What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-05 · 112 added, 95 removed, 453 unchanged (31% of the section changed)

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Throughout this MD&A, we commonly discuss the following performance metrics:

• Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more (with the exception of Habit Burger Grill restaurants acquired in the first quarter of 2020 for which we included all sales in the quarter ended March 31, 2020 both before and after the acquisition in the prior year base for purposes of determining 2021 same-store sales growth), including those temporarily closed.

• Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more (with the exception of Habit Burger Grill restaurants acquired in the first quarter of 2020 for which we included all sales in the quarter ended March 31, 2020 both before and after the acquisition in the prior year base for purposes of determining same-store sales growth for the year to date ended September 30, 2021), including those temporarily closed.

From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues.

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• Net new unit growth reflects new unit openings offset by permanent store closures, by us and our franchisees.

To determine whether a restaurant meets the definition of a unit we consider whether the restaurant has operations that are ongoing and

independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales.

To determine whether a restaurant meets the definition of a unit we consider whether the restaurant has operations that are ongoing and independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales.

We believe net new unit growth is useful to investors because we depend on net new units for a significant portion of our growth.

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All comparisons within this summary are versus the same period a year ago.

For the quarter ended June 30, 2021, GAAP diluted EPS was $1.29 per share, an increase from $0.67 per share in the quarter ended June 30, 2020, and diluted EPS, excluding Special Items, was $1.16 per share, an increase from $0.82 per share in the quarter ended June 30, 2020.

For the year to date ended June 30, 2021, GAAP diluted EPS was $2.35 per share, an increase from $0.94 per share in the year to date ended June 30, 2020, and diluted EPS, excluding Special Items, was $2.22 per share, an increase from $1.46 per share in the year to date ended June 30, 2020.

For the quarter ended September 30, 2021, GAAP diluted EPS was $1.75 per share, an increase from $0.92 per share in the quarter ended September 30, 2020, and diluted EPS, excluding Special Items, was $1.22 per share, an increase from $1.01 per share in the quarter ended September 30, 2020.

For the year to date ended September 30, 2021, GAAP diluted EPS was $4.10 per share, an increase from $1.86 per share in the year to date ended September 30, 2020, and diluted EPS, excluding Special Items, was $3.44 per share, an increase from $2.47 per share in the year to date ended September 30, 2020.

Quarterly Financial highlights:

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+15 +12 +4 +60 +26

(1) Worldwide system sales growth ex F/X for the year to date ended June 30, 2021, includes the benefit of our acquisition of Habit Burger Grill on March 18, 2020.

(1) Worldwide system sales growth ex F/X for the year to date ended September 30, 2021, includes the benefit of our acquisition of Habit Burger Grill on March 18, 2020.

Same-store sales reflects the inclusion of Habit Burger Grill in the prior year base for periods in the first-quarter of 2020 both before and after the acquisition.

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During the year to date, we repurchased 7.3 million shares totaling $860 million at an average price of $117.07.

• Foreign currency translation favorably impacted Divisional Operating Profit for the quarter and year to date by $27 million and $43 million, respectively.

• Foreign currency translation positively impacted Divisional Operating Profit for the quarter and year to date by $12 million and $55 million, respectively.

Quarter ended Year to date

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Income before income taxes 451 316 43 1,267 668 90

Income tax provision 16 51 68 99 63 (58)

Income tax (benefit) provision (77) 33 330 22 96 77

Net Income $ 528 $ 283 87 $ 1,245 $ 572 118

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Foreign Currency Impact on System sales (b)

10 N/A 15 N/A

System sales, excluding FX $ 3,139 $ 2,914 $ 9,194 $ 8,074

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Unlocking Opportunity Initiative contribution (b)

— (50) — (50)

Charges associated with resource optimization (c)

(4) (32) (7) (32)

Other Special Items Income (Expense) 1 1 2 (6)

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— (34) (34) (34)

Special Items Expense before Income Taxes (33) (54) (31) (199)

Tax Benefit on Special Items (e)

Special Items Income (Expense) before Income Taxes (3) (69) (34) (268)

Tax (Expense) Benefit on Special Items (e)

Tax Benefit - Intra-entity transfer of intellectual property (f)

152 25 216 25

Special Items Income (Expense), net of tax $ 160 $ (27) $ 200 $ (186)

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(a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018.

As such, refranchising gains and losses recorded during 2021 and 2020 as Special Items are directly associated with restaurants that were refranchised as of the end of 2018.

During the quarters ended June 30, 2021 and 2020, we recorded net refranchising gains of $2 million and $3 million, respectively, that have been reflected as Special Items.

During the years to date ended June 30, 2021 and 2020, we recorded net refranchising gains of $4 million and $6 million, respectively, that have been reflected as Special Items.

Additionally, we recorded net refranchising gains of $5 million during both quarters ended June 30, 2021 and 2020, that have not been reflected as Special Items.

During the years to date ended June 30, 2021 and 2020, we recorded net refranchising gains of $18 million and $15 million, respectively, that have not been reflected as Special Items.

These gains relate to refranchising of restaurants in 2021 and 2020 that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity.

As such, refranchising gains and losses recorded during 2021 and 2020 as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018.

During the quarter ended September 30, 2020, we recorded net refranchising gains of $2 million that have been reflected as a Special Item.

During the years to date ended September 30, 2021 and 2020, we recorded net refranchising gains of $4 million and $8 million, respectively, that have been reflected as Special Items.

Additionally, we recorded net refranchising losses of $1 million and net refranchising gains of $7 million during the quarters ended September 30, 2021 and 2020, respectively, that have not been reflected as Special Items.

During the years to date ended September 30, 2021 and 2020, we recorded net refranchising gains of $17 million and $22 million, respectively, that have not been reflected as Special Items.

These net gains and losses relate to refranchising of restaurants in 2021 and 2020 that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity.

(b) On June 24, 2020, the YUM!

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As a result of the size and specific nature of this contribution, we have reflected the associated expense as a Special Item.

(c) During the quarter ended June 30, 2021, we recorded a charge of $2 million to General and administrative expenses and a credit of $1 million to Other pension (income) expense related to a resource optimization program initiated in the third quarter of 2020.

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

(c) During the quarter ended September 30, 2021, we recorded a charge of $4 million to General and administrative expenses, and during the quarter ended September 30, 2020, we recorded charges of $32 million and $1 million to General and administrative expenses and Other pension (expense) income, respectively, related to a resource optimization program initiated in the third quarter of 2020.

During the years to date ended September 30, 2021 and 2020, we recorded charges of $7 million and $32 million to General and administrative expenses, respectively, and a credit of $1 million and a charge of $1 million, respectively, to Other pension (expense) income related to the resource optimization program.

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.

Due to the size and scope of the resource optimization program, these charges have been reflected as Special Items.

Due to the size and scope of the resource optimization program, these amounts have been reflected as Special Items.

(d) During the quarter ended June 30, 2021, certain subsidiaries of the Company redeemed $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes due in 2026 (the “2026 Notes”).

The redemption amount was equal to 102.625% of the $1,050 million aggregate principal amount redeemed, reflecting a $28 million “call premium”.

We recognized the call premium and the write-off of $6 million of unamortized debt issuance costs associated with the 2026 Notes within Interest expense, net and we reflected the charges as Special Items due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense.

(e) Tax Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

(f) During the quarter ended June 30, 2021, the United Kingdom ("UK") Finance Act 2021 was enacted resulting in an increase in the UK corporate income tax rate from 19% to 25%.

As a result, in the quarter ended June 30, 2021, we remeasured the deferred tax assets originally recorded as a Special Item as part of a fourth quarter 2019 intercompany restructuring of intellectual property rights into the UK, which resulted in the recognition of an additional $64 million deferred tax benefit as a Special Item.

We recognized the call premium and the write-off of $6 million of unamortized debt issuance costs associated with the 2026 Notes within Interest expense, net which we reflected as Special Items due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense.

During the quarter ended September 30, 2020, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, each of which a wholly-owned subsidiary of the Company, issued a notice of redemption for $1,050 million aggregate principal amount of 5.00% Subsidiary Senior Unsecured Notes due in 2024 (the "2024 Notes").

The redemption amount included a $26 million call premium plus accrued and unpaid interest to the date of redemption of October 9, 2020.

We recorded the call premium, $6 million of unamortized debt issuance costs associated with the 2024 Notes and $2 million of accrued and unpaid interest associated with the period of time from prepayment of the 2024 Notes with the Trustee on September 25, 2020, to their redemption date within Interest expense, net and reflected the charges as Special Items due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense.

(e) Tax (Expense) Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

Additionally, during the quarter ended September 30, 2021, we recorded as a Special Item a $10 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.

(f) During the quarter ended September 30, 2020, the United Kingdom (“UK”) Finance Act 2020 was enacted resulting in an increase in the UK corporate income tax rate from 17% to 19%.

As a result, in the quarter ended September 30, 2020, we remeasured the deferred tax assets originally recorded as a Special Item in the fourth quarter of 2019 as part of an intercompany restructuring of certain intellectual property (“IP”) rights into the UK and recognized an additional $25 million deferred tax benefit as a Special Item.

During the quarter ended June 30, 2021, the UK Finance Act 2021 was enacted resulting in an increase in the UK corporate income tax rate from 19% to 25%.

As a result, in the quarter ended June 30, 2021, we remeasured the deferred tax assets originally recorded as a Special Item as part of the aforementioned 2019 intercompany restructuring of certain IP rights into the UK and recognized an additional $64 million deferred tax benefit as a Special Item.

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 completed intra-entity transfers of certain KFC IP 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 as a Special Item in the quarter ended September 30, 2021.

(g) The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented.

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Quarter ended 9/30/2021

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Unallocated Total

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 314 $ 101 $ 184 $ 1 $ (73) $ 527

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Quarter ended 9/30/2020

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Unallocated Total

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 278 $ 89 $ 186 $ (7) $ (75) $ 471

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Year to date 9/30/2021

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Unallocated Total

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 932 $ 306 $ 560 $ 6 $ (167) $ 1,637

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Year to date 9/30/2020

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Unallocated Total

KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 655 $ 252 $ 484 $ (15) $ (355) $ 1,021

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Company restaurant margin % 11.2 % 3.4 % 25.0 % 2.2 % N/A 15.9 %

Items Impacting Current Quarter and Expected to Impact Future Results

Items Impacting Reported Results and Expected to Impact Future Results

The following items impacted reported results in 2021 and/or 2020 and/or are expected to impact future results.

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In addition to the loss of sales due to restaurants being temporarily closed, we also lost sales due to dining room closures or other limitations on access.

Beginning in 2020 and continuing through the second quarter of 2021 we have been able to mitigate the loss of sales due to temporary unit closures, dining room closures or other limitations on access through the strength of our off-premise channels, aided by increasing consumer access to our brands via digital channels.

As a result, our same-store sales in the quarter and year to date ended June 30, 2021, increased 23% and 16%, respectively, driven by strong performance in North America, the United Kingdom and Australia, with improved performance in Europe as it began to reopen and show signs of recovery.

Additionally, we have seen strong new unit development of 1,038 gross units during the first half of 2021, which we believe is primarily a result of improving unit-level economics, our franchisees’ financial strength and commitment to our Concepts, the inherent competitive advantages of the Quick Service Restaurant sector throughout the COVID-19 pandemic, our Concepts’ off-premise and digital capabilities, as well as selective use of development incentives with certain franchisees.

Our second quarter 2021 same-store sales results include the impact of approximately 700 restaurants remaining temporarily closed as of June 30, 2021, due to COVID-19.

These temporary closures are primarily KFC and Pizza Hut restaurants located in countries where COVID-19 government restrictions remain elevated, including Latin America and certain parts of Asia.

Beginning in 2020 and continuing through the third quarter of 2021 we have been able to mitigate the loss of sales due to temporary unit closures, dining room closures or other limitations on access through the strength of our off-premise channels, aided by increasing consumer access to our brands via digital channels.

As a result, our same-store sales in the quarter and year to date ended September 30, 2021, increased 5% and 12%, respectively, driven by strong performance in developed markets such as North America and the United Kingdom.

Additionally, during the quarter ended September 30, 2021, we began to see significant recovery across Europe as restrictions eased throughout the quarter as well as pockets of strength in emerging markets including the Middle East, Latin America, Africa and India.

We have also seen strong net new unit development of 1,798 units during the year to date ended September 30, 2021, which we believe is primarily a result of improving unit-level economics, our franchisees’ financial strength and commitment to our Concepts, the inherent competitive advantages of the Quick Service Restaurant sector throughout the COVID-19 pandemic, our Concepts’ off-premise and digital capabilities, as well as selective use of development incentives with certain franchisees.

Our third quarter 2021 same-store sales results include the impact of approximately 500 restaurants remaining temporarily closed as of September 30, 2021, due to COVID-19.

These temporary closures were primarily KFC and Pizza Hut restaurants located in countries where COVID-19 government restrictions remained elevated, including certain parts of Asia and Latin America as well as Australia.

Assets located in malls, transportation centers, airports and other similar locations continue to be pressured, making up many of the temporary closures.

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The ultimate pace of our recovery will largely depend on the pace of restaurant reopenings and the continuation of current sales trends, although we expect continuing adverse impacts from COVID-19 in certain parts of the world.

In addition, for our restaurants that prominently feature drive-thru, carryout and delivery options, COVID-19 has in many cases contributed to an increase in sales during 2020 and the first half of 2021.

If the impact of COVID-19 recedes, in-person dining restrictions are lifted or lessened and the restaurant industry in general returns to more normal operations, the benefits to sales experienced by certain of our restaurants, including our Pizza Hut delivery restaurants, could wane and our results could be negatively impacted.

As 98% of our restaurants are operated by approximately 2,000 independent franchisees across the world, we are closely monitoring the impact of COVID-19 on our franchisees' financial condition.

The Habit Restaurants, Inc.

On March 18, 2020, we acquired The Habit Restaurants, Inc.

for total cash consideration of $408 million, net of cash acquired.

Our condensed consolidated financial statements and system sales metric reflect the ongoing results of Habit Burger Grill operations for fourteen days in the quarter ended March 31, 2020 and full quarter results for the quarter ended June 30, 2020.

As a result of the impacts of COVID-19 on the results of Habit Burger Grill’s operations, as well as general market conditions, we recorded an after-tax impairment charge of $107 million in the first quarter of 2020 related to the goodwill arising from the preliminary purchase price allocation associated with the acquisition.

We have reflected this impairment as a Special Item, resulting in a Special Item EPS charge for the year to date ended June 30, 2020, of approximately $0.35.

Franchise Bad Debt Expense

We experienced significant quarterly fluctuations in franchise bad debt expense in 2020 due in large part to the uncertainties associated with COVID-19.

During the quarter ended June 30, 2021, we recognized net bad debt recoveries of $4 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were

primarily reflected within Franchise and property expenses.

These net bad debt recoveries of $4 million compared to $13 million of bad debt expense recognized in the quarter ended June 30, 2020, and thus benefited Operating Profit growth by $17 million quarter-over-quarter.

During the year to date ended June 30, 2021, we recognized net bad debt recoveries of $10 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were primarily reflected within Franchise and property expenses.

These net bad debt recoveries of $10 million compared to $42 million of bad debt expense recognized in the year to date ended June 30, 2020, and thus benefited Operating Profit growth by $52 million year-over-year.

Due to the quarterly fluctuations in franchise bad debt expense in 2020 discussed above, we expect quarterly operating profit growth to be negatively impacted in the second half of 2021 as we lap net bad debt recoveries of $21 million and $8 million in the quarters ended September 30, 2020, and December 31, 2020, respectively.

During the quarter ended September 30, 2021, we recognized net bad debt expense of $3 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were primarily reflected within Franchise and property expenses.

This net bad debt expense of $3 million compared to $21 million of net bad debt recoveries recognized in the quarter ended September 30, 2020, and thus negatively impacted Operating Profit growth by $24 million quarter-over-quarter.

During the year to date ended September 30, 2021, we recognized net bad debt recoveries of $7 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were primarily reflected within Franchise and property expenses.

These net bad debt recoveries of $7 million compared to $21 million of bad debt expense recognized in the year to date ended September 30, 2020, and thus benefited Operating Profit growth by $28 million year-over-year.

Due to the quarterly fluctuations in franchise bad debt expense in 2020 discussed above, we expect quarterly operating profit growth to be negatively impacted in the fourth quarter of 2021 as we lap net bad debt recoveries of $8 million in the quarter ended December 31, 2020.

Investment in Devyani

In 2020, we received an approximate 5% minority interest in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India.

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 this investment became readily determinable.

As a result, concurrent with the initial public offering we began recording changes in fair value in Investment (income) expense, net in our Condensed Consolidated Statements of Income and recognized pre-tax investment income of $52 million, in the quarter ended September 30, 2021.

Investment in Grubhub, Inc.

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While we held our investment in Grubhub common stock we recognized changes in the fair value in our investment in our Condensed Consolidated Statements of Income.

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

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.

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.

The KFC Division has 26,222 units, 85% of which are located outside the U.S.

Additionally, 99% of the KFC Division units were operated by franchisees as of June 30, 2021.

Additionally, 99% of the KFC Division units were operated by franchisees as of September 30, 2021.

Quarter ended Year to date

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Total revenues $ 692 $ 586 18 14 $ 1,999 $ 1,561 28 21

Company restaurant profit $ 29 $ 3 NM NM $ 51 $ 18 NM NM

Company restaurant profit $ 26 $ 21 28 20 $ 77 $ 39 100 84

Company restaurant margin % 18.9 % 16.3 % 2.6 ppts.

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The quarterly and year to date increases in Franchise and property revenues, excluding the impacts of foreign currency translation, were driven by franchise same-store sales growth of 6% and 14% for the quarter and year to date, respectively, and unit growth.

The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our annual incentive compensation program and higher professional fees.

The year to date increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our annual incentive compensation program and higher professional fees, partially offset by lower travel related costs.

The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher professional fees.

The year to date increase in G&A, excluding the impact of foreign currency translation, was driven by higher expenses related to our annual incentive compensation program and higher professional fees, partially offset by lower travel related costs.

Operating Profit

The quarterly and year to date increases in Operating Profit, excluding the impacts of foreign currency translation, were driven by same-store sales growth, lower franchise bad debt expense, unit growth, and lapping the prior year write-off of software no longer being used, partially offset by higher G&A.

The quarterly increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by current year net bad debt expense lapping prior year net bad debt recoveries for past due franchise receivables and higher G&A.

The year to date increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth, unit growth, current year net bad debt recoveries lapping prior year net bad debt expense for past due franchise receivables and lapping the prior year write-off of software no longer being used, partially offset by higher G&A.

Pizza Hut Division

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airports) and includes units operating under both the Pizza Hut and Telepizza brands.

Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of June 30, 2021.

Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of September 30, 2021.

Quarter ended Year to date

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Total revenues $ 247 $ 243 2 — $ 747 $ 713 5 3

Company restaurant profit $ 1 $ 1 19 7 $ 2 $ — NM NM

Company restaurant profit $ 1 $ 2 (52) (54) $ 3 $ 2 42 32

Company restaurant margin % 6.0 % 8.2 % (2.2) ppts.

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Company sales

The quarterly and year to date decreases in Company sales, excluding the impacts of foreign currency translation, were driven by the refranchising of stores in the UK in the quarter ended March 31, 2021, partially offset by company same-store sales growth of 9%.

Franchise and property revenues

The quarterly and year to date increases in Franchise and property revenues, excluding the impacts of foreign currency translation, were driven by franchise same-store sales growth of 10% and 11%, respectively, partially offset by unit declines.

The quarterly decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower headcount and lower expenses related to our deferred compensation programs, partially offset by higher professional fees.

The year to date decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower headcount and lower travel related costs.

The quarterly decrease in G&A, excluding the impacts of foreign currency translation, was driven by lapping higher expenses in the prior year related to our annual incentive compensation program, lower professional fees and lower headcount.

The year to date decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower headcount, lapping higher expenses in the prior year related to our annual incentive compensation program and lower professional fees.

Operating Profit

The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth and lower G&A, partially offset by higher Franchise advertising and other services expense primarily related to digital and technology expenses.

The year to date increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth, lower G&A and lower franchise bad debt expense, partially offset by the impact of unit declines.

The year to date increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth, lower G&A and current year net bad debt recoveries lapping prior year net bad debt expense for past due franchise receivables, partially offset by higher Franchise advertising and other services expense primarily related to digital and technology expenses.

Taco Bell Division

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The Company owned 7% of the Taco Bell units in the U.S.

as of June 30, 2021.

as of September 30, 2021.

Quarter ended Year to date

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The quarterly and year to date increases in Company sales were driven by same-store sales growth of 2% and 7% for the quarter and year to date, respectively, and unit growth.

The quarterly and year to date increases in Company restaurant margin percentage were driven by same-store sales growth partially offset by higher labor costs, commodity inflation and an increase in other restaurant operating costs.

The quarterly decrease in Company restaurant margin percentage was driven by higher labor costs, higher advertising expenses, commodity inflation and higher other restaurant operating costs, partially offset by same-store sales growth.

The year to date decrease in Company restaurant margin percentage was driven by higher labor costs, higher other restaurant operating costs, higher advertising costs and commodity inflation, partially offset by same-store sales growth.

Franchise and property revenues

The quarterly and year to date increases in Franchise and property revenues were driven by franchise same-store sales growth of 5% and 12%, respectively, and unit growth.

The quarterly decrease in G&A was driven by lower headcount, lower expenses related to our deferred compensation programs and lower professional fees, partially offset by higher expenses related to our annual incentive compensation program.

The year to date decrease in G&A was driven by lower headcount, lapping higher severance expenses, lower professional fees and lower travel related costs, partially offset by higher expenses related to our annual incentive compensation program.

The quarterly increase in G&A was driven by higher expenses related to our annual incentive compensation programs and higher professional fees.

The year to date decrease in G&A was driven by lower headcount and lapping higher prior year severance expenses, offset by higher expenses related to our annual incentive compensation programs.

Operating Profit

The quarterly and year to date increases in Operating Profit were driven by same-store sales growth, lower G&A expenses and unit growth partially offset by higher restaurant costs.

The quarterly decrease in Operating Profit was driven by higher restaurant costs and higher G&A expenses partially offset by same-store sales growth and unit growth.

The year to date increase in Operating Profit was driven by same-store sales growth, unit growth and lower G&A expenses partially offset by higher restaurant costs.

Habit Burger Grill Division

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The Company owned 90% of the Habit Burger Grill units in the U.S.

as of June 30, 2021.

During the quarter ended June 30, 2021, The Habit Burger Grill opened 4 gross new restaurants and reported same-store sales growth of 31%.

Total revenues and Operating Profit were $139 million and $5 million, respectively, for the quarter ended June 30, 2021.

During the year to date ended June 30, 2021, The Habit Burger Grill opened 10 gross new restaurants and reported same-store sales growth of 22%.

Total revenues and Operating Profit were $261 million and $5 million, respectively, for the year to date ended June 30, 2021.

as of September 30, 2021.

During the quarter ended September 30, 2021, The Habit Burger Grill opened 8 gross new restaurants and reported same-store sales growth of 11%.

Total revenues and Operating Profit were $133 million and $1 million, respectively, for the quarter ended September 30, 2021.

During the year to date ended September 30, 2021, The Habit Burger Grill opened 18 gross new restaurants and reported same-store sales growth of 18%.

Total revenues and Operating Profit were $394 million and $6 million, respectively, for the year to date ended September 30, 2021.

Corporate & Unallocated

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Unallocated Company restaurant expenses — 1 NM — — NM

Unallocated Franchise and property expenses — (1) NM — (3) 112

Unallocated Franchise and property expenses — — (70) — (3) 118

Unallocated Refranchising gain (loss) (1) 9 (108) 21 30 (30)

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Other pension income (expense) (See Note 10)

(1) (4) 74 (6) (9) 34

Interest expense, net (126) (161) 23 (416) (411) (1)

Income tax provision (See Note 7) (16) (51) 68 (99) (63) (58)

Income tax benefit (provision) (See Note 7) 77 (33) 330 (22) (96) 77

Effective tax rate (See Note 7) (17.0) % 10.5 % 27.5 ppts.

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Corporate and unallocated G&A

The quarterly decrease in Corporate and Unallocated G&A expense was driven by lapping the prior year charitable contribution of $50 million related to our “Unlocking Opportunity Initiative” (See Note 9) and lower expenses related to our deferred compensation programs, partially offset by higher annual incentive compensation expense, higher share-based compensation expense and increased headcount supporting our technology initiatives.

The year to date decrease in Corporate and Unallocated G&A expense was driven by lapping the prior year charitable contribution of $50 million related to our “Unlocking Opportunity Initiative“ (See Note 9) and lapping prior year costs associated with the acquisition of Habit Burger Grill, partially offset by higher annual incentive compensation expense, higher share-based compensation expense and increased headcount supporting our technology initiatives.

The quarterly decrease in Corporate and Unallocated G&A expense was driven by lapping higher prior year costs associated with a voluntary early retirement program offered to our U.S.

based employees and a worldwide severance program (see Note 9) and lapping prior year higher charitable contributions, partially offset by higher current year expenses related to our annual incentive compensation programs and increased headcount supporting our technology initiatives.

The year to date decrease in Corporate and Unallocated G&A expense was driven by lapping higher prior year costs for charitable contributions including $50 million related to our “Unlocking Opportunity Initiative” (see Note 9), lapping prior year costs associated with a voluntary early retirement program offered to our U.S.

based employees and a worldwide severance program (see Note 9) and lower professional fees including lapping prior year costs associated with the acquisition of Habit Burger Grill, offset by higher current year expenses related to our annual incentive compensation programs, higher share-based compensation expense and increased headcount supporting our technology initiatives.

Unallocated Other income (expense)

Unallocated Other income (expense) for the year to date ended June 30, 2020, includes a goodwill impairment charge of $139 million for Habit Burger Grill (see Note 2).

Unallocated Other income (expense) for the quarter and year to date ended September 30, 2020, includes charges of $5 million and $144 million, respectively, related to the impairment of Habit Burger Grill goodwill (see Note 2).

Interest expense, net

The quarterly and year to date increases in Interest expense, net were driven by $34 million of call premium paid and unamortized debt issuance costs written-off associated with the redemption of the 2026 Notes (see Note 11), offset by decreased borrowings on the Revolving Facility.

The year to date increase in Interest expense, net was also driven by fees expensed as well as unamortized debt issuance costs written off totaling approximately $12 million related to the refinancing of the Credit Agreement (see Note 11).

The quarterly decrease in Interest expense, net was primarily driven by lapping $34 million in expense representing a prior year call premium and unamortized debt issuance costs write-off associated with the prior year redemption of YUM Subsidiary Senior Unsecured Notes due in 2024.

The year to date increase in Interest expense, net was primarily driven by higher borrowings offset by a lower weighted-average interest rate.

Consolidated Cash Flows

Net cash provided by operating activities was $1,292 million in 2021 versus $853 million in 2020.

The increase was largely driven by an increase in Operating profit before Special Items, decreased annual incentive compensation payments, the lapping of our $50 million contribution related to our "Unlocking Opportunity Initiative" and a decrease in interest payments, partially offset by an increase in income tax payments.

The increase was largely driven by an increase in Operating profit before Special Items, the lapping of our $50 million contribution related to our “Unlocking Opportunity Initiative” and a decrease in income tax payments, partially offset by the timing of accounts receivable collections.

Net cash used in investing activities was $123 million in 2021 versus $269 million in 2020.

The change was primarily driven by the lapping of our prior year acquisition of The Habit Restaurants, Inc., the current year sale of certain mutual fund investments (see Note 13) and higher refranchising proceeds in the current year, partially offset by higher current year capital spending.

The change was primarily driven by the lapping of our prior year acquisition of The Habit Restaurants, Inc., the current year sale of certain mutual fund investments and higher refranchising proceeds in the current year, partially offset by the lapping of prior year proceeds from the sale of our investment in Grubhub, Inc.

common stock, the current year acquisition of Dragontail Systems Limited and higher current year capital spending.

Net cash used in financing activities was $881 million in 2021 versus net cash provided by financing activities of $24 million in 2020.

The change was primarily driven by lower net borrowings and higher share repurchases.

The change was primarily driven by higher share repurchases.

Liquidity and Capital Resources

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It is our intent to use these operating cash flows to continue to invest in growing our business and pay a meaningful dividend, with any remaining excess then returned to shareholders through share repurchases.

To the extent operating cash flows plus other sources of cash do not cover our anticipated cash needs, we maintain a $1.25 billion Revolving Facility under our Credit Agreement that was undrawn as of June 30, 2021.

We believe that our existing cash from operations, cash on hand and availability under our Revolving Facility, will be sufficient to fund our operations, anticipated capital expenditures and debt repayment obligations over the next twelve months.

Debt Instruments

As of June 30, 2021, approximately 93%, including the impact of interest rate swaps, of our $10.7 billion of total debt outstanding, excluding finance leases, is fixed with an effective overall interest rate of approximately 4.6%.

As of September 30, 2021, approximately 93%, including the impact of interest rate swaps, of our $11.3 billion of total debt outstanding, excluding finance leases, is fixed with an effective overall interest rate of approximately 4.2%.

We are managing a capital structure which reflects consolidated leverage, net of available cash, in-line with our target of ~5.0x EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years.

We have credit ratings of BB (Standard & Poor's)/Ba2 (Moody's) with a balance sheet consistent with highly-levered peer restaurant franchise companies.

The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of June 30, 2021.

The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of September 30, 2021.

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total

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Total $ 14 $ 68 $ 398 $ 87 $ 692 $ 1,606 $ 1,637 $ 1,979 $ 564 $ 807 $ 1,731 $ 1,100 $ 325 $ 275 $ 11,283

Securitization Notes include four series of senior secured notes issued by Taco Bell Funding, LLC (the “Issuer”) totaling $2.9 billion with fixed interest rates ranging from 4.318% to 4.970%.

Securitization Notes include five series of senior secured notes issued by Taco Bell Funding, LLC (the “Issuer”) totaling $3.8 billion with fixed interest rates ranging from 1.946% to 4.970%.

The Securitization Notes are secured by substantially all of the assets of the Issuer and the Issuer’s special purpose, wholly-owned subsidiaries (collectively with the Issuer, the “ Securitization Entities ” ), and include a lien on all existing and future U.S.

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The Securitization Notes contain cross-default provisions whereby the failure to pay principal on any outstanding Securitization Notes will constitute an event of default under any other Securitization Notes.

On August 19, 2021, the Issuer 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 Class A-2-II Notes of $480 million and 2018 Class A-2-I Notes of $804 million.

The remaining net proceeds were distributed to Taco Bell Corp.

to pay certain transaction-related expenses, for general corporate purposes and may also be used to return capital to shareholders of the Company.

See Note 11 for details regarding our refinance of the Securitization Notes during the quarter ended September 30, 2021.

Credit Agreement includes senior secured credit facilities consisting of a $750 million Term Loan A facility (the “Term Loan A Facility”), a $1.5 billion Term Loan B facility (the “Term Loan B Facility”) and a $1.25 billion revolving facility (the “Revolving Facility”) issued by KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC (collectively, the “Borrowers”), each of which is a wholly-owned subsidiary of the Company.

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

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

The interest rates applicable to the Term Loan A Facility and the Revolving Facility range from 0.75% to 1.50% plus LIBOR or from 0.00% to 0.50% plus the Base Rate, at the Borrowers’ election, based upon the total net leverage ratio of the Borrowers and the Specified Guarantors (as defined in the Credit Agreement).

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The redemption amount was equal to 102.625% of the principal amount redeemed, reflecting a “call premium”.

YUM Senior Unsecured Notes include eight series of senior unsecured notes issued by Yum!

YUM Senior Unsecured Notes include seven series of senior unsecured notes issued by Yum!

totaling $4.5 billion with fixed interest rates ranging from 3.625% to 7.75%.

Our YUM Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of any of our indebtedness or the failure to pay principal of such indebtedness above certain thresholds will constitute an event of default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.

Our YUM Senior Unsecured Notes contain cross-default provisions

whereby the acceleration of the maturity of any of our indebtedness or the failure to pay principal of such indebtedness above certain thresholds will constitute an event of default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.

On April 1, 2021, Yum!

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Quantitative and Qualitative Disclosures About Market Risk

There were no material changes during the quarter ended June 30, 2021, to the disclosures made in Item 7A of the Company’s 2020 Form 10-K.

There were no material changes during the quarter ended September 30, 2021, to the disclosures made in Item 7A of the Company’s 2020 Form 10-K.

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 2. Management’s Discussion and Analysis