Starting in the first quarter of 2020, the COVID-19 pandemic significantly impacted the Company’s operations, resulting in a significant decline in Operating profit mainly driven by same-store sales declines and temporary store closures. The results of the third quarter of 2021 were significantly impacted by the Delta variant outbreak that started in late July. This regional outbreak was the most widely spread wave since the first quarter of 2020. Operating profit was $178 million and $556 million for the quarters ended September 30, 2021 and 2020, respectively, and $753 million and $781 million for the years to date ended September 30, 2021 and 2020, respectively. The decrease in Operating profit for the quarter ended September 30, 2021 was mainly due to sales deleveraging as well as lapping the impact of a $239 million gain from the re-measurement of our previously held equity interest in Suzhou KFC in the third quarter of 2020 upon the acquisition, which is further described below. The decrease in Operating profit for the year to date ended September 30, 2021 was mainly due to lapping the re-measurement gain related to Suzhou KFC, offset by same-store sales growth.

In April 2020, the Company and Lavazza Group established the Lavazza joint venture to explore and develop the Lavazza coffee shop concept in China, with ownership of a 65% and 35% equity interest, respectively. The Company accounted for the Lavazza joint venture under the equity method of accounting because Lavazza Group held substantive participating rights on certain significant financial and operating decisions. In September 2021, the Company and Lavazza Group entered into agreements for the joint venture, whereby substantive participating rights previously held by Lavazza Group were removed, and thus the Company obtained control over the joint venture and started to consolidate its results from the acquisition date.

In the third quarter of 2020, the Company completed the acquisition of an additional 25% equity interest in Suzhou KFC for cash consideration of $149 million, increasing our equity interest to 72%, and thus the Company obtained control over the joint venture and started to consolidate Suzhou KFC from the acquisition date.

As a result of the consolidation of the Lavazza joint venture and Suzhou KFC, the Company also recognized a gain of $10 million and $239 million, respectively, in the third quarter of 2021 and 2020, respectively, from the re-measurement of our previously held equity interest at fair value using a discounted cash flow valuation approach and incorporating assumptions and estimates that are Level 3 inputs. Key assumptions used in estimating future cash flows included projected revenue growth and costs and expenses, which were based on internal projections, store expansion plans, historical performance of stores of the brand, and the business environment, as well as the selection of an appropriate discount rate based on the weighted-average cost of capital which includes company-specific risk premium. The gain was recorded in Other income, net and not allocated to any segment for performance reporting purposes.

Additionally, as a result of the acquisition of Suzhou KFC, $61 million of the purchase price was allocated to intangible assets related to reacquired franchise rights, which are being amortized over the remaining franchise contract period of 2.4 years.

In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange listed company, for a total consideration of approximately $261 million. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier.

The Company accounted for the equity securities at fair value based on their closing market price on each measurement date, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.

In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being Sunner’s second largest shareholder, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment and reclassified this investment from Other assets to Investment in unconsolidated affiliates in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the third quarter of 2021, the Company’s equity income from Sunner was immaterial. The unrealized loss of $22 million was included in Investment gain or loss in our Condensed Consolidated Statements of Income for the year to date ended September 30, 2021, representing changes in fair value before the equity method of accounting was applied.

Since Sunner became the Company’s unconsolidated affiliate in May 2021, the Company purchased inventories of $125 million and $198 million from Sunner during the quarter and year to date ended September 30, 2021, respectively, and the Company’s accounts payable and other current liabilities due to Sunner were $57 million as of September 30, 2021.

As of September 30, 2021, the Company’s investment in Sunner was stated at the carrying amount of $244 million, which was $168 million higher than the Company’s interest in Sunner’s underlying net assets. Of this basis difference, $20 million was related to finite-lived intangible assets which are being amortized over estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of September 30, 2021, the market value of the Company’s investment in Sunner was $209 million based on its quoted closing price.

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 HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan for proceeds of approximately $54 million, and realized a $17 million pre-tax gain which was recognized during the holding period.

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. The fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.

A summary of pre-tax gains or losses on investment in equity securities of Meituan recognized, which was included in Investment gain or loss in our Condensed Consolidated Statements of Income, is as follows:

	Quarter Ended					Year to Date Ended
	9/30/2021			9/30/2020		9/30/2021			9/30/2020
Unrealized (losses) gains recorded on equity securities still held as of the end of the period	$	(41	)	$	38	$	(27	)	$	76
Losses recorded on equity securities sold during the period		—			—		—			(1	)
(Losses) gains recorded on equity securities	$	(41	)	$	38	$	(27	)	$	75

We recorded store impairment charges of $4 million and $23 million for the quarter and year to date ended September 30, 2021, respectively, and $3 million and $39 million for the quarter and year to date ended September 30, 2020, respectively. The decrease in store impairment charges for the year to date ended September 30, 2021 is due to additional impairment evaluation in the first quarter of 2020. See Note 11 for additional information.