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EX-32.2 - EX-32.2 - Yum China Holdings, Inc.yumc-ex322_8.htm
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EX-31.2 - EX-31.2 - Yum China Holdings, Inc.yumc-ex312_6.htm
EX-31.1 - EX-31.1 - Yum China Holdings, Inc.yumc-ex311_7.htm

 

 

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 August 31, 2017

 

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

 

16/F Two Grand Gateway

3 Hong Qiao Road

Shanghai  200030

People’s Republic of China

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

(469) 980-2898

(Registrant’s Telephone Number, Including Area Code)  

 

Not Applicable

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

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

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

The number of shares outstanding of the registrant’s common stock as of September 27, 2017 was 384,275,398 shares.

 

 

 


 

Yum China Holdings, Inc.

INDEX

 

 

 

Page

 

 

No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Condensed Consolidated and Combined Statements of Income – Quarters and Years to date ended August 31, 2017 and 2016

3

 

 

 

 

Condensed Consolidated and Combined Statements of Comprehensive Income – Quarters and Years to date ended August 31, 2017 and 2016

4

 

 

 

 

Condensed Consolidated and Combined Statements of Cash Flows – Years to date ended August 31, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Balance Sheets – August 31, 2017 and December 31, 2016

6

 

 

 

 

Notes to Condensed Consolidated and Combined Financial Statements

7

 

 

 

 

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

17

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

 

Item 4 – Controls and Procedures

33

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

34

 

 

 

 

Item 1A – Risk Factors

34

 

 

 

 

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

34

 

 

 

 

Item 6 – Exhibits

35

 

 

 

 

Signatures

36

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 

Condensed Consolidated and Combined Statements of Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions, except for number of shares and per share data)

 

 

 

Quarter ended

 

Year to date ended

Revenues

 

8/31/2017

 

8/31/2016

 

8/31/2017

 

8/31/2016

Company sales

 

$

1,998

 

 

 

$

1,848

 

 

 

$

4,818

 

 

 

$

4,684

 

 

Franchise fees and income

 

 

40

 

 

 

 

35

 

 

 

 

98

 

 

 

 

90

 

 

Total revenues

 

 

2,038

 

 

 

 

1,883

 

 

 

 

4,916

 

 

 

 

4,774

 

 

Costs and Expenses, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company restaurants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper

 

 

575

 

 

 

 

514

 

 

 

 

1,373

 

 

 

 

1,361

 

 

Payroll and employee benefits

 

 

403

 

 

 

 

376

 

 

 

 

1,018

 

 

 

 

963

 

 

Occupancy and other operating expenses

 

 

622

 

 

 

 

602

 

 

 

 

1,501

 

 

 

 

1,562

 

 

Company restaurant expenses

 

 

1,600

 

 

 

 

1,492

 

 

 

 

3,892

 

 

 

 

3,886

 

 

General and administrative expenses

 

 

120

 

 

 

 

101

 

 

 

 

294

 

 

 

 

271

 

 

Franchise expenses

 

 

20

 

 

 

 

20

 

 

 

 

48

 

 

 

 

51

 

 

Closures and impairment expenses, net

 

 

3

 

 

 

 

5

 

 

 

 

20

 

 

 

 

36

 

 

Refranchising gain, net

 

 

 

 

 

 

(4

)

 

 

 

(2

)

 

 

 

(8

)

 

Other income, net

 

 

(22

)

 

 

 

(17

)

 

 

 

(50

)

 

 

 

(44

)

 

Total costs and expenses, net

 

 

1,721

 

 

 

 

1,597

 

 

 

 

4,202

 

 

 

 

4,192

 

 

Operating Profit

 

 

317

 

 

 

 

286

 

 

 

 

714

 

 

 

 

582

 

 

Interest income, net

 

 

6

 

 

 

 

3

 

 

 

 

13

 

 

 

 

7

 

 

Income Before Income Taxes

 

 

323

 

 

 

 

289

 

 

 

 

727

 

 

 

 

589

 

 

Income tax provision

 

 

(102

)

 

 

 

(87

)

 

 

 

(213

)

 

 

 

(165

)

 

Net income – including noncontrolling interests

 

 

221

 

 

 

 

202

 

 

 

 

514

 

 

 

 

424

 

 

Net income – noncontrolling interests

 

 

10

 

 

 

 

10

 

 

 

 

21

 

 

 

 

10

 

 

Net Income – Yum China Holdings, Inc.

 

$

211

 

 

 

$

192

 

 

 

$

493

 

 

 

$

414

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

385,836,842

 

 

 

 

363,758,219

 

 

 

 

387,028,586

 

 

 

 

363,758,219

 

 

Diluted

 

 

398,497,353

 

 

 

 

363,758,219

 

 

 

 

397,385,512

 

 

 

 

363,758,219

 

 

Basic Earnings Per Common Share

 

$

0.55

 

 

 

$

0.53

 

 

 

$

1.28

 

 

 

$

1.14

 

 

Diluted Earnings Per Common Share

 

$

0.53

 

 

 

$

0.53

 

 

 

$

1.24

 

 

 

$

1.14

 

 

 

See accompanying Notes to Condensed Consolidated and Combined Financial Statements.

 

 

3


 

Condensed Consolidated and Combined Statements of Comprehensive Income (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

 

Quarter ended

 

Year to date ended

 

 

8/31/2017

 

8/31/2016

 

8/31/2017

 

8/31/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - including noncontrolling interests

 

$

221

 

 

 

$

202

 

 

 

$

514

 

 

 

$

424

 

 

Other comprehensive income, net of tax of nil:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency gains (losses) arising during the period

 

 

76

 

 

 

 

(28

)

 

 

 

111

 

 

 

 

(57

)

 

Comprehensive income - including noncontrolling interests

 

 

297

 

 

 

 

174

 

 

 

 

625

 

 

 

 

367

 

 

Comprehensive income - noncontrolling interests

 

 

12

 

 

 

 

8

 

 

 

 

24

 

 

 

 

9

 

 

Comprehensive Income - Yum China Holdings, Inc.

 

$

285

 

 

 

$

166

 

 

 

$

601

 

 

 

$

358

 

 

 

See accompanying Notes to Condensed Consolidated and Combined Financial Statements.

 

 

4


 

Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)

Yum China Holdings, Inc.

(in US$ millions)

 

 

 

Year to date ended

 

 

8/31/2017

 

8/31/2016

Cash Flows – Operating Activities

 

 

 

 

 

 

 

 

 

 

Net income – including noncontrolling interests

 

$

514

 

 

 

$

424

 

 

Depreciation and amortization

 

 

265

 

 

 

 

272

 

 

Closures and impairment expenses

 

 

20

 

 

 

 

36

 

 

Refranchising gain

 

 

(2

)

 

 

 

(8

)

 

Deferred income taxes

 

 

(3

)

 

 

 

(26

)

 

Equity income from investments in unconsolidated affiliates

 

 

(51

)

 

 

 

(44

)

 

Distributions of income received from unconsolidated affiliates

 

 

36

 

 

 

 

18

 

 

Share-based compensation expense

 

 

16

 

 

 

 

9

 

 

Changes in accounts receivable

 

 

(2

)

 

 

 

(37

)

 

Changes in inventories

 

 

35

 

 

 

 

(35

)

 

Changes in prepaid expenses and other current assets

 

 

(7

)

 

 

 

34

 

 

Changes in accounts payable and other current liabilities

 

 

132

 

 

 

 

149

 

 

Changes in income taxes payable

 

 

57

 

 

 

 

54

 

 

Other, net

 

 

(23

)

 

 

 

(22

)

 

Net Cash Provided by Operating Activities

 

 

987

 

 

 

 

824

 

 

Cash Flows – Investing Activities

 

 

 

 

 

 

 

 

 

 

Capital spending

 

 

(262

)

 

 

 

(268

)

 

Purchases of short-term investments

 

 

(318

)

 

 

 

(53

)

 

Maturities of short-term investments

 

 

312

 

 

 

 

53

 

 

Proceeds from refranchising of restaurants

 

 

3

 

 

 

 

19

 

 

Proceeds from disposal of aircraft

 

 

 

 

 

 

19

 

 

Acquisition of business, net of cash acquired

 

 

(25

)

 

 

 

 

 

Other, net

 

 

(4

)

 

 

 

(2

)

 

Net Cash Used in Investing Activities

 

 

(294

)

 

 

 

(232

)

 

Cash Flows – Financing Activities

 

 

 

 

 

 

 

 

 

 

Net transfers to Parent

 

 

 

 

 

 

(243

)

 

Payment of capital lease obligation

 

 

(2

)

 

 

 

(3

)

 

Repurchase of shares of common stock

 

 

(128

)

 

 

 

 

 

Proceeds from exercise of stock options

 

 

5

 

 

 

 

 

 

Other, net

 

 

(17

)

 

 

 

(3

)

 

Net Cash Used in Financing Activities

 

 

(142

)

 

 

 

(249

)

 

Effect of Exchange Rates on Cash and Cash Equivalents

 

 

41

 

 

 

 

(18

)

 

Net Increase in Cash and Cash Equivalents

 

 

592

 

 

 

 

325

 

 

Cash and Cash Equivalents - Beginning of Period

 

 

885

 

 

 

 

425

 

 

Cash and Cash Equivalents - End of Period

 

$

1,477

 

 

 

$

750

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

 

 

Cash paid for income tax

 

 

161

 

 

 

 

136

 

 

 

See accompanying Notes to Condensed Consolidated and Combined Financial Statements.

 

 

5


 

Condensed Consolidated Balance Sheets

Yum China Holdings, Inc.

(in US$ millions, except for number of shares)

 

 

 

8/31/2017

 

12/31/2016

ASSETS

 

(Unaudited)

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,477

 

 

 

$

885

 

 

Short-term investments

 

 

91

 

 

 

 

79

 

 

Accounts receivable, net

 

 

81

 

 

 

 

74

 

 

Inventories, net

 

 

246

 

 

 

 

268

 

 

Prepaid expenses and other current assets

 

 

159

 

 

 

 

120

 

 

Total Current Assets

 

 

2,054

 

 

 

 

1,426

 

 

Property, plant and equipment, net

 

 

1,652

 

 

 

 

1,647

 

 

Goodwill

 

 

107

 

 

 

 

79

 

 

Intangible assets, net

 

 

104

 

 

 

 

88

 

 

Investments in unconsolidated affiliates

 

 

74

 

 

 

 

71

 

 

Other assets

 

 

301

 

 

 

 

254

 

 

Deferred income taxes

 

 

168

 

 

 

 

162

 

 

Total Assets

 

$

4,460

 

 

 

$

3,727

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

1,120

 

 

 

$

971

 

 

Income taxes payable

 

 

92

 

 

 

 

33

 

 

Total Current Liabilities

 

 

1,212

 

 

 

 

1,004

 

 

Capital lease obligations

 

 

28

 

 

 

 

28

 

 

Other liabilities and deferred credits

 

 

274

 

 

 

 

252

 

 

Total Liabilities

 

 

1,514

 

 

 

 

1,284

 

 

Redeemable Noncontrolling Interest

 

 

5

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

Common stock,  $0.01 par value; 1,000,000,000 shares authorized;

  388,196,025.42 shares and 383,344,835.42 shares issued at August 31, 2017

  and December 31, 2016, respectively; 384,055,643 shares and 383,344,835.42 shares

  outstanding at August 31, 2017 and December 31, 2016, respectively

 

 

4

 

 

 

 

4

 

 

Treasury stock

 

 

(148

)

 

 

 

(20

)

 

Additional paid-in capital

 

 

2,373

 

 

 

 

2,352

 

 

Retained earnings

 

 

533

 

 

 

 

40

 

 

Accumulated other comprehensive income

 

 

109

 

 

 

 

1

 

 

Total Equity – Yum China Holdings, Inc.

 

 

2,871

 

 

 

 

2,377

 

 

Noncontrolling interests

 

 

70

 

 

 

 

66

 

 

Total Equity

 

 

2,941

 

 

 

 

2,443

 

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

4,460

 

 

 

$

3,727

 

 

 

See accompanying Notes to Condensed Consolidated and Combined Financial Statements.

 

 

6


 

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

(Tabular amounts in US$ millions)

 

 

Note 1 – Description of the Business

 

Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, 2016. The Company separated from Yum! Brands, Inc. (“YUM” or the “Parent”) on October 31, 2016 (the “separation”), becoming an independent publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016.

 

The Company owns, franchises or has an ownership in entities that own and operate restaurants under the KFC, Pizza Hut, East Dawning, Little Sheep and Taco Bell concepts (collectively, the “Concepts”). In connection with the separation of the Company from YUM, Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect subsidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of Yum China, entered into a 50-year master license agreement with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew, for the exclusive right to use and sub-license the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China excluding Hong Kong, Taiwan and Macau (the “PRC” or “China”). In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the East Dawning and Little Sheep intellectual property and pay no license fee related to these concepts.

 

During the quarter ended May 31, 2017, the Company completed the acquisition of a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider. The Company agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition, the Company held 90% of Daojia’s outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis.  Daojia became an operating segment of the Company. The acquisition was considered immaterial.

 

During the quarter ended May 31, 2017, Pizza Hut Casual Dining and Pizza Hut Home Service were combined and reported together as the Pizza Hut reportable segment. As a result, the Company has two reportable segments: KFC, which remains unchanged, and Pizza Hut. Our remaining operating segments, including the operations of East Dawning, Little Sheep, Taco Bell and Daojia, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior periods has been recast to align with this change in segment reporting. There was no impact to the consolidated and combined financial statements of the Company as a result of this change.

 

Note 2 – Basis of Presentation

 

In connection with our separation from YUM, the direct and indirect equity interests of all of our operating subsidiaries and intermediate holding companies were transferred from YUM to Yum China, when Yum China was still one of YUM’s subsidiaries, through a series of transactions, which were completed in August 2016. The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM.

 

The financial statements presented herein represent (i) for periods prior to October 31, 2016, the combined financial statements of YUM’s China businesses and operations when Yum China was a wholly-owned subsidiary of YUM (referred to as “Condensed Combined Financial Statements”) and (ii) for periods subsequent to October 31, 2016, the consolidated financial statements of the Company as a separate publicly traded company following its separation from YUM (referred to as “Condensed Consolidated Financial Statements” and, together with the Condensed Combined Financial Statements, referred to as the “Condensed Consolidated and Combined Financial Statements”).

 

Our preparation of the accompanying Condensed Consolidated and Combined 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.

7


 

 

The accompanying Condensed Combined Financial Statements have been prepared on a standalone basis and are derived from YUM’s consolidated financial statements and underlying accounting records. Transactions between the Company and YUM that were not cash settled were considered to be effectively settled at the time the transactions were recorded. The Condensed Combined Financial Statements include all revenues, costs, assets and liabilities directly attributable to the Company either through specific identification or allocation. The Condensed Combined Statements of Income include allocations for certain of YUM’s Corporate functions that provided a direct benefit to the Company. These costs have been allocated based on Company system sales relative to YUM’s global system sales. System sales includes the sales results of all restaurants regardless of ownership. All allocated costs have been deemed to have been paid to YUM in the period in which the costs were recorded. The Company considers the cost allocation methodology and results for the periods prior to October 31, 2016 to be reasonable. However, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent publicly traded company for the periods prior to October 31, 2016. Upon the separation, Parent Company Investment was adjusted as a result of settlement of certain assets and liabilities with YUM and formed the Company’s common stock and additional paid-in capital. See Note 3 for further discussion.

 

We have prepared the Condensed Consolidated and Combined 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 and Combined Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of August 31, 2017, and the results of our operations and comprehensive income for the quarters and years to date ended August 31, 2017 and 2016, and cash flows for the years to date ended August 31, 2017 and 2016. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Consolidated and Combined Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 8, 2017.

 

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 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.

 

Recently Adopted Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-11, Inventory (Topic 330) (ASU 2015-11), which requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for the Company in the first quarter of 2017, with early adoption permitted. We adopted ASU 2015-11 during the quarter ended February 28, 2017, and such adoption did not have a material impact on our financial statements.

 

8


 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) (ASU 2016-09): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 includes a requirement that the tax effect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement. The simplification of income tax accounting for share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 during the quarter ended February 28, 2017 and the impact of the adoption resulted in the following:

 

 

The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when appropriate, as is currently required. This adoption did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

 

The Company recorded an excess tax benefit of $0.2 million and $7.0 million within provision for income taxes for the quarter and year to date ended August 31, 2017, respectively, related to excess tax benefits on awards, on a prospective basis. Prior to adoption, the tax effect of share-based awards would have been recognized in additional paid-in capital.

 

Under ASU 2016-09, excess tax benefits from share-based arrangements are classified within cash flow from operating activities, rather than within cash flow from financing activities. The Company applied this provision on a retrospective basis and the prior period statement of cash flows was adjusted. This adoption did not have a material impact on the Company’s cash flows.

 

There was no material impact on the computation of weighted-average diluted shares outstanding.

 

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

 

Our fiscal year ends on December 31. The Company operates on a fiscal monthly calendar, with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter.

 

 

Note 3 – Transactions with YUM

Prior to the separation, there existed a parent-subsidiary relationship between YUM and the Company. We had the following transactions with YUM for the quarter and year to date ended August 31, 2016:

Allocation of Corporate Expenses

Prior to October 31, 2016, YUM historically performed centralized corporate functions on our behalf. Accordingly, certain YUM costs have been allocated to the Company and reflected as expenses in the Condensed Combined Financial Statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical expenses attributable to the Company. The expenses reflected in the Condensed Combined Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate, standalone entity.

Corporate expense allocations primarily relate to centralized corporate functions, including finance, accounting, treasury, tax, legal, internal audit and risk management functions. In addition, corporate expense allocations include, among other costs, IT maintenance, professional fees for legal services and expenses related to litigation, investigations or similar matters. Corporate allocations of $3 million and $9 million were allocated to the Company during the quarter and year to date ended August 31, 2016, respectively, and have been included in general and administrative (“G&A”) expenses in the Condensed Combined Statements of Income. All of the corporate allocations of costs are deemed to have been incurred and settled through Parent Company Investment in the Condensed Combined Balance Sheets in the period where the costs were recorded. Following the separation from YUM, we perform these functions using our own resources or purchased services.

9


 

License Fee

The Condensed Combined Statements of Income include license fees that were historically paid to YUM comprised of initial fees and continuing fees equal to 3% of our Company and franchise sales prior to October 31, 2016. Total license fees paid during the quarter and year to date ended August 31, 2016 are reflected in the table below:

 

 

 

Quarter ended

 

Year to date ended

 

 

8/31/2016

 

8/31/2016

 

 

Initial fees - Company

 

$

3

 

 

 

$

7

 

 

Initial fees - Franchise

 

 

 

 

 

 

1

 

 

Continuing Fees - Company

 

 

53

 

 

 

 

135

 

 

Continuing Fees - Franchise

 

 

13

 

 

 

 

35

 

 

Total

 

$

69

 

 

 

$

178

 

 

 

Cash Management and Treasury

The Company funds its operations through cash generated from the operation of its Company-owned stores, franchise operations and dividend payments from unconsolidated affiliates. Prior to October 31, 2016, excess cash was historically repatriated to YUM through intercompany loans or dividends. Transfers of cash both to and from YUM are included within Parent Company Investment in the Condensed Combined Balance Sheets. YUM has issued debt for general corporate purposes but in no case has any such debt been guaranteed or assumed by the Company or otherwise secured by the assets of the Company. As YUM’s debt and related interest is not directly attributable to the Company, no such amounts have been allocated to the Condensed Combined Financial Statements.

 

 

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

 

On October 31, 2016, YUM’s shareholders of record as of 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. For periods ended October 31, 2016 and prior, basic and diluted earnings per share were computed using the number of shares of Yum China common stock outstanding as of October 31, 2016, the date on which Yum China common stock was distributed to YUM’s shareholders. The same number of shares was used to calculate basic and diluted earnings per share for the quarter and year to date ended August 31, 2016 since there were no dilutive securities until after the separation.

The following table summarizes the components of basic and diluted earnings per share:

 

 

 

Quarter ended

 

Year to date ended

 

 

8/31/2017

 

8/31/2016

 

8/31/2017

 

8/31/2016

Net Income – Yum China Holdings, Inc.

 

$

211

 

 

 

$

192

 

 

 

$

493

 

 

 

$

414

 

 

Weighted-average common shares outstanding (for basic

   calculation) (a)

 

 

385,836,842

 

 

 

 

363,758,219

 

 

 

 

387,028,586

 

 

 

 

363,758,219

 

 

Effect of dilutive share-based employee compensation (a)

 

 

11,238,837

 

 

 

 

 

 

 

 

9,993,824

 

 

 

 

 

 

Effect of dilutive warrants(b)

 

 

1,421,674

 

 

 

 

 

 

 

 

363,102

 

 

 

 

 

 

Weighted-average common and dilutive potential common

   shares outstanding (for diluted calculation)

 

 

398,497,353

 

 

 

 

363,758,219

 

 

 

 

397,385,512

 

 

 

 

363,758,219

 

 

Basic Earnings Per Share

 

$

0.55

 

 

 

$

0.53

 

 

 

$

1.28

 

 

 

$

1.14

 

 

Diluted Earnings Per Share

 

$

0.53

 

 

 

$

0.53

 

 

 

$

1.24

 

 

 

$

1.14

 

 

Employee stock options, stock appreciation rights and warrants

   excluded from the diluted EPS computation (c)

 

 

8,200,405

 

 

 

 

 

 

 

 

10,256,326

 

 

 

 

 

 

 

(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.

 

10


 

(b)

Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors two tranches of warrants on January 9, 2017, with each tranche providing the right to purchase 8,200,405 shares of Yum China common stock, at an exercise price of $31.40 and $39.25 per share, respectively. The outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the period exceeds the exercise price of the warrants.

 

(c)

These outstanding employee stock options, stock appreciation rights and warrants were not included in the computation of diluted EPS because to do so would have been antidilutive for the quarters and years to date 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

 

 

Income

 

 

Shares

 

 

Amount

 

 

Interests

 

 

Equity

 

 

Interest

 

Balance at December 31, 2016

 

 

383,344,835.42

 

 

$

4

 

 

$

2,352

 

 

$

40

 

 

$

1

 

 

 

(784,686.42

)

 

$

(20

)

 

$

66

 

 

$

2,443

 

 

$

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

514

 

 

 

 

 

Foreign currency translation gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

111

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

625

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

(22

)

 

 

 

 

Acquisition of Daojia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

5

 

Repurchase of shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,355,696.00

)

 

 

(128

)

 

 

 

 

 

 

(128

)