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, Taco Bell and COFFii & JOY 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 (the “PRC” or “China”), excluding Hong Kong, Taiwan and Macau. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants.
We own the intellectual property of East Dawning, Little Sheep, and COFFii & JOY and pay no license fee related to these Concepts.
The Company also owns a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider in China.
In addition, the Company started a new e-commerce business in 2017, offering a wide selection of products including electronics, home and kitchen accessories, and other general merchandise to customers directly through the Company’s e-commerce platform.
Note 2 – Basis of Presentation
Our preparation of the accompanying Condensed Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We have prepared the Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of March 31, 2019, and the results of our operations, comprehensive income and cash flows for the quarters ended March 31, 2019 and 2018. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto defined and included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 27, 2019.
Through the acquisition of Daojia in 2017, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia.
There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the 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.
7
During the first quarter of 2018, the Company completed the acquisition of an additional 36% equity interest in an unconsolidated affiliate
that operates KFC stores in Wuxi, China (“Wuxi KFC”), for cash consideration of approximately $98 million, increasing the Company’s equity interest to 83%, allowing the Company to consolidate the entity. The acquisition was considered immaterial. We began
consolidating Wuxi KFC upon the completion of acquisition.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02” or “ASC 842”), 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. The FASB subsequently issued amendments to clarify the implementation guidance. The Company adopted these standards on January 1, 2019, using a modified retrospective method for leases that exist at, or are entered into after, January 1, 2019, and has not recast the comparative periods presented in the Condensed Consolidated Financial Statements. Additionally, we elected the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
Upon the adoption of ASC 842, the Company recognized right-of-use assets and lease liabilities of approximately $2.0 billion and $2.2 billion, respectively, for operating leases of the land and/or building of our restaurants and office spaces based on the present value of lease payments over the lease term. In addition, an impairment charge of $60 million (net of related impact on deferred taxes and noncontrolling interests) on right-of-use assets arising from existing operating leases as of January 1, 2019 was recorded as an adjustment to retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease right-of-use assets been recognized at the time of impairment.
The following table summarizes the effect on the Consolidated Balance Sheet as a result of adopting ASC 842.
8
|
|
December 31, 2018
|
|
Effect of adoption
|
|
January 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
$
|
1,266
|
|
|
Short-term investments
|
|
|
122
|
|
|
|
|
|
|
|
|
|
122
|
|
|
Accounts receivable, net
|
|
|
80
|
|
|
|
|
|
|
|
|
|
80
|
|
|
Inventories, net
|
|
|
307
|
|
|
|
|
|
|
|
|
|
307
|
|
|
Prepaid expenses and other current assets
|
|
|
177
|
|
|
|
|
(39
|
)
|
(a)
|
|
|
138
|
|
|
Total Current Assets
|
|
|
1,952
|
|
|
|
|
(39
|
)
|
|
|
|
1,913
|
|
|
Property, plant and equipment, net
|
|
|
1,615
|
|
|
|
|
(1
|
)
|
|
|
|
1,614
|
|
|
Operating lease right-of-use assets
|
|
|
—
|
|
|
|
|
1,997
|
|
(b)
|
|
|
1,997
|
|
|
Goodwill
|
|
|
266
|
|
|
|
|
|
|
|
|
|
266
|
|
|
Intangible assets, net
|
|
|
116
|
|
|
|
|
(2
|
)
|
(c)
|
|
|
114
|
|
|
Deferred income taxes
|
|
|
89
|
|
|
|
|
19
|
|
(d)
|
|
|
108
|
|
|
Investments in unconsolidated affiliates
|
|
|
81
|
|
|
|
|
(1
|
)
|
|
|
|
80
|
|
|
Other assets
|
|
|
491
|
|
|
|
|
(4
|
)
|
(c)
|
|
|
487
|
|
|
Total Assets
|
|
$
|
4,610
|
|
|
|
$
|
1,969
|
|
|
|
$
|
6,579
|
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
1,199
|
|
|
|
$
|
320
|
|
(e)
|
|
$
|
1,519
|
|
|
Income taxes payable
|
|
|
54
|
|
|
|
|
|
|
|
|
|
54
|
|
|
Total Current Liabilities
|
|
|
1,253
|
|
|
|
|
320
|
|
|
|
|
1,573
|
|
|
Non-current operating lease liabilities
|
|
|
—
|
|
|
|
|
1,860
|
|
(f)
|
|
|
1,860
|
|
|
Non-current finance lease liabilities
|
|
|
25
|
|
|
|
|
—
|
|
|
|
|
25
|
|
|
Other liabilities
|
|
|
355
|
|
|
|
|
(148
|
)
|
(g)
|
|
|
207
|
|
|
Total Liabilities
|
|
|
1,633
|
|
|
|
|
2,032
|
|
|
|
|
3,665
|
|
|
Redeemable Noncontrolling Interest
|
|
|
1
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
4
|
|
|
|
|
|
|
|
|
|
4
|
|
|
Treasury stock
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
(460
|
)
|
|
Additional paid-in capital
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
2,402
|
|
|
Retained earnings
|
|
|
944
|
|
|
|
|
(60
|
)
|
(h)
|
|
|
884
|
|
|
Accumulated other comprehensive loss
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
Total Equity – Yum China Holdings, Inc.
|
|
|
2,873
|
|
|
|
|
(60
|
)
|
|
|
|
2,813
|
|
|
Noncontrolling interests
|
|
|
103
|
|
|
|
|
(3
|
)
|
(i)
|
|
|
100
|
|
|
Total Equity
|
|
|
2,976
|
|
|
|
|
(63
|
)
|
|
|
|
2,913
|
|
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity
|
|
$
|
4,610
|
|
|
|
$
|
1,969
|
|
|
|
$
|
6,579
|
|
|
(a)
|
Represents the current portion of prepaid rent reclassified to operating lease right-of-use assets.
|
(b)
|
Represents the net result of capitalization of operating lease payments and reclassification of prepaid rent, initial direct cost, deferred rent accrual and lease incentives, and offset by impairment of operating lease right-of-use assets that existed prior to the date of adoption.
|
(c)
|
Represents initial direct cost, favorable lease and non-current prepaid rent reclassified to operating lease right-of-use assets.
|
(d)
|
Represents the deferred tax impact related to impairment of operating lease right-of-use assets.
|
(e)
|
Represents recognition of the current portion of operating lease liabilities, offset by the reclassification of accrued rental payments and the current portion of deferred rent accrual to operating lease right-of-use assets.
|
(f)
|
Represents recognition of the non-current operating lease liabilities.
|
9
(g)
|
Represents reclassification of the non-current portion of deferred rent accrual and lease incentives to operating lease right-of-use assets.
|
(h)
|
Represents an impairment charge on operating lease right-of-use assets arising from existing operating leases as of January 1, 2019, net of related impact on deferred taxes and noncontrolling interests, with a corresponding reduction to the carrying amount of operating lease right-of-use assets. The impairment charge was recorded for those restaurants under operating leases with full impairment on the long-lived assets before January 1, 2019, as the additional impairment charge would have been recorded before January 1, 2019 had the operating lease right-of-use assets been recognized at the time of impairment.
|
(i)
|
Represents impairment of operating lease right-of-use assets attributable to noncontrolling interests.
|
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 (the “Tax Act”) and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for the Company from January 1, 2019, with early adoption permitted. We adopted the standard on January 1, 2019, and such adoption did not have a material impact on our financial statements.
In June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”). The new guidance largely aligns the accounting for share-based awards issued to employees and non-employees. Existing guidance for employee awards will apply to nonemployee share-based transactions with limited exceptions. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606,
Revenue from Contracts with Customers
. ASU 2018-07 is effective for the Company fr
om January 1, 2019, with early adoption permitted. We adopted the standard on January 1, 2019, and such adoption did not have a material impact on our financial statements.
Certain prior period items in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.
Note 3 – Revenue Recognition
The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from transactions with franchisees and unconsolidated affiliates.
Company Sales
Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggregators’ platforms, we use our dedicated riders, or, in limited cases, 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 are fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature.
We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer.
Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months.
We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.
Our privilege membership program offers privilege members benefits, such as free delivery and discounts on coffee or breakfast items. The associated membership fees are recognized ratably over the membership period.
10
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 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 certain percentage of sales from substantially all of our restaurants, including franchisees and unconsolidated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of customer support and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.
Loyalty Programs
Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns, including an estimate of the breakage for points that members will never redeem. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.
11
Disaggregation of Revenue
The following table presents revenue disaggregated by types of arrangements and segments:
|
|
Quarter Ended 3/31/2019
|
|
Revenues
|
|
KFC
|
|
|
Pizza Hut
|
|
|
All Other Segments
(a)
|
|
|
Corporate and Unallocated
(a)
|
|
|
Combined
|
|
|
Elimination
|
|
|
Consolidated
|
|
Company sales
|
|
$
|
1,539
|
|
|
$
|
541
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
2,089
|
|
|
$
|
—
|
|
|
$
|
2,089
|
|
Franchise fees and income
|
|
|
36
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
39
|
|
Revenues from transactions
with franchisees and
unconsolidated affiliates
|
|
|
17
|
|
|
|
1
|
|
|
|
7
|
|
|
|
145
|
|
|
|
170
|
|
|
|
—
|
|
|
|
170
|
|
Other revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
1
|
|
|
|
15
|
|
|
|
(9
|
)
|
|
|
6
|
|
Total revenues
|
|
$
|
1,592
|
|
|
$
|
543
|
|
|
$
|
32
|
|
|
$
|
146
|
|
|
$
|
2,313
|
|
|
$
|
(9
|
)
|
|
$
|
2,304
|
|
|
|
Quarter Ended 3/31/2018
|
|
Revenues
|
|
KFC
|
|
|
Pizza Hut
|
|
|
All Other Segments
(a)
|
|
|
Corporate and Unallocated
(a)
|
|
|
Combined
|
|
|
Elimination
|
|
|
Consolidated
|
|
Company sales
|
|
$
|
1,444
|
|
|
$
|
564
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
2,016
|
|
|
$
|
—
|
|
|
$
|
2,016
|
|
Franchise fees and income
|
|
|
37
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
Revenues from transactions
with franchisees and
unconsolidated affiliates
|
|
|
17
|
|
|
|
—
|
|
|
|
7
|
|
|
|
137
|
|
|
|
161
|
|
|
|
—
|
|
|
|
161
|
|
Other revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
4
|
|
Total revenues
|
|
$
|
1,498
|
|
|
$
|
565
|
|
|
$
|
21
|
|
|
$
|
138
|
|
|
$
|
2,222
|
|
|
$
|
(1
|
)
|
|
$
|
2,221
|
|
12
(a)
|
As COFFii & JOY and our e-commerce business became operating segments starting from the first quarter of 2019, revenue by segment information for prior quarters has been recast to align with the change in segment reporting. Additional details on our reportable segments are included in Note 13.
|
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 consist 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, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets on the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company did 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 $8 million at March 31, 2019 and December 31, 2018, respectively.
Contract Liabilities
Contract liabilities at March 31, 2019 and December 31, 2018 were as follows:
Contract liabilities
|
|
3/31/2019
|
|
12/31/2018
|
- Deferred revenue related to prepaid stored-value products
|
|
$
|
80
|
|
|
|
$
|
73
|
|
|
- Deferred revenue related to customer loyalty programs
|
|
|
22
|
|
|
|
|
17
|
|
|
- Deferred revenue related to upfront fees
|
|
|
39
|
|
|
|
|
37
|
|
|
Total
|
|
$
|
141
|
|
|
|
$
|
127
|
|
|
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 current liabilities on the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities on the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $33 million and $19 million in the quarter ended March 31, 2019 and March 31, 2018, respectively.
Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the periods presented.
The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for 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.
13
Note 4 – Earnings Per Common Share (“EPS”)
The following table summarizes the components of basic and diluted EPS (in millions, except per share data):
|
|
Quarter Ended
|
|
|
|
3/31/2019
|
|
3/31/2018
|
|
Net Income – Yum China Holdings, Inc.
|
|
$
|
222
|
|
|
|
$
|
288
|
|
|
|
Weighted-average common shares outstanding
(for basic calculation)
(a)
|
|
|
379
|
|
|
|
|
386
|
|
|
|
Effect of dilutive share-based awards
(a)
|
|
|
7
|
|
|
|
|
12
|
|
|
|
Effect of dilutive warrants
(b)
|
|
|
2
|
|
|
|
|
3
|
|
|
|
Weighted-average common and dilutive potential
common shares outstanding (for diluted calculation)
|
|
|
388
|
|
|
|
|
401
|
|
|
|
Basic Earnings Per Common Share
|
|
$
|
0.59
|
|
|
|
$
|
0.75
|
|
|
|
Diluted Earnings Per Common Share
|
|
$
|
0.57
|
|
|
|
$
|
0.72
|
|
|
|
Share-based awards excluded from the diluted EPS computation
(c)
|
|
|
2
|
|
|
|
|
1
|
|
|
|
(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, subject to customary anti-dilution adjustments. The warrants may be exercised at any time through October 31, 2021. 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 stock appreciation rights, restricted stock units and performance share units were not included in the computation of diluted EPS because to do so would have been antidilutive for the quarters presented.
|
Note 5 – Equity
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
|
|
|
(Loss) Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Interests
|
|
|
Equity
|
|
|
Interest
|
|
Balance at December 31, 2018
|
|
|
392
|
|
|
$
|
4
|
|
|
$
|
2,402
|
|
|
$
|
944
|
|
|
$
|
(17
|
)
|
|
|
(13
|
)
|
|
$
|
(460
|
)
|
|
$
|
103
|
|
|
$
|
2,976
|
|
|
$
|
1
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
229
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
59
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
Cash dividends declared
($0.12 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
|
|
Repurchase of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
Exercise and vesting of share-based awards
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(63
|
)
|
|
|
|
|
Balance at March 31, 2019
|
|
|
394
|
|
|
$
|
4
|
|
|
$
|
2,408
|
|
|
$
|
1,060
|
|
|
$
|
39
|
|
|
|
(15
|
)
|
|
$
|
(525
|
)
|
|
$
|
76
|
|
|
$
|
3,062
|
|
|
$
|
1
|
|
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. On October 30, 2018, the Board of Directors further increased the share repurchase authorization to an aggregate of $1.4
14
billion.
The Company repurchased 1.7 million shares of Yum China common stock at a total cost of $65 million during the quarter ended March 31, 2019. This includes approximately 46 thousand
shares repurchased for $2 million with trade dates prior to March 31, 2019 but cash settlement dates subsequent to March 31, 2019. There were no shares repurchased during the quarter ended March 31, 2018.
As of March 31, 2019, $895 million remained availab
le for future share repurchases under the authorization.
Note 6 – Items Affecting Comparability of Net Income and Cash Flows
Gain from Re-Measurement of Equity Interest Upon Acquisition
In the first quarter of 2018, the Company completed the acquisition of Wuxi KFC. In connection with the acquisition, the Company also recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value using discounted cash flow valuation approach and incorporating assumptions and estimates that were not observable in the market. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, which were based on internal projections, historical performance of stores and the business environment, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium. The gain was not allocated to any segment for performance reporting purposes.
Meituan Dianping (“Meituan”) Investment
In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the Hong Kong Stock Exchange in September 2018. The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. As of March 31, 2019, the fair value of the investment was $57 million. The unrealized gain of $10 million was included in Investment gain in our Condensed Consolidated Statements of Income during the quarter ended March 31, 2019.
Incremental Restaurant-Level Impairment Upon Adoption of ASC 842
We performed an additional impairment evaluation of long-lived assets of restaurants as a result of adopting ASC 842 and recorded an incremental restaurant-level impairment charge of $12 million in the first quarter of 2019. See Note 11 for additional information.
Transition Tax
We completed the evaluation of the impact on our transition tax computation based on the final regulations that were released by the U.S. Treasury Department and the Internal Revenue Service (“IRS”) and became effective in the first quarter of 2019, and recorded an additional amount of $8 million for the transition tax accordingly. See Note 12 for additional information.
Note 7 – Other Income, net
|
|
Quarter Ended
|
|
|
|
3/31/2019
|
|
3/31/2018
|
|
Equity income from investments in unconsolidated affiliates
|
|
$
|
23
|
|
|
|
$
|
23
|
|
|
|
Gain from re-measurement of equity interest upon acquisition
(a)
|
|
|
—
|
|
|
|
|
98
|
|
|
|
Foreign exchange impact and other
|
|
|
(4
|
)
|
|
|
|
5
|
|
|
|
Other income, net
|
|
$
|
19
|
|
|
|
$
|
126
|
|
|
|
(a)
|
As a result of the acquisition of Wuxi KFC in the first quarter of 2018, 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.
|
15
Note 8 – Supplemental Balance Sheet Information
Accounts Receivable, net
|
|
3/31/2019
|
|
12/31/2018
|
Accounts receivable, gross
|
|
$
|
79
|
|
|
|
$
|
81
|
|
|
Allowance for doubtful accounts
|
|
|
(2
|
)
|
|
|
|
(1
|
)
|
|
Accounts receivable, net
|
|
$
|
77
|
|
|
|
$
|
80
|
|
|
Prepaid Expenses and Other Current Assets
|
|
3/31/2019
|
|
12/31/2018
|
Receivables from payment processors and aggregators
|
|
$
|
46
|
|
|
|
$
|
49
|
|
|
Dividends receivable from unconsolidated affiliates
|
|
|
53
|
|
|
|
|
20
|
|
|
Prepaid rent
|
|
|
—
|
|
|
|
|
42
|
|
|
Other prepaid expenses and current assets
|
|
|
80
|
|
|
|
|
66
|
|
|
Prepaid expenses and other current assets
|
|
$
|
179
|
|
|
|
$
|
177
|
|
|
Property, Plant and Equipment
|
|
3/31/2019
|
|
12/31/2018
|
Buildings and improvements
|
|
$
|
2,209
|
|
|
|
$
|
2,121
|
|
|
Finance leases, primarily buildings
|
|
|
26
|
|
|
|
|
26
|
|
|
Machinery, equipment and construction in progress
|
|
|
1,218
|
|
|
|
|
1,201
|
|
|
Property, plant and equipment, gross
|
|
|
3,453
|
|
|
|
|
3,348
|
|
|
Accumulated depreciation
|
|
|
(1,833
|
)
|
|
|
|
(1,733
|
)
|
|
Property, plant and equipment, net
|
|
$
|
1,620
|
|
|
|
$
|
1,615
|
|
|
Other Assets
|
|
3/31/2019
|
|
12/31/2018
|
|
VAT assets
|
|
$
|
249
|
|
|
|
$
|
226
|
|
|
|
Land use right
|
|
|
141
|
|
|
|
|
138
|
|
|
|
Long-term deposits
|
|
|
67
|
|
|
|
|
64
|
|
|
|
Investment in equity securities
|
|
|
57
|
|
|
|
|
47
|
|
|
|
Costs to obtain contracts
|
|
|
10
|
|
|
|
|
8
|
|
|
|
Others
|
|
|
3
|
|
|
|
|
8
|
|
|
|
Other Assets
|
|
$
|
527
|
|
|
|
$
|
491
|
|
|
|
Accounts Payable and Other Current Liabilities
|
|
3/31/2019
|
|
12/31/2018
|
Accounts payable
|
|
$
|
556
|
|
|
|
$
|
619
|
|
|
Operating leases liabilities
|
|
|
364
|
|
|
|
|
—
|
|
|
Accrued compensation and benefits
|
|
|
163
|
|
|
|
|
200
|
|
|
Contract liabilities
|
|
|
109
|
|
|
|
|
96
|
|
|
Accrued capital expenditures
|
|
|
106
|
|
|
|
|
137
|
|
|
Accrued marketing expenses
|
|
|
76
|
|
|
|
|
32
|
|
|
Other current liabilities
|
|
|
133
|
|
|
|
|
115
|
|
|
Accounts payable and other current liabilities
|
|
$
|
1,507
|
|
|
|
$
|
1,199
|
|
|
Other Liabilities
|
|
3/31/2019
|
|
12/31/2018
|
Accrued income tax payable
|
|
$
|
80
|
|
|
|
$
|
71
|
|
|
Deferred income tax liabilities
|
|
|
64
|
|
|
|
|
65
|
|
|
Contract liabilities
|
|
|
32
|
|
|
|
|
31
|
|
|
Deferred rent accrual
|
|
|
—
|
|
|
|
|
144
|
|
|
Other non-current liabilities
|
|
|
44
|
|
|
|
|
44
|
|
|
Other liabilities
|
|
$
|
220
|
|
|
|
$
|
355
|
|
|
16
Note 9 –
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
|
|
Total
Company
|
|
|
KFC
|
|
|
Pizza Hut
|
|
|
All Other
Segments
|
|
Balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
$
|
648
|
|
|
$
|
238
|
|
|
$
|
19
|
|
|
$
|
391
|
|
Accumulated impairment losses
(a)
|
|
|
(382
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(382
|
)
|
Goodwill, net
|
|
|
266
|
|
|
|
238
|
|
|
|
19
|
|
|
|
9
|
|
Effect of currency translation adjustment
|
|
|
7
|
|
|
|
6
|
|
|
|
1
|
|
|
|
—
|
|
Balance as of March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
655
|
|
|
|
244
|
|
|
|
20
|
|
|
|
391
|
|
Accumulated impairment losses
(a)
|
|
|
(382
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(382
|
)
|
Goodwill, net
|
|
$
|
273
|
|
|
$
|
244
|
|
|
$
|
20
|
|
|
$
|
9
|
|
(
a
)
|
Accumulated impairment losses represent Little Sheep goodwill impairment.
|
Intangible assets, net as of March 31, 2019 and December 31, 2018 are as follows:
|
|
3/31/2019
|
|
|
12/31/2018
|
|
|
|
Gross Carrying
Amount
(a)
|
|
|
Accumulated
Amortization
|
|
|
Accumulated impairment losses
|
|
|
Net Carrying Amount
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Accumulated impairment losses
|
|
|
Net Carrying Amount
|
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
154
|
|
|
$
|
(108
|
)
|
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
150
|
|
|
$
|
(100
|
)
|
|
$
|
—
|
|
|
$
|
50
|
|
Daojia platform
|
|
|
16
|
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
3
|
|
|
|
16
|
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
3
|
|
Customer-related assets
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
Others
(b)
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
6
|
|
|
|
17
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
8
|
|
|
|
$
|
191
|
|
|
$
|
(122
|
)
|
|
$
|
(12
|
)
|
|
$
|
57
|
|
|
$
|
195
|
|
|
$
|
(120
|
)
|
|
$
|
(12
|
)
|
|
$
|
63
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Little Sheep trademark
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
245
|
|
|
$
|
(122
|
)
|
|
$
|
(12
|
)
|
|
$
|
111
|
|
|
$
|
248
|
|
|
$
|
(120
|
)
|
|
$
|
(12
|
)
|
|
$
|
116
|
|
(a)
|
Changes in gross carrying amount include effect of currency translation adjustment.
|
(b)
|
Decrease in Others during the quarter ended March 31, 2019 is primarily due to the reclassification of favorable lease assets, with gross carrying amount of $7 million and accumulated amortization of $5 million, to right-of-use assets upon adoption of ASC 842.
|
Amortization expense of definite-lived intangible assets was $6 million and $6 million for the quarters ended March 31, 2019 and 2018, respectively. As of March 31, 2019, expected amortization expense for the unamortized definite-lived intangible assets is approximately $11 million for the remainder of 2019, $13 million in 2020, $13 million in 2021, $13 million in 2022 and $3 million in 2023.
Note 10 – Leases
As of March 31, 2019, we operated more than 8,600 restaurants, leasing the underlying land and/or building. We generally enter into lease agreements with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent;
17
(ii) the higher of a fixed base rent or a percentage of the restaurant’s sales revenue; or (iii) a percentage of the restaurant’s sales revenue. Most leases require us to pay common area maintenance fees for the leased pr
operty. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Prior to the adoption of ASC 842, operating leases were not recognized on the balance sheet of the Company, but rent expenses were recognized on a straight-line basis over the lease term. Upon adoption, right-of-use assets and lease liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. This is consistent with the historical recognition of finance leases, which is unchanged upon adoption of ASC 842. Variable lease payments that do not depend on a rate or index are expensed as incurred. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with an initial term of 12 months or less; we recognize lease expense for these leases on a straight-line basis over the lease term. In addition, the Company has elected not to separate non-lease components (e.g., common area maintenance fees) from the lease components.
In limited cases, we sublease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of restaurant’s annual sales revenue. Income from sublease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Condensed Consolidated Statements of Income. The impact of ASC 842 on our accounting as a lessor was not significant.
Supplemental Balance Sheet
|
|
|
|
|
|
|
|
|
3/31/2019
|
|
|
Account Classification
|
Assets
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
2,016
|
|
|
Operating lease right-of-use assets
|
Finance lease right-of-use assets
|
|
|
14
|
|
|
Property, plant and equipment, net
|
Total leased assets
|
|
$
|
2,030
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
364
|
|
|
Accounts payable and other current liabilities
|
Finance lease liabilities
|
|
|
2
|
|
|
Accounts payable and other current liabilities
|
Non-current
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
1,869
|
|
|
Non-current operating lease liabilities
|
Finance lease liabilities
|
|
|
23
|
|
|
Non-current finance lease liabilities
|
Total lease liabilities
|
|
$
|
2,258
|
|
|
|
Summary of Lease Cost
|
|
Quarter Ended
|
|
|
Account Classification
|
|
|
3/31/2019
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
117
|
|
|
Occupancy and other operating expenses, G&A
or Franchise expenses
|
Variable lease cost
|
|
|
91
|
|
|
Occupancy and other operating expenses
or Franchise expenses
|
Short-term lease cost
|
|
|
3
|
|
|
Occupancy and other operating expenses or G&A
|
Sublease income
|
|
|
(7
|
)
|
|
Franchise fees and income or Other revenues
|
Total lease cost
|
|
$
|
204
|
|
|
|
Finance lease cost for the quarter ended March 31, 2019 is not material.
Supplemental Cash Flow Information
|
|
Quarter Ended
|
|
|
|
|
3/31/2019
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
127
|
|
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities:
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
57
|
|
|
|
|
18
Cash paid related to finance leases and right-of-use assets obtained in exchange for new finance lease liabilities
for the quarter ended March 31, 2019 is not material.
|
|
Quarter Ended
|
|
|
Lease Term and Discount Rate
|
|
3/31/2019
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
|
Operating leases
|
|
|
7.3
|
|
|
Finance leases
|
|
|
12.0
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
|
Operating leases
|
|
|
6.1
|
%
|
|
Finance leases
|
|
|
5.7
|
%
|
|
Summary of Future Lease Payments and Lease Liabilities
Maturities of lease liabilities as of March 31, 2019 were as follows:
|
|
Amount of
Operating Leases
|
|
|
Amount of
Finance Leases
|
|
|
Total
|
|
Remainder of 2019
|
|
$
|
372
|
|
|
$
|
2
|
|
|
$
|
374
|
|
2020
|
|
|
460
|
|
|
|
3
|
|
|
|
463
|
|
2021
|
|
|
413
|
|
|
|
3
|
|
|
|
416
|
|
2022
|
|
|
353
|
|
|
|
3
|
|
|
|
356
|
|
2023
|
|
|
287
|
|
|
|
3
|
|
|
|
290
|
|
Thereafter
|
|
|
903
|
|
|
|
21
|
|
|
|
924
|
|
Total undiscounted lease payment
|
|
|
2,788
|
|
|
|
35
|
|
|
|
2,823
|
|
Less: imputed interest
(a)
|
|
|
555
|
|
|
|
10
|
|
|
|
565
|
|
Present value of lease liabilities
|
|
$
|
2,233
|
|
|
$
|
25
|
|
|
$
|
2,258
|
|
(a)
|
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the imputed interest and present value of lease payments. We used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
|
As of March 31, 2019, we have additional lease agreements that have been signed but not yet commenced of $87 million. These leases will commence between the second quarter of 2019 and 2020 with lease term of 1 year to 20 years.
Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
|
|
Commitments
|
|
|
|
Amount of
Operating Leases
|
|
|
Amount of
Finance Leases
|
|
|
Total
|
|
2019
|
|
$
|
466
|
|
|
$
|
3
|
|
|
$
|
469
|
|
2020
|
|
|
440
|
|
|
|
3
|
|
|
|
443
|
|
2021
|
|
|
394
|
|
|
|
3
|
|
|
|
397
|
|
2022
|
|
|
336
|
|
|
|
3
|
|
|
|
339
|
|
2023
|
|
|
275
|
|
|
|
3
|
|
|
|
278
|
|
Thereafter
|
|
|
864
|
|
|
|
22
|
|
|
|
886
|
|
|
|
$
|
2,775
|
|
|
$
|
37
|
|
|
$
|
2,812
|
|
At December 31, 2018, the present value of minimum payments under finance leases was $27 million, after deducting imputed interest of $10 million. The current portion of finance lease obligations was $2 million as of December 31, 2018, and was classified in Accounts payable and other current liabilities.
19
Note 11 – Fair Value Measurements
The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, accounts receivable and accounts payable, and the carrying values of these assets and liabilities approximate their fair value in general.
The Company accounts for its investment in the equity securities of Meituan at fair value, which is determined based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.
The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred during the quarter ended March 31, 2019.
|
|
|
|
|
|
Fair Value Measurement or Disclosure
at March 31, 2019
|
|
|
Balance at
March 31, 2019
|
|
|
Level 1
|
|
|
|
|
Level 2
|
|
|
|
|
Level 3
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
720
|
|
|
$
|
—
|
|
|
|
|
$
|
720
|
|
|
|
|
$
|
—
|
|
|
Money market funds
|
|
|
129
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt securities
(a)
|
|
|
89
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
938
|
|
|
|
218
|
|
|
|
|
|
720
|
|
|
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
284
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
284
|
|
|
|
—
|
|
|
|
|
|
284
|
|
|
|
|
|
—
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities
|
|
|
57
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,279
|
|
|
$
|
275
|
|
|
|
|
$
|
1,004
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Fair Value Measurement or Disclosure
at December 31, 2018
|
|
|
Balance at
December 31, 2018
|
|
|
Level 1
|
|
|
|
|
Level 2
|
|
|
|
|
Level 3
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
570
|
|
|
$
|
—
|
|
|
|
|
$
|
570
|
|
|
|
|
$
|
—
|
|
|
Money market funds
|
|
|
226
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt securities
(a)
|
|
|
153
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
949
|
|
|
|
379
|
|
|
|
|
|
570
|
|
|
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
122
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
122
|
|
|
|
—
|
|
|
|
|
|
122
|
|
|
|
|
|
—
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities
|
|
|
47
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,118
|
|
|
$
|
426
|
|
|
|
|
$
|
692
|
|
|
|
|
$
|
—
|
|
|
(a)
|
Classified as held-to-maturity investments and measured at amortized cost.
|
Non-Recurring Fair Value Measurements
In addition, certain of the Company’s assets, such as operating lease right-of-use (“ROU”) assets, property, plant and equipment, goodwill and intangible assets, are measured at fair value on a non-recurring basis, if determined to be impaired.
The following table presents amounts recognized from all non-recurring fair value measurements during the quarter ended March 31, 2019. All fair value measurements were based on unobservable inputs (Level 3). These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective quarter-end dates.
20
|
|
Amount
|
|
Account Classification
|
|
|
|
|
|
|
|
ROU impairment prior to the adoption of ASC 842
(a)
|
$
|
82
|
|
Retained Earnings
|
|
Incremental restaurant-level impairment
upon adoption of ASC 842
(b)
|
|
12
|
|
Closure and impairment expenses, net
|
|
Total
|
|
94
|
|
|
|
(a)
|
ROU impairment prior to the adoption of ASC 842 represents an impairment charge on operating lease right-of-use assets arising from existing operating leases as of January 1, 2019. After netting with related impact on deferred taxes of $19 million and the impact on noncontrolling interests of $3 million, we recorded a cumulative adjustment of $60 million to retained earnings in accordance with the transition guidance for the new lease standard. For those restaurants under operating leases with full impairment on their long-lived assets (primarily property, plant and equipment) before January 1, 2019, an additional impairment charge would have been recorded before January 1, 2019 had the operating lease right-of-use assets been recognized at the time of impairment. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3) at the time of impairment.
|
(b)
|
Incremental restaurant-level impairment
upon adoption of ASC 842
represents additional impairment charges as a result of adopting the new lease standard in the first quarter of 2019. We performed an additional impairment evaluation of long-lived assets of restaurants, which includes operating lease right-of-use assets, and property, plant and equipment. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3).
|
During the quarter ended March 31, 2018, we recorded restaurant-level impairment (Level 3) of nil.
Note 12 – Income Taxes
|
|
Quarter Ended
|
|
|
|
3/31/2019
|
|
3/31/2018
|
|
Income tax provision
|
|
$
|
93
|
|
|
|
$
|
107
|
|
|
|
Effective tax rate
|
|
|
28.9
|
%
|
|
|
|
26.6
|
%
|
|
|
The higher effective tax rate for the quarter ended March 31, 2019 was primarily due to an adjustment of transition tax based on the final regulations that were released by the U.S. Treasury Department and the IRS and became effective in the first quarter of 2019.
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 impacted Yum China in two material aspects: (1) in general, 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 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.
We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made a reversal to provisional amount in the amount of $36 million for the transition tax recorded in 2017 accordingly. The U.S. Treasury Department and the IRS released the final transition tax regulations on January 15, 2019, which were published in the Federal Register and became effective on February 5, 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.
The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred, and therefore included it in estimating the annual effective tax rate.
21
Note 13 –Segment Reporting
We have two reportable segments: KFC and Pizza Hut. Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, our six non-reportable operating segments, including the operations of East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior quarters has been recast to align with this change in segment reporting. There was no impact on the consolidated financial statements of the Company as a result of this change.
|
|
Quarter Ended 3/31/2019
|
Revenues
|
|
KFC
|
|
Pizza Hut
|
|
All Other Segments
|
|
Corporate and Unallocated
(a)
|
|
Combined
|
|
Elimination
|
|
Consolidated
|
Revenue from external
customers
|
|
$
|
1,592
|
|
|
|
$
|
543
|
|
|
|
$
|
23
|
|
|
|
$
|
146
|
|
|
|
|
2,304
|
|
|
|
$
|
—
|
|
|
|
$
|
2,304
|
|
|
Inter-segment revenue
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
9
|
|
|
|
|
—
|
|
|
|
|
9
|
|
|
|
|
(9
|
)
|
|
|
|
—
|
|
|
Total
|
|
$
|
1,592
|
|
|
|
$
|
543
|
|
|
|
$
|
32
|
|
|
|
$
|
146
|
|
|
|
$
|
2,313
|
|
|
|
$
|
(9
|
)
|
|
|
$
|
2,304
|
|
|
|
|
Quarter Ended 3/31/2018
|
Revenues
|
|
KFC
|
|
Pizza Hut
|
|
All Other Segments
|
|
Corporate and Unallocated
(a)
|
|
Combined
|
|
Elimination
|
|
Consolidated
|
Revenue from external
customers
|
|
$
|
1,498
|
|
|
|
$
|
565
|
|
|
|
$
|
20
|
|
|
|
$
|
138
|
|
|
|
|
2,221
|
|
|
|
$
|
—
|
|
|
|
$
|
2,221
|
|
|
Inter-segment revenue
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
(1
|
)
|
|
|
|
—
|
|
|
Total
|
|
$
|
1,498
|
|
|
|
$
|
565
|
|
|
|
$
|
21
|
|
|
|
$
|
138
|
|
|
|
$
|
2,222
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
2,221
|
|
|
|
|
Quarter Ended
|
|
Operating Profit
|
|
3/31/2019
|
|
|
3/31/2018
|
|
KFC
(b)
|
|
$
|
288
|
|
|
$
|
296
|
|
Pizza Hut
|
|
|
50
|
|
|
|
34
|
|
All Other Segments
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Unallocated revenues from transactions with
franchisees and unconsolidated affiliates
(c)
|
|
|
145
|
|
|
|
137
|
|
Unallocated Other revenues
|
|
|
1
|
|
|
|
1
|
|
Unallocated expenses from transactions with
franchisees and unconsolidated affiliates
(c)
|
|
|
(143
|
)
|
|
|
(137
|
)
|
Unallocated Other operating costs and expenses
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Unallocated and corporate G&A expenses
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Unallocated Other income
(d)
|
|
|
1
|
|
|
|
102
|
|
Operating Profit
|
|
$
|
303
|
|
|
$
|
395
|
|
Interest income, net
(a)
|
|
|
9
|
|
|
|
8
|
|
Investment gain
(a)
|
|
|
10
|
|
|
|
—
|
|
Income Before Income Taxes
|
|
$
|
322
|
|
|
$
|
403
|
|
|
|
Quarter Ended
|
|
|
Impairment Charges
|
|
3/31/2019
|
|
|
3/31/2018
|
|
|
KFC
(e)
|
|
$
|
8
|
|
|
$
|
1
|
|
|
Pizza Hut
(e)
|
|
|
5
|
|
|
|
1
|
|
|
All Other Segments
|
|
|
1
|
|
|
$
|
—
|
|
|
|
|
$
|
14
|
|
|
$
|
2
|
|
|
22
|
|
Total Assets
|
|
|
|
3/31/2019
|
|
|
12/31/2018
|
|
KFC
(f)
|
|
$
|
3,082
|
|
|
$
|
1,745
|
|
Pizza Hut
|
|
|
1,073
|
|
|
|
558
|
|
All Other Segments
|
|
|
161
|
|
|
|
132
|
|
Corporate and Unallocated
(g)
|
|
|
2,446
|
|
|
|
2,175
|
|
|
|
$
|
6,762
|
|
|
$
|
4,610
|
|
(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 $23 million for the quarters ended March 31, 2019 and 2018, respectively.
|
(c)
|
Primarily includes revenues and associated expenses of transactions with franchisee and unconsolidated affiliates derived from the Company’s central procurement model whereby the Company centrally purchases substantially all food and paper products from suppliers and then sells and delivers to restaurants, including franchisees and unconsolidated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are deemed corporate revenues and expenses in nature.
|
(d)
|
Primarily includes gain from re-measurement of the previously held equity interest in connection with the acquisition of Wuxi KFC (See Note 2).
|
(e)
|
Primarily includes store closure impairment charges as well as incremental restaurant-level impairment charges as a result of adopting ASC 842 (See Note 11).
|
(
f
)
|
Includes investments in unconsolidated affiliates.
|
(g)
|
Primarily includes cash and cash equivalents, short-term investments, investment in equity securities, and inventories that are centrally managed.
|
Note 14 – Contingencies
Indemnification of China Tax on Indirect Transfers of Assets
In February 2015, the Chinese State 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, 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.
23
Guarantees
From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affiliates. As of March 31, 2019, we have provided guarantees of approximately $1 million on behalf of franchisees and no guarantees were outstanding for unconsolidated affiliates.
Legal Proceedings
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 15 – Subsequent Events
On April 29, 2019, the Company announced that the Board of Directors declared a cash dividend of $0.12 per share, payable as of the close of business on June 17, 2019 to stockholders of record as of the close of business on May 28, 2019. The total estimated cash dividend payable is approximately $46 million.
24