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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2022

 

OR

 

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

 

For the transition period from ____________ to _________________

 

Commission file number 001-37762

 

 

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

81-2421743

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

7100 Corporate Drive

Plano, Texas 75024

United States of America

 

Yum China Building

20 Tian Yao Qiao Road

Shanghai 200030

People’s Republic of China

 

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

(469) 980-2898

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

YUMC

New York Stock Exchange

9987

The Stock Exchange of Hong Kong Limited

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

The number of shares outstanding of the registrant’s common stock as of August 3, 2022 was 419,571,781 shares.

 

 

 


 

Yum China Holdings, Inc.

INDEX

 

 

 

Page

 

 

No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Income – Quarters and Years to Date Ended June 30, 2022 and 2021 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Quarters and Years to Date Ended June 30, 2022 and 2021 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Years to Date Ended June 30, 2022 and 2021 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2022 (Unaudited) and December 31, 2021

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

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

26

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

 

Item 4 – Controls and Procedures

42

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

43

 

 

 

 

Item 1A – Risk Factors

43

 

 

 

 

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

45

 

 

 

 

Item 6 – Exhibits

46

 

 

 

 

Signatures

47

 

 

 


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Statements of Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions, except per share data)

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 Revenues

 

6/30/2022

 

 

6/30/2021

 

 

6/30/2022

 

 

6/30/2021

 

 Company sales

 

$

2,026

 

 

$

2,233

 

 

$

4,574

 

 

$

4,564

 

 Franchise fees and income

 

 

19

 

 

 

38

 

 

 

43

 

 

 

80

 

 Revenues from transactions with
   franchisees and unconsolidated affiliates

 

 

62

 

 

 

164

 

 

 

139

 

 

 

335

 

 Other revenues

 

 

21

 

 

 

16

 

 

 

40

 

 

 

29

 

 Total revenues

 

 

2,128

 

 

 

2,451

 

 

 

4,796

 

 

 

5,008

 

 Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 Food and paper

 

 

627

 

 

 

686

 

 

 

1,419

 

 

 

1,390

 

 Payroll and employee benefits

 

 

549

 

 

 

540

 

 

 

1,216

 

 

 

1,084

 

 Occupancy and other operating expenses

 

 

605

 

 

 

653

 

 

 

1,343

 

 

 

1,301

 

 Company restaurant expenses

 

 

1,781

 

 

 

1,879

 

 

 

3,978

 

 

 

3,775

 

 General and administrative expenses

 

 

141

 

 

 

136

 

 

 

292

 

 

 

266

 

 Franchise expenses

 

 

8

 

 

 

16

 

 

 

18

 

 

 

33

 

 Expenses for transactions with
   franchisees and unconsolidated affiliates

 

 

61

 

 

 

160

 

 

 

136

 

 

 

329

 

 Other operating costs and expenses

 

 

18

 

 

 

13

 

 

 

35

 

 

 

24

 

 Closures and impairment expenses, net

 

 

14

 

 

 

13

 

 

 

16

 

 

 

11

 

 Other expenses (income), net

 

 

24

 

 

 

1

 

 

 

49

 

 

 

(5

)

 Total costs and expenses, net

 

 

2,047

 

 

 

2,218

 

 

 

4,524

 

 

 

4,433

 

 Operating Profit

 

 

81

 

 

 

233

 

 

 

272

 

 

 

575

 

 Interest income, net

 

 

14

 

 

 

16

 

 

 

26

 

 

 

31

 

 Investment gain (loss)

 

 

20

 

 

 

8

 

 

 

(17

)

 

 

(4

)

 Income Before Income Taxes and Equity in
   Net Earnings (Losses) from Equity Method Investments

 

 

115

 

 

 

257

 

 

 

281

 

 

 

602

 

 Income tax provision

 

 

(31

)

 

 

(64

)

 

 

(86

)

 

 

(166

)

 Equity in net earnings (losses) from
   equity method investments

 

 

(1

)

 

 

 

 

 

(2

)

 

 

 

 Net income – including noncontrolling interests

 

 

83

 

 

 

193

 

 

 

193

 

 

 

436

 

 Net income – noncontrolling interests

 

 

 

 

 

12

 

 

 

10

 

 

 

25

 

 Net Income – Yum China Holdings, Inc.

 

$

83

 

 

$

181

 

 

$

183

 

 

$

411

 

 Weighted-average common shares outstanding (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 Basic

 

 

421

 

 

 

421

 

 

 

423

 

 

 

420

 

 Diluted

 

 

424

 

 

 

435

 

 

 

427

 

 

 

434

 

 Basic Earnings Per Common Share

 

$

0.20

 

 

$

0.43

 

 

$

0.43

 

 

$

0.98

 

 Diluted Earnings Per Common Share

 

$

0.20

 

 

$

0.42

 

 

$

0.43

 

 

$

0.95

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

6/30/2022

 

 

6/30/2021

 

 

6/30/2022

 

 

6/30/2021

 

 Net income – including noncontrolling interests

 

$

83

 

 

$

193

 

 

$

193

 

 

$

436

 

 Other comprehensive (loss) income, net of tax of nil:

 

 

 

 

 

 

 

 

 

 

 

 

 Foreign currency translation adjustments

 

 

(280

)

 

 

58

 

 

 

(267

)

 

 

40

 

 Comprehensive (loss) income – including noncontrolling
    interests

 

 

(197

)

 

 

251

 

 

 

(74

)

 

 

476

 

 Comprehensive (loss) income – noncontrolling interests

 

 

(41

)

 

 

15

 

 

 

(29

)

 

 

27

 

 Comprehensive (Loss) Income – Yum China Holdings, Inc.

 

$

(156

)

 

$

236

 

 

$

(45

)

 

$

449

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Year to Date Ended

 

 

 

6/30/2022

 

 

6/30/2021

 

 Cash Flows – Operating Activities

 

 

 

 

 

 

 Net income – including noncontrolling interests

 

$

193

 

 

$

436

 

 Depreciation and amortization

 

 

317

 

 

 

252

 

 Non-cash operating lease cost

 

 

230

 

 

 

204

 

 Closures and impairment expenses

 

 

16

 

 

 

11

 

 Investment loss

 

 

17

 

 

 

4

 

 Equity income from investments in unconsolidated affiliates

 

 

 

 

 

(27

)

 Distributions of income received from unconsolidated affiliates

 

 

 

 

 

21

 

 Deferred income taxes

 

 

(7

)

 

 

29

 

 Share-based compensation expense

 

 

21

 

 

 

25

 

 Changes in accounts receivable

 

 

(17

)

 

 

(5

)

 Changes in inventories

 

 

59

 

 

 

22

 

 Changes in prepaid expenses, other current assets and VAT assets (Note 9(a))

 

 

24

 

 

 

8

 

 Changes in accounts payable and other current liabilities

 

 

(51

)

 

 

16

 

 Changes in income taxes payable

 

 

6

 

 

 

1

 

 Changes in non-current operating lease liabilities

 

 

(198

)

 

 

(204

)

 Other, net

 

 

(1

)

 

 

(20

)

 Net Cash Provided by Operating Activities

 

 

609

 

 

 

773

 

 Cash Flows – Investing Activities

 

 

 

 

 

 

 Capital spending

 

 

(347

)

 

 

(303

)

 Purchases of short-term investments

 

 

(2,145

)

 

 

(2,824

)

 Purchases of long-term time deposits

 

 

 

 

 

(25

)

 Maturities of short-term investments

 

 

2,461

 

 

 

2,801

 

 Acquisition of business, net of cash acquired

 

 

(23

)

 

 

 

 Acquisition of equity investment

 

 

 

 

 

(261

)

 Other, net

 

 

2

 

 

 

1

 

 Net Cash Used in Investing Activities

 

 

(52

)

 

 

(611

)

 Cash Flows – Financing Activities

 

 

 

 

 

 

 Repurchase of shares of common stock

 

 

(400

)

 

 

 

 Cash dividends paid on common stock

 

 

(101

)

 

 

(101

)

 Dividends paid to noncontrolling interests

 

 

(23

)

 

 

(14

)

 Contribution from noncontrolling interests

 

 

18

 

 

 

 

 Payment of acquisition related holdback

 

 

(6

)

 

 

 

 Other, net

 

 

(1

)

 

 

(4

)

 Net Cash Used in Financing Activities

 

 

(513

)

 

 

(119

)

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

 

 

(33

)

 

 

8

 

 Net Increase in Cash, Cash Equivalents and Restricted Cash

 

 

11

 

 

 

51

 

 Cash, Cash Equivalents and Restricted Cash – Beginning of Period

 

 

1,136

 

 

 

1,158

 

 Cash, Cash Equivalents and Restricted Cash – End of Period

 

$

1,147

 

 

$

1,209

 

 

 

 

 

 

 

 

 Supplemental Cash Flow Data

 

 

 

 

 

 

 Cash paid for income tax

 

 

93

 

 

 

150

 

 Non-cash Investing and Financing Activities

 

 

 

 

 

 

 Capital expenditures included in accounts payable and other current liabilities

 

 

141

 

 

 

185

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

6/30/2022

 

 

12/31/2021

 

 

 

(Unaudited)

 

 

 

 

 ASSETS

 

 

 

 

 

 

 Current Assets

 

 

 

 

 

 

 Cash and cash equivalents

 

$

1,147

 

 

$

1,136

 

 Short-term investments

 

 

2,506

 

 

 

2,860

 

 Accounts receivable, net

 

 

79

 

 

 

67

 

 Inventories, net

 

 

353

 

 

 

432

 

 Prepaid expenses and other current assets

 

 

491

 

 

 

221

 

 Total Current Assets

 

 

4,576

 

 

 

4,716

 

 Property, plant and equipment, net

 

 

2,065

 

 

 

2,251

 

 Operating lease right-of-use assets

 

 

2,306

 

 

 

2,612

 

 Goodwill

 

 

2,047

 

 

 

2,142

 

 Intangible assets, net

 

 

213

 

 

 

272

 

 Investments in unconsolidated affiliates

 

 

287

 

 

 

292

 

 Deferred income tax assets

 

 

103

 

 

 

106

 

 Other assets

 

 

457

 

 

 

832

 

 Total Assets

 

$

12,054

 

 

$

13,223

 

 

 

 

 

 

 

 

 LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 Current Liabilities

 

 

 

 

 

 

 Accounts payable and other current liabilities

 

$

2,099

 

 

$

2,332

 

 Income taxes payable

 

 

54

 

 

 

51

 

 Total Current Liabilities

 

 

2,153

 

 

 

2,383

 

 Non-current operating lease liabilities

 

 

2,000

 

 

 

2,286

 

 Non-current finance lease liabilities

 

 

39

 

 

 

40

 

 Deferred income tax liabilities

 

 

400

 

 

 

425

 

 Other liabilities

 

 

160

 

 

 

167

 

 Total Liabilities

 

 

4,752

 

 

 

5,301

 

 

 

 

 

 

 

 

 Redeemable Noncontrolling Interest

 

 

13

 

 

 

14

 

 

 

 

 

 

 

 

 Equity

 

 

 

 

 

 

 Common stock, $0.01 par value; 1,000 million shares authorized; 420 million shares
    and
449 million shares issued at June 30, 2022 and December 31, 2021, respectively;
    
420 million shares and 428 million shares outstanding at June 30, 2022 and
    December 31, 2021, respectively

 

 

4

 

 

 

4

 

 Treasury stock

 

 

 

 

 

(803

)

 Additional paid-in capital

 

 

4,402

 

 

 

4,695

 

 Retained earnings

 

 

2,083

 

 

 

2,892

 

 Accumulated other comprehensive income

 

 

40

 

 

 

268

 

 Total Yum China Holdings, Inc. Stockholders' Equity

 

 

6,529

 

 

 

7,056

 

 Noncontrolling interests

 

 

760

 

 

 

852

 

 Total Equity

 

 

7,289

 

 

 

7,908

 

 Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

12,054

 

 

$

13,223

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Tabular amounts in US$ millions, except as otherwise noted)

 

Note 1 – Description of Business

 

Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016.

 

The Company owns, franchises or has ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY 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”), a master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company, and YUM, through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019. Pursuant to the master license agreement, we are the exclusive licensee of KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones as amended in April 2022, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Little Sheep, Huang Ji Huang and COFFii & JOY, and pay no license fee related to these concepts.

 

In the second quarter of 2020, the Company partnered with Luigi Lavazza S.p.A. (“