YUM BRANDS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction and Overview The following Management's Discussion and Analysis (“MD&A”), should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, (“2020 Form 10-K”). All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. Yum! Brands, Inc. 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, primarily under the concepts of KFC, Pizza Hut, Taco Bell and The Habit Burger Grill (collectively, the “Concepts”). 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. Of the over 52,000 restaurants, 98% are operated by franchisees. YUM currently consists of four operating segments: • The KFC Division which includes our worldwide operations of the KFC concept • The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept • The Taco Bell Division which includes our worldwide operations of the Taco Bell concept • The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept Through our Recipe for Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of technology and better leverage of our systemwide scale. Our Recipe for Growth is based on four key drivers: • Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success • Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences • Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion • Bold Restaurant Development: Drive market and franchise expansion with strong economics and value Our global citizenship strategy, called the Recipe for Good, reflects our priorities for socially responsible growth, risk management and sustainable stewardship of our people, food and planet. We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. 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 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. Throughout 2020 and continuing into 2021 we have had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as a result of COVID-19. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends. 24 • 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. We believe net new unit growth is useful to investors because we depend on net new units for a significant portion of our growth. Additionally, net new unit growth is generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants. • System sales and System sales excluding the impacts of foreign currency translation (“FX”) reflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants . Sales at franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Increasingly, customers are paying a fee to a third party to deliver or facilitate the ordering of our Concepts' products. We also include in System sales any portion of the amount customers pay these third parties for which the third party is obligated to pay us a license fee as a percentage of such amount. Franchise restaurant sales and fees paid by customers to third parties to deliver or facilitate the ordering of our Concepts' products are not included in Company sales on the Condensed Consolidated Statements of Income; however, any resulting franchise and license fees we receive are included in the Company's revenues. We believe System sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates our primary revenue drivers, Company and franchise same-store sales as well as net unit growth. In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America ( “ GAAP ” ), the Company provides the following non-GAAP measurements: • Diluted Earnings Per Share excluding Special Items (as defined below); • Effective Tax Rate excluding Special Items; • Core Operating Profit. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally. • Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below). These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations. Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special Items when assessing segment performance. Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Condensed Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales (“Company restaurant margin %”) is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry. Certain performance metrics and non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. 25 Results of Operations Summary All comparisons within this summary are versus the same period a year ago. 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: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +11 +6 +7 +14 +10 Pizza Hut Division +4 +4 +1 +13 +11 Taco Bell Division +8 +5 +3 (1) (1) Worldwide +8 +5 +4 +12 +3 Year to date Financial highlights: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +18 +14 +7 +42 +35 Pizza Hut Division +7 +9 +1 +21 +18 Taco Bell Division +14 +12 +3 +16 +16 Worldwide (1) +15 +12 +4 +60 +26 (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. Operating profit results of Habit Burger Grill for the period subsequent to our acquisition are reflected in the consolidated figures. Additionally: • Net new units added were 760 for the quarter and 1,798 for the year to date. • During the quarter, we repurchased 2.6 million shares totaling $330 million at an average price of $126.98. During the year to date, we repurchased 7.3 million shares totaling $860 million at an average price of $117.07. • Foreign currency translation positively impacted Divisional Operating Profit for the quarter and year to date by $12 million and $55 million, respectively. 26 Worldwide GAAP Results Quarter ended Year to date 2021 2020 % B/(W) 2021 2020 % B/(W) Company sales $ 513 $ 486 5 $ 1,509 $ 1,244 21 Franchise and property revenues 716 639 12 2,080 1,760 18 Franchise contributions for advertising and other services 377 323 17 1,105 905 22 Total revenues 1,606 1,448 11 4,694 3,909 20 Company restaurant expenses 421 399 (5) 1,230 1,046 (18) G&A expenses 253 257 1 689 724 5 Franchise and property expenses 31 13 (145) 81 107 25 Franchise advertising and other services expense 375 313 (19) 1,090 887 (23) Refranchising (gain) loss 1 (9) (108) (21) (30) (30) Other (income) expense (2) 4 NM (12) 154 NM Total costs and expenses, net 1,079 977 (10) 3,057 2,888 (6) Operating Profit 527 471 12 1,637 1,021 60 Investment (income) expense, net (51) (10) 386 (52) (67) (22) Other pension (income) expense 1 4 74 6 9 34 Interest expense, net 126 161 23 416 411 (1) Income before income taxes 451 316 43 1,267 668 90 Income tax (benefit) provision (77) 33 330 22 96 77 Net Income $ 528 $ 283 87 $ 1,245 $ 572 118 Diluted EPS (a) $ 1.75 $ 0.92 90 $ 4.10 $ 1.86 120 Effective tax rate (17.0) % 10.5 % 27.5 ppts. 1.8 % 14.4 % 12.6 ppts. (a) See Note 3 for the number of shares used in this calculation. Performance Metrics Unit Count 9/30/2021 9/30/2020 % Increase (Decrease) Franchise 51,070 49,003 4 Company-owned 1,081 1,123 (4) Total 52,151 50,126 4 Quarter ended Year to date 2021 2020 2021 2020 Same-store Sales Growth (Decline) % 5 (2) 12 (8) System Sales Growth (Decline) %, reported 11 1 18 (6) System Sales Growth (Decline) %, excluding FX 8 1 15 (5) 27 Our system sales breakdown by Company and franchise sales was as follows: Quarter ended Year to date 2021 2020 2021 2020 Consolidated Company sales (a) $ 513 $ 486 $ 1,509 $ 1,244 Franchise sales 13,828 12,457 40,341 34,108 System sales 14,341 12,943 41,850 35,352 Foreign Currency Impact on System sales (b) 298 N/A 1,297 N/A System sales, excluding FX $ 14,043 $ 12,943 $ 40,553 $ 35,352 KFC Division Company sales (a) $ 143 $ 130 $ 423 $ 346 Franchise sales 7,735 6,779 22,366 18,138 System sales 7,878 6,909 22,789 18,484 Foreign Currency Impact on System sales (b) 235 N/A 1,012 N/A System sales, excluding FX $ 7,643 $ 6,909 $ 21,777 $ 18,484 Pizza Hut Division Company sales (a) $ 13 $ 20 $ 39 $ 57 Franchise sales 3,157 2,974 9,370 8,491 System sales 3,170 2,994 9,409 8,548 Foreign Currency Impact on System sales (b) 59 N/A 267 N/A System sales, excluding FX $ 3,111 $ 2,994 $ 9,142 $ 8,548 Taco Bell Division Company sales (a) $ 225 $ 218 $ 656 $ 610 Franchise sales 2,918 2,696 8,556 7,464 System sales 3,143 2,914 9,212 8,074 Foreign Currency Impact on System sales (b) 4 N/A 18 N/A System sales, excluding FX $ 3,139 $ 2,914 $ 9,194 $ 8,074 Habit Burger Grill Division Company sales (a) $ 132 $ 118 $ 391 $ 231 Franchise sales 18 8 49 15 System sales 150 126 440 246 Foreign Currency Impact on System sales (b) — N/A — N/A System sales, excluding FX $ 150 $ 126 $ 440 $ 246 (a) Company sales represents sales from our Company-operated stores as presented on our Condensed Consolidated Statements of Income. (b) The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales. Non-GAAP Items Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below. Quarter ended Year to date 2021 2020 2021 2020 Core Operating Profit Growth (Decline) % 3 7 26 (8) Diluted EPS Growth (Decline) %, excluding Special Items 21 27 39 (3) Effective Tax Rate excluding Special Items 18.9 % 19.3 % 19.7 % 19.0 % Quarter ended Year to date 2021 2020 2021 2020 Company restaurant profit $ 92 $ 87 $ 279 $ 198 Company restaurant margin % 17.9 % 17.8 % 18.5 % 15.9 % 28 Quarter ended Year to date Detail of Special Items 2021 2020 2021 2020 Refranchising gain (loss) (a) $ — $ 2 $ 4 $ 8 Costs associated with acquisition and integration of Habit Burger Grill (See Note 2) — — — (9) Impairment of Habit Burger Grill goodwill (See Note 2) — (5) — (144) Unlocking Opportunity Initiative contribution (b) — — — (50) Charges associated with resource optimization (c) (4) (32) (7) (32) Other Special Items Income (Expense) 1 1 2 (6) Special Items Income (Expense) - Operating Profit (3) (34) (1) (233) Charges associated with resource optimization - Other pension (expense) income (c) — (1) 1 (1) Interest expense, net (d) — (34) (34) (34) Special Items Income (Expense) before Income Taxes (3) (69) (34) (268) Tax (Expense) Benefit on Special Items (e) 11 17 18 57 Tax Benefit - Intra-entity transfer of intellectual property (f) 152 25 216 25 Special Items Income (Expense), net of tax $ 160 $ (27) $ 200 $ (186) Average diluted shares outstanding 302 307 304 307 Special Items diluted EPS $ 0.53 $ (0.09) $ 0.66 $ (0.61) Reconciliation of GAAP Operating Profit to Core Operating Profit Consolidated GAAP Operating Profit $ 527 $ 471 $ 1,637 $ 1,021 Special Items Income (Expense) (3) (34) (1) (233) Foreign Currency Impact on Divisional Operating Profit (g) 12 N/A 55 N/A Core Operating Profit $ 518 $ 505 $ 1,583 $ 1,254 KFC Division GAAP Operating Profit $ 314 $ 278 $ 932 $ 655 Foreign Currency Impact on Divisional Operating Profit (g) 10 N/A 46 N/A Core Operating Profit $ 304 $ 278 $ 886 $ 655 Pizza Hut Division GAAP Operating Profit $ 101 $ 89 $ 306 $ 252 Foreign Currency Impact on Divisional Operating Profit (g) 2 N/A 8 N/A Core Operating Profit $ 99 $ 89 $ 298 $ 252 Taco Bell Division GAAP Operating Profit $ 184 $ 186 $ 560 $ 484 Foreign Currency Impact on Divisional Operating Profit (g) — N/A 1 N/A Core Operating Profit $ 184 $ 186 $ 559 $ 484 Habit Burger Grill Division GAAP Operating Profit (Loss) $ 1 $ (7) $ 6 $ (15) Foreign Currency Impact on Divisional Operating Profit (g) — N/A — N/A Core Operating Profit (Loss) $ 1 $ (7) $ 6 $ (15) Reconciliation of Diluted EPS to Diluted EPS excluding Special Items Diluted EPS $ 1.75 $ 0.92 $ 4.10 $ 1.86 Special Items Diluted EPS 0.53 (0.09) 0.66 (0.61) Diluted EPS excluding Special Items $ 1.22 $ 1.01 $ 3.44 $ 2.47 Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items GAAP Effective Tax Rate (17.0) % 10.5 % 1.8 % 14.4 % Impact on Tax Rate as a result of Special Items (e)(f) (35.9) % (8.8) % (17.9) % (4.6) % Effective Tax Rate excluding Special Items 18.9 % 19.3 % 19.7 % 19.0 % 29 (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 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! Brands, Inc. Board of Directors approved the establishment of the Company's new global “Unlocking Opportunity Initiative” including a $100 million investment over the next five years to fight inequality by unlocking opportunities for employees, restaurant team members and communities. The Company contributed $50 million in the quarter ended June 30, 2020 to Yum! Brands Foundation, Inc. (a stand-alone, not-for-profit organization that is not consolidated in the Company's results) as part of these efforts and investment. 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 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 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 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. See Note 11. 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. 30 (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. When determining applicable Core Operating Profit growth percentages, the Core Operating Profit for the current year should be compared to the prior year GAAP Operating Profit adjusted only for any prior year Special Items Income (Expense). Reconciliation of GAAP Operating Profit to Company Restaurant Profit Quarter ended 9/30/2021 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 Less: Franchise and property revenues 391 147 177 1 — 716 Franchise contributions for advertising and other services 158 87 132 — — 377 Add: General and administrative expenses 86 45 40 12 70 253 Franchise and property expenses 20 2 9 — — 31 Franchise advertising and other services expense 154 90 131 — — 375 Refranchising (gain) loss — — — — 1 1 Other (income) expense 1 (3) (2) — 2 (2) Company restaurant profit $ 26 $ 1 $ 53 $ 12 $ — $ 92 Company sales $ 143 $ 13 $ 225 $ 132 $ — $ 513 Company restaurant margin % 18.9 % 6.0 % 23.4 % 8.6 % N/A 17.9 % 31 Quarter ended 9/30/2020 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 Less: Franchise and property revenues 340 134 165 — — 639 Franchise contributions for advertising and other services 116 89 118 — — 323 Add: General and administrative expenses 81 51 33 11 81 257 Franchise and property expenses 7 (2) 8 — — 13 Franchise advertising and other services expense 111 85 117 — — 313 Refranchising (gain) loss — — — — (9) (9) Other (income) expense — 2 (1) (1) 4 4 Company restaurant profit $ 21 $ 2 $ 60 $ 3 $ 1 $ 87 Company sales $ 130 $ 20 $ 218 $ 118 $ — $ 486 Company restaurant margin % 16.3 % 8.2 % 27.8 % 2.2 % N/A 17.8 % Year to date 9/30/2021 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 Less: Franchise and property revenues 1,124 435 518 3 — 2,080 Franchise contributions for advertising and other services 452 273 380 — — 1,105 Add: General and administrative expenses 239 128 104 35 183 689 Franchise and property expenses 49 9 23 — — 81 Franchise advertising and other services expense 438 275 377 — — 1,090 Refranchising (gain) loss — — — — (21) (21) Other (income) expense (5) (7) (5) — 5 (12) Company restaurant profit $ 77 $ 3 $ 161 $ 38 $ — $ 279 Company sales $ 423 $ 39 $ 656 $ 391 $ — $ 1,509 Company restaurant margin % 18.3 % 6.9 % 24.5 % 9.7 % N/A 18.5 % 32 Year to date 9/30/2020 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 Less: Franchise and property revenues 906 393 460 1 — 1,760 Franchise contributions for advertising and other services 309 263 333 — — 905 Add: General and administrative expenses 224 141 108 22 229 724 Franchise and property expenses 69 11 24 — 3 107 Franchise advertising and other services expense 301 256 330 — — 887 Refranchising (gain) loss — — — — (30) (30) Other (income) expense 5 (2) (1) (1) 153 154 Company restaurant profit $ 39 $ 2 $ 152 $ 5 $ — $ 198 Company sales $ 346 $ 57 $ 610 $ 231 $ — $ 1,244 Company restaurant margin % 11.2 % 3.4 % 25.0 % 2.2 % N/A 15.9 % 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. See also the Detail of Special Items section of this MD&A for other items similarly impacting results. COVID-19 In late 2019, a novel strain of coronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. Throughout 2020 and into 2021, COVID-19 has spread throughout the U.S. and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19. These measures include restrictions on travel outside the home and other limitations on business and other activities as well as encouraging social distancing. As a result of COVID-19, we and our franchisees have experienced significant store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities to reduce the spread of COVID-19, as well as our reliance on dine-in sales in the market. Our results were significantly impacted by the impacts of COVID-19 in the year ended December 31, 2020, as evidenced by our worldwide same-store sales decline of 6%. Overall, our sales declines were primarily driven by temporary store closures, which peaked in early April 2020 at about 11,000 restaurants and ended the year at about 830 restaurants, which meant roughly 98% of our system was open in a full or limited capacity at year end. 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 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. 33 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. The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company's results for the balance of 2021. 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 year to date 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. 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 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. (“Grubhub”) In April of 2018 we purchased 2.8 million shares of Grubhub common stock for $200 million. In the quarter ended September 30, 2020, we sold our entire investment in Grubhub and received proceeds of $206 million. 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 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. KFC Division 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 September 30, 2021. 34 Quarter ended Year to date % B/(W) % B/(W) 2021 2020 Reported Ex FX 2021 2020 Reported Ex FX System Sales $ 7,878 $ 6,909 14 11 $ 22,789 $ 18,484 23 18 Same-Store Sales Growth (Decline) % 6 (4) N/A N/A 14 (11) N/A N/A Company sales $ 143 $ 130 10 5 $ 423 $ 346 22 14 Franchise and property revenues 391 340 15 12 1,124 906 24 19 Franchise contributions for advertising and other services 158 116 36 32 452 309 46 38 Total revenues $ 692 $ 586 18 14 $ 1,999 $ 1,561 28 21 Company restaurant profit $ 26 $ 21 28 20 $ 77 $ 39 100 84 Company restaurant margin % 18.9 % 16.3 % 2.6 ppts. 2.4 ppts. 18.3 % 11.2 % 7.1 ppts. 6.8 ppts. G&A expenses $ 86 $ 81 (8) (6) $ 239 $ 224 (7) (4) Franchise and property expenses 20 7 (165) (159) 49 69 29 32 Franchise advertising and other services expense 154 111 (37) (32) 438 301 (45) (36) Operating Profit $ 314 $ 278 14 10 $ 932 $ 655 42 35 % Increase (Decrease) Unit Count 9/30/2021 9/30/2020 Franchise 25,932 24,302 7 Company-owned 290 300 (3) Total 26,222 24,602 7 Company sales and Company restaurant margin % The quarterly and year to date increases in Company sales, excluding the impacts of foreign currency translation, were driven by company same-store sales growth of 9% and 22% for the quarter and year to date, respectively, partially offset by refranchising. The quarterly and year to date increases in Company restaurant margin % were driven by same-store sales growth. 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 6% and 14% for the quarter and year to date, respectively, and unit growth. G&A The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher professional fees. 35 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 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 The Pizza Hut Division has 18,007 units, 64% of which are located outside the U.S. The Pizza Hut Division uses multiple distribution channels including delivery, dine-in and express (e.g. 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 September 30, 2021. Quarter ended Year to date % B/(W) % B/(W) 2021 2020 Reported Ex FX 2021 2020 Reported Ex FX System Sales $ 3,170 $ 2,994 6 4 $ 9,409 $ 8,548 10 7 Same-Store Sales Growth (Decline) % 4 (3) N/A N/A 9 (8) N/A N/A Company sales $ 13 $ 20 (34) (36) $ 39 $ 57 (31) (34) Franchise and property revenues 147 134 9 7 435 393 10 8 Franchise contributions for advertising and other services 87 89 (1) (2) 273 263 4 3 Total revenues $ 247 $ 243 2 — $ 747 $ 713 5 3 Company restaurant profit $ 1 $ 2 (52) (54) $ 3 $ 2 42 32 Company restaurant margin % 6.0 % 8.2 % (2.2) ppts. (2.4) ppts. 6.9 % 3.4 % 3.5 ppts. 3.3 ppts. G&A expenses $ 45 $ 51 10 11 $ 128 $ 141 9 10 Franchise and property expenses 2 (2) (216) (217) 9 11 20 20 Franchise advertising and other services expense 90 85 (6) (5) 275 256 (8) (7) Operating Profit $ 101 $ 89 13 11 $ 306 $ 252 21 18 % Increase (Decrease) Unit Count 9/30/2021 9/30/2020 Franchise 17,954 17,745 1 Company-owned 53 97 (45) Total 18,007 17,842 1 36 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 5% and 7% in the quarter and year to date, respectively. 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 4% and 9%, respectively. G&A 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 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 The Taco Bell Division has 7,619 units, the vast majority of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of September 30, 2021. 37 Quarter ended Year to date % B/(W) % B/(W) 2021 2020 Reported Ex FX 2021 2020 Reported Ex FX System Sales $ 3,143 $ 2,914 8 8 $ 9,212 $ 8,074 14 14 Same-Store Sales Growth % 5 3 N/A N/A 12 (2) N/A N/A Company sales $ 225 $ 218 3 3 $ 656 $ 610 7 7 Franchise and property revenues 177 165 8 7 518 460 13 13 Franchise contributions for advertising and other services 132 118 12 12 380 333 14 14 Total revenues $ 534 $ 501 6 6 $ 1,554 $ 1,403 11 11 Company restaurant profit $ 53 $ 60 (13) (13) $ 161 $ 152 5 5 Company restaurant margin % 23.4 % 27.8 % (4.4) ppts. (4.4) ppts. 24.5 % 25.0 % (0.5) ppts. (0.5) ppts. G&A expenses $ 40 $ 33 (18) (18) $ 104 $ 108 4 4 Franchise and property expenses 9 8 (17) (16) 23 24 5 5 Franchise advertising and other services expense 131 117 (12) (12) 377 330 (14) (14) Operating Profit $ 184 $ 186 (1) (1) $ 560 $ 484 16 16 % Increase (Decrease) Unit Count 9/30/2021 9/30/2020 Franchise 7,143 6,925 3 Company-owned 476 475 — Total 7,619 7,400 3 Company sales and Company restaurant margin % 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 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. 38 G&A 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 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 The Habit Burger Grill Division has 303 units, the vast majority of which are in the U.S. The Company owned 90% of the Habit Burger Grill units in the U.S. 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 Quarter ended Year to date (Expense) / Income 2021 2020 % B/(W) 2021 2020 % B/(W) Corporate and unallocated G&A $ (70) $ (81) 13 $ (183) $ (229) 20 Unallocated Company restaurant expenses — 1 NM — — NM Unallocated Franchise and property expenses — — (70) — (3) 118 Unallocated Refranchising gain (loss) (1) 9 (108) 21 30 (30) Unallocated Other income (expense) (2) (4) NM (5) (153) NM Investment income (expense), net (See Note 9) 51 10 386 52 67 (22) Other pension income (expense) (See Note 10) (1) (4) 74 (6) (9) 34 Interest expense, net (126) (161) 23 (416) (411) (1) 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. 1.8 % 14.4 % 12.6 ppts. Corporate and unallocated G&A 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. 39 Unallocated Other income (expense) 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 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, 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 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 higher share repurchases. Liquidity and Capital Resources Our primary sources of liquidity are cash generated by operations, cash on hand and our Revolving Facility (as defined below). We have historically generated substantial cash flows from the operations of our Company-owned stores and from our extensive franchise operations, which require a limited YUM investment. Our annual operating cash flows have historically been in excess of $1 billion. 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 September 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 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. 40 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 Securitization Notes $ 9 $ 39 $ 39 $ 39 $ 39 $ 944 $ 872 $ 582 $ 564 $ 7 $ 681 $ 3,815 Credit Agreement 5 29 34 48 53 662 15 1,397 2,243 Subsidiary Senior Unsecured Notes 750 750 YUM Senior Unsecured Notes 325 600 $ 800 $ 1,050 $ 1,100 $ 325 $ 275 4,475 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 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. Taco Bell franchise and license agreements and the royalties payable thereunder, existing and future U.S. Taco Bell intellectual property, certain transaction accounts and a pledge of the equity interests in asset-owning Securitization Entities. 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 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). The interest rates applicable to the Term Loan B Facility are 1.75% plus LIBOR or 0.75% plus the Base Rate, at the Borrowers' election. Our Term Loan A Facility and Term Loan B Facility contain cross-default provisions whereby the failure to pay principal of or otherwise perform any agreement or condition under indebtedness of certain subsidiaries with a principal amount in excess of $100 million will constitute an event of default under the Credit Agreement. See Note 11 for details regarding our refinance of the Credit Agreement during the quarter ended March 31, 2021. Subsidiary Senior Unsecured Notes include $750 million aggregate principal amount of 4.75% Subsidiary Senior Unsecured Notes due 2027. Our Subsidiary Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of the indebtedness of certain subsidiaries with a principal amount in excess of $100 million or the failure to pay principal of such indebtedness will constitute an event of default under the Subsidiary Senior Unsecured Notes. On April 23, 2021, the Borrowers issued a notice of redemption for June 1, 2021 for $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes for 2026 (the “2026 Notes”). The redemption amount was equal to 102.625% of the principal amount redeemed, reflecting a “call premium”. See Note 11. YUM Senior Unsecured Notes include seven series of senior unsecured notes issued by Yum! Brands, Inc. totaling $4.5 billion with fixed interest rates ranging from 3.625% to 7.75%. Our YUM Senior Unsecured Notes contain cross-default provisions 41 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! Brands, Inc. issued $1.1 billion aggregate principal amount of 4.625% YUM Senior Unsecured Notes due January 31, 2032 (the “2032 Notes”). We used the net proceeds from the 2032 Notes and cash on hand to fund the redemption of the 2026 Notes discussed above. See Note 11. On June 30, 2021, YUM! Brands, Inc. issued a notice of redemption for August 2, 2021 for $350 million aggregate principal amount of 3.75% YUM Senior Unsecured Notes due November 1, 2021 (the “2021 Notes”). The redemption amount was equal to 100% of the $350 million aggregate principal amount redeemed, plus accrued interest to the date of redemption. See Note 11. New Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates, including the impact on our interest rate swaps with notional amounts of $1.5 billion expiring in March 2025. These interest rate swaps are designated cash flow hedges. We do not anticipate the impact of adopting this standard will be material to our Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.