UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
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Incorporation or Organization) |
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Identification No.) |
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(Address, Including Zip Code, of Principal Executive Offices) ( |
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(Registrant’s Telephone Number, Including Area Code) |
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Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
The number of shares outstanding of the registrant’s common stock as of August 3, 2020 was
Yum China Holdings, Inc.
INDEX
2
PART I – FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
Condensed Consolidated Statements of Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions, except per share data)
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Quarter Ended |
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Year to Date Ended |
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Revenues |
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6/30/2020 |
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6/30/2019 |
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6/30/2020 |
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6/30/2019 |
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Company sales |
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$ |
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$ |
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$ |
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$ |
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Franchise fees and income |
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Revenues from transactions with franchisees and unconsolidated affiliates |
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Other revenues |
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Total revenues |
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Costs and Expenses, Net |
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Company restaurants |
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Food and paper |
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Payroll and employee benefits |
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Occupancy and other operating expenses |
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Company restaurant expenses |
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General and administrative expenses |
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Franchise expenses |
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Expenses for transactions with franchisees and unconsolidated affiliates |
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Other operating costs and expenses |
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Closures and impairment expenses, net |
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Other income, net |
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( |
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( |
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Total costs and expenses, net |
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Operating Profit |
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Interest income, net |
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Investment gain |
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Income Before Income Taxes |
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Income tax provision |
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( |
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( |
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( |
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( |
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Net income – including noncontrolling interests |
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Net income – noncontrolling interests |
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Net Income – Yum China Holdings, Inc. |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding (in millions): |
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Basic |
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Diluted |
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Basic Earnings Per Common Share |
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$ |
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$ |
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$ |
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$ |
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Diluted Earnings Per Common Share |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
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Quarter Ended |
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Year to Date Ended |
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6/30/2020 |
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6/30/2019 |
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6/30/2020 |
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6/30/2019 |
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Net income - including noncontrolling interests |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income, net of tax of nil: |
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Foreign currency translation adjustments |
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( |
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Comprehensive income - including noncontrolling interests |
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Comprehensive income - noncontrolling interests |
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Comprehensive Income - Yum China Holdings, Inc. |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Yum China Holdings, Inc.
(in US$ millions)
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Year to Date Ended |
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6/30/2020 |
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6/30/2019 |
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Cash Flows – Operating Activities |
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Net income – including noncontrolling interests |
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$ |
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$ |
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Depreciation and amortization |
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Non-cash operating lease cost |
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Closures and impairment expenses |
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Investment gain |
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( |
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Equity income from investments in unconsolidated affiliates |
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Distributions of income received from unconsolidated affiliates |
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Deferred income taxes |
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Share-based compensation expense |
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Changes in accounts receivable |
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( |
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Changes in inventories |
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( |
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Changes in prepaid expenses and other current assets |
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— |
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Changes in accounts payable and other current liabilities |
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Changes in income taxes payable |
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Changes in non-current operating lease liabilities |
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Other, net |
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( |
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( |
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Net Cash Provided by Operating Activities |
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Cash Flows – Investing Activities |
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Capital spending |
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( |
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Purchases of short-term investments |
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( |
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Purchase of long-term time deposits |
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— |
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Maturities of short-term investments |
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Contribution to unconsolidated affiliates |
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— |
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Acquisition of business, net of cash acquired |
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— |
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Disposal of equity securities |
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— |
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Other, net |
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Net Cash Used in Investing Activities |
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Cash Flows – Financing Activities |
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Repurchase of shares of common stock |
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Cash dividends paid on common stock |
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Dividends paid to noncontrolling interests |
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Other, net |
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— |
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Net Cash Used in Financing Activities |
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( |
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Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash |
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— |
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Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash |
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Cash, Cash Equivalents and Restricted Cash - Beginning of Period |
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Cash, Cash Equivalents and Restricted Cash - End of Period |
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$ |
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$ |
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Supplemental Cash Flow Data |
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Cash paid for income tax |
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Non-cash Investing and Financing Activities |
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Capital expenditures included in accounts payables and other current liabilities |
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See accompanying Notes to Condensed Consolidated Financial Statements.
5
Condensed Consolidated Balance Sheets
Yum China Holdings, Inc.
(in US$ millions)
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6/30/2020 |
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12/31/2019 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Deferred income taxes |
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Investments in unconsolidated affiliates |
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Other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY |
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Current Liabilities |
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Accounts payable and other current liabilities |
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$ |
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$ |
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Income taxes payable |
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Total Current Liabilities |
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Non-current operating lease liabilities |
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Non-current finance lease liabilities |
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Other liabilities |
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Total Liabilities |
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Redeemable Noncontrolling Interest |
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— |
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Equity |
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Common stock, $ |
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Treasury stock |
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( |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total Yum China Holdings, Inc. Stockholders' Equity |
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Noncontrolling interests |
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Total Equity |
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Total Liabilities, Redeemable Noncontrolling Interest and Equity |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Tabular amounts in US$ millions)
Note 1 – Description of Business
Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in
The Company owns, franchises or has ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, COFFii & JOY, East Dawning and Taco Bell concepts (collectively, the “concepts”). In connection with the separation of the Company in 2016 from its former parent company, YUM! Brands, Inc. (“YUM”), Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect subsidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company, entered into a
The Company also owns a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider in China.
In addition, the Company started a new e-commerce business in 2017, offering a wide selection of products including electronics, home and kitchen accessories, fresh groceries, and other general merchandise to customers directly through the Company’s e-commerce platform.
On April 8, 2020, the Company completed the acquisition of a
In the quarter ended June 30, 2020, the Company partnered with Lavazza Group, the world renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee shop concept in China. As the first step, a new Lavazza flagship store was opened in Shanghai, China.
The Company has
7
Note 2 – Basis of Presentation
Our preparation of the accompanying Condensed Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We have prepared the Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of June 30, 2020, results of our operations and comprehensive income for the quarters and years to date ended June 30, 2020 and 2019, and cash flows for the years to date ended June 30, 2020 and 2019. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 27, 2020.
Through the acquisition of Daojia, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and is entitled to substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.
The results of Huang Ji Huang’s operations have been included in the Company’s Condensed Consolidated Financial Statements since its acquisition date of April 8, 2020.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. The FASB subsequently issued amendments to clarify the implementation guidance. We adopted these standards on January 1, 2020 using the modified retrospective method. The adoption of this standard resulted in a change of our provision policy primarily for accounts receivable, but such adoption did not have a material impact on our financial statements. See Note 3 for additional information related to our accounts receivable provision policy.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends the fair value measurement guidance by modifying disclosure requirements. We adopted the standard on January 1, 2020, and such adoption did not have a material impact on our financial statements. See Note 11 for additional disclosure on fair value measurement.
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In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. We adopted this standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarifies that transactions in a collaborative arrangement should be accounted for under ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) when the counterparty is a customer for a distinct good or service. The amendment also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. We adopted the standard on January 1, 2020, and such adoption did not have a material impact on our financial statements.
Note 3 – Revenue Recognition
The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from transactions with franchisees and unconsolidated affiliates.
Company Sales
Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we either used our dedicated riders or, in the past, third-party aggregators’ delivery staff. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders were fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognized revenue, excluding delivery fees, when control of the food was transferred to the third-party aggregators’ delivery staff. The payment terms with respect to those sales were short-term in nature. Starting in 2019, we use our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores.
We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next
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Our privilege membership programs offer privilege members rights to multiple benefits, such as free delivery and discounts on certain products. For certain KFC and Pizza Hut privilege membership programs offering a pre-defined amount of benefits that can be redeemed ratably over the membership period, revenue is ratably recognized over the period based on the elapse of time. With respect to the Pizza Hut family privilege membership program offering members a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the benefits provided based on their relative standalone selling price and revenue is recognized when food or services are delivered or the benefits expire. In determining the relative standalone selling price of the benefits, the Company considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.
Franchise Fees and Income
Franchise fees and income primarily include upfront franchise fees, such as initial fees and renewal fees, and continuing fees. We have determined that the services we provide in exchange for upfront franchise fees and continuing fees are highly interrelated with the franchise right. We recognize upfront franchise fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with ASC 606. The franchise agreement term is generally
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
Revenues from transactions with franchisees and unconsolidated affiliates consist primarily of sales of food and paper products, advertising services and other services provided to franchisees and unconsolidated affiliates.
The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates, and then sells and delivers them to the restaurants. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees and unconsolidated affiliates. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees and unconsolidated affiliates.
For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on a certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to the franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.
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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
Disaggregation of Revenue
The following table presents revenue disaggregated by types of arrangements and segments:
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Quarter Ended 6/30/2020 |
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Revenues |
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KFC |
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Pizza Hut |
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All Other Segments |
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Corporate and Unallocated |
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Combined |
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Elimination |
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Consolidated |
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Company sales |
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$ |
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$ |
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$ |
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$ |
— |
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$ |
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$ |
— |
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$ |
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Franchise fees and income |
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