensation (a) |
|
|
12 |
|
|
|
|
7 |
|
|
Effect of dilutive warrants (b) |
|
|
3 |
|
|
|
|
— |
|
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) |
|
|
401 |
|
|
|
|
395 |
|
|
Basic Earnings Per Common Share |
|
$ |
0.75 |
|
|
|
$ |
0.53 |
|
|
Diluted Earnings Per Common Share |
|
$ |
0.72 |
|
|
|
$ |
0.52 |
|
|
Employee stock options, stock appreciation rights and warrants excluded from the diluted EPS computation (c) |
|
|
1 |
|
|
|
|
19 |
|
|
(a) |
As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards on shares of common stock of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of common shares outstanding. The outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect. |
(b) |
Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors two tranches of warrants on January 9, 2017, with each tranche providing the right to purchase 8,200,405 shares of Yum China common stock, at an exercise price of $31.40 and $39.25 per share, respectively. The warrants may be exercised at any time through October 31, 2021 and contain customary anti-dilution protections. The outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the period exceeds the exercise price of the warrants. |
(c) |
These outstanding employee stock options, stock appreciation rights and warrants were not included in the computation of diluted EPS because to do so would have been antidilutive for the quarters presented. |
11
Changes in Equity and Redeemable Noncontrolling Interest
|
|
Yum China Holdings, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable |
|
||||||||
|
|
Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Noncontrolling |
|
|
Total |
|
|
Noncontrolling |
|
||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Interests |
|
|
Equity |
|
|
Interest |
|
||||||||||
Balance at December 31, 2017 |
|
|
389 |
|
|
$ |
4 |
|
|
$ |
2,375 |
|
|
$ |
397 |
|
|
$ |
137 |
|
|
|
(4 |
) |
|
$ |
(148 |
) |
|
$ |
77 |
|
|
$ |
2,842 |
|
|
$ |
5 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
296 |
|
|
|
|
|
Foreign currency translation gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
90 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
|
|
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
Cash dividends declared ($0.10 Per Common Share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
(33 |
) |
|
|
|
|
Exercise and vesting of share-based awards |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Balance at March 31, 2018 |
|
|
390 |
|
|
$ |
4 |
|
|
$ |
2,381 |
|
|
$ |
646 |
|
|
$ |
224 |
|
|
|
(4 |
) |
|
$ |
(148 |
) |
|
$ |
91 |
|
|
$ |
3,198 |
|
|
$ |
5 |
|
Share Repurchase Program
On February 7, 2017, we announced that our Board of Directors authorized a $300 million share repurchase program. On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million. No shares of Yum China common stock were repurchased during the quarters ended March 31, 2018 and 2017.
Note 6 – Other Income, net
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
Equity income from investments in unconsolidated affiliates |
|
$ |
23 |
|
|
|
$ |
21 |
|
|
Gain from re-measurement of equity interest upon acquisition (a) |
|
|
98 |
|
|
|
|
— |
|
|
Foreign exchange gain and other |
|
|
6 |
|
|
|
|
(1 |
) |
|
Other income, net |
|
$ |
127 |
|
|
|
$ |
20 |
|
|
(a) |
As a result of the acquisition of Wuxi KFC as disclosed in Note 2, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes. |
Note 7 – Supplemental Balance Sheet Information
Accounts Receivable, net |
|
3/31/2018 |
|
12/31/2017 |
||||||
Accounts receivable, gross |
|
$ |
64 |
|
|
|
$ |
83 |
|
|
Allowance for doubtful accounts |
|
|
(1 |
) |
|
|
|
(2 |
) |
|
Accounts receivable, net |
|
$ |
63 |
|
|
|
$ |
81 |
|
|
Prepaid Expenses and Other Current Assets |
|
3/31/2018 |
|
12/31/2017 |
||||||
Prepaid rent |
|
$ |
44 |
|
|
|
$ |
41 |
|
|
Receivables from payment processors and aggregators |
|
|
32 |
|
|
|
|
38 |
|
|
Dividends receivable from unconsolidated affiliates |
|
|
48 |
|
|
|
|
21 |
|
|
Other prepaid expenses and current assets |
|
|
79 |
|
|
|
|
60 |
|
|
Prepaid expenses and other current assets |
|
$ |
203 |
|
|
|
$ |
160 |
|
|
12
|
3/31/2018 |
|
12/31/2017 |
|||||||
Buildings and improvements |
|
$ |
2,324 |
|
|
|
$ |
2,184 |
|
|
Capital leases, primarily buildings |
|
|
29 |
|
|
|
|
28 |
|
|
Machinery, equipment and construction in progress |
|
|
1,240 |
|
|
|
|
1,204 |
|
|
Property, plant and equipment, gross |
|
|
3,593 |
|
|
|
|
3,416 |
|
|
Accumulated depreciation |
|
|
(1,838 |
) |
|
|
|
(1,725 |
) |
|
Property, plant and equipment, net |
|
$ |
1,755 |
|
|
|
$ |
1,691 |
|
|
Other Assets |
|
3/31/2018 |
|
12/31/2017 |
|
|||||||
Land use right |
|
$ |
142 |
|
|
|
$ |
131 |
|
|
|
|
VAT assets |
|
|
189 |
|
|
|
|
176 |
|
|
|
|
Costs to obtain contracts |
|
|
10 |
|
|
|
|
12 |
|
|
|
|
Others |
|
|
71 |
|
|
|
|
66 |
|
|
|
|
Other Assets |
|
$ |
412 |
|
|
|
$ |
385 |
|
|
|
Accounts Payable and Other Current Liabilities |
|
3/31/2018 |
|
12/31/2017 |
||||||
Accounts payable |
|
$ |
529 |
|
|
|
$ |
424 |
|
|
Accrued capital expenditures |
|
|
112 |
|
|
|
|
142 |
|
|
Accrued compensation and benefits |
|
|
168 |
|
|
|
|
233 |
|
|
Accrued taxes, other than income taxes |
|
|
17 |
|
|
|
|
16 |
|
|
Dividends payable |
|
|
33 |
|
|
|
|
— |
|
|
Accrued marketing expenses |
|
|
104 |
|
|
|
|
28 |
|
|
Contract liabilities |
|
|
79 |
|
|
|
|
72 |
|
|
Other current liabilities |
|
|
72 |
|
|
|
|
70 |
|
|
Accounts payable and other current liabilities |
|
$ |
1,114 |
|
|
|
$ |
985 |
|
|
Other Liabilities and Deferred Credits |
|
3/31/2018 |
|
12/31/2017 |
||||||
Deferred escalating minimum rent |
|
$ |
168 |
|
|
|
$ |
162 |
|
|
Contract liabilities |
|
|
33 |
|
|
|
|
33 |
|
|
Accrued income tax payable |
|
|
114 |
|
|
|
|
112 |
|
|
Deferred income tax liabilities |
|
|
75 |
|
|
|
|
32 |
|
|
Other noncurrent liabilities and deferred credits |
|
|
52 |
|
|
|
|
49 |
|
|
Other liabilities and deferred credits |
|
$ |
442 |
|
|
|
$ |
388 |
|
|
Note 8 – 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, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross |
|
$ |
490 |
|
|
$ |
80 |
|
|
$ |
19 |
|
|
$ |
391 |
|
Accumulated impairment losses (a) |
|
|
(382 |
) |
|
|
— |
|
|
|
— |
|
|
|
(382 |
) |
Goodwill, net |
|
|
108 |
|
|
|
80 |
|
|
|
19 |
|
|
|
9 |
|
Goodwill acquired (b) |
|
|
175 |
|
|
|
175 |
|
|
|
— |
|
|
|
— |
|
Effect of currency translation adjustment |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
— |
|
Balance as of March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross |
|
|
673 |
|
|
|
262 |
|
|
|
20 |
|
|
|
391 |
|
Accumulated impairment losses (a) |
|
|
(382 |
) |
|
|
— |
|
|
|
— |
|
|
|
(382 |
) |
Goodwill, net |
|
$ |
291 |
|
|
$ |
262 |
|
|
$ |
20 |
|
|
$ |
9 |
|
( a ) |
Accumulated impairment losses represent Little Sheep goodwill impairment. |
13
Intangible assets, net as of March 31, 2018 and December 31, 2017 are as follows:
|
|
3/31/2018 |
|
|
12/31/2017 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
||||||
Definite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired franchise rights (c) |
|
$ |
165 |
|
|
$ |
(93 |
) |
|
$ |
72 |
|
|
$ |
100 |
|
|
$ |
(87 |
) |
|
$ |
13 |
|
Daojia platform |
|
|
18 |
|
|
|
(2 |
) |
|
|
16 |
|
|
|
18 |
|
|
|
(1 |
) |
|
|
17 |
|
Customer-related assets |
|
|
13 |
|
|
|
(7 |
) |
|
|
6 |
|
|
|
12 |
|
|
|
(6 |
) |
|
|
6 |
|
Other |
|
|
20 |
|
|
|
(11 |
) |
|
|
9 |
|
|
|
19 |
|
|
|
(10 |
) |
|
|
9 |
|
|
|
$ |
216 |
|
|
$ |
(113 |
) |
|
$ |
103 |
|
|
$ |
149 |
|
|
$ |
(104 |
) |
|
$ |
45 |
|
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Little Sheep trademark |
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
58 |
|
|
$ |
56 |
|
|
$ |
— |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
274 |
|
|
$ |
(113 |
) |
|
$ |
161 |
|
|
$ |
205 |
|
|
$ |
(104 |
) |
|
$ |
101 |
|
( c ) |
Increase in gross carrying amount of reacquired franchise rights during the quarter ended March 31, 2018 primarily resulted from the acquisition of Wuxi KFC. |
Amortization expense of definite-lived intangible assets was $6 million and $3 million for the quarters ended March 31, 2018 and 2017, respectively. As of March 31, 2018, expected amortization expense for the unamortized definite-lived intangible assets is approximately $22 million for the remainder of 2018, $22 million in 2019, $16 million in 2020, $16 million in 2021 and $15 million in 2022.
Note 9 – Fair Value Measurements
As of March 31, 2018, the carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated their fair values because of the short-term nature of these instruments.
In addition, certain of the Company’s assets, such as property, plant and equipment, goodwill and intangible assets, are measured at fair value on a non-recurring basis, if determined to be impaired.
During the quarters ended March 31, 2018 and 2017, we recorded restaurant-level impairment (Level 3) of nil and $3 million, respectively. The remaining net book value of the assets measured at fair value as of March 31, 2018, subsequent to these impairments, was not significant.
Note 10 – Income Taxes
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
Income tax provision |
|
$ |
107 |
|
|
|
$ |
90 |
|
|
Effective tax rate |
|
|
26.6 |
% |
|
|
|
30.0 |
% |
|
Our effective tax rate for the quarter ended March 31, 2018 was lower than the prior year primarily due to less estimated repatriation of current year earnings to the U.S.
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”) , which included a broad range of tax reforms, including, but not limited to, the establishment of a flat corporate income tax rate of 21% , the elimination or reduction of certain business deductions, and the imposition of tax on deemed repatriation of accumulated undistributed foreign earnings. The Tax Act impacted Yum China in two material aspects: (1) all of the foreign-source dividends received by Yum China from its foreign subsidiaries will be exempted from taxation starting from the tax year beginning after December 31, 2017 and (2) Yum China
14
recorded additional income tax expense in the fourth quarter of 2017, including an estimated one-time transition tax on its deemed repatriation of accumulated undistributed foreign earnings and additional tax related to revaluation of certain deferred tax assets.
The Tax Act requires a U.S. shareholder to tax on Global Intangible Low Taxed Income ( “ GILTI ” ) earned by foreign subsidiaries. The Company has not determined its accounting policy with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method. We have, however, included the 2018 estimate of current year GILTI as a period cost and included as part of the estimated annual effective tax rate.
As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service ( “ IRS ” ), and other standard-setting bodies, we may make adjustments to the provisional amounts. We continue to expect to complete our analysis within the measurement period not exceeding one year from the enactment date.
Note 11 – Reportable Operating Segments
We have two reportable segments: KFC and Pizza Hut. We also have four operating segments, East Dawning, Little Sheep, Taco Bell and Daojia, which are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate.
|
|
Quarter Ended |
||||||||
Revenues |
|
3/31/2018 |
|
3/31/2017 |
||||||
KFC |
|
$ |
1,498 |
|
|
|
$ |
1,250 |
|
|
Pizza Hut |
|
|
565 |
|
|
|
|
528 |
|
|
All Other Segments |
|
|
20 |
|
|
|
|
23 |
|
|
Corporate and Unallocated (a) |
|
|
138 |
|
|
|
|
125 |
|
|
Total |
|
$ |
2,221 |
|
|
|
$ |
1,926 |
|
|
|
|
Quarter Ended |
||||||||
Operating Profit |
|
3/31/2018 |
|
3/31/2017 |
||||||
KFC (b) |
|
$ |
296 |
|
|
|
$ |
245 |
|
|
Pizza Hut |
|
|
34 |
|
|
|
|
80 |
|
|
All Other Segments |
|
|
(4 |
) |
|
|
|
1 |
|
|
Unallocated revenues from transactions with franchisees and unconsolidated affiliates (a) |
|
|
137 |
|
|
|
|
125 |
|
|
Unallocated Other revenues (a) |
|
|
1 |
|
|
|
|
— |
|
|
Unallocated expenses from transactions with franchisees and unconsolidated affiliates (a) |
|
|
(137 |
) |
|
|
|
(125 |
) |
|
Unallocated Other operating costs (a) |
|
|
(1 |
) |
|
|
|
— |
|
|
Unallocated and corporate G&A expenses (a) |
|
|
(33 |
) |
|
|
|
(31 |
) |
|
Unallocated Other income (a)(c) |
|
|
102 |
|
|
|
|
1 |
|
|
Operating Profit |
|
$ |
395 |
|
|
|
$ |
296 |
|
|
Interest income, net (a) |
|
|
8 |
|
|
|
|
4 |
|
|
Income Before Income Taxes |
|
$ |
403 |
|
|
|
$ |
300 |
|
|
|
|
Identifiable Assets |
|
|||||
|
|
3/31/2018 |
|
|
12/31/2017 |
|
||
KFC (d) |
|
$ |
1,824 |
|
|
$ |
1,544 |
|
Pizza Hut |
|
|
670 |
|
|
|
668 |
|
All Other Segments |
|
|
147 |
|
|
|
144 |
|
Corporate and Unallocated (e) |
|
|
2,253 |
|
|
|
1,931 |
|
|
|
$ |
4,894 |
|
|
$ |
4,287 |
|
15
|
|
Long-Lived Assets (f) |
|
|||||
|
|
3/31/2018 |
|
|
12/31/2017 |
|
||
KFC |
|
$ |
1,453 |
|
|
$ |
1,152 |
|
Pizza Hut |
|
|
580 |
|
|
|
580 |
|
All Other Segments |
|
|
117 |
|
|
|
114 |
|
Corporate and Unallocated |
|
|
57 |
|
|
|
54 |
|
|
|
$ |
2,207 |
|
|
$ |
1,900 |
|
(a) |
Amounts have not been allocated to any segment for performance reporting purposes. |
(b) |
Includes equity income from investments in unconsolidated affiliates of $23 million and $21 million as of March 31, 2018 and 2017, respectively. |
(c) |
Amounts mainly include gain from re-measurement of previously held equity interest in connection with the acquisition of Wuxi KFC. See Note 6. |
( d ) |
Includes investments in the unconsolidated affiliates. |
(e) |
Primarily includes cash and cash equivalents, short-term investments and inventories that are centrally managed. |
(f) |
Includes property, plant and equipment, goodwill and intangible assets, net. |
Note 12 – Contingencies
Indemnification of China Tax on Indirect Transfers of Assets
In February 2015, the Chinese State Administration of Taxation (“SAT”) issued Bulletin 7 on Income arising from Indirect Transfers of Assets by Non-Resident Enterprises. Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a Chinese resident enterprise, by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to Chinese enterprise income tax at a rate of 10%.
YUM concluded and we concurred that it is more likely than not that YUM will not be subject to this tax with respect to the distribution. However, given how recently Bulletin 7 was promulgated, there are significant uncertainties regarding what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the taxing authorities will ultimately view the distribution. As a result, YUM’s position could be challenged by Chinese tax authorities resulting in a 10% tax assessed on the difference between the fair market value and the tax basis of the separated China business. As YUM’s tax basis in the China business is minimal, the amount of such tax could be significant.
Any tax liability arising from the application of Bulletin 7 to the distribution is expected to be settled in accordance with the tax matters agreement between the Company and YUM. Pursuant to the tax matters agreement, to the extent any Chinese indirect transfer tax pursuant to Bulletin 7 is imposed, such tax and related losses will be allocated between YUM and the Company in proportion to their respective share of the combined market capitalization of YUM and the Company during the 30 trading days after the separation. Such a settlement could be significant and have a material adverse effect on our results of operations and our financial condition. At the inception of the tax indemnity being provided to YUM, the fair value of the non-contingent obligation to stand ready to perform was insignificant and the liability for the contingent obligation to make payment was not probable or estimable.
Guarantees
From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of March 31, 2018, we have provided guarantees of approximately $2 million on behalf of franchisees and no guarantees were outstanding for unconsolidated affiliates.
16
From time to time, the Company is subject to various lawsuits covering a variety of allegations. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Condensed Consolidated 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 13 – Subsequent Events
On May 1, 2018, the Company announced that the Board of Directors declared a cash dividend of $0.10 per share on Yum China’s common stock, payable as of the close of business on June 20, 2018, to stockholders of record as of the close of business on May 30, 2018. Total estimated cash dividend payable is approximately $39 million.
17
References to the Company throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) are made using the first person notations of “we,” “us” or “our.” This MD&A contains forward-looking statements, including statements with respect to the retail tax structure reform and the potential effects thereof, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases, our ability to pay dividends and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.
Introduction
Yum China Holdings, Inc. is the largest restaurant company in China, with over 8,100 restaurants as of March 31, 2018. Our growing restaurant base consists of China’s leading restaurant brands and concepts, primarily KFC, Pizza Hut, East Dawning, Little Sheep and Taco Bell. Following our separation from YUM, we have had the exclusive right to operate and sub-license the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”), and we own the East Dawning and Little Sheep marks outright. We were the first major global restaurant brand when we entered China in 1987 and we have developed deep operating experience in the market. We have since grown to become one of China’s largest restaurant developers with locations in over 1,200 cities as of March 31, 2018.
KFC is the leading Quick-Service Restaurant (“QSR”) brand in the PRC in terms of system sales and number of restaurants. As of March 31, 2018, KFC operated over 5,600 restaurants in over 1,200 cities across China. Measured by number of restaurants, we believe KFC has a two-to-one lead over the nearest Western QSR competitor in China, and KFC has continued to grow in both large and small cities. During the quarter ended March 31, 2018, the Company completed the acquisition of an additional 36% interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), increasing equity interest to 83% and allowing the Company to consolidate the entity.
During the second quarter of 2017, we integrated the business of Pizza Hut Casual Dining and Pizza Hut Home Service as Pizza Hut. Segment financial information for prior periods has been recast to align with this change in segment reporting. After the integration, Pizza Hut continues to be the leading Casual Dining Restaurant (“CDR”) brand in China as measured by system sales and number of restaurants. We believe Pizza Hut has a four-to-one lead in terms of number of restaurants over its nearest Western CDR competitor in China. As of March 31, 2018, Pizza Hut operated over 2,200 restaurants in over 500 cities.
Separation from YUM
The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016.
Overview
We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company’s performance. Throughout this MD&A, we discuss the following performance metrics:
|
• |
The Company provides certain percentage changes excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. |
|
• |
System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our Concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales on 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. |
18
|
• |
Company Restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. Within the Company sales and Restaurant Profit analysis, Store Portfolio Actions represent the net impact of new unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation. |
|
• |
In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Diluted Earnings Per Common Share, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items, including store impairment charges. The Special Item for the quarter ended March 31, 2018 represents a gain recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, as described in Note 6. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These 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. |
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.
Effective at the beginning of fiscal 2018, the Company changed its fiscal calendar from two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter, to four three-month quarters ending on March 31, June 30, September 30 and December 31 of each year. Prior periods have been recast as if they had been reported under the new fiscal calendar.
Quarters ended March 31, 2018 and 2017
Results of Operations
Summary
The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of East Dawning, Little Sheep, Taco Bell and Daojia, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate.
Quarterly highlights: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|||||||||||
|
System Sales (a) |
|
|
Same-Store Sales (a) |
|
|
Net New Units |
|
Operating Profit |
|
|||
KFC |
+9 |
|
|
+5 |
|
|
+6 |
|
+21 |
|
|||
Pizza Hut |
|
(1 |
) |
|
|
(5 |
) |
|
+5 |
|
|
(58 |
) |
All Other Segments (b) |
|
(32 |
) |
|
|
(5 |
) |
|
+9 |
|
NM |
|
|
Total |
+6 |
|
|
+3 |
|
|
+6 |
|
+33 |
|
(a) |
System Sales and Same-Store Sales percentages as shown in tables exclude the impact of F/X. |
(b) |
Sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty, are excluded from System Sales and Same-Store Sales. |
19
As of March 31, 2018, the Company operated over 8,100 units, predominately KFC and Pizza Hut restaurants, which are the leading QSR and CDR brands, respectively, in mainland China. Given our strong competitive position, a growing economy and a population o f approximately 1.4 billion in mainland China, the Company has rapidly added KFC and Pizza Hut restaurants.
As compared to the first quarter of 2017, Company sales in the first quarter of 2018 increased 16%, or 7% if excluding the impact of F/X. The increase in Company sales during the quarter, excluding the impact of F/X, was driven by same-store sales growth and net unit growth. The increase in Restaurant profit for the quarter was driven by same-store sales leverage, partially offset by higher promotion and product upgrade costs and wage inflation.
The Consolidated Results of Operations for the quarters ended March 31, 2018 and 2017 are presented below:
|
|
Quarter Ended |
|
% B/(W) (a) |
|||||||||||
|
|
3/31/2018 |
|
3/31/2017 |
|
Reported |
|||||||||
Company sales |
|
$ |
2,016 |
|
|
|
$ |
1,738 |
|
|
|
|
16 |
|
|
Franchise fees and income |
|
|
40 |
|
|
|
|
36 |
|
|
|
|
11 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
|
161 |
|
|
|
|
147 |
|
|
|
|
9 |
|
|
Other revenues |
|
|
4 |
|
|
|
|
5 |
|
|
|
|
(23 |
) |
|
Total revenues |
|
$ |
2,221 |
|
|
|
$ |
1,926 |
|
|
|
|
15 |
|
|
Restaurant profit |
|
$ |
361 |
|
|
|
$ |
354 |
|
|
|
|
2 |
|
|
Restaurant Margin % |
|
|
17.9 |
% |
|
|
|
20.4 |
% |
|
|
|
(2.5 |
) |
ppts. |
Operating Profit |
|
$ |
395 |
|
|
|
$ |
296 |
|
|
|
|
33 |
|
|
Interest income, net |
|
|
8 |
|
|
|
|
4 |
|
|
|
|
99 |
|
|
Income tax provision |
|
|
(107 |
) |
|
|
|
(90 |
) |
|
|
|
(19 |
) |
|
Net Income - including noncontrolling interests |
|
|
296 |
|
|
|
|
210 |
|
|
|
|
41 |
|
|
Net Income - noncontrolling interests |
|
|
8 |
|
|
|
|
6 |
|
|
|
|
24 |
|
|
Net Income - Yum China Holdings, Inc. |
|
$ |
288 |
|
|
|
$ |
204 |
|
|
|
|
41 |
|
|
Diluted Earnings Per Common Share |
|
$ |
0.72 |
|
|
|
$ |
0.52 |
|
|
|
|
38 |
|
|
Effective tax rate |
|
|
26.6 |
% |
|
|
|
30.0 |
% |
|
|
|
|
|
|
Adjusted Operating Profit |
|
$ |
297 |
|
|
|
$ |
296 |
|
|
|
|
|
|
|
Adjusted Diluted Earnings Per Common Share |
|
$ |
0.53 |
|
|
|
$ |
0.52 |
|
|
|
|
|
|
|
Adjusted Effective Tax Rate |
|
|
27.1 |
% |
|
|
|
30.0 |
% |
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
417 |
|
|
|
$ |
396 |
|
|
|
|
|
|
|
(a) |
Represents period-over-period change in percentage. NM refers to changes over 100%, from negative to positive amounts or from zero to an amount. |
Performance Metrics
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
System Sales Growth (Decline) |
|
|
15 |
% |
|
|
|
(1 |
)% |
|
System Sales Growth, excluding F/X |
|
|
6 |
% |
|
|
|
4 |
% |
|
Same-store Sales Growth |
|
|
3 |
% |
|
|
|
1 |
% |
|
Unit Count |
|
3/31/2018 |
|
|
3/31/2017 |
|
|
% Increase (Decrease) |
|
|||
Company-owned |
|
|
6,563 |
|
|
|
6,074 |
|
|
|
8 |
|
Unconsolidated affiliates |
|
|
762 |
|
|
|
848 |
|
|
|
(10 |
) |
Franchisees |
|
|
787 |
|
|
|
731 |
|
|
|
8 |
|
|
|
|
8,112 |
|
|
|
7,653 |
|
|
|
6 |
|
20
Special Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
|
|
Quarter Ended |
||||||||
Detail of Special Items |
|
3/31/2018 |
|
3/31/2017 |
||||||
Gain from re-measurement of equity interest upon acquisition (a) |
|
$ |
98 |
|
|
|
$ |
— |
|
|
Special Items Income - Operating Profit |
|
|
98 |
|
|
|
|
— |
|
|
Tax Expenses on Special Items (b) |
|
|
(24 |
) |
|
|
|
— |
|
|
Special Items Income, net of tax - including noncontrolling interests |
|
|
74 |
|
|
|
|
— |
|
|
Special Items Expense, net of tax - noncontrolling interests |
|
|
— |
|
|
|
|
— |
|
|
Special Items Income, net of tax - Yum China Holdings, Inc. |
|
$ |
74 |
|
|
|
$ |
— |
|
|
Weighted-average diluted shares outstanding |
|
|
401 |
|
|
|
|
395 |
|
|
Special Items Diluted Earnings Per Common Share |
|
$ |
0.19 |
|
|
|
$ |
— |
|
|
Reconciliation of Operating Profit to Adjusted Operating Profit |
|
|
|
|
|
|
|
|
|
|
Operating Profit |
|
$ |
395 |
|
|
|
$ |
296 |
|
|
Special Items Income - Operating Profit |
|
|
98 |
|
|
|
|
— |
|
|
Adjusted Operating Profit |
|
$ |
297 |
|
|
|
$ |
296 |
|
|
Reconciliation of EPS to Adjusted EPS |
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share |
|
$ |
0.72 |
|
|
|
$ |
0.52 |
|
|
Special Items Diluted Earnings Per Common Share |
|
|
0.19 |
|
|
|
|
— |
|
|
Adjusted Diluted Earnings Per Common Share |
|
$ |
0.53 |
|
|
|
$ |
0.52 |
|
|
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate |
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate (See Note 10) |
|
|
26.6 |
% |
|
|
|
30.0 |
% |
|
Impact on Effective Tax Rate as a result of Special Items (b) |
|
|
(0.5 |
)% |
|
|
|
(— |
)% |
|
Adjusted Effective Tax Rate |
|
|
27.1 |
% |
|
|
|
30.0 |
% |
|
( a ) |
As a result of the acquisition of Wuxi KFC as disclosed in Note 6, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes. |
( b ) |
The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate. |
Adjusted EBITDA
Net income, along with the reconciliation to Adjusted EBITDA, is presented below.
|
|
Quarter Ended |
||||||||
Reconciliation of Net Income to Adjusted EBITDA |
|
3/31/2018 |
|
3/31/2017 |
||||||
Net Income — Yum China Holdings, Inc. |
|
$ |
288 |
|
|
|
$ |
204 |
|
|
Net Income — noncontrolling interests |
|
|
8 |
|
|
|
|
6 |
|
|
Income tax provision |
|
|
107 |
|
|
|
|
90 |
|
|
Interest income, net |
|
|
(8 |
) |
|
|
|
(4 |
) |
|
Operating Profit |
|
|
395 |
|
|
|
|
296 |
|
|
Depreciation and amortization |
|
|
118 |
|
|
|
|
96 |
|
|
Store impairment charges |
|
|
2 |
|
|
|
|
4 |
|
|
Special Items Income – Operating Profit |
|
|
(98 |
) |
|
|
|
— |
|
|
Adjusted EBITDA |
|
$ |
417 |
|
|
|
$ |
396 |
|
|
21
KFC
|
|
Quarter Ended |
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
% B/(W) |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
|
Reported |
|
Ex F/X |
||||||||||||
Company sales |
|
$ |
1,444 |
|
|
|
$ |
1,199 |
|
|
|
|
20 |
|
|
|
|
11 |
|
|
Franchise fees and income |
|
|
37 |
|
|
|
|
34 |
|
|
|
|
10 |
|
|
|
|
1 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
|
17 |
|
|
|
|
17 |
|
|
|
|
— |
|
|
|
|
(4 |
) |
|
Total revenues |
|
$ |
1,498 |
|
|
|
$ |
1,250 |
|
|
|
|
20 |
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
|
$ |
301 |
|
|
|
$ |
249 |
|
|
|
|
21 |
|
|
|
|
12 |
|
|
Restaurant margin % |
|
|
20.9 |
% |
|
|
|
20.8 |
% |
|
|
|
0.1 |
|
ppts. |
|
|
0.1 |
|
ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
|
$ |
46 |
|
|
|
$ |
39 |
|
|
|
|
(19 |
) |
|
|
|
(10 |
) |
|
Expenses for transactions with franchisees and unconsolidated affiliates |
|
$ |
17 |
|
|
|
$ |
17 |
|
|
|
|
— |
|
|
|
|
4 |
|
|
Other income, net |
|
$ |
(23 |
) |
|
|
$ |
(18 |
) |
|
|
|
27 |
|
|
|
|
17 |
|
|
Operating Profit |
|
$ |
296 |
|
|
|
$ |
245 |
|
|
|
|
21 |
|
|
|
|
11 |
|
|
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
System Sales Growth (Decline) |
|
|
18 |
% |
|
|
|
(2 |
)% |
|
System Sales Growth, excluding F/X |
|
|
9 |
% |
|
|
|
3 |
% |
|
Same-Store Sales Growth |
|
|
5 |
% |
|
|
|
1 |
% |
|
Unit Count |
|
3/31/2018 |
|
3/31/2017 |
|
% Increase (Decrease) |
|
|||||||
Company-owned |
|
|
4,353 |
|
|
|
|
3,959 |
|
|
|
|
10 |
|
Unconsolidated affiliates |
|
|
762 |
|
|
|
|
848 |
|
|
|
|
(10 |
) |
Franchisees |
|
|
487 |
|
|
|
|
470 |
|
|
|
|
4 |
|
|
|
|
5,602 |
|
|
|
|
5,277 |
|
|
|
|
6 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
|
Quarter Ended |
|||||||||||||||||||||||
Income (Expense) |
|
3/31/2017 |
|
Store Portfolio Actions |
|
|
|
Other |
|
F/X |
|
3/31/2018 |
|||||||||||||
Company sales |
|
$ |
1,199 |
|
|
|
$ |
65 |
|
|
|
$ |
67 |
|
|
|
$ |
113 |
|
|
|
$ |
1,444 |
|
|
Cost of sales |
|
|
(353 |
) |
|
|
|
(20 |
) |
|
|
|
(18 |
) |
|
|
|
(33 |
) |
|
|
|
(424 |
) |
|
Cost of labor |
|
|
(241 |
) |
|
|
|
(15 |
) |
|
|
|
(14 |
) |
|
|
|
(23 |
) |
|
|
|
(293 |
) |
|
Occupancy and other |
|
|
(356 |
) |
|
|
|
(19 |
) |
|
|
|
(18 |
) |
|
|
|
(33 |
) |
|
|
|
(426 |
) |
|
Restaurant profit |
|
$ |
249 |
|
|
|
$ |
11 |
|
|
|
$ |
17 |
|
|
|
$ |
24 |
|
|
|
$ |
301 |
|
|
The increases in Company sales and Restaurant profit associated with store portfolio actions for the quarter, excluding the impact of F/X, was driven by net unit growth. Significant other factors impacting Company sales and Restaurant profit were the Company same-store sales growth, partially offset by higher labor costs mainly due to wage inflation of 5%, higher rental expenses, depreciation costs and promotion costs.
22
The increase in Franchise fees and income for the quarter, excluding the impact of F/X, was primarily driven by the same-store sales growth of unconsolidated affiliates and franchisees and net unit growth, partially offset by the impact of the acquisition of Wuxi KFC.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs due to merit increases.
Operating Profit
The increase in Operating Profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth and net unit growth, partially offset by higher restaurant operating costs.
Pizza Hut
|
|
Quarter Ended |
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
% B/(W) |
|
|
||||||
|
|
3/31/2018 |
|
3/31/2017 |
|
Reported |
|
|
|
Ex F/X |
||||||||||
Company sales |
|
$ |
564 |
|
|
|
$ |
527 |
|
|
|
|
7 |
|
|
|
|
(1 |
) |
|
Franchise fees and income |
|
|
1 |
|
|
|
|
1 |
|
|
|
|
25 |
|
|
|
|
15 |
|
|
Total revenues |
|
$ |
565 |
|
|
|
$ |
528 |
|
|
|
|
7 |
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
|
$ |
60 |
|
|
|
$ |
104 |
|
|
|
|
(43 |
) |
|
|
|
(48 |
) |
|
Restaurant margin % |
|
|
10.5 |
% |
|
|
|
19.7 |
% |
|
|
|
(9.2 |
) |
ppts. |
|
|
(9.2 |
) |
ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
|
$ |
28 |
|
|
|
$ |
25 |
|
|
|
|
(14 |
) |
|
|
|
(6 |
) |
|
Other income, net |
|
$ |
(2 |
) |
|
|
$ |
(1 |
) |
|
|
NM |
|
|
|
NM |
|
|
||
Operating Profit |
|
$ |
34 |
|
|
|
$ |
80 |
|
|
|
|
(58 |
) |
|
|
|
(61 |
) |
|
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
System Sales Growth |
|
|
7 |
% |
|
|
|
3 |
% |
|
System Sales Growth (Decline), excluding F/X |
|
|
(1 |
)% |
|
|
|
9 |
% |
|
Same-Store Sales Growth (Decline) |
|
|
(5 |
)% |
|
|
|
3 |
% |
|
Unit Count |
|
3/31/2018 |
|
3/31/2017 |
|
% Increase |
|
|||||||
Company-owned |
|
|
2,183 |
|
|
|
|
2,078 |
|
|
|
|
5 |
|
Franchisees |
|
|
31 |
|
|
|
|
27 |
|
|
|
|
15 |
|
|
|
|
2,214 |
|
|
|
|
2,105 |
|
|
|
|
5 |
|
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
|
|
Quarter Ended |
|||||||||||||||||||||||
Income (Expense) |
|
3/31/2017 |
|
Store Portfolio Actions |
|
|
|
Other |
|
F/X |
|
3/31/2018 |
|||||||||||||
Company sales |
|
$ |
527 |
|
|
|
$ |
21 |
|
|
|
$ |
(28 |
) |
|
|
$ |
44 |
|
|
|
$ |
564 |
|
|
Cost of sales |
|
|
(129 |
) |
|
|
|
(7 |
) |
|
|
|
(18 |
) |
|
|
|
(13 |
) |
|
|
|
(167 |
) |
|
Cost of labor |
|
|
(124 |
) |
|
|
|
(6 |
) |
|
|
|
(6 |
) |
|
|
|
(11 |
) |
|
|
|
(147 |
) |
|
Occupancy and other |
|
|
(170 |
) |
|
|
|
(6 |
) |
|
|
|
1 |
|
|
|
|
(15 |
) |
|
|
|
(190 |
) |
|
Restaurant profit |
|
$ |
104 |
|
|
|
$ |
2 |
|
|
|
$ |
(51 |
) |
|
|
$ |
5 |
|
|
|
$ |
60 |
|
|
23
The decreases in Company sales and Restaurant profit for the quarter, excluding the impact of F/X, were primarily driven by same-store sales decline, higher promotion and product upgrade costs, and higher labor costs mainly attributable to wage inflation o f 6%.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs due to merit increases.
Operating Profit
The decrease in Operating Profit for the quarter, excluding the impact of F/X, was primarily driven by same-store sales decline and higher restaurant operating costs mainly attributable to promotion and product upgrade costs and wage inflation.
All Other Segments
All Other Segments includes East Dawning, Little Sheep, Taco Bell and Daojia.
|
|
Quarter Ended |
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
% B/(W) |
|
|
||||||
|
|
3/31/2018 |
|
3/31/2017 |
|
Reported |
|
|
|
Ex F/X |
|
|
||||||||
Company sales |
|
$ |
8 |
|
|
|
$ |
12 |
|
|
|
|
(26 |
) |
|
|
|
(32 |
) |
|
Franchise fees and income |
|
|
2 |
|
|
|
|
1 |
|
|
|
|
63 |
|
|
|
|
50 |
|
|
Revenues from transactions with franchisees and unconsolidated affiliates |
|
|
7 |
|
|
|
|
5 |
|
|
|
|
19 |
|
|
|
|
10 |
|
|
Other revenues |
|
|
3 |
|
|
|
|
5 |
|
|
|
|
(41 |
) |
|
|
|
(42 |
) |
|
Total revenues |
|
$ |
20 |
|
|
|
$ |
23 |
|
|
|
|
(14 |
) |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant profit |
|
$ |
— |
|
|
|
|
1 |
|
|
|
|
(83 |
) |
|
|
|
(85 |
) |
|
Restaurant margin % |
|
|
2.1 |
% |
|
|
|
8.9 |
% |
|
|
|
(6.8 |
) |
ppts. |
|
|
(7.0 |
) |
ppts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses |
|
$ |
7 |
|
|
|
$ |
3 |
|
|
|
NM |
|
|
|
NM |
|
|
||
Expenses for transactions with franchisees and unconsolidated affiliates |
|
$ |
6 |
|
|
|
$ |
5 |
|
|
|
|
(13 |
) |
|
|
|
(4 |
) |
|
Operating (Loss) Profit |
|
$ |
(4 |
) |
|
|
$ |
1 |
|
|
|
NM |
|
|
|
NM |
|
|
|
|
Quarter Ended |
||||||||
|
|
3/31/2018 |
|
3/31/2017 |
||||||
Same-Store Sales Decline |
|
|
(5 |
)% |
|
|
|
(13 |
)% |
|
The decrease in Company sales for the quarter, excluding the impact of F/X, was primarily driven by unit closures and refranchising.
The increase in G&A expenses for the quarter, was primarily due to G&A expenses incurred by Daojia, which was acquired by the Company in the second quarter of 2017.
24
|
|
Quarter Ended |
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
% B/(W) |
|
|
||||||
|
|
3/31/2018 |
|
3/31/2017 |
|
Reported |
|
|
|
Ex F/X |
|
|
||||||||
Revenues from transactions with franchisees and unconsolidated affiliates |
|
$ |
137 |
|
|
|
$ |
125 |
|
|
|
|
10 |
|
|
|
|
1 |
|
|
Other revenue |
|
|
1 |
|
|
|
|
— |
|
|
|
NM |
|
|
|
NM |
|
|
||
Expenses for transactions with franchisees and unconsolidated affiliates |
|
|
137 |
|
|
|
|
125 |
|
|
|
|
(10 |
) |
|
|
|
— |
|
|
Other operating costs |
|
|
1 |
|
|
|
|
— |
|
|
|
NM |
|
|
|
NM |
|
|
||
Corporate G&A expenses |
|
|
33 |
|
|
|
|
31 |
|
|
|
|
(8 |
) |
|
|
|
(3 |
) |
|
Other income (See Note 11) |
|
|
(102 |
) |
|
|
|
(1 |
) |
|
|
NM |
|
|
|
NM |
|
|
||
Interest income, net |
|
|
8 |
|
|
|
|
4 |
|
|
|
|
99 |
|
|
|
|
84 |
|
|
Income tax provision (See Note 10) |
|
|
(107 |
) |
|
|
|
(90 |
) |
|
|
|
(19 |
) |
|
|
|
(11 |
) |
|
Effective tax rate (See Note 10) |
|
|
26.6 |
% |
|
|
|
30.0 |
% |
|
|
|
3.4 |
% |
|
|
|
3.0 |
% |
|
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
The increase in Revenues from transactions with franchisees and unconsolidated affiliates for the quarter, excluding the impact of F/X, was primarily in line with system sales growth of unconsolidated affiliates and franchisees.
Interest Income, Net
The increase in interest income, net for the quarter was driven by higher returns on larger balances of short-term investments and time deposits.
Income Tax Provision
Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%, a 10% withholding tax on repatriation of earnings outside of China, and U.S. corporate income tax, if any. Our effective tax rate was 26.6% and 30.0% for the quarters ended March 31, 2018 and 2017, respectively. The lower effective tax rate for the quarter ended March 31, 2018 was primarily due to less estimated repatriation of current year earnings into the U.S.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
The Tax Act
In December 2017 , the U.S. enacted the Tax Act, which included a broad range of tax reforms, including, but not limited to, the establishment of a flat corporate income tax rate of 21%, the elimination or reduction of certain business deductions and the imposition of tax on deemed repatriation of accumulated undistributed foreign earnings. The Tax Act has impacted Yum China in two material aspects: (i) all of the foreign-source dividends received by Yum China from its foreign subsidiaries will be exempted from taxation starting from the tax year beginning after December 31, 2017 and (ii) Yum China recorded, in the fourth quarter of 2017, an additional income tax expense of $163.9 million, which includes an estimated one-time transition tax of $129.8 million on the deemed repatriation of accumulated undistributed foreign earnings, $4.5 million primarily related to the re-measurement of certain deferred tax assets based on the rates at which they are expected to reverse in the future, and the valuation allowance of $29.6 million for certain deferred tax assets.
25
The Tax Act requires complex computations with significant estimates to be performed, significant judgments to be made in interpretation of the provis ions, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, the SEC and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our current interpretation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. We expect to complete our analysis within the measurement period not exceeding one year from the enactment date.
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing authorities with respect to income and non-income based taxes. Currently we are under a national audit on transfer pricing by the SAT in China regarding our related party transactions for the period from 2006 to 2015. It is reasonably possible that there could be significant developments within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing discussions with the SAT and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the SAT prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.
PRC Value-Added Tax (“VAT”)
Effective May 1, 2016, the Chinese government implemented reform to its retail tax structure, which is intended to be a progressive and positive shift to more closely align with a more modern service-based economy. Under this reform, a 6% output VAT replaced the 5% business tax previously applied to certain restaurant sales. VAT rates imposed on goods and services included 17%, 13%, 11% and 6%. Input VAT would be creditable to the aforementioned 6% output VAT.
Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as an input VAT credit asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, on the Condensed Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any input VAT credit asset for recoverability based on its forecasted operating results. We evaluate the recoverability of the net VAT credit asset based on our estimated operating results and capital spending, which inherently includes significant assumptions that are subject to change.
As of March 31, 2018, an input VAT credit asset of $189 million and payable of $1 million were recorded in Other assets and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against net VAT payables more than one year from March 31, 2018. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year.
We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter.
Effective from July 1, 2017, the 13% VAT rate primarily applicable to certain agricultural products was reduced to 11%. On March 28, 2018, the Chinese government further announced that effective from May 1, 2018, the VAT rates of 17% and 11% would be lowered to 16% and 10%, respectively. These rate changes will impact our input VAT on all materials and certain services, mainly including construction, transportation and leasing. However, the impact on our operating results is not expected to be significant.
26
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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, 2018 and 2017 were as follows:
Net cash provided by operating activities was $551 million in 2018 as compared to $336 million in 2017. The increase was primarily driven by higher Net income and timing of payments for inventory.
Net cash used in investing activities was $267 million in 2018 as compared to $211 million in 2017. The increase was primarily driven by acquisition of Wuxi KFC, partially offset by cash inflow generated by short-term investment activities.
Net cash used in financing activities was $51 million in 2018 as compared to $11 million in 2017. The increase was primarily driven by cash dividends paid to stockholders.
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores and from our franchise operations and dividend payments from our unconsolidated affiliates.
Our ability to fund our future operations and capital needs will depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations, capital expenditures and any distributions to our stockholders or share repurchases we may make. We believe that our future cash from operations, together with our access to funds on hand and capital markets, will provide adequate resources to fund these uses of cash and that our existing cash and net cash from operations will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months.
If our cash flows from operations are less than we require, we may need to access the capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:
|
• |
our financial performance; |
|
• |
our credit ratings or absence of a credit rating; |
|
• |
the liquidity of the overall capital markets; and |
|
• |
the state of the Chinese, U.S. and global economies. |
There can be no assurance, particularly as a relatively new company that currently has no credit rating, that we will have access to the capital markets on terms acceptable to us or at all.
Generally our income is subject to the Chinese statutory tax rate of 25%. However, to the extent our cash flows from operations exceed our China cash requirements, the excess cash may be subject to an additional 10% withholding tax levied by the Chinese tax authority.
Dividends and Share Repurchases
On February 7, 2017, we announced that our Board of Directors authorized a $300 million share repurchase program. On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million. 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. The Company did not repurchase any shares for the quarters ended March 31, 2018 and 2017.
27
Our ability to declare and pay any dividends on our stock may be restricted by applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previou s 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 th eir 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 st aff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
On February 6, 2018, the Board of Directors declared a cash dividend of $0.10 per share. The cash dividend totaling $39 million was paid to stockholders in March 2018.
On May 1, 2018, the Company announced that the Board of Directors declared a cash dividend of $0.10 per share on Yum China’s common stock, payable as of the close of business on June 20, 2018, to stockholders of record as of the close of business on May 30, 2018. Total estimated cash dividend payable is approximately $39 million.
Borrowing Capacity
As of March 31, 2018, the Company had credit facilities of RMB2,128 million (approximately $339 million), including onshore credit facilities of RMB1,500 million (approximately $239 million) in the aggregate and an offshore credit facility of $100 million.
The credit facilities have terms ranging from one to three years. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China 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 financial covenants including, among other things, limitations on certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Interest on any outstanding borrowings is due at least monthly. As of March 31, 2018, the full amount of borrowings was available to us under each facility.
Off-Balance Sheet Arrangements
See the Guarantees section of Note 12 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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the Company in our first quarter of fiscal 2019 with early adoption permitted. The standard must be adopted using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect that this standard will have a material effect on our financial statements. While we are continuing to assess the effect of adoption, we currently believe the most significant changes relate to the recognition of right-of-use assets and lease liabilities on our balance sheet for operating leases of the land and/or building of our restaurants and office space. At March 31, 2018, we operated more than 6,500 restaurants, leasing the underlying land and/or building, with our commitments expiring within 20 years from the inception of the lease. The amount of our future minimum lease payments under operating leases was approximately $3 billion as of March 31, 2018. We anticipate continuing to add more restaurants and increase our leasing activity between now and adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted beginning in the first quarter of 2019. We are currently evaluating the impact the adoption of this standard will have on our financial statements.
28
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for the Company in the first quarter of 2019, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ( “ASU 2018-02”) . The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.
29
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan,” “could,” “target,” “predict,” “likely,” “should,” “forecast,” “outlook,” “model,” “continue,” “ongoing” or other similar terminology. Forward-looking statements are based on our expectations, estimates, assumptions or projections concerning future results or events as of the date of the filing of this Form 10-Q. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those statements. We cannot assure you that any of our assumptions are correct or any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the following:
|
• |
Risks related to our business and industry, such as (a) food safety and food-borne illness concerns, (b) significant failure to maintain effective quality control systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other diseases, (e) the fact that we derive substantially all of our revenue from our operations in China, (f) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food and other supplies, (i) our inability to attain our target development goals and the potential cannibalization of existing sales by aggressive development, (j) fluctuation of raw materials prices, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, delivery aggregators, internet infrastructure operators and internet service providers, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our inability to integrate Daojia successfully and the anticipated benefits of the acquisition may not be realized in a timely manner or at all, (u) the Chinese government may determine that the VIE structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (v) our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media, (w) litigation and failure to comply with anti-bribery or anti-corruption laws, (x)U.S. federal income taxes, changes in tax rates, disagreements with taxing authorities and imposition of new taxes, (y) changes in consumer discretionary spending and general economic conditions, (z) competition in the retail food industry, (aa) loss or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (bb) our inability to adequately protect the intellectual property we own or have the right to use, (cc) YUM’s failure to protect its intellectual property, (dd) seasonality and certain major events in China, (ee) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (ff) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (gg) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (hh) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC and (ii) unforeseeable business interruptions; ; |
|
• |
Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) changes in laws and regulations, (c) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, (d) fluctuation in the value of the Chinese Renminbi, (e) limitations on our ability to utilize our cash balances effectively due to governmental control of currency conversion and payments of foreign currency, (f) reliance on distributions by our operating subsidiaries in China to fund offshore cash requirements, (g) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (h) uncertainty regarding indirect transfers of equity interests and enhanced scrutiny by Chinese tax authorities, (i) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (j) risk in relation to unexpected land acquisitions, building closures or demolitions, (k) potential fines for failure to comply with law and (l) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion; |
30
In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Forward-Looking Statements” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017) 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.
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, 2018, the Company’s Operating Profit would have decreased approximately $37 million if the RMB weakened 10% relative to the US$. 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.
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.
31
Changes in Internal Control Over Financial Reporting
There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended March 31, 2018.
32
Information regarding legal proceedings is incorporated by reference from Note 12 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.
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, 2017, which was filed with the SEC on February 27, 2018.
On February 7, 2017, we announced that our Board of Directors authorized a $300 million share repurchase program. This authorization does not have an expiration date.
On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million.
The Company did not repurchase any shares of common stock in the quarter ended March 31, 2018.
33
Exhibit
|
|
Description of Exhibits |
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
3.3 |
|
|
|
|
|
10.1 |
|
|
|
|
|
10.2 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document * |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document * |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document * |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document * |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document * |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document * |
* Filed or furnished herewith.
34
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 4, 2018 |
/s/ Xueling Lu |
|
|
|
Controller and Principal Accounting Officer |
|
|
|
|
35
Yun China Holdings, Inc.
PERFORMANCE SHARE UNIT PLAN
(Effective as of January 1, 2018)
SECTION 1
GENERAL
1.1. |
History and Purpose . The Yum China Holdings, Inc. Performance Share Unit Plan (the “Plan”) was established by the Compensation Committee (the “Committee”) of the Board of Directors of Yum China Holdings, Inc. (the “Company”) effective as of January 1, 2018. The purpose of the Plan is to provide an incentive to participating employees to increase shareholder value while providing the participating employees with an opportunity for a highly leveraged award for their role in delivering performance results. Shares of common stock of the Company (“Stock”) granted under the Plan are granted under and pursuant to the Yum China Holdings, Inc. Long Term Incentive Plan (the “LTIP”), effective October 31, 2016, and are subject to the terms of the LTIP. |
1.2. |
Operation, Administration, and Definitions . The operation and administration of the Plan shall be subject to the provisions of Section 5 (relating to operation and administration). Capitalized terms in the Plan shall be defined as set forth in the Plan (including the definition provisions of Section 7) or, if not otherwise defined in the Plan, as defined in the LTIP. |
1.3. |
Administration . The authority to control and manage the operation and administration of the Plan shall be vested in the Committee, and the Committee shall have all authority with respect to the Plan as it has with respect to the LTIP. |
SECTION 2
GRANT AND ADJUSTMENT OF PERFORMANCE UNITS
2.1. |
Participation . Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, those persons who shall be granted one or more Performance Units under the Plan, and thereby become “Participants” in the Plan. |
2.2. |
Grant of Performance Units . Except as otherwise provided by the Committee, with respect to each Performance Period, the Committee shall grant to each person designated by the Committee as a Participant, a number of Performance Units determined pursuant Exhibit A hereto, which form of Exhibit may be amended from time to time. |
2.3. |
Adjustment for Dividends . As of each dividend record date for the Stock that occurs during any Performance Period, the number of Performance Units allocated to a Participant for that Performance Period (disregarding for this purpose any Performance Units allocated to the Participant by reason of the payment of other dividends during the Performance Period) shall be increased by a number of Performance Units equal to (a) the dividend amount that would be payable with respect to the number of shares of Stock equal to the number of Performance Units allocated to the Participant on the dividend record date; divided by (b) the Fair Market Value of a share of Stock on the date of payment of the dividend. |
2.4. |
Adjustment for Transactions . The number of Performance Units allocated to a Participant, including the determination of the Performance Multiplier, shall be subject to adjustment in accordance with Section 4.2 of the LTIP for changes in corporate capitalization or other events described in that section. |
SECTION 3
DETERMINATION OF EARNED
PERFORMANCE
UNITS
3.1. |
Determination of Number of Performance Units Earned . Except as determined by the Committee, for each Performance Period, the number of Performance Units earned by the Participant shall be determined in accordance with Exhibit A hereto. |
3.2. |
Certification by Committee . No distribution of shares of Stock shall be made with respect to a Performance Period unless, on or before the date of distribution, the Committee has certified that the performance goals for the Performance Period and any other material provisions with respect to the distribution of shares have in fact been satisfied. The Committee has complete and absolute discretion to determine whether and to what extent the performance goals have been satisfied and its decision shall be binding on all Participants. |
3.3. |
Employment Termination during Performance Period . If a Participant’s Date of Termination occurs prior to the last day of a Performance Period, the Participant shall forfeit all Performance Units (including any additional Performance Units or dividend equivalents attributable to dividends allocated to the Participant) granted with respect to that Performance Period; provided , however , that if a Participant’s Date of Termination occurs by reason of the Participant’s death, Disability or Retirement prior to the end of the Performance Period, the Participant (or in the event of his death, his estate) shall receive the number of shares of Stock with respect to that Performance Period that the Participant would have received if the Date of Termination did not occur during the Performance Period (and based on the actual performance for the entire Performance Period), but subject to a pro rata reduction to reflect the number of days remaining in the Performance Period after the Date of Termination. Distribution of shares of Stock with respect to all Performance Periods that have not ended prior to the Date of Termination shall be made at the same time distribution would have been made with respect to such Performance Periods determined as though the Date of Termination had not occurred. |
3.4. |
Change in Control during Performance Period . Notwithstanding the foregoing provisions of this Section 3, if the Participant is involuntarily terminated (other than by the Company or one of its affiliates for Cause) upon or within two (2) years following such Change in Control and during the Performance Period, then performance shall be measured for each outstanding Performance Period through the Date of Termination and Participant shall receive the number of shares of Stock that the Participant would have received with respect to each then outstanding Performance Period based on actual performance through the Date of Termination, but the number of shares of Stock to be distributed shall be subject to a pro rata reduction to reflect the number of days remaining in the Performance Period after the Date of Termination. Distribution of shares of Stock under this subsection 3.4 with respect to all Performance Periods shall be made within 30 days following the Participant’s Date of Termination. |
3.5. |
General . Upon distribution with respect to any Performance Period in accordance with subsection 3.3 or subsection 3.4, all further rights of the Participant pursuant to Performance Units granted for that Performance Period shall be canceled (without regard to the level of performance after that date). In addition, if the Participant is subject to U.S. taxes, then the timing of the distribution of any shares pursuant to this Plan shall also be governed by the Section 409A Addendum attached hereto. |
SECTION 4
SETTLEMENT OF PERFORMANCE UNITS
4.1. |
Settlement of Performance Units . As soon as practicable after the determination of a Participant’s number of Performance Units earned for any Performance Period and certification by the Committee under subsection 3.2 (but no later than the fifteenth day of the third month of the calendar year following the year in which the Performance Period ends), shares of Stock equal to the number of Performance Units shall be distributed to the Participant, and such Performance Units shall be canceled at the time of such distribution. |
4.2. |
Fractional Shares . In lieu of issuing a fraction of a share of Stock attributable to a fractional Performance Unit or otherwise, the Company shall be entitled to pay to the Participant in cash an amount equal to the Fair Market Value of such fractional share. |
4.4. |
Awards Subject to Clawback . The Performance Units granted under this Plan and any shares of Stock or cash payment delivered pursuant to an award of Performance Units are subject to forfeiture, recovery by the Company or other action pursuant to the applicable award agreement or any clawback or recoupment policy which the Company may adopt from time to time, including without limitation the Yum China Holdings, Inc. Compensation Recovery Policy, adopted by the Committee in November 2016, and any such policy which the Company may be required to adopt under the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing rules and regulations thereunder, or as otherwise required by law. |
SECTION 5
OPERATION AND ADMINISTRATION
5.1. |
Effective Date and Duration . |
|
(a) |
The Plan shall be effective as of January 1, 2018. |
|
(b) |
In the event of Plan termination, the terms of the Plan shall remain in effect as long as any Performance Units under it are outstanding. |
5.2. |
Agreement with the Company . Any Performance Units granted under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan and the LTIP, as the Committee shall, in its sole discretion, prescribe; provided that to the extent that any such terms and conditions are not set forth in the Plan or the LTIP, they shall be reflected in such form of written (including electronic) document as is determined by the Committee. A copy of such document shall be provided to the Participant, and the Committee may, but need not, require that the Participant sign a copy of (or electronically accept) such document. |
5.3. |
Tax Withholding . All distributions under the Plan are subject to withholding of all applicable taxes, and the Committee may condition the distribution of any benefits under the Plan on satisfaction of the applicable withholding obligations. |
5.4. |
Transferability . Except as otherwise provided by the Committee, a Participant’s rights under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution. |
5.5. |
Voting Rights . The Participant shall not be entitled to vote any Performance Units, but shall be entitled to vote shares of Stock with respect to record dates occurring after the date such shares are distributed to the Participant. |
5.6. |
Regulatory Changes . Notwithstanding anything herein to the contrary, the implementation of the Plan (or any localized version of the Plan) is subject to modifications for compliance with legal, regulatory and taxation restrictions and requirements of all applicable jurisdictions, including the PRC, if and when applicable. In particular, the Participant may be required to sign additional documents and/or take additional actions required to complete/fulfill all regulatory and tax filing/registration requirements/obligations under the PRC laws and regulations, if and when applicable/mandated. |
SECTION 6
AMENDMENT AND TERMINATION
The Committee (or a delegate authorized by the Committee) may, at any time, amend or terminate the Plan.
In addition to the other definitions contained herein, the following definitions shall apply:
|
(a) |
Cause . The term “Cause” shall have the meaning set forth in the Participant’s employment or letter agreement with the Company and, if no such agreement or the term is not defined therein, means: (i) the willful failure by the Participant to perform the Participant’s duties with the Company or an affiliate (other than any such failure resulting from Participant’s incapacity due to Disability; (ii) Participant’s willful misconduct that is demonstrably and materially injurious to the Company or any of its affiliates, monetarily or otherwise; (iii) Participant’s commission of such acts of dishonesty, fraud, misrepresentation or other acts of moral turpitude; (iv) Participant’s conviction or plea of no contest to a felony (or equivalent crime in the PRC) or a crime of moral turpitude; or (v) any terminable events under the Company’s Code of Conduct in effect at the commencement of the Performance Period. |
|
(b) |
Date of Termination . The term “Date of Termination” means the date of the Participant’s termination of employment with the Company and its affiliates. |
|
(c) |
Disability . The term “Disability” means that the Participant either (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months or (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, is receiving income replacement benefits for a period of not less than six (6) months under an accident and health plan covering employees of the Company. |
|
( d ) |
Performance Period . The term “Performance Period” means a three consecutive calendar year period as designated by the Committee, or such other period determined by the Committee. |
|
( e ) |
Retirement . The term “Retirement” means termination of employment by the Participant on or after the Participant’s attainment of age 55 and ten (10) years of service or age 65 and five (5) years of service (and not for any other reason). Notwithstanding the definition of Retirement set forth immediately above, if the Company receives an opinion of counsel that there has been a legal judgment and/or legal development in the Participant’s jurisdiction that would likely result in the favorable Retirement treatment that applies to this grant under the Plan being deemed unlawful and/or discriminatory, then the Committee will not apply the favorable Retirement treatment at the time of the Participant’s termination of employment and the Participant’s award shall be governed by the remaining provisions related to termination of the Participant’s employment. |
Determination of Number of Performance Units Granted and Earned
I. Determination of Number of Performance Units to be Granted
Subject to the provisions of subsection 2.2 of the Plan, for each Performance Period each Participant shall be granted a target number of Performance Units as determined by the Committee.
If the target number of Performance Units is not a whole number, the number of Performance Units shall be rounded up to the nearest whole number.
II. Determination of Number of Performance Units to be Earned
Subject to Section 3 of the Plan, the number of Performance Units earned by the Participant for any Performance Period shall be equal to:
|
(a) |
the sum of the number of Performance Units granted to the Participant for the Performance Period, plus the number of additional Performance Units attributable to dividends allocated to the Participant for that Performance Period in accordance with subsection 2.3; multiplied by |
|
(b) |
the Performance Multiplier for that Performance Period determined in accordance with the schedule set forth below. |
The Performance Multiplier shall be based on the Company’s relative Total Shareholder Return (“TSR”) percentile ranking for the Performance Period against the 149 constituents under MSCI International China Index (or such other peer group designated by the Committee at the beginning of the Performance Period and communicated to the Participant). As soon as practicable after the end of each Performance Period, the Committee shall determine the level of achievement of the TSR performance objective for that Performance Period in accordance with the schedule set forth below. The Committee has complete and absolute discretion to determine whether and to what extent the performance goals have been satisfied and its decision shall be binding on all Participants.
If the TSR Percentile Ranking for the Performance Period is: |
The Performance Multiplier will be: |
85% or higher |
200% |
55% |
100% |
30% |
35% |
Less than 30% |
0% |
TSR shall be calculated for a company by dividing (A) the sum of (i) the cumulative amount of dividends paid during the Performance Period, assuming dividend reinvestment, and (ii) the increase or decrease in the Average Stock Price from the first day of the Performance Period to the last day of the Performance Period, by (B) the Average Stock Price determined as of the first day of the Performance Period. “Average Stock Price” means the average of the closing sales prices of a share of common stock, as reported on the principal national stock exchange on which such common stock is traded, for the 20 business days immediately preceding the date for which the Average Stock Price is being determined; provided, however, for purposes of determining the Average Stock Price as of the last day of the Performance Period, the 20 business day average shall be calculated inclusive of the last day of the Performance Period. If the Company’s TSR is negative, payout shall be based on the relative ranking from the schedule above but payout shall not exceed 100%. Companies that leave the peer group during the Performance Period due to bankruptcy shall have their TSR calculated based on the payments that the shareholders receive during the Performance Period and through the bankruptcy. In the event a peer group company undergoes a merger, is acquired or experiences a similar transaction during the Performance Period, if determined to be equitable and appropriate by the Committee, such peer company shall have its TSR calculated based on the payments that shareholders received during the Performance Period, as determined in the sole discretion of the Committee. Notwithstanding anything herein to the contrary, the Committee shall have authority to determine the extent to which the performance goal has been satisfied and to make decisions regarding the Plan in order to effectuate the purpose and intent of the Plan.
A-1
This addendum is applicable to Participants subject to U.S. tax laws, including Section 409A of the Code. It is intended that any amounts payable under the Plan shall either be exempt from or comply with Section 409A of the Code and all regulations, guidance and other interpretive authority issued thereunder (“ Code Section 409A ”) so as not to subject a Participant to payment of any additional tax, penalty or interest imposed under Code Section 409A. The provisions of this Plan shall be construed and interpreted to avoid the imputation of any such additional tax, penalty or interest under Code Section 409A yet preserve (to the nearest extent reasonably possible) the intended benefit payable to Participant; provided , however , that the Company does not make any guarantee of the tax treatment of benefits provided under the Plan. Notwithstanding the foregoing or any other provision of the Plan to the contrary, if any payment or benefit hereunder is subject to Code Section 409A:
|
(a) |
if such payment or benefit is to be paid or provided on account of a Participant’s Date of Termination (or other separation from service or termination of employment) and if the Participant is a specified employee (within the meaning of Code Section 409A(a)(2)(B)) and if any such payment or benefit is required to be made or provided prior to the first day of the seventh month following the Participant’s Date of Termination (or other separation from service or termination of employment), such payment or benefit shall be delayed until the first day of the seventh month following the Participant’s Date of Termination (or other separation from service); |
|
(b) |
the determination as to whether a Participant has had a termination of employment (or separation from service) shall be made in accordance with the provisions of Code Section 409A and the guidance issued thereunder without application of any alternative levels of reductions of bona fide services permitted thereunder; |
|
(c) |
to the extent any such payment is conditioned upon the Participant’s execution of a release and such payment is to be paid or provided during a designated period that begins in one taxable year and ends in a second taxable year, such payment shall be paid or provided in the later of the two taxable years; and |
|
(d) |
in the event the Participant becomes entitled to shares under Section 3.4, such shares shall be paid at the time set forth in Section 3.4 only if the Change in Control is a “change in control event” within the meaning of Section 409A of the Code and such termination of employment occurs within two years following such Change in Control and, if the foregoing conditions are not satisfied, any shares deliverable under Section 3.4 shall be delivered at the time set forth in Section 3.3, in each case, subject to clauses (a), (b) and (c) of this sentence. |
Addendum-1
Exhibit 10.2
YUM CHINA HOLDINGS, INC.
PERFORMANCE SHARE UNIT PLAN
Performance Share Unit Award Notice
Joey Wat
You have been awarded Performance Units (“
Award
”) with respect to shares of common stock of Yum China Holdings, Inc., a Delaware corporation (the “
Company
”), under the terms and conditions of the Yum China Holdings, Inc. Performance Share Unit Plan (the “
Plan
”), which is administered under the Yum China Holdings, Inc. Long Term Incentive Plan. A copy of the Plan is attached to this Performance Unit Award Notice (this “
Award Notice
”). Capitalized terms not defined in this Award Notice have the meanings specified in the Plan.
Shares Subject to Award : |
Subject to the terms and conditions of the Plan and this Award Notice, your Award entitles you to receive 59,881 shares of common stock of the Company (the “ Stock ”) if the Company attains the target level of Total Shareholder Return (“ TSR ”) for the Performance Period. Based on the Company’s TSR percentile ranking for the Performance Period, the vesting level of your Award may range from 0% to 200% of target. More detailed information regarding the determination of the number of shares of Stock you may earn pursuant to your Award is contained in the Plan, including Exhibit A thereto. |
Grant Date : |
[February 9, 2018] |
Performance Period : |
January 1, 2018 – December 31, 2020. |
Additional Information : |
Additional information, including information regarding the settlement of Performance Units and the treatment of your Award upon your termination of employment during the Performance Period, is available in the Plan. |
|
YUM CHINA HOLDINGS, INC. |
||
|
|
|
|
|
By: |
|
/s/ Aiken Yuen |
|
Name: |
|
Aiken Yuen |
|
Title: |
|
VP, HR |
Acknowledgment, Acceptance, and Agreement :
By signing below and returning this Award Notice to Yum China Holdings, Inc. at the address stated below, I hereby acknowledge receipt of the Award Notice and the Plan, accept the Award granted to me and agree to be bound by the terms and conditions of this Award Notice and the Plan.
/s/ Joey Wat |
|
||
Holder: |
|
Joey Wat |
|
|
|
|
|
Date: |
|
March 2, 2018 |
|
Yum China Holdings, Inc.
Attn: [KN Lau, Executive Comp]
[HR 10 th Floor, YumChina Building, Shanghai]
Exhibit 31.1
CERTIFICATION
I, Joey Wat, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Yum China Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report. |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 4, 2018 |
/s/ Joey Wat |
|
Joey Wat Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Jacky Lo, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Yum China Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report. |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 4, 2018 |
/s/ Jacky Lo |
|
Jacky Lo Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Yum China Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Joey Wat, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 4, 2018 |
/s/ Joey Wat |
|
Joey Wat Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Yum China Holdings, Inc. and will be retained by Yum China Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Yum China Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Jacky Lo, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 4, 2018 |
/s/ Jacky Lo |
|
Jacky Lo Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Yum China Holdings, Inc. and will be retained by Yum China Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.