What changed in this filing

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Item 1. Financial Statements

2021-11-03 compared with 2021-08-05 · 126 added, 80 removed, 545 unchanged (27% of the section changed)

22 unchanged sentences

Income Before Income Taxes 451 316 1,267 668

Income tax provision 16 51 99 63

Income tax (benefit) provision ( 77 ) 33 22 96

Net Income $ 528 $ 283 $ 1,245 $ 572

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( 2 ) 1 ( 8 ) 25

6 ( 1 ) 24 ( 75 )

Other comprehensive income (loss), net of tax ( 7 ) 36 80 ( 64 )

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Acquisition of The Habit Restaurants, Inc., net of cash acquired — ( 408 )

Proceeds from sale of investment in Grubhub, Inc.

common stock — 206

Proceeds from refranchising of restaurants 48 13

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Effect of Exchange Rates on Cash and Cash Equivalents ( 1 ) ( 1 )

Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 190 ) 680

Net Increase in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents 287 607

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 1,024 768

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AND SUBSIDIARIES

Quarters ended June 30, 2021 and 2020

Quarters and years to date ended September 30, 2021 and 2020

(in millions)

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Shares Amount

Balance at March 31, 2021

Balance at June 30, 2021

296 $ — $ ( 7,569 ) $ ( 324 ) $ ( 7,893 )

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Pension and post-retirement benefit plans (net of tax impact of $ 2 million)

Net loss on derivative instruments (net of tax impact of $ 1 million)

Net gain on derivative instruments (net of tax impact of $ 2 million)

Comprehensive Income 521

3 unchanged sentences

Share-based compensation events 21 21

Balance at June 30, 2021

Balance at September 30, 2021

294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 )

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Share-based compensation events 62 62

Balance at June 30, 2021

Balance at September 30, 2021

294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 )

Balance at March 31, 2020

Balance at June 30, 2020

301 $ 11 $ ( 7,631 ) $ ( 488 ) $ ( 8,108 )

3 unchanged sentences

Net loss on derivative instruments (net of tax impact of $ 1 million)

( 11 ) ( 11 )

Comprehensive Income 319

3 unchanged sentences

Share-based compensation events 15 15

Balance at June 30, 2020

Balance at September 30, 2020

302 $ 23 $ ( 7,490 ) $ ( 452 ) $ ( 7,919 )

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Adoption of Expected Credit Loss accounting standard ( 8 ) ( 8 )

Balance at June 30, 2020

Balance at September 30, 2020

302 $ 23 $ ( 7,490 ) $ ( 452 ) $ ( 7,919 )

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and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 52,000 restaurants in more than 150 countries and territories.

As of June 30, 2021, 98 % of these restaurants were owned and operated by franchisees.

As of September 30, 2021, 98 % of these restaurants were owned and operated by franchisees.

The Company’s KFC, Pizza Hut and Taco Bell brands are global leaders of the chicken, pizza and Mexican-style food categories, respectively.

The Habit Burger Grill, a concept we acquired on March 18, 2020, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more.

As of June 30, 2021, YUM consisted of four operating segments:

As of September 30, 2021, YUM consisted of four operating segments:

• The KFC Division which includes our worldwide operations of the KFC concept

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Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

Note 2 - Habit Burger Grill Acquisition

Note 2 - Acquisitions

Habit Burger Grill Acquisition

On March 18, 2020, we completed the acquisition of all of the issued and outstanding common shares of The Habit Restaurants, Inc.

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The acquisition was accounted for as a business combination using the acquisition method of accounting.

During the quarter ended March 31, 2021, we finalized our estimate of the fair value of the net assets acquired, which resulted in goodwill being reduced by $ 15 million compared to the initial fair value estimate recorded in the quarter ended March 31, 2020 ($ 2 million of this reduction was recorded in the quarter ended March 31, 2021).

During the quarter ended March 31, 2021, we finalized our estimate of the fair value of the net assets acquired, which resulted in goodwill being reduced

by $ 15 million compared to the initial fair value estimate recorded in the quarter ended March 31, 2020 ($ 2 million of this reduction was recorded in the quarter ended March 31, 2021).

The final allocation of consideration to the net tangible and intangible assets acquired upon the March 18, 2020 acquisition is presented in the table below.

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Subsequent to these 2020 goodwill impairment charges and the finalization during the quarter ended March 31, 2021, of the allocation of consideration to the net assets acquired (described above), the Habit Burger Grill reporting unit goodwill was $ 60 million.

Dragontail Systems Acquisition

On September 7, 2021, we completed the acquisition of Dragontail Systems Limited (“Dragontail”).

The Dragontail acquisition advances our digital capabilities and its AI-based integrated kitchen order management and delivery technologies are intended to strengthen store operations, enhance the customer experience and make it easier for team members to run a restaurant.

Total cash consideration paid in connection with the acquisition was $ 66 million, net of cash acquired of $ 3 million.

This net consideration has been classified within Other, net cash flows from investing activities within our Condensed Consolidated Statements of Cash Flows.

The acquisition was accounted for as a business combination using the acquisition method of accounting.

The primary assets recorded as a result of the preliminary purchase price allocation were goodwill of $ 57 million and amortizable intangible assets of $ 11 million.

The amortizable intangible assets, which consist of software, have an estimated weighted average useful life of 7 years.

The goodwill recorded resulted from synergies expected to be achieved through leveraging our scale and resources to enhance these technologies and deploy them globally to our brands and franchisees over time.

We anticipate that all of the goodwill recognized will be non-deductible for income tax purposes.

The purchase price allocation for Dragontail is preliminary and subject to completion of valuation analyses.

The final assignment of goodwill to our reporting units has not yet been completed as of the date of these financial statements.

The financial results of Dragontail have been included in our Condensed Consolidated Financial Statements since the date of the acquisition but did not significantly impact our results for the quarter or year-to-date periods ended September 30, 2021.

The pro forma impact on our results of operations if the acquisition had been completed as of the beginning of 2020 would not have been significant.

The direct transaction costs associated with the acquisition were also not material and were expensed as incurred.

Note 3 - Earnings Per Common Share (“EPS”)

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Note 4 - Shareholders' Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended June 30, 2021 and 2020 as indicated below.

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended September 30, 2021 and 2020 as indicated below.

All amounts exclude applicable transaction fees.

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(thousands) Dollar Value of Shares

Repurchased Remaining Dollar Value of Shares that may be Repurchased

Authorization Date 2021 2020 2021 2020 2021

November 2019 4,746 (a)

(a) Includes the effect of $ 11 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, June 30, 2021, but cash settlement dates subsequent to June 30, 2021 and excludes the effect of $ 11 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, December 31, 2020, but cash settlement dates subsequent to December 31, 2020.

November 2019 4,746

May 2021 2,602 — 330 — 1,670

Total 7,348 (a)

(a) Includes the effect of $ 14 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, September 30, 2021, but cash settlement dates subsequent to September 30, 2021 and excludes the effect of $ 11 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, December 31, 2020, but cash settlement dates subsequent to December 31, 2020.

In May 2021, our Board of Directors authorized share repurchases from July 1, 2021 through December 31, 2022, of up to $ 2 billion (excluding applicable transaction fees) of our outstanding Common Stock.

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Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature Pension and Post-Retirement Benefits Derivative Instruments Total

Balance at March 31, 2021, net of tax $ ( 179 ) $ ( 55 ) $ ( 112 ) $ ( 346 )

Balance at June 30, 2021, net of tax $ ( 165 ) $ ( 44 ) $ ( 115 ) $ ( 324 )

OCI, net of tax

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( 19 ) 6 6 ( 7 )

Balance at June 30, 2021, net of tax $ ( 165 ) $ ( 44 ) $ ( 115 ) $ ( 324 )

Balance at September 30, 2021, net of tax $ ( 184 ) $ ( 38 ) $ ( 109 ) $ ( 331 )

Balance at December 31, 2020, net of tax $ ( 182 ) $ ( 96 ) $ ( 133 ) $ ( 411 )

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Gains (losses) arising during the period classified into AOCI, net of tax

( 2 ) 46 12 56

(Gains) losses reclassified from AOCI, net of tax

Balance at June 30, 2021, net of tax $ ( 165 ) $ ( 44 ) $ ( 115 ) $ ( 324 )

( 2 ) 58 24 80

Balance at September 30, 2021, net of tax $ ( 184 ) $ ( 38 ) $ ( 109 ) $ ( 331 )

Note 5 - Other (Income) Expense

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9/30/2021 9/30/2020 9/30/2021 9/30/2020

Foreign exchange net (gain) loss and other (a)

$ ( 4 ) $ ( 8 ) $ ( 11 ) $ 4

Impairment and closure expense (b)

Foreign exchange net (gain) loss and other $ ( 3 ) $ ( 6 ) $ ( 14 ) $ ( 2 )

Impairment and closure expense (a)

Other (income) expense $ ( 2 ) $ 4 $ ( 12 ) $ 154

(a) The year to date ended June 30, 2021, includes a gain of $ 6 million associated with the sale of property.

(b) The year to date ended June 30, 2020, includes a charge of $ 139 million related to the impairment of Habit Burger Grill goodwill.

The quarter and year to date ended June 30, 2020 also includes a charge of $ 6 million related to the write-off of software no longer being used.

(a) The quarter and year to date ended September 30, 2020, include charges of $ 5 million and $ 144 million, respectively, related to the impairment of Habit Burger Grill goodwill.

The quarter and year to date ended September 30, 2020 also include charges of $ 5 million and $ 11 million, respectively, related to the write-off of software no longer being used.

Note 6 - Supplemental Balance Sheet Information

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Property, plant and equipment, net $ 1,193 $ 1,235

Assets held-for-sale totaled $ 7 million as of both June 30, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Assets held-for-sale totaled $ 27 million and $ 7 million as of September 30, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Liabilities held-for-sale totaled $ 10 million as of September 30, 2021, and are included in Accounts payable and other current liabilities in our Condensed Consolidated Balance Sheet.

Other Assets 9/30/2021 12/31/2020

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Other assets $ 1,459 $ 1,435

(a) Non-current operating lease liabilities of $ 821 million and $ 823 million as of June 30, 2021 and December 31, 2020, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets.

(a) Non-current operating lease liabilities of $ 811 million and $ 823 million as of September 30, 2021 and December 31, 2020, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets.

Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows

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2021 2020 2021 2020

Income tax provision $ 16 $ 51 $ 99 $ 63

Income tax (benefit) provision $ ( 77 ) $ 33 $ 22 $ 96

Effective tax rate ( 17.0 ) % 10.5 % 1.8 % 14.4 %

Our second quarter and year to date effective tax rates are lower than the prior year primarily due to tax benefits of $ 64 million recorded associated with the remeasurement of deferred tax assets necessitated by the enactment of the United Kingdom ("UK") Finance Act 2021 during the quarter ended June 30, 2021.

The UK Finance Act 2021 increased the UK corporate income tax rate from 19 % to 25 %, beginning April 1, 2023.

In addition, the year-over-year change in uncertain tax positions favorably impacted our effective tax rates for both the quarter and year to date.

KFC Europe Reorganization

In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland.

Concurrent with this change in management responsibility, we have completed intra-entity transfers of certain intellectual property rights to subsidiaries in Switzerland subsequent to the end of the quarter ended June 30, 2021.

As a result of the transfers of these rights, we received a step-up in tax basis to current fair value under applicable Swiss tax law.

To the extent this step-up in tax basis will be amortizable against future Swiss taxable income, we will recognize a one-time deferred tax benefit in the quarter ended September 30, 2021.

We currently estimate this tax benefit, net of other tax costs of the reorganization, will exceed $ 100 million.

Our third quarter effective tax rate was lower than the prior year primarily due to tax benefits resulting from a KFC Europe reorganization executed in the quarter ended September 30, 2021.

In July 2021, we concentrated management responsibility for European (excluding the United Kingdom (“UK”)) KFC franchise development, support operations and management oversight in Switzerland.

Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC intellectual property rights from subsidiaries in the UK to subsidiaries in Switzerland.

With the transfer of these rights, we

received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law.

As a result of this transfer, we recorded a net, one-time tax benefit of $ 152 million in the quarter ended September 30, 2021.

In the quarter ended September 30, 2020, our effective rate was favorably impacted by $ 25 million due to the remeasurement of our deferred tax assets in the UK resulting from an increase in the UK corporate tax rate from 17 % to 19 % enacted during the quarter.

Our year to date effective tax rate was also lower than the prior year due to tax benefits resulting from a $ 64 million favorable impact due to the remeasurement of our deferred tax assets in the UK resulting from an increase in the UK corporate tax rate from 19 % to 25 % enacted during the quarter ended June 30, 2021.

Note 8 - Revenue Recognition

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Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 52

Balance at June 30, 2021 $ 413

Balance at September 30, 2021 $ 411

(a) Primarily includes impact of foreign currency translation.

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Investment income (expense), net (c)

Other pension income (expense) (See Note 10) ( 2 ) ( 2 ) ( 5 ) ( 5 )

Other pension income (expense) ( 1 ) ( 4 ) ( 6 ) ( 9 )

Interest expense, net (d)

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As such, we do not allocate such amounts to our Divisional segments for performance reporting purposes.

(a) Includes a $ 50 million contribution to Yum!

(a) Includes charges related to a resource optimization program initiated in the third quarter of 2020.

This program is part of our efforts to optimize our resources, reallocating them toward critical areas of the business that will drive future growth.

These critical areas include accelerating our digital, technology and innovation capabilities to deliver a modern, world-class team member and customer experience and improve unit economics.

We recorded charges of $ 4 million and $ 32 million during the quarters ended September 30, 2021 and 2020, respectively, for this program.

We recorded charges of $ 7 million and $ 32 million during the years to date ended September 30, 2021 and 2020, respectively, for this program.

Also included in the year to date ended September 30, 2020, is a $ 50 million charitable contribution to Yum!

Brands Foundation, Inc.

(a stand-alone, not-for-profit organization that is not consolidated in the Company's results) in the second quarter of 2020 related to our "Unlocking Opportunity Initiative".

Also included are costs related to our acquisition of Habit Burger Grill in the quarter and year to date ended June 30, 2020 of $ 3 million and $ 9 million, respectively.

(b) Includes a charge of $ 139 million related to the impairment of Habit Burger Grill goodwill in the year to date ended June 30, 2020.

("Grubhub") common stock and other investments.

For the quarter and year to date ended June 30, 2020, we recognized investment income of $ 84 million and $ 62 million, respectively, related to changes in fair value of our investment in Grubhub common stock.

(a standalone, not-for-profit organization that is not consolidated in the Company's results) in the second quarter of 2020 related to our “Unlocking Opportunity Initiative” and costs related to our acquisition of Habit Burger Grill of $ 9 million.

(b) Includes charges of $ 5 million and $ 144 million in the quarter and year to date ended September 30, 2020, respectively, related to the impairment of Habit Burger Grill goodwill.

(c) Includes changes in the value of our investment in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India.

During the quarter ended September 30, 2021, Devyani executed an initial public offering and subsequently the fair value of our investment became readily determinable.

As a result, we began recording changes in fair value in Investment income (expense), net.

In the quarter ended September 30, 2021, we recognized pre-tax investment income of $ 52 million related to changes in fair value of our investment in Devyani.

Also includes changes in the value of Grubhub, Inc.

(“Grubhub”) common stock.

For the quarter and year to date ended September 30, 2020, we recognized pre-tax investment income of $ 8 million and $ 69 million, respectively, related to changes in fair value of our investment in Grubhub common stock.

In the quarter ended September 30, 2020, we sold our investment in Grubhub.

(d) Includes a $ 28 million call premium and $ 6 million of unamortized debt issuance costs written off related to the redemption of the 2026 Notes during the quarter ended June 30, 2021.

Includes fees expensed and unamortized debt issuance costs written off totaling $ 12 million related to the refinancing of the Credit Agreement during the year to date ended June 30, 2021.

(d) Includes a $ 28 million call premium and $ 6 million of unamortized debt issuance costs written off related to the redemption of the 2026 Notes during the year to date ended September 30, 2021.

Also includes a $ 26 million call premium and $ 6 million of unamortized debt issuance costs written off associated with the early redemption of YUM Subsidiary Senior Unsecured Notes due in 2024 as well as $ 2 million of accrued and unpaid interest associated with the period of time from prepayment of the notes with the trustee to their redemption date during the quarter and year to date ended September 30, 2020.

Note 10 - Pension Benefits

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All other material provisions under the Credit Agreement remain unchanged.

Our Revolving Facility was undrawn as of September 30, 2021.

As a result of this Credit Agreement refinancing, $ 8 million of fees were capitalized as debt issuance costs, $ 3 million of which were paid directly to lenders.

The debt issuance costs will be amortized to Interest expense, net through the contractual maturities of the Credit Agreement using the effective interest method.

During the quarter ended March 31, 2021, fees expensed of $ 4 million as well as previously recorded unamortized debt issuance costs written off of $ 8 million were recognized within Interest expense, net due to this refinancing.

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issued a notice of redemption for $ 350 million aggregate principal amount of 3.75 % YUM Senior Unsecured Notes due November 1, 2021 (the “2021 Notes”).

The redemption, which occurred on August 2, 2021, was in an amount equal to 100 % of the $ 350 million aggregate principal amount redeemed, plus accrued interest to the date of redemption.

Excluding the amounts associated with the Credit Agreement refinancing and extinguishment of the 2026 Notes discussed above, cash paid for interest during the years to date ended June 30, 2021 and 2020 was $ 235 million and $ 243 million, respectively.

The redemption, which occurred on August 2, 2021, was in an amount equal to 100 % of the principal amount of the 2021 Notes, plus accrued interest to the date of redemption.

On August 19, 2021, Taco Bell Funding, LLC (the “Issuer”), a special purpose limited liability company and a direct, wholly-owned subsidiary of Taco Bell Corp.

(“TBC”), completed a refinancing transaction and issued $ 900 million of its Series 2021-1 1.946 % Fixed Rate Senior Secured Notes, Class A-2-I (the “2021 Class A-2-I Notes”), $ 600 million of its Series 2021-1 2.294 % Fixed Rate Senior Secured Notes, Class A-2-II (the “2021 Class A-2-II Notes”) and $ 750 million of its Series 2021-1 2.542 % Fixed Rate Senior Secured Notes, Class A-2-III (the “2021 Class A-2-III Notes” and, together with the 2021 Class A-2-I Notes and the 2021 Class A-2-II Notes, the “2021 Class A-2 Notes”).

The net proceeds from the issuance of the 2021 Class A-2 Notes were used to repay in full the 2016-1 Class A-2-II Notes of $ 480 million and 2018-1 Class A-2-I Notes of $ 804 million.

The remaining net proceeds were distributed to TBC to pay certain transaction-related expenses, for general corporate purposes and to return capital to shareholders of the Company.

The remaining 2016-1 Class A-2-III Notes of $ 957 million and 2018-1 Class A-2-II Notes of $ 608 million, together with the 2021 Class A-2 Notes are collectively referred to as the “Securitization Notes”.

The legal final maturity date of the 2021 Class A-2 Notes is in August 2051.

However, the anticipated repayment dates of the 2021 Class A-2-I Notes, the 2021 Class A-2-II Notes and the 2021 Class A-2-III Notes are approximately 6, 8 and 10 years (the “Anticipated Repayment Dates”), respectively, from the date of issuance.

If the Issuer has not repaid or refinanced a series of Securitization Notes prior to its respective Anticipated Repayment Dates, rapid amortization of principal on all Securitization Notes will occur and additional interest will accrue on the Securitization Notes, as provided in the Indenture for the Securitization Notes.

As a result of the issuance of the 2021 Class A-2 Notes, $ 19 million of fees were capitalized as debt issuance costs.

The debt issuance costs are being amortized to Interest expense, net through the Anticipated Repayment Dates of the Securitization Notes utilizing the effective interest rate method.

As of September 30, 2021, the effective interest rates, including the amortization of debt issuance costs, were 2.11 %, 2.42 % and 2.64 % for the 2021 Class A-2-I Notes, 2021 Class A-2-II Notes and 2021 Class A-2-III Notes, respectively.

During the quarter ended September 30, 2021, previously recorded unamortized debt issuance costs written off totaling approximately $ 5 million were recognized within Interest expense, net due to the extinguishment of the 2016 Class A-2-II Notes and 2018 Class A-2-I Notes.

Excluding the payments associated with the extinguishment of the 2026 Notes discussed above, cash paid for interest during the year to date ended September 30, 2021 was $ 328 million.

Excluding $ 28 million of call premium and interest associated with the period of time from prepayment to redemption associated with the extinguishment of $ 1,050 million aggregate principal amount of 5.00 % Subsidiary Senior Unsecured Notes due in 2024, cash paid for interest during the year to date September 30, 2020 was $ 329 million.

Note 12 - Derivative Instruments

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We have entered into interest rate swaps, with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments primarily under our Term Loan B Facility.

At both June 30, 2021 and December 31, 2020, we had interest rate swaps that expired in July 2021 with notional amounts of $ 1.55 billion and interest rate swaps expiring in March 2025 with notional amounts of $ 1.5 billion.

These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt.

There were no other interest rate swaps outstanding as of June 30, 2021 or December 31, 2020.

At both September 30, 2021 and December 31, 2020, we had interest rate swaps expiring in March 2025 with notional amounts of $ 1.5 billion.

At December 31, 2020, we also had interest rate swaps that expired in July 2021 with notional amounts of $ 1.55 billion.

These interest rate swaps have been designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt.

There were no other interest rate swaps outstanding as of September 30, 2021 or December 31, 2020.

Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings.

Through June 30, 2021, the swaps were highly effective cash flow hedges.

Through September 30, 2021, the swaps were highly effective cash flow hedges.

Foreign Currency Contracts

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Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements.

Through June 30, 2021, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of June 30, 2021 and December 31, 2020, outstanding foreign currency contracts related to intercompany receivables and payables had total notional amounts of $ 34 million and $ 39 million, respectively.

Through September 30, 2021, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of September 30, 2021 and December 31, 2020, outstanding foreign currency contracts related to intercompany receivables and payables had total notional amounts of $ 34 million and $ 39 million, respectively.

These foreign currency forward contracts all have durations that expire in 2021.

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To mitigate the counterparty credit risk, we only enter into contracts with major financial institutions carefully selected based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties.

At June 30, 2021, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies.

At September 30, 2021, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies.

To date, all counterparties have performed in accordance with their contractual obligations.

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Income tax benefit/(expense) ( 1 ) 2 ( 1 ) ( 1 ) ( 5 ) 25 ( 3 ) —

As of June 30, 2021, the estimated net loss included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $ 42 million, based on current LIBOR interest rates.

As of September 30, 2021, the estimated net loss included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $ 43 million, based on current LIBOR interest rates.

Total Return Swaps

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As a result, the changes in the fair value of these derivatives are recognized immediately in earnings within General and administrative expenses in our Condensed Consolidated Statements of Income largely offsetting the changes in the associated EID liabilities.

The fair value associated with the total return swaps as of June 30, 2021, was not significant.

The fair value associated with the total return swaps as of September 30, 2021, was not significant.

See Note 13 for the fair value of our derivative assets and liabilities.

Note 13 - Fair Value Disclosures

As of June 30, 2021, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments.

As of September 30, 2021, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments.

The fair value of notes receivable, net of allowances, and lease guarantees, less reserves for expected losses, approximates their carrying value.

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The Company has interest rate swaps, foreign currency contracts and other investments, all of which are required to be measured at fair value on a recurring basis (see Note 12 for discussion regarding derivative instruments).

The following table

presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall.

The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall.

Condensed Consolidated Balance Sheet Level 9/30/2021 12/31/2020

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The fair value of the Company’s interest rate swaps and foreign currency contracts were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based on observable inputs.

The other investments as of September 30, 2021, primarily include an approximate 5 % minority interest in Devyani International Limited (“Devyani”) with a fair value of $ 83 million.

The minority interest was received in lieu of cash proceeds upon the refranchising of approximately 60 KFC restaurants in India.

At the time of the refranchisings, the fair value of this minority interest was estimated to be approximately $ 31 million.

During the quarter ended September 30, 2021, Devyani executed an initial public offering and subsequently the fair value of these equity securities became readily determinable.

As a result, concurrent with the initial public offering we began recording changes in fair value in Investment (income) expense, net.

Prior to the initial public offering the fair value of these equity securities was not readily determinable and we applied the measurement alternative in accordance with ASC Topic 321.

For both the quarter and year to date ended September 30, 2021, we recognized pre-tax investment income of $ 52 million related to changes in fair value of our investment in Devyani.

The other investments as of December 31, 2020, primarily include investments in mutual funds, which were historically used to offset fluctuations for a portion of our EID liabilities and whose fair values were determined based on the closing market prices of the respective mutual funds.

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These proceeds have been classified within Other, net cash flows from investing activities within our Condensed Consolidated Statements of Cash Flows.

Note 14 - Commitments and Contingencies

Note 14 - Contingencies

Internal Revenue Service Proposed Adjustment

As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on June 30, 2021, we received a draft notice of proposed adjustment from the IRS for the 2014 fiscal year relating to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines.

As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on October 13, 2021, we received a Notice of Proposed Adjustment (“NPA”) from the IRS for the 2014 fiscal year relating to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines.

The IRS asserts that these reorganizations involved taxable distributions of approximately $6.0 billion.

We anticipate that we will soon receive a final notice of proposed adjustment and draft Revenue Agent’s Report (“RAR”) and, thereafter, a final RAR.

The amount of additional tax that may be asserted by the IRS in the final RAR cannot be quantified at this time;

however, based on the draft notice received, the amount of additional tax to be proposed is likely to be material.

We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment and intend to contest it vigorously by filing a protest disputing on multiple grounds any proposed taxes and proceeding to the IRS Office of Appeals.

We expect to receive the Revenue Agent’s Report (“RAR”) including the IRS’s calculation of the tax assessment in early 2022.

The amount of additional tax that may be asserted by the IRS in the RAR cannot be quantified at this time;

however, based on the NPA, the amount of additional tax to be proposed is expected to be material.

We disagree with the IRS’s position as asserted in the NPA and intend to contest it vigorously by filing a protest disputing on multiple grounds any proposed taxes and proceeding to the IRS Office of Appeals.

The final resolution of this matter is uncertain, but the Company believes that it is more likely than not the Company’s tax position will be sustained;

4 unchanged sentences

These leases have varying terms, the latest of which expires in 2065 .

As of June 30, 2021, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $ 400 million.

The present value of these potential payments discounted at our pre-tax cost of debt at June 30, 2021, was approximately $ 350 million.

As of September 30, 2021, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $ 400 million.

The present value of these potential payments discounted at our pre-tax cost of debt at September 30, 2021, was approximately $ 350 million.

Our franchisees are the primary lessees under the vast majority of these leases.

1 unchanged sentence

We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases, although such risk may not be reduced in the context of a bankruptcy or other similar restructuring of a large franchisee or group of franchisees.

The liability recorded for our expected losses under such leases as of June 30, 2021, was not material.

The liability recorded for our expected losses under such leases as of September 30, 2021, was not material.

Legal Proceedings

11 unchanged sentences

We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020.

The stay order remains in effect and the next hearing is scheduled for August 9, 2021.

The stay order remains in effect and the next hearing is now scheduled for November 24, 2021.

We deny liability and intend to continue vigorously defending this matter.

2 unchanged sentences

However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Condensed Consolidated Financial Statements.

Dragontail Acquisition

On May 26, 2021, we announced our definitive agreement pursuant to which we will acquire all the issued share capital of Dragontail Systems Limited (“Dragontail”) for A$ 93.5 million in cash.

Dragontail is a cutting-edge restaurant technology company whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch and customer order tracking.

The transaction is conditional upon, among other matters, Australian Federal Court approval, approval by Dragontail’s shareholders and other certain regulatory waivers and rulings.

The transaction is expected to be completed by the end of the third-quarter of 2021.

If the transaction is consummated, we intend to fund the acquisition of Dragontail using cash on hand.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements