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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-22 · 288 added, 374 removed, 395 unchanged (63% of the section changed)

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Percentages may not recompute due to rounding.

and its subsidiaries (collectively referred to herein as the "Company", “YUM”, "we", "us" or "our") franchise or operate a system of over 50,000 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.

and its subsidiaries (collectively referred to herein as the “Company”, “YUM”, “we”, “us” or “our”) franchise or operate a system of over 53,000 restaurants in 157 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”).

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

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

Of the over 53,000 restaurants, 98% are operated by franchisees.

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• 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 Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept

• The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept

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Our global citizenship and sustainability strategy, called the Recipe for Good, reflects our priorities for socially responsible growth, risk management and sustainable stewardship of our people, food and planet.

On October 11, 2016, YUM announced our transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands (“YUM's Strategic Transformation Initiatives”) following the spin-off of our China business into an independent publicly-traded company under the name of Yum China Holdings, Inc.

(“Yum China”).

At this time, we established transformation goals to be met by the end of 2019 including becoming:

• More Focused.

By focusing on four growth drivers similar to those that make up our Recipe for Growth above we accelerated system sales growth to 8% in 2019 (excluding the impacts of the 53 rd week and foreign currency translation).

• More Franchised.

The Company successfully increased franchise restaurant ownership to 98% as of the end of 2018.

• More Efficient.

The Company revamped its financial profile, improving the efficiency of its organization and cost structure globally, by:

• R educing annual capital expenditures associated with Company-operated restaurant maintenance and other projects and funded additional capital for new Company units through the refranchising of existing Company units.

Capital spending in 2019 net of refranchising proceeds was $86 million.

• Lowering General and administrative expenses ("G&A") to 1.7% of system sales in 2019;

• Maintaining an optimized capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) net leverage.

From 2017 through 2019, we returned $6.5 billion to shareholders through share repurchases and cash dividends.

We funded these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our ~5.0x EBITDA consolidated net leverage.

We generated pre-tax proceeds of $2.8 billion through our refranchising initiatives to achieve targeted franchise ownership of 98%.

Refer to the Liquidity and Capital Resources section of this MD&A for additional details.

As a result of the impacts on our business due to the COVID-19 pandemic, certain measures we established as part of our transformation goals were negatively impacted in 2020.

For the full year 2020, G&A, excluding the impact of Special Items, represented 1.9% of consolidated system sales, primarily due to sales pressures resulting from the COVID-19 pandemic.

While we took certain austerity measures to reduce G&A spending such as lower travel related costs and a reduction of our Chief Executive Officer's salary, these reductions were offset by accelerated digital and technology spending to enhance our customer experience and off-premise capabilities.

We expect our G&A as a percentage of consolidated system sales to move back toward our historical target of 1.7% as sustained growth resumes.

Additionally, during 2020 our EBITDA was negatively impacted by the impacts of the COVID-19 pandemic, which increased our consolidated leverage, net of available cash.

We currently estimate we will grow back into our ~5.0x EBITDA consolidated net leverage by second quarter 2021.

Going forward, we expect to:

• Maintain a capital structure of ~5.0x EBITDA consolidated net leverage;

• Invest capital in a manner consistent with an asset light, franchisor model;

• Allocate G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives.

We intend to drive long-term growth and shareholder returns primarily through consistent same-store sales growth and new unit development across all of our Concepts.

We intend to support this growth and development through a capital and operating structure that:

• Targets a capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) consolidated net leverage;

• Invests capital in a manner consistent with an asset light, franchisor model;

• Allocates G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives;

• Pays a competitive dividend and returns excess cash to shareholders through share repurchases.

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, 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 (except as noted below), 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 we 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.

Throughout 2020 and 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).

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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.

In 2020, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of our acquisition of The Habit Restaurants, Inc.

In 2021 and 2020, when calculating respective same-store sales growth we also included in our prior year base the sales of stores that were added as a result of our acquisition of The Habit Restaurants, Inc.

on March 18, 2020, and that were open for one year or more.

In 2019, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of the Telepizza strategic alliance in December 2018 and that were open for one year or more.

In 2019, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of the Food Delivery Brands Group, S.A.

(previously named Telepizza Group S.A.

(“Telepizza”)) strategic alliance in December 2018 and that were open for one year or more.

See additional discussion of the acquisition of The Habit Restaurants, Inc.

and Telepizza strategic alliance within this MD&A.

• 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.

• Gross unit openings reflects new openings by us and our franchisees.

Net new unit growth reflects gross 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 factors such as 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 gross unit openings and net new unit growth are useful to investors because we depend on new units for a significant portion of our growth.

Additionally, gross unit openings and net new unit growth are generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants.

• System sales, System sales excluding the impacts of foreign currency translation (“FX”), and System sales excluding FX and the impact of the 53 rd week in 2019 for our U.S.

subsidiaries and certain international subsidiaries that operate on a weekly period calendar.

System sales reflect the results of all restaurants regardless of ownership, including Company-

owned and franchise restaurants.

System sales 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.

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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.

• Company restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales.

Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales.

Restaurant profit is useful to investors as it provides a measure of profitability for our Company-owned restaurants.

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.

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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.

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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 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.

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For discussion of our results of operations for 2020 compared to 2019, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.

For 2020, GAAP diluted EPS decreased 29% to $2.94 per share, and diluted EPS, excluding Special Items, increased 2% to $3.62 per share.

For 2021, GAAP diluted EPS increased 77% to $5.21 per share, and diluted EPS, excluding Special Items, increased 23% to $4.46 per share.

2021 financial highlights:

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KFC Division +16 +11 +8 +33 +29

Pizza Hut Division (7) (6) (6) (9) (9)

Taco Bell Division Even (1) +1 +2 +2

Worldwide (4) (6) Even (22) (8)

Results Excluding 53rd Week in 2019

System Sales, ex FX Core Operating Profit

KFC Division (5) (11)

Pizza Hut Division (6) (8)

Taco Bell Division +13 +11 +5 +9 +9

Pizza Hut Division +6 +7 +4 +16 +13

Worldwide +13 +10 +6 +42 +18

Additionally:

• During the year, net units increased by 183 units (including our acquisition of The Habit Burger Grill in the first quarter of 2020).

• During the year, 4,180 gross units were opened contributing to the addition of 3,057 net new units

• During the year, we repurchased 13 million shares totaling $1,580 million at an average price of $121.70.

• During the year, we recognized pre-tax investment income of $69 million related to the change in fair value of our investment in Grubhub, Inc.

common stock that we sold in the third quarter of 2020, which added $0.17 to diluted EPS for the year.

When coupled with $77 million of pre-tax investment expense in 2019, which resulted in a negative $0.19 impact to diluted EPS, our Grubhub investment favorably impacted year-over-year diluted EPS growth by $0.36.

• Foreign currency translation impacted Divisional Operating Profit unfavorably for the year by $9 million.

• Foreign currency translation favorably impacted Divisional Operating Profit for the year by $54 million.

Amount % B/(W)

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Total revenues 6,584 5,652 5,597 16 1

Restaurant profit $ 304 $ 311 $ 366 (2) (15)

Restaurant margin % 16.8 % 20.1 % 18.3 % (3.3) ppts.

Company restaurant expenses $ 1,725 $ 1,506 $ 1,235 (15) (22)

G&A expenses 1,060 1,064 917 — (16)

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Other (income) expense 2 154 4 NM NM

Total costs and expenses, net 4,445 4,149 3,667 (7) (13)

Operating Profit 2,139 1,503 1,930 42 (22)

Investment (income) expense, net (74) 67 (9) NM NM

Other pension (income) expense 14 4 14 NM 71

Investment (income) expense, net (86) (74) 67 16 211

Other pension (income) expense 7 14 4 48 (235)

Interest expense, net 544 543 486 — (12)

Income before income taxes 1,674 1,020 1,373 64 (26)

Income tax provision 99 116 79 15 (48)

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2021 2020 2019

GAAP Company sales (a)

Company sales (a)

$ 2,106 $ 1,810 $ 1,546

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System sales, excluding FX and 53rd Week $ 56,911 $ 50,558 $ 52,130

GAAP Company sales (a)

Company sales (a)

$ 596 $ 506 $ 571

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System sales, excluding FX and 53rd Week $ 30,365 $ 26,481 $ 27,733

Pizza Hut Division

GAAP Company sales (a)

Taco Bell Division

Company sales (a)

$ 944 $ 882 $ 921

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Foreign Currency Impact on System sales (b)

(5) (259) N/A

System sales, excluding FX 13,263 11,747 11,784

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System sales, excluding FX and 53rd Week $ 13,263 $ 11,747 $ 11,600

Taco Bell Division

GAAP Company sales (a)

Pizza Hut Division

Company sales (a)

$ 46 $ 76 $ 54

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Habit Burger Grill Division (c)

GAAP Company sales (a)

$ 346 N/A N/A

Franchise sales 24 N/A N/A

System sales 370 N/A N/A

Company sales (a)

$ 520 $ 346 N/A

Franchise sales 68 24 N/A

System sales 588 370 N/A

Foreign Currency Impact on System sales (b)

System sales, excluding FX $ 370 N/A N/A

System sales, excluding FX $ 588 $ 370 N/A

(a) Company sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income.

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Effective Tax Rate excluding Special Items 21.4 % 15.9 % 19.8 %

2021 2020 2019

Company restaurant profit $ 381 $ 304 $ 311

Company restaurant margin % 18.1 % 16.8 % 20.1 %

Detail of Special Items 2021 2020 2019

Refranchising gain (loss) (a)

$ 8 $ 12 $ 540

Costs associated with acquisition and integration of Habit Burger Grill (See Note 3)

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Transformation Agreement (b)

YUM's Strategic Transformation Initiatives (c)

Other Special Items Income (Expense) (d)

Other Special Items Income (Expense) (c)

Special Items Income (Expense) - Operating Profit (9) (267) (11)

Charges associated with resource optimization - Other Pension Expense (See Note 5)

Interest expense, net (d) (See Note 5)

Charges associated with resource optimization - Other pension (expense) income (See Note 5)

Interest expense, net (c) (d)

(34) (34) (2)

Special Items Income (Expense) before Income Taxes (42) (303) (13)

Tax Benefit (Expense) on Special Items (e)

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

Tax Benefit - U.S.

Tax Benefit - Intra-entity transfer of intellectual property (see Note 5)

Special Items Income (Expense), net of tax $ 226 $ (210) $ 183

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Special Items diluted EPS $ 0.75 $ (0.68) $ 0.59

Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week

(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, 2020 and 2019 as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018.

During the years ended December 31, 2021, 2020 and 2019, we recorded net refranchising gains of $3 million, $8 million and $12 million, respectively, that have been reflected as Special Items.

Additionally, during the years ended December 31, 2021, 2020 and 2019, we recorded net refranchising gains of $32 million, $26 million, and $25 million, respectively, that have not been reflected as Special Items.

These gains relate to

refranchising of restaurants in 2021, 2020 and 2019 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) In May 2017, we reached an agreement with our Pizza Hut U.S.

franchisees that improved brand marketing alignment, accelerated enhancements in operations and technology and that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees.

In connection with this agreement, we recognized charges of $5 million and $13 million in the years ended December 31, 2020 and 2019, respectively, related to operating investments required as part of this agreement.

The majority of these costs were recorded within Franchise and property expenses.

Based on their nature and the significance in related spending in 2017, these charges have been reflected as Special Items.

(c) During the second quarter of 2019, we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses.

Consistent with prior adjustments to the recorded contingent consideration we have reflected this as a Special Item.

(d) On June 1, 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.

On September 9, 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.

We reflected the call premiums and charges associated with the redemptions 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.

During the year ended December 31, 2021, we recorded as a Special Item an $8 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.

Further, in the fourth quarter of 2019, we increased our Income tax provision by $34 million to record a reserve against the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item.

Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week Year

2021 2020 2019

GAAP Operating Profit $ 2,139 $ 1,503 $ 1,930

Special Items Income (Expense) - Operating Profit (9) (267) (11)

Foreign Currency Impact on Divisional Operating Profit (h)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit 2,094 1,779 1,941

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GAAP Operating Profit $ 1,230 $ 922 $ 1,052

Foreign Currency Impact on Divisional Operating Profit (h)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit 1,185 931 1,052

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Core Operating Profit, excluding 53rd Week $ 1,185 $ 931 $ 1,044

Pizza Hut Division

Taco Bell Division

GAAP Operating Profit $ 758 $ 696 $ 683

Foreign Currency Impact on Divisional Operating Profit (h)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit 757 696 683

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Core Operating Profit, excluding 53rd Week $ 757 $ 696 $ 670

Taco Bell Division

Pizza Hut Division

GAAP Operating Profit $ 387 $ 335 $ 369

Foreign Currency Impact on Divisional Operating Profit (h)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit 379 335 369

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Habit Burger Grill Division

GAAP Operating Profit $ (22) N/A N/A

Foreign Currency Impact on Divisional Operating Profit (h)

Core Operating Profit $ (22) N/A N/A

GAAP Operating Profit $ 2 $ (22) N/A

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit $ 2 $ (22) N/A

Reconciliation of Diluted EPS to Diluted EPS excluding Special Items

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GAAP Effective Tax Rate 5.9 % 11.4 % 5.7 %

Impact on Tax Rate as a result of Special Items (e)(f)(g)

(4.5) % (14.1) % (4.2) %

Impact on Tax Rate as a result of Special Items (15.5) % (4.5) % (14.1) %

Effective Tax Rate excluding Special Items 21.4 % 15.9 % 19.8 %

As such, refranchising gains and losses recorded during 2020 as Special Items primarily include true-ups to refranchising gains and losses recorded prior to December 31, 2018.

Refranchising gains and losses recorded during 2019 as Special Items primarily include gains or losses associated with sales of underlying real estate associated with stores that were franchised as of December 31, 2018, or true-ups to refranchising gains and losses recorded prior to December 31, 2018.

During the years ended December 31, 2020, 2019 and 2018, we recorded net refranchising gains of $8 million, $12 million and $540 million, respectively, that have been reflected as Special Items.

Additionally, during the years ended December 31, 2020, and 2019 we recorded refranchising gains of $26 million and $25 million, respectively, that have not been reflected as Special Items as such amounts are considered indicative of our expected ongoing refranchising activity.

These net gains relate to the refranchising of restaurants in 2020 and 2019 that were not part of our aforementioned plans to achieve 98% franchise ownership.

(b) In May 2017, we reached an agreement with our Pizza Hut U.S.

In connection with this agreement, we recognized charges of $5 million, $13 million and $6 million in the years ended December 31, 2020, 2019 and 2018, respectively, related to operating investments required as part of this agreement.

The majority of these costs were recorded within Franchise and property expenses.

Based on their nature and the significance in related spending in 2017, these charges have been reflected as Special Items.

(c) In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated spin-off of our China business (the "Separation") on October 31, 2016, into an independent, publicly-traded company under the name of Yum China Holdings, Inc.

("Yum China").

Major features of the Company’s strategic transformation plans involved being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure.

We incurred charges of $8 million related to our Strategic Transformation Initiatives in the year ended December 31, 2018, primarily recorded in G&A, including contract termination costs and relocation and severance costs for restaurant-support center employees.

Due to the scope of these initiatives as well as the significance in related spending in 2017 and 2016, these charges were recognized as Special Items.

(d) During the second quarter of 2019, we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses.

Consistent with prior adjustments to the recorded contingent consideration we have reflected this as a Special Item.

(e) Tax Benefit (Expense) 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, we increased our Income tax provision by $34 million in the fourth quarter of 2019 to record a reserve against and by $19 million in the second quarter of 2018 to correct an error related to the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item.

(f) In the fourth quarter of 2019, we completed intra-entity transfers of certain intellectual property rights.

As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom (“UK”), we received a step-up in tax basis to current fair value under applicable tax law.

To the extent this step-up in tax basis will be amortizable against future taxable income, we recognized one-time deferred tax benefits of $3 million and $226 million as a Special Item in the quarters ended December 31, 2020 and December 31, 2019, respectively.

During the quarter ended September 30, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%.

As a result, in the quarter ended September 30, 2020, we remeasured the related deferred tax asset originally recorded in the fourth quarter of 2019.

This remeasurement resulted in the recognition of an additional $25 million deferred tax benefit as a Special Item in the quarter ended September 30, 2020.

(g) In 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") that was reported as a Special Item.

We also recorded a Special Items tax benefit of $31 million in 2018 related to 2018 U.S.

foreign tax credits that became realizable directly as a result of the impact of deemed repatriation tax expense associated with the Tax Act.

(h) 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 Operating Profit, prior to adjustment for the prior year FX impact.

Items Impacting Reported Results and/or Expected to Impact Future Results

The following items impacted reported results in 2020 and/or 2019 and/or are expected to impact future results.

(a) 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

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

GAAP Operating Profit (Loss) $ 1,230 $ 758 $ 387 $ 2 $ (238) $ 2,139

Franchise and property revenues 1,557 742 597 4 — 2,900

Franchise contributions for advertising and other services 640 552 385 1 — 1,578

General and administrative expenses 377 174 201 48 260 1,060

Franchise and property expenses 74 33 11 — (1) 117

Franchise advertising and other services expense 627 553 395 1 — 1,576

Refranchising (gain) loss — — — — (35) (35)

Other (income) expense (5) 1 (9) 1 14 2

Company restaurant profit $ 106 $ 225 $ 3 $ 47 $ — $ 381

Company sales $ 596 $ 944 $ 46 $ 520 $ — $ 2,106

Company restaurant margin % 17.7 % 23.9 % 6.8 % 9.0 % N/A 18.1 %

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

GAAP Operating Profit (Loss) $ 922 $ 696 $ 335 $ (22) $ (428) $ 1,503

Franchise and property revenues 1,295 662 552 1 — 2,510

Franchise contributions for advertising and other services 471 487 374 — — 1,332

General and administrative expenses 346 158 215 33 312 1,064

Franchise and property expenses 91 33 17 — 4 145

Franchise advertising and other services expense 465 484 365 — — 1,314

Refranchising (gain) loss — — — — (34) (34)

Other (income) expense 9 3 (3) (1) 146 154

Company restaurant profit $ 67 $ 225 $ 3 $ 9 $ — $ 304

Company sales $ 506 $ 882 $ 76 $ 346 $ — $ 1,810

Company restaurant margin % 13.2 % 25.5 % 5.1 % 2.6 % N/A 16.8 %

KFC Division Taco Bell Division Pizza Hut Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 1,052 $ 683 $ 369 $ (174) $ 1,930

Franchise and property revenues 1,390 673 597 — 2,660

Franchise contributions for advertising and other services 530 485 376 — 1,391

General and administrative expenses 346 181 202 188 917

Franchise and property expenses 89 38 39 14 180

Franchise advertising and other services expense 520 481 367 — 1,368

Refranchising (gain) loss — — — (37) (37)

Other (income) expense — (4) (1) 9 4

Company restaurant profit $ 87 $ 221 $ 3 $ — $ 311

Company sales $ 571 $ 921 $ 54 $ — $ 1,546

Company restaurant margin % 15.3 % 24.0 % 4.2 % N/A 20.1 %

Items Impacting Reported Results and/or Reasonably Likely to Impact Future Results

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

See also the Detail of Special Items section of this M&DA for other items similarly impacting results.

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, COVID-19 has spread throughout the U.S.

Throughout 2020 and 2021, COVID-19 spread throughout the U.S.

and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19.

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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.

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%.

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.

Overall, our sales declines have been primarily driven by temporary store closures, which peaked in early April at about 11,000 restaurants.

From that date, temporarily closed restaurants gradually reopened until, as of the end of our third quarter, we had approximately 1,100 units temporarily closed.

We continued to see reopenings through the balance of the fourth-quarter;

however, due to the second-wave impacts of COVID-19, including increased government restrictions, temporary closures climbed back to approximately 1,000 as of February 4, 2021.

As a result, roughly 98% of our system is currently open in a full or limited capacity.

Geographies experiencing temporary closures have evolved and we are now seeing more closures in Europe, Canada and the Middle East, offset by some re-openings in Latin America and India.

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

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

We have been able to mitigate the loss of sales due to 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.

Our worldwide same-store sales decline of 1% for the fourth quarter of 2020 represents an improvement from the same-store sales declines of 7%, 15% and 2% in the respective first, second and third quarters of 2020.

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 2020 at about 830 restaurants.

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 throughout 2021 we were 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, each of our Concepts recorded positive same-store sales growth for the year, contributing to our worldwide same-store sales increase of 10% in 2021 which was driven by strong performance in developed markets such as North America and the United Kingdom.

As we ended the year, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in Asia.

We also saw strong gross unit openings of 4,180 units for the year ended December 31, 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.

The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company's 2022 results.

The ultimate pace of 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 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.

The ultimate pace of our recovery will largely depend on 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 2021 and 2020.

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.

Net New Unit Growth

In addition to the restaurants that have been, or continue to be, temporarily closed during 2020, the uncertainties associated with COVID-19 contributed to fewer new restaurant openings and increased permanent restaurant closures during 2020 versus both our recent history and expectations.

In addition to permanent closures due to the impacts of COVID-19, the Pizza Hut system also experienced increased permanent closures of certain asset types primarily due to business model pressures as discussed in the following paragraph.

For the year ended December 31, 2020, our Concepts collectively opened 2,423 new units while permanently closing 2,516 units.

While net new unit growth at each of KFC, Taco Bell and The Habit Burger Grill was lower than expected in 2020, each Concept realized positive net new unit growth for the year.

Pizza Hut experienced a net new unit decline of 1,064 restaurants in

2020, largely due to 1,745 global closures, including 867 closures in the U.S., nearly 300 of which were stores operated by NPC International, Inc.

("NPC") as discussed in the following paragraph.

These global closures, which were largely underperforming or low volume casual dining-based and license units, have hastened the transition of the Pizza Hut system to a more delivery-focused and modern estate, which we believe will optimize our ability to grow the Pizza Hut system going forward.

However, these and continued closures within our Pizza Hut Division will present a headwind to the Division's net unit and operating profit growth in 2021.

NPC, our largest Pizza Hut U.S.

franchisee, filed voluntary petitions on July 1, 2020, to restructure under Chapter 11 of the U.S.

Bankruptcy Code in the U.S.

Bankruptcy Court for the Southern District of Texas.

In connection with the bankruptcy filing, we consented to up to 300 mutually selected closures of underperforming units, primarily dine-in assets.

These units were largely closed during the quarter ended September 30, 2020.

In January 2021, Flynn Restaurant Group, an existing YUM franchisee, announced its intention to acquire NPC’s approximately 950 remaining Pizza Hut U.S.

Franchise Bad Debt Expense

We experienced significant quarterly fluctuations in franchise bad debt expense in 2021 and 2020 due in large part to the uncertainties associated with COVID-19.

During the year ended December 31, 2021, we recognized net bad debt recoveries of $8 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 $8 million compared to $13 million of net bad debt expense recognized in the year ended December 31, 2020, and thus positively impacted Operating Profit growth by $21 million year-over-year.

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.

On August 16, 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 Consolidated Statements of Income and recognized pre-tax investment income of $87 million, in the year ended December 31, 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 Consolidated Statements of Income.

For the years ended December 31, 2020, 2019 and 2018, we recognized pre-tax investment income of $69 million, pre-tax investment expense of $77 million and pre-tax investment income of $14 million, respectively.

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.

We have reflected the ongoing results of Habit Burger Grill’s operations from March 18, 2020 through December 31, 2020, in our Financial Statements.

These ongoing results had an insignificant impact on our consolidated results of operations.

Additionally, we have included the system sales of Habit Burger Grill for the period from March 18, 2020 through December 31, 2020, in our consolidated system sales and reflected Habit Burger Grill’s same-store sales results for this same period in our consolidated same-store sales results, as applicable, for the year ended December 31, 2020.

Consolidated system sales in 2020, excluding the impact of FX and the lapping of the 53rd week in 2019, were positively impacted by one percentage point due to the inclusion of Habit Burger Grill while consolidated same-store sales results were not impacted.

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.

As we continued to refine our preliminary purchase price allocation for Habit in the quarter ended September 30, 2020, the after-tax impairment charge was adjusted upward by $4 million.

We have reflected this impairment as a Special Item, resulting in a Special Item EPS charge for the year ended December 31, 2020, of approximately $0.36.

For the years ended December 31, 2020 and 2019, we recognized pre-tax investment income of $69 million and pre-tax investment expense of $77 million, respectively, related to changes in fair value of our investment in Grubhub common stock.

Extra Week in 2019

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The 53rd week in 2019 favorably impacted Diluted EPS by $0.05 per share.

KFC Division Pizza Hut Division Taco Bell Division Total

KFC Division Taco Bell Division Pizza Hut Division Total

Company sales

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% B/(W) % B/(W)

2020 2019 2018 Reported Ex FX Ex FX and 53rd Week in 2019 Reported Ex FX Ex FX and 53 rd Week in 2019

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

System Sales $ 31,365 $ 26,289 $ 27,900 19 16 (6) (5) (5)

Same-Store Sales Growth % (9) N/A N/A 4 N/A N/A

Same-Store Sales Growth % 11 N/A (9) N/A N/A

Company sales $ 596 $ 506 $ 571 18 12 (11) (9) (8)

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Total revenues $ 2,793 $ 2,272 $ 2,491 23 18 (9) (8) (7)

Restaurant profit $ 67 $ 87 $ 119 (24) (24) (22) (26) (23) (24)

Restaurant margin % 13.2 % 15.3 % 13.3 % (2.1) ppts.

Company restaurant profit $ 106 $ 67 $ 87 58 48 (24) (24) (22)

Company restaurant margin % 17.7 % 13.2 % 15.3 % 4.5 ppts.

G&A expenses $ 377 $ 346 $ 346 (9) (7) — (1) (1)

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Total 26,934 25,000 24,104 8 4

Company sales and Restaurant margin percentage

In 2020, the decrease in Company sales, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by refranchising and company same-store sales declines of 6%, partially offset by net new unit growth.

In 2020, the decrease in Restaurant margin percentage was driven by transaction declines and increased restaurant costs, including one-time bonuses and other costs incurred as a result of COVID-19, partially offset by the favorable impact of higher guest check.

Company sales and Company restaurant margin %

In 2021, the increase in Company sales, excluding the impacts of foreign currency translation, was driven by company same-store sales growth of 17%, partially offset by refranchising.

In 2021, the increase in Company restaurant margin percentage was driven by company same-store sales growth, partially offset by higher restaurant operating costs.

Franchise and property revenues

In 2020, the decrease in Franchise and property revenues, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by franchise same-store sales declines of 9%, partially offset by net new unit growth.

In 2020, the increase in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by higher professional fees, higher share-based compensation and higher salaries, partially offset by lower travel related costs and lower incentive compensation.

In 2021, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 11% and unit growth.

In 2021, the 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 share-based compensation.

Operating Profit

In 2020, the decrease in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by same-store sales declines, partially offset by net new unit growth.

Pizza Hut Division

The Pizza Hut Division has 17,639 units, 63% of which are located outside the U.S.

Over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2020.

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.

On December 30, 2018, the Company consummated a strategic alliance with Telepizza Group S.A.

(“Telepizza”), to be the master franchisee of Pizza Hut in Latin America and portions of Europe, which added approximately 1,300 Telepizza units to our Pizza Hut Division unit count on December 30, 2018.

The addition of the Telepizza units positively impacted 2019 Pizza Hut Division system sales growth, excluding the impacts of foreign currency and 53rd week, by 5 percentage points.

The impact to Operating Profit for the year ended December 31, 2019, as a result of the strategic alliance was not significant.

In 2021, the increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth, unit growth, and current year net bad debt recoveries lapping prior year net bad debt expense for past due franchise receivables, partially offset by higher G&A.

Taco Bell Division

The Taco Bell Division has 7,791 units, 90% of which are in the U.S.

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

as of the end of 2021.

% B/(W) % B/(W)

2020 2019 2018 Reported Ex FX Ex FX and 53rd Week in 2019 Reported Ex FX Ex FX and 53 rd Week in 2019

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

System Sales $ 13,280 $ 11,745 $ 11,784 13 13 — — 1

Same-Store Sales Growth (Decline) % (6) N/A N/A — N/A N/A

Same-Store Sales Growth % 11 N/A (1) N/A N/A

Company sales $ 944 $ 882 $ 921 7 7 (4) (4) (3)

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Total revenues $ 2,238 $ 2,031 $ 2,079 10 10 (2) (2) (1)

Restaurant profit $ 3 $ 3 $ — 72 67 69 NM NM NM

Restaurant margin % 5.1 % 4.2 % (0.1) % 0.9 ppts.

Company restaurant profit $ 225 $ 225 $ 221 — — 2 2 4

Company restaurant margin % 23.9 % 25.5 % 24.0 % (1.6) ppts.

G&A expenses $ 174 $ 158 $ 181 (11) (10) 13 13 12

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Total 7,791 7,427 7,363 5 1

Company sales

In 2020, the increase in Company sales, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by the acquisition of stores in the UK in the quarter ended September 30, 2019, and company same-store sales growth of 4%.

Company sales and Company restaurant margin %

In 2021, the increase in Company sales was driven by same-store sales growth of 7% and unit growth partially offset by refranchising.

In 2021, the decrease in Company restaurant margin percentage was driven by higher restaurant operating costs, principally labor and commodities, partially offset by same-store sales growth.

Franchise and property revenues

In 2020, the increase in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by higher share-based compensation, higher professional fees, higher incentive compensation and higher headcount, partially offset by lower travel related costs.

In 2021, the increase in Franchise and property revenues was driven by franchise same-store sales growth of 11% and unit growth.

In 2021, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our annual incentive compensation programs, higher professional fees and higher charitable contributions, partially offset by lower headcount and lower share-based compensation.

Operating Profit

In 2020, the decrease in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by same-store sales declines, higher G&A, net new unit declines, and the write-off of software no longer being used, partially offset by recoveries on past due receivables.

Taco Bell Division

The Taco Bell Division has 7,427 units, 92% of which are in the U.S.

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

as of the end of 2020.

In 2021, the increase in Operating Profit was driven by same-store sales growth and unit growth, partially offset by higher restaurant operating costs and higher G&A costs.

Pizza Hut Division

The Pizza Hut Division has 18,381 units, 64% of which are located outside the U.S.

Over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2021.

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.

On December 30, 2018, the Company consummated a strategic alliance with Food Delivery Brands Group, S.A.

(previously named Telepizza Group S.A.

(“Telepizza”)), to be the master franchisee of Pizza Hut in Latin America and portions of Europe, which added approximately 1,300 Telepizza units to our Pizza Hut Division unit count on December 30, 2018.

The addition of the Telepizza units positively impacted 2019 Pizza Hut Division system sales growth, excluding the impacts of foreign currency and 53rd week, by 5 percentage points.

The impact to Operating Profit for the year ended December 31, 2019, as a result of the strategic alliance was not significant.

% B/(W) % B/(W)

2020 2019 2018 Reported Ex FX Ex FX and 53rd Week in 2019 Reported Ex FX Ex FX and 53 rd Week in 2019

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

System Sales $ 12,955 $ 11,955 $ 12,900 8 6 (7) (7) (6)

Same-Store Sales Growth % (1) N/A N/A 5 N/A N/A

Same-Store Sales Growth (Decline) % 7 N/A (6) N/A N/A

Company sales $ 46 $ 76 $ 54 (40) (42) 42 41 42

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Total revenues $ 1,028 $ 1,002 $ 1,027 3 1 (2) (2) (1)

Restaurant profit $ 225 $ 221 $ 244 2 2 4 (9) (9) (11)

Restaurant margin % 25.5 % 24.0 % 23.5 % 1.5 ppts.

Company restaurant profit $ 3 $ 3 $ 3 (19) (24) 72 67 69

Company restaurant margin % 6.8 % 5.1 % 4.2 % 1.7 ppts.

G&A expenses $ 201 $ 215 $ 202 6 7 (7) (7) (8)

7 unchanged sentences

Total 18,381 17,639 18,703 4 (6)

Company sales and Restaurant margin percentage

In 2020, the decrease in Company Sales, excluding the impact of lapping the 53rd week in 2019, was driven by company same-store sales declines of 3% and refranchising offset by net new unit growth.

In 2020, the increase in restaurant margin percentage was driven by the favorable impact of higher guest check, lower restaurant operating costs such as labor and repairs and maintenance costs due to dining room closures as a result of COVID-19 and lower advertising costs, partially offset by transaction declines and a COVID-19 related bonus for restaurant employees.

Company sales

In 2021, the decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the refranchising of stores in the United Kingdom, partially offset by company same-store sales growth of 7%.

Franchise and property revenues

In 2020, Franchise and property revenues were flat for the year, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, as net new unit growth was offset by franchise same-store sales declines of 1%.

In 2020, the decrease in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by lower incentive compensation, lower travel related costs, decreased professional fees and decreased salaries, partially offset by higher share-based compensation.

In 2021, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 7%.

In 2021, the decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower headcount and lower share-based compensation, partially offset by higher expenses related to our annual incentive compensation programs.

Operating Profit

In 2020, the increase in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by lower G&A costs, net new unit growth and lower restaurant operating costs partially offset by same-store sales declines and higher restaurant asset impairment charges.

In 2021, the 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.

Habit Burger Grill Division

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as of December 31, 2021.

From March 18, 2020, the date we acquired The Habit Burger Grill, through December 31, 2020, we reported a same-store sales decline of 11%.

Total revenues and Operating loss were $347 million and $22 million, respectively, for the period from March 18, 2020 through December 31, 2020.

During this period we also opened 14 gross new restaurants.

2021 2020 Reported Ex FX

System Sales $ 588 $ 370 59 59

Same-Store Sales Growth % 16 N/A

Total revenues $ 525 $ 347 51 51

Operating Profit (Loss) $ 2 $ (22) 111 111

% Increase (Decrease)

Unit Count 2021 2020 2021

Franchise 42 34 24

Company-owned 276 253 9

Total 318 287 11

Corporate & Unallocated

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Corporate and unallocated G&A $ (260) $ (312) $ (188) 17 (66)

Unallocated Company restaurant expenses — — 3 NM (95)

Unallocated Franchise and property expenses 1 (4) (14) 115 68

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Investment income (expense), net (See Note 5)

74 (67) 9 NM NM

86 74 (67) 16 211

Other pension income (expense) (See Note 15)

(14) (4) (14) NM 71

(7) (14) (4) 48 (235)

Interest expense, net (544) (543) (486) — (12)

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Corporate and unallocated G&A

In 2020, the increase in Corporate and unallocated G&A expense was driven by charitable contributions of $50 million related to our “Unlocking Opportunity Initiative” and $25 million related to COVID-19 relief (see Note 5).

The increase was also driven by costs associated with a voluntary early retirement program offered to our U.S.

based employees and a related worldwide severance program (see Note 5), higher professional fees including costs associated with the acquisition of The Habit Burger Grill and higher share-based compensation, partially offset by lower expenses related to our incentive and deferred compensation programs.

Unallocated Franchise and property expenses

Unallocated Franchise and property expenses reflect charges related to the Pizza Hut U.S.

Transformation Agreement and/or the KFC U.S.

Acceleration Agreement.

In 2021, the decrease in Corporate and unallocated G&A expenses was driven by lapping higher prior year cost for charitable contributions including $50 million related to our “Unlocking Opportunity Initiative” and $25 million related to COVID-19 relief (see Note 5).

The decrease was also driven by lapping prior year costs associated with a voluntary early retirement programs offered to our U.S.

based employees and a worldwide severance program (see Note 5), offset by higher current year expenses related to our annual incentive compensation programs and increased headcount supporting our technology initiatives.

Unallocated Other income (expense)

Unallocated Other income (expense) for the year ended December 31, 2020, includes a charge of $144 million related to the impairment of Habit Burger Grill goodwill (see Note 3).

The year ended December 31, 2019, includes a settlement of contingent consideration charge of $8 million associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses (see Note 8).

Interest expense, net

The increase in Interest expense, net for 2020 was driven by increased outstanding borrowings and $34 million of premiums paid and other costs associated with extinguishment of debt (see Note 5), partially offset by a decrease in the rate on our floating rate debt.

The increase in Interest expense, net for 2021 was primarily driven by increased outstanding borrowings offset by a lower weighted average-interest rate.

Consolidated Cash Flows

Net cash provided by operating activities was $1,305 million in 2020 compared to $1,315 million in 2019.

The decrease was largely driven by a decrease in Operating Profit before Special Items and higher charitable contributions reflected as Special Items, partially offset by lower advertising spending.

Net cash used in investing activities was $335 million in 2020 compared to $88 million in 2019.

The increase was primarily driven by the acquisition of The Habit Restaurants, Inc.

and lower refranchising proceeds in the current year, partially offset by proceeds from the sale of our investment in Grubhub, Inc.

common stock and lower capital spending.

Net cash used in financing activities was $738 million in 2020 compared to $938 million in 2019.

The decrease was primarily driven by lower share repurchases, partially offset by lower net borrowings.

Consolidated Financial Condition

Our Consolidated Balance Sheet was impacted by the acquisition of The Habit Restaurants, Inc.

(See Note 3).

Net cash provided by operating activities was $1,706 million in 2021 versus $1,305 million in 2020.

The increase was largely driven by an increase in Operating profit before Special Items, the lapping of charitable contributions reflected as Special Items and an increase in upfront fees received, partially offset by the timing of accounts receivable collections and higher advertising spending.

Net cash used in investing activities was $173 million in 2021 versus $335 million in 2020.

The change was primarily driven by the lapping of our prior year acquisition of The Habit Restaurants, Inc., higher refranchising proceeds in the current year and the current year sale of certain mutual fund investments, 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 $1,767 million in 2021 versus $738 million in 2020.

The change was primarily driven by higher share repurchases, partially offset by higher net borrowings.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash generated by operations and our revolving facilities.

As of December 31, 2020, we had Cash and cash equivalents of $730 million.

We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores.

Our annual operating cash flows have historically been in excess of $1 billion.

Decreases in operating cash flows from the operation of fewer Company-owned stores in recent years due to refranchising have been offset, and are expected to continue to be offset, with savings generated from decreased capital investment and G&A required to support company operations.

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

Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM.

Our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur and Company sales are paid in cash or by credit card (which is quickly converted into cash).

Substantial amounts of cash received have historically been either returned to shareholders or invested in new restaurant assets which are non-current in nature.

As part of our working capital strategy, we negotiate favorable credit terms with vendors and, as a result, our on-hand inventory turns faster than the related short-term liabilities.

Accordingly, it is not unusual for current liabilities to exceed current assets.

We believe such a deficit has no significant impact on our liquidity or operations.

During 2020 net cash provided by operating activities was negatively impacted by lower Operating Profit due in large part to the impacts of the COVID-19 pandemic.

In light of the impacts on our business from the COVID-19 pandemic, the Company took the following steps to bolster our cash balance and increase our liquidity position during 2020.

• During the first quarter of 2020, we suspended our share repurchase program, pursuant to which the Company's Board of Directors previously authorized repurchases of up to $2 billion of the Company's common stock through June 30, 2021, (the “Share Repurchase Program”).

Commensurate with the performance of the business, health of our balance sheet and liquidity position, including our repayment of remaining borrowings under our Revolving Facility during the quarter ended September 30, 2020, and our confidence that we will grow back into our ~5.0x EBITDA consolidated net leverage target by second-quarter 2021, we resumed share repurchases in the fourth quarter of 2020.

• On March 24, 2020, Pizza Hut Holdings, LLC, KFC Holding Co.

and Taco Bell of America, LLC (collectively, the “ Borrowers ” ), each a wholly-owned subsidiary of Yum!

Brands, Inc., borrowed $525 million under our existing Revolving Facility.

This borrowing, together with $425 million borrowed under the Revolving Facility on March 18, 2020, to fund amounts associated with the acquisition of The Habit Restaurants, Inc., resulted in an aggregate of $950 million outstanding under the Revolving Facility as of March 31, 2020.

In the second and third quarters of 2020 we made repayments of $375 million and $575 million, respectively, and as of both December 31, 2020 and September 30, 2020, our Revolving Facility was undrawn.

The current interest rate for borrowings under the Revolving Facility is LIBOR plus 1.50%.

• On April 1, 2020, Yum!

issued $600 million aggregate principal amount of 7.75% YUM Senior Unsecured Notes due April 1, 2025.

See Note 11 for more detail.

• On September 25, 2020, Yum!

issued $1,050 million aggregate principal amount of 3.625% YUM Senior Unsecured Notes due March 15, 2031.

The net proceeds from the issuance, together with cash on hand, were used to repay $1,050 million aggregate principal amount of Subsidiary Senior Unsecured Notes due in 2024.

See Note 11 for more detail.

Debt Instruments

Our annual operating cash flows have been in excess of $1.3 billion in each of the past three years and we expect that to continue to be the case in 2022.

It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive 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 (see Note 11) that was undrawn as of December 31, 2021.

We believe that our ongoing cash from operations, cash on hand, which was approximately $500 million at December 31, 2021, and availability under our Revolving Facility will be sufficient to fund our cash requirements over the next twelve months.

Our material cash requirements include the following contractual and other obligations.

Debt Obligations and Interest Payments

As of December 31, 2021, approximately 93%, including the impact of interest rate swaps, of our $11.3 billion of total debt outstanding, excluding finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.2%.

We are currently managing towards 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 currently target a capital structure which reflects consolidated leverage, net of available cash, 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.

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Total $ 68 $ 398 $ 87 $ 692 $ 1,606 $ 1,640 $ 1,980 $ 565 $ 807 $ 1,732 $ 1,100 $ 325 $ 275 $ 11,275

Securitization Notes include four 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%.

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.

Credit Agreement includes senior secured credit facilities consisting of a $431 million Term Loan A facility (the “Term Loan A Facility"), a $1.9 billion Term Loan B facility (the “Term Loan B Facility”) and a $1.0 billion revolving facility (the “Revolving Facility”) issued by the Borrowers.

Our Revolving Facility was undrawn as of December 31, 2020.

The interest rates applicable to the Term Loan A Facility and Revolving Facility range from 1.25% to 1.75% plus LIBOR or from 0.25% to

0.75% 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.

Subsidiary Senior Unsecured Notes include $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes due 2026 and $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.

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

totaling $3.7 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.

See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes .

Contractual Obligations

Our significant contractual obligations and payments as of December 31, 2020, included:

Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

Long-term debt obligations (a)

$ 14,037 $ 945 $ 2,993 $ 3,249 $ 6,850

Finance leases (b)

102 9 19 16 58

Operating leases (b)

1,225 128 256 218 623

Purchase obligations (c)

473 230 141 67 35

Benefit plans and other (d)

197 29 36 34 98

Total contractual obligations $ 16,034 $ 1,341 $ 3,445 $ 3,584 $ 7,664

(a) Amounts include maturities of debt outstanding as of December 31, 2020, and expected interest payments on those outstanding amounts on a nominal basis.

Interest payments on the outstanding long-term debt in the table above total $3,384 million, with $464 million due within the next twelve months on the outstanding amounts on a nominal basis.

The estimated interest payments related to the variable rate portion of our debt are based on current LIBOR interest rates.

(b) These obligations, which are shown on a nominal basis and represent the non-cancellable term of the lease, relate primarily to approximately 800 Company-owned restaurants and 350 units that we sublease land, building or both to our franchisees.

(c) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including:

See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.

Operating and Finance Leases

Payments required under our operating and finance leases total $1,252 million, of which $141 million is payable within the next 12 months.

These amounts are on a nominal basis and include payments related to lease renewal options we are reasonably certain to exercise.

These leases relate primarily to approximately 700 Company-owned restaurants and approximately 300 leased restaurants for which we sublease land, building or both to our franchisees.

Capital Expenditures

We remain committed to maintaining our asset light, franchisor model that includes at least a 98% franchise mix.

Our allocation strategy for capital expenditures includes:

• Run-rate capital expenditures consisting of company restaurant repairs, maintenance and remodels, support of our digital and technology initiatives and project-specific capital expenditures,

• Targeted new company unit development to spur additional growth that is largely funded through refranchising a comparable number of existing company units, and

• Strategic investments that create incremental value for shareholders and franchisees.

In 2022, we expect that new store investments will exceed refranchising proceeds by $50 to $100 million, primarily driven by our strategy to accelerate growth of the Habit Burger Grill equity estate.

This will result in net capital expenditures of approximately $250 million, reflecting up to $350 million of gross capital expenditures and $100 million of refranchising proceeds.

Purchase Obligations

Our purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including:

fixed or minimum quantities to be purchased;

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We have excluded agreements that are cancellable without penalty.

Purchase obligations relate primarily to marketing, information technology and supply agreements.

(d) Includes actuarially-determined timing of payments from our most significant unfunded pension plan as well as scheduled payments from our deferred compensation plan and other unfunded benefit plans where payment dates are determinable.

This table excludes $37 million of future benefit payments for deferred compensation and other unfunded benefit plans to be paid upon separation of employee's service or retirement from the company, as we cannot reasonably estimate the dates of these future cash payments.

We sponsor noncontributory defined benefit pension plans covering certain salaried and hourly employees, the most significant of which are in the U.S.

The most significant of the U.S.

plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from our other significant U.S.

plan are paid by the Company as incurred (see footnote (d) above).

policy for the Plan is to contribute annually amounts that will at least equal the minimum amounts required to comply with the Pension Protection Act of 2006.

However, additional voluntary contributions are made from time-to-time to improve the Plan’s funded status.

At December 31, 2020, the Plan was in a net underfunded position of $20 million.

The UK pension plans were in a net overfunded position of $78 million at our 2020 measurement date.

We do not anticipate making any significant contributions to the Plan in 2021.

Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumptions.

Future changes in investment performance and corporate bond rates could impact our funded status and the timing and amounts of required contributions in 2021 and beyond.

Our post-retirement health care plan in the U.S.

is not required to be funded in advance, but is pay as you go.

We made post-retirement benefit payments of $3 million in 2020 and no future funding amounts are included in the contractual obligations table.

We have excluded from the contractual obligations table payments we may make for exposures for which we are self-insured, including workers’ compensation, employment practices liability, general liability, automobile liability, product liability and property losses (collectively “property and casualty losses”) and employee healthcare and long-term disability claims.

The majority of our recorded liability for self-insured property and casualty losses and employee healthcare and long-term disability claims represents estimated reserves for incurred claims that have yet to be filed or settled.

We have not included in the contractual obligations table $64 million of liabilities for unrecognized tax benefits relating to various tax positions we have taken.

These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities.

As discussed further in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement in India imposing a penalty on Yum!

Our purchase obligations relate primarily to marketing, information technology and supply agreements.

We have purchase obligations of approximately $420 million at December 31, 2021, with approximately $240 million due within the next 12 months.

In addition to our contractual and other obligations, we seek to pay a competitive dividend and return excess cash to shareholders through share repurchases.

As discussed in Note 20, we are also subject to claims and contingencies related to certain tax and legal matters that may require future cash outlays.

Dividends and Share Repurchases

In February 2022, our Board of Directors declared a dividend of $0.57 per share of Common Stock, a 14% increase from the quarterly dividend of $.50 per share of Common Stock paid in 2021.

This quarterly dividend will be distributed March 11, 2022 to shareholders of record at the close of business on February 18, 2022, and will total approximately $165 million.

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

As of December 31, 2021, we have remaining capacity to repurchase up to $950 million of Common Stock under this authorization.

This authorization does not obligate the Company to acquire any specific number of shares.

Contingencies

As discussed in Note 20, as a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on October 13, 2021, we received a Notice of Proposed Adjustment (“NPA”) from the IRS for the 2014 fiscal year relating to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines.

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

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

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

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

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

Also, as discussed in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement in India imposing a penalty on Yum!

Restaurants India Private Limited of approximately Indian Rupee 11 billion, or approximately $150 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994.

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We do not consider the risk of any significant loss arising from this order to be probable.

Off-Balance Sheet Arrangements

See the Lease Guarantees section of Note 20 for discussion of our off-balance sheet arrangements.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued guidance related to reference rate reform.

In March 2020, the Financial Accounting Standards Board 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.

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We are currently evaluating the impact of the transition from LIBOR to alternative reference rates, including the impact on our interest rate swaps.

As of December 30, 2020, our interest rate swaps expiring in July 2021 had notional amounts of $1.55 billion and our interest rate swaps expiring in March 2025 had notional amounts of $1.5 billion.

As of December 30, 2021, our interest rate swaps which expire in March 2025, had notional amounts of $1.5 billion.

These interest rate swaps are designated cash flow hedges.

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A description of what we consider to be our most significant critical accounting policies follows.

Business Combinations

The acquisition of The Habit Restaurants, Inc.

was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations.

The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed.

This allocation process involves the use of estimates and assumptions to derive fair values and to complete the allocation.

Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at March 18, 2020.

We will continue to obtain information to assist in determining the fair value of net assets acquired during the remaining measurement period.

As discussed below, during the year ended December 31, 2020, we recorded an impairment charge related to Habit Burger Grill reporting unit goodwill resulting from the impacts of COVID-19 on substantially all Habit Burger grill restaurants.

In the event that actual results further vary from any of the estimates or assumptions used in applying the acquisition method of accounting, we may be required to record an additional impairment charge or an increase in depreciation or amortization in future periods, or both.

See Note 3 for additional information about accounting for the acquisition of The Habit Restaurants, Inc.

Impairment or Disposal of Long-Lived Assets

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In each of the years ended December 31, 2021 and 2019 our primary indicator of potential impairment for our restaurant assets was two consecutive years of operating losses.

For the year ended December 31, 2020, as a result of the impacts of the COVID-19 pandemic this indicator was expanded to include restaurants that were open less than two years with operating losses as of our annual impairment test.

This expanded impairment indicator resulted in an increase in the number of store assets reviewed for potential impairment.

As a result of our annual impairment review, we recognized store impairment charges of $12 million, which is presented within Other (income) expense in our Consolidated Statement of Income.

The magnitude of the charges recorded during the year ended December 31, 2020, was not particularly sensitive to variations in fair value input as, in most situations, the fair value of the store assets, except the value of any right-of-use lease asset, if applicable, was fully impaired.

Fair value estimates of right-of-use lease assets in such instances included an estimate of sublease income from a non-franchisee that could be reasonably obtained, which typically resulted in a partial impairment of the right-of-use lease assets.

For the year ended December 31, 2020, as a result of the impacts of the COVID-19 pandemic this indicator was expanded to include restaurants that were open less than two years with cumulative operating losses for the last year or cumulative operating losses since the store open date if open less than one year.

We perform an impairment evaluation at a restaurant group level when it is more likely than not that we will refranchise restaurants as a group.

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We evaluate indefinite-lived intangible assets for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist.

Fair value is an estimate of the

price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset.

Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset.

Our most significant indefinite-lived intangible asset is our Habit Burger Grill brand asset with a book value of $96 million at December 31, 2021.

As of our fourth quarter 2020 annual impairment testing date, the Habit Burger Grill's forecasted results have improved from those used in determining the brand asset value as part of the initial valuation at the date of the acquisition and we determined that it was not more likely than not that the Habit Burger Grill brand asset was impaired.

As of our fourth quarter 2021 annual impairment testing date, the Habit Burger Grill’s forecasted results have improved from those used in determining the brand asset fair value as part of the prior year impairment test.

As such, the fair values of all of our indefinite-lived intangible assets at December 31, 2021, were in excess of their respective carrying values and no impairment was recorded.

Impairment of Goodwill

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Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values.

Our reporting units are our business units (which are aligned based on geography) in our KFC, Pizza Hut, Taco Bell and Habit Burger Grill Divisions.

Our reporting units are our business units (which are aligned based on geography) in our KFC, Taco Bell, Pizza Hut and Habit Burger Grill Divisions.

Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from franchise royalties and Company-owned restaurant operations, if any.

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We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

Other than the Habit Burger Grill reporting unit, the fair values of all our reporting units with goodwill balances were substantially in excess of their respective carrying values as of the 2020 goodwill testing date.

During the first quarter of 2020, the operations of substantially all Habit Burger Grill restaurants were impacted by COVID-19.

As a result, we performed an interim impairment test of the Habit Burger Grill reporting unit goodwill as of March 31, 2020.

This test of impairment included comparing the estimated fair value of the Habit Burger Grill reporting unit to its carrying value, including goodwill, as originally determined through our preliminary purchase price allocation performed through application of the acquisition method of accounting.

The fair value estimate of the Habit Burger Grill reporting unit was based on the estimated price a willing buyer would pay for the reporting unit and was determined using an income approach through a discounted cash flow analysis using unobservable inputs (Level 3).

The most impactful of these inputs included future average unit volumes of Habit Burger Grill restaurants as well as restaurant unit counts.

The fair value was determined based upon a probability-weighted average of three scenarios, which included assumed recovery of Habit Burger Grill average unit volumes to a pre—COVID-19 level over periods ranging from the beginning of 2021 to the end of 2022.

Factors impacting restaurant unit counts were near-term unit closures as the result of COVID-19 as well as the pace of expected new unit development.

Unit counts assumed were correlated with the expected recoveries in average unit volumes.

Based upon this fair value estimate, we determined that the carrying value of our Habit Burger Grill reporting unit exceeded its fair value.

As a result, during the first quarter of 2020 we recorded a goodwill impairment charge of $139 million to Other (income) expense and a corresponding income tax benefit of $32 million.

As we continued to refine our preliminary purchase price allocation in the quarter ended September 30, 2020, the impairment charge was adjusted upward by $5 million, which resulted in a corresponding income tax benefit of $1 million.

The amount of the goodwill impairment charge and related tax benefit could change again as we finalize the purchase price allocation associated with the acquisition.

As of the beginning of our fourth quarter, the date of our annual goodwill impairment assessment, Habit’s forecasted results have improved from those relied upon in our March 31, 2020, interim impairment test and we determined that it was not more likely than not that the fair value of the Habit Burger Grill reporting unit was less than its carrying value.

The fair values of all our reporting units with goodwill balances were in excess of their respective carrying values as of our fourth quarter 2021 goodwill testing date, with all but the Habit Burger Grill reporting unit having fair values that were substantially in excess of their respective carrying values as of the 2021 goodwill testing date.

As it relates to our Habit Burger Grill reporting unit, assumptions for unit growth and same-store sales growth utilized in the fourth quarter 2021 annual impairment test improved as compared to the prior year impairment test, due in large part to the continued recovery from the impacts of COVID-19.

As such, the fair value of the reporting unit increased versus prior year.

When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit that will be retained.

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When determining whether such franchise agreement is at prevailing market rates our primary consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world.

believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.

The Company believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.

The discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee is reduced by future royalties the franchisee will pay the Company.

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Others may consider the fair value of these future royalties as fair value disposed of and thus would conclude that a larger percentage of a reporting unit’s fair value is disposed of in a refranchising transaction.

During 2020, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was less than $1 million.

See Note 2 for a further discussion of our policies regarding goodwill.

During 2021, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was approximately $3 million.

Pension Plans

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The net periodic benefit cost we will record in 2022 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date.

We expect net periodic benefit cost plus expected pension settlement charges for our U.S.

plans to increase approximately $4 million in 2021.

We expect net periodic benefit cost for our U.S.

plans to decrease approximately $8 million in 2022.

A 50 basis-point change in our discount rate assumption at our 2021 measurement date would impact our 2022 U.S.

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Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 5.40% will impact our unrecognized pre-tax actuarial net loss by approximately $9 million.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $96 million included in AOCI for these U.S.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $33 million included in Accumulated other comprehensive income for these U.S.

plans at December 31, 2021.

We will recognize approximately $11 million of such loss in net periodic benefit cost in 2022 versus $14 million recognized in 2021.

At December 31, 2020, we had valuation allowances of approximately $789 million to reduce our $1,636 million of deferred tax assets to amounts that are more likely than not to be realized.

At December 31, 2021, we had valuation allowances of $462 million to reduce our $1,541 million of deferred tax assets to amounts that are more likely than not to be realized.

The net deferred tax assets primarily relate to temporary differences in profitable U.S.

federal, state and foreign jurisdictions and net operating losses in certain foreign jurisdictions, the majority of which do not expire.

In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions as well as carryforward periods and restrictions on usage.

In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions, carryforward periods, restrictions on usage and prudent and feasible tax planning strategies.

The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans.

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A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

At December 31, 2020, we had $175 million of unrecognized tax benefits, $132 million of which would impact the effective tax rate if recognized.

At December 31, 2021, we had $116

million of unrecognized tax benefits, $75 million of which would impact the effective tax rate if recognized.

We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.

The 2017 Tax Cuts and Jobs Act included a mandatory deemed repatriation tax on accumulated earnings of foreign subsidiaries, and as a result, previously unremitted earnings for which no U.S.

deferred tax liability had been provided have now been subject to U.S.

Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S.

Undistributed foreign earnings may still be subject to certain state and foreign income and withholding taxes upon repatriation.

Our cash currently held overseas is primarily limited to that necessary to fund working capital requirements.

Thus, we have not provided taxes on our foreign unremitted earnings, including U.S.

state income and foreign withholding taxes, as we believe they are indefinitely reinvested.

See Note 18 for a further discussion of our Income taxes.

Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings outside the U.S.

Thus, we have provided taxes, including any U.S.

federal and state income, foreign income, or foreign withholding taxes on the majority of our unremitted earnings.

In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions.

We believe any such taxes would be immaterial.

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-K

Item 7. Management’s Discussion and Analysis