YUM BRANDS INC 10-Q

Item 1. Financial Statements 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions, except per share data) Quarter ended Revenues 3/31/2022 3/31/2021 Company sales $ 470 $ 476 Franchise and property revenues 714 658 Franchise contributions for advertising and other services 363 352 Total revenues 1,547 1,486 Costs and Expenses, Net Company restaurant expenses 402 392 General and administrative expenses 253 206 Franchise and property expenses 32 23 Franchise advertising and other services expense 361 343 Refranchising (gain) loss ( 4 ) ( 15 ) Other (income) expense ( 6 ) ( 6 ) Total costs and expenses, net 1,038 943 Operating Profit 509 543 Investment (income) expense, net ( 7 ) — Other pension (income) expense — 3 Interest expense, net 118 131 Income Before Income Taxes 398 409 Income tax (benefit) provision ( 1 ) 83 Net Income $ 399 $ 326 Basic Earnings Per Common Share $ 1.38 $ 1.09 Diluted Earnings Per Common Share $ 1.36 $ 1.07 Dividends Declared Per Common Share $ 0.57 $ 0.50 See accompanying Notes to Condensed Consolidated Financial Statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Quarter ended 3/31/2022 3/31/2021 Net Income $ 399 $ 326 Other comprehensive income, net of tax Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature Adjustments and gains (losses) arising during the period ( 23 ) 3 ( 23 ) 3 Tax (expense) benefit — — ( 23 ) 3 Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the period — 47 Reclassification of (gains) losses into Net Income 5 7 5 54 Tax (expense) benefit ( 1 ) ( 13 ) 4 41 Changes in derivative instruments Unrealized gains (losses) arising during the period 57 24 Reclassification of (gains) losses into Net Income 12 4 69 28 Tax (expense) benefit ( 17 ) ( 7 ) 52 21 Other comprehensive income, net of tax 33 65 Comprehensive Income $ 432 $ 391 See accompanying Notes to Condensed Consolidated Financial Statements. 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Quarter ended 3/31/2022 3/31/2021 Cash Flows – Operating Activities Net Income $ 399 $ 326 Depreciation and amortization 37 39 Refranchising (gain) loss ( 4 ) ( 15 ) Investment (income) expense, net ( 7 ) — Deferred income taxes ( 77 ) 14 Share-based compensation expense 26 21 Changes in accounts and notes receivable 29 27 Changes in prepaid expenses and other current assets ( 13 ) ( 9 ) Changes in accounts payable and other current liabilities ( 176 ) ( 123 ) Changes in income taxes payable 29 5 Other, net 10 39 Net Cash Provided by Operating Activities 253 324 Cash Flows – Investing Activities Capital spending ( 42 ) ( 45 ) Proceeds from refranchising of restaurants 24 20 Other, net ( 11 ) 39 Net Cash Provided by (Used In) Investing Activities ( 29 ) 14 Cash Flows – Financing Activities Proceeds from long-term debt — 800 Repayments of long-term debt ( 15 ) ( 912 ) Revolving credit facility, three months or less, net 174 — Short-term borrowings by original maturity More than three months - proceeds — — More than three months - payments — — Three months or less, net — — Repurchase shares of Common Stock ( 343 ) ( 286 ) Dividends paid on Common Stock ( 165 ) ( 150 ) Other, net ( 28 ) ( 15 ) Net Cash Used in Financing Activities ( 377 ) ( 563 ) Effect of Exchange Rates on Cash and Cash Equivalents — 3 Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 153 ) ( 222 ) Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 771 1,024 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period $ 618 $ 802 See accompanying Notes to Condensed Consolidated Financial Statements. 6 CONDENSED CONSOLIDATED BALANCE SHEETS YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) (Unaudited) 3/31/2022 12/31/2021 ASSETS Current Assets Cash and cash equivalents $ 365 $ 486 Accounts and notes receivable, net 565 596 Prepaid expenses and other current assets 426 450 Total Current Assets 1,356 1,532 Property, plant and equipment, net 1,181 1,207 Goodwill 656 657 Intangible assets, net 354 359 Other assets 1,485 1,487 Deferred income taxes 784 724 Total Assets $ 5,816 $ 5,966 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current Liabilities Accounts payable and other current liabilities $ 1,202 $ 1,334 Income taxes payable 27 13 Short-term borrowings 73 68 Total Current Liabilities 1,302 1,415 Long-term debt 11,332 11,178 Other liabilities and deferred credits 1,673 1,746 Total Liabilities 14,307 14,339 Shareholders’ Deficit Common Stock, no par value, 750 shares authorized; 286 shares issued in 2022 and 289 issued in 2021 — — Accumulated deficit ( 8,199 ) ( 8,048 ) Accumulated other comprehensive loss ( 292 ) ( 325 ) Total Shareholders’ Deficit ( 8,491 ) ( 8,373 ) Total Liabilities and Shareholders’ Deficit $ 5,816 $ 5,966 See accompanying Notes to Condensed Consolidated Financial Statements. 7 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES Quarters ended March 31, 2022 and 2021 (in millions) Yum! Brands, Inc. Issued Common Stock Accumulated Deficit Accumulated Other Comprehensive Loss Total Shareholders' Deficit Shares Amount Balance at December 31, 2021 289 $ — $ ( 8,048 ) $ ( 325 ) $ ( 8,373 ) Net Income 399 399 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 23 ) ( 23 ) Pension and post-retirement benefit plans (net of tax impact of $ 1 million) 4 4 Net gain on derivative instruments (net of tax impact of $ 17 million) 52 52 Comprehensive Income 432 Dividends declared ( 165 ) ( 165 ) Repurchase of shares of Common Stock ( 3 ) ( 22 ) ( 385 ) ( 407 ) Employee share-based award exercises ( 16 ) ( 16 ) Share-based compensation events 38 38 Balance at March 31, 2022 286 $ — $ ( 8,199 ) $ ( 292 ) $ ( 8,491 ) Balance at December 31, 2020 300 $ — $ ( 7,480 ) $ ( 411 ) $ ( 7,891 ) Net Income 326 326 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 3 3 Pension and post-retirement benefit plans (net of tax impact of $ 13 million) 41 41 Net gain on derivative instruments (net of tax impact of $ 7 million) 21 21 Comprehensive Income 391 Dividends declared ( 151 ) ( 151 ) Repurchase of shares of Common Stock ( 3 ) ( 14 ) ( 261 ) ( 275 ) Employee share-based award exercises 1 ( 10 ) ( 10 ) Share-based compensation events 24 24 Balance at March 31, 2021 298 $ — $ ( 7,566 ) $ ( 346 ) $ ( 7,912 ) See accompanying Notes to Condensed Consolidated Financial Statements. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Tabular amounts in millions, except per share data) Note 1 - Financial Statement Presentation We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”). Yum! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 54,000 restaurants in more than 155 countries and territories. As of March 31, 2022, 98 % of these restaurants were owned and operated by franchisees. 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 is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. As of March 31, 2022, YUM consisted of four operating segments: • The KFC Division which includes our worldwide operations of the KFC 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 YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. The majority of our U.S. subsidiaries, including, beginning in fiscal year 2022, our Habit Burger Grill Division, and certain international subsidiaries operate on a weekly periodic calendar where the first three quarters of each fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks. Our remaining international subsidiaries operate on a monthly calendar similar to that on which YUM operates. For fiscal year 2021, our Habit Burger Grill Division operated on a weekly periodic calendar where each quarter consisted of 13 weeks. The impact of this change in reporting calendar was not significant and accordingly, prior year amounts presented in these Condensed Consolidated Financial Statements have not been restated. Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2021 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate. We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2022. These reclassifications had no effect on previously reported Net Income. Russia Invasion of Ukraine Given the Russian invasion of Ukraine, during the quarter ended March 31, 2022, we announced the suspension of all investment and restaurant development efforts in Russia as well as the operations of our 70 company-owned KFC restaurants in Russia and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all Pizza Hut restaurant operations. In addition to these actions, we have begun a process aimed at transferring ownership to local operators. 9 Our asset base in Russia at March 31, 2022 includes approximately $ 80 million in property, plant and equipment and lease right-of-use assets related primarily to our company-owned KFC restaurants and $ 13 million in goodwill related to our KFC Russia and Central and Eastern Europe reporting unit. Additionally, we have approximately $ 50 million of cumulative foreign currency translation losses associated with Russian assets recorded within Shareholders’ Deficit at March 31, 2022. We review long-lived assets of restaurants and goodwill 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. As a result of our decisions regarding our Russian operations as described in the previous paragraph, we conducted an impairment review of our long-lived assets and goodwill during the quarter ended March 31, 2022. As a result of our review, there was no impairment recorded during the quarter ended March 31, 2022. We will continue to monitor developments in Russia, including the status of our ownership transfer process, and update our impairment reviews accordingly. Note 2 - Earnings Per Common Share (“EPS”) Quarter ended 2022 2021 Net Income $ 399 $ 326 Weighted-average common shares outstanding (for basic calculation) 289 301 Effect of dilutive share-based employee compensation 5 4 Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) 294 305 Basic EPS $ 1.38 $ 1.09 Diluted EPS $ 1.36 $ 1.07 Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation (a) 1.2 2.3 (a) These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented. Note 3 - Shareholders' Deficit Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 31, 2022 and 2021 as indicated below. All amounts exclude applicable transaction fees. Shares Repurchased (thousands) Dollar Value of Shares Repurchased Remaining Dollar Value of Shares that may be Repurchased Authorization Date 2022 2021 2022 2021 2022 November 2019 — 2,599 $ — $ 275 $ — May 2021 3,359 — 407 — 543 Total 3,359 (a) 2,599 (b) $ 407 (a) $ 275 (b) $ 543 (a) 2022 amount includes the effect of $ 64 million in share repurchases ( 0.5 million shares) with trade dates on, or prior to, March 31, 2022, but cash settlement dates subsequent to March 31, 2022. (b) 2021 amount excludes the effect of $ 11 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to December 31, 2020, but cash settlement dates subsequent to December 31, 2020. In May 2021, our Board of Directors authorized share repurchases from July 1, 2021 through December 31, 2022, of up to $ 2 billion (excluding applicable transaction fees) of our outstanding Common Stock. 10 Changes in Accumulated other comprehensive loss (“AOCI”) are presented below. Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature Pension and Post-Retirement Benefits Derivative Instruments Total Balance at December 31, 2021, net of tax $ ( 206 ) $ ( 34 ) $ ( 85 ) $ ( 325 ) OCI, net of tax Gains (losses) arising during the period classified into AOCI, net of tax ( 23 ) — 43 20 (Gains) losses reclassified from AOCI, net of tax — 4 9 13 ( 23 ) 4 52 33 Balance at March 31, 2022, net of tax $ ( 229 ) $ ( 30 ) $ ( 33 ) $ ( 292 ) Note 4 - Other (Income) Expense Quarter ended 3/31/2022 3/31/2021 Foreign exchange net (gain) loss $ ( 4 ) $ 2 Impairment and closure expense — 1 Other (a) ( 2 ) ( 9 ) Other (income) expense $ ( 6 ) $ ( 6 ) (a) The quarter ended March 31, 2021, includes a gain of $ 6 million associated with the sale of property. Note 5 - Supplemental Balance Sheet Information Accounts and Notes Receivable, net The Company’s receivables are primarily generated from ongoing business relationships with our franchisees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable, net in our Condensed Consolidated Balance Sheets. Accounts and notes receivable, net also includes receivables generated from advertising cooperatives that we consolidate. 11 3/31/2022 12/31/2021 Accounts and notes receivable, gross $ 606 $ 632 Allowance for doubtful accounts ( 41 ) ( 36 ) Accounts and notes receivable, net (a) $ 565 $ 596 (a) Accounts and notes receivable, net includes approximately $ 2 million in license fees at March 31, 2022 related to Yum China Holdings, Inc. ("Yum China") gross revenue during the quarter ended March 31, 2022 that Yum China is now disputing are due under the terms of the Master License Agreement (“MLA”) between the Company and Yum China. License fees related to such revenue have historically been paid by Yum China and we believe they continue to be due under the terms of the MLA. Property, Plant and Equipment, net 3/31/2022 12/31/2021 Property, plant and equipment, gross $ 2,468 $ 2,477 Accumulated depreciation and amortization ( 1,287 ) ( 1,270 ) Property, plant and equipment, net $ 1,181 $ 1,207 Assets held-for-sale totaled $ 9 million and $ 12 million as of March 31, 2022 and December 31, 2021, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets. Other Assets 3/31/2022 12/31/2021 Operating lease right-of-use assets (a) $ 791 $ 809 Franchise incentives 179 164 Investment in Devyani International Limited (See Note 12) 122 118 Other 393 396 Other assets $ 1,485 $ 1,487 (a) Non-current operating lease liabilities of $ 776 million and $ 793 million as of March 31, 2022 and December 31, 2021, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets. Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows 3/31/2022 12/31/2021 Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets $ 365 $ 486 Restricted cash included in Prepaid expenses and other current assets (a) 218 250 Restricted cash and restricted cash equivalents included in Other assets (b) 35 35 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows $ 618 $ 771 (a) Restricted cash within Prepaid expenses and other current assets reflects the cash related to advertising cooperatives which we consolidate that can only be used to settle obligations of the respective cooperatives and cash held in reserve for Taco Bell Securitization interest payments. (b) Primarily trust accounts related to our self-insurance program. Note 6 - Income Taxes Quarter ended 2022 2021 Income tax (benefit) provision $ ( 1 ) $ 83 Effective tax rate ( 0.2 ) % 20.2 % 12 The decrease in our effective tax rate for the quarter ended March 31, 2022, as compared with the quarter ended March 31, 2021, is primarily due to an $ 82 million tax benefit discretely recorded in the quarter ended March 31, 2022, from the release of a valuation allowance on foreign tax credit carryforwards. In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year. These regulations make foreign taxes paid to certain countries no longer creditable in the U.S. Accordingly, we reversed a valuation allowance associated with existing foreign tax credit carryforwards that we now believe will be used to offset these now non-creditable taxes in 2022 and future years. Note 7 - Revenue Recognition Disaggregation of Total Revenues The following tables disaggregate revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors. Quarter ended 3/31/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 15 $ 214 $ 5 $ 125 $ 359 Franchise revenues 45 157 64 1 267 Property revenues 3 11 1 — 15 Franchise contributions for advertising and other services 6 123 72 — 201 China Franchise revenues 61 — 16 — 77 Other Company sales 111 — — — 111 Franchise revenues 260 11 70 — 341 Property revenues 14 — — — 14 Franchise contributions for advertising and other services 145 1 16 — 162 $ 660 $ 517 $ 244 $ 126 $ 1,547 13 Quarter ended 3/31/2021 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 14 $ 208 $ 5 $ 121 $ 348 Franchise revenues 44 144 67 1 256 Property revenues 4 10 — — 14 Franchise contributions for advertising and other services 6 117 79 — 202 China Franchise revenues 62 — 16 — 78 Other Company sales 119 — 9 — 128 Franchise revenues 230 8 57 — 295 Property revenues 14 — 1 — 15 Franchise contributions for advertising and other services 132 1 17 — 150 $ 625 $ 488 $ 251 $ 122 $ 1,486 Contract Liabilities Our contract liabilities are comprised of unamortized upfront fees received from franchisees and are presented within Accounts payable and other current liabilities and Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets. A summary of significant changes to the contract liability balance during 2022 is presented below. Deferred Franchise Fees Balance at December 31, 2021 $ 421 Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period ( 19 ) Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 16 Balance at March 31, 2022 $ 418 We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows: Less than 1 year $ 67 1 - 2 years 62 2 - 3 years 57 3 - 4 years 50 4 - 5 years 44 Thereafter 138 Total $ 418 Note 8 - Reportable Operating Segments We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments: 14 Quarter ended Revenues 2022 2021 KFC Division $ 660 $ 625 Taco Bell Division 517 488 Pizza Hut Division 244 251 Habit Burger Grill Division 126 122 $ 1,547 $ 1,486 Quarter ended Operating Profit 2022 2021 KFC Division $ 291 $ 300 Taco Bell Division 185 178 Pizza Hut Division 102 102 Habit Burger Grill Division ( 8 ) — Corporate and unallocated G&A expenses ( 71 ) ( 50 ) Unallocated Company restaurant expenses — — Unallocated Franchise and property expenses — — Unallocated Refranchising gain (loss) 4 15 Unallocated Other income (expense) 6 ( 2 ) Operating Profit $ 509 $ 543 Investment income (expense), net (a) 7 — Other pension income (expense) — ( 3 ) Interest expense, net (b) ( 118 ) ( 131 ) Income before income taxes $ 398 $ 409 Our chief operating decision maker ( “ CODM ” ) does not consider the impact of Corporate and unallocated amounts when assessing Divisional segment performance. As such, we do not allocate such amounts to our Divisional segments for performance reporting purposes. (a) Includes changes in the value of our investment in Devyani International Limited (see Note 12). (b) Includes fees expensed and unamortized debt-issuance costs written off totaling $ 12 million related to the refinancing of the Credit Agreement (as described within our 2021 Form 10-K) during the quarter ended March 31, 2021. Note 9 - Pension Benefits We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the “ Plan ” ), is funded. We fund our other U.S. plans as benefits are paid. The Plan and our non-qualified plans in the U.S. are closed to new salaried participants. 15 The components of net periodic benefit cost associated with our U.S. pension plans are as follows: Quarter ended 2022 2021 Service cost $ 2 $ 2 Interest cost 8 8 Expected return on plan assets ( 12 ) ( 11 ) Amortization of net loss 3 6 Amortization of prior service cost 1 1 Net periodic benefit cost $ 2 $ 6 Note 10 - Short-term Borrowings and Long-term Debt Short-term Borrowings 3/31/2022 12/31/2021 Current maturities of long-term debt $ 80 $ 75 Less current portion of debt issuance costs and discounts ( 7 ) ( 7 ) Short-term borrowings $ 73 $ 68 Long-term Debt Securitization Notes $ 3,802 $ 3,811 Subsidiary Senior Unsecured Notes 750 750 Revolving Facility 174 — Term Loan A Facility 750 750 Term Loan B Facility 1,485 1,489 YUM Senior Unsecured Notes 4,475 4,475 Finance lease obligations 64 64 $ 11,500 $ 11,339 Less debt issuance costs and discounts ( 88 ) ( 86 ) Less current maturities of long-term debt ( 80 ) ( 75 ) Long-term debt $ 11,332 $ 11,178 Details of our Short-term borrowings and Long-term debt as of December 31, 2021 can be found within our 2021 Form 10-K. On February 23, 2022, Yum! Brands, Inc. issued a notice of redemption for the $ 600 million aggregate principal amount of 7.75 % YUM Senior Unsecured Notes due April 1, 2025 (the “2025 Notes”). The 2025 Notes were redeemed subsequent to the first quarter, on April 1, 2022, at an amount equal to 103.875 % of the aggregate principal amount of the 2025 Notes, reflecting a $ 23 million “call premium”, plus accrued and unpaid interest to the date of redemption. Also subsequent to the first quarter, on April 1, 2022, Yum! Brands, Inc. issued $ 1.0 billion aggregate principal amount of 5.375 % YUM Senior Unsecured Notes due April 1, 2032 (the “April 2032 Notes”). The net proceeds from the April 2032 Notes were used to fund the redemption of the 2025 Notes discussed above and for general corporate purposes. The redemption of the 2025 Notes and issuance of the April 2032 Notes are not reflected in the table above. Cash paid for interest during the quarter ended March 31, 2022, was $ 90 million. During the quarter ended March 31, 2021, fees expensed as well as previously recorded unamortized debt issuance costs written off totaling $ 12 million were recognized within Interest expense, net due to the refinancing of our Credit Agreement. Excluding these amounts associated with the Credit Agreement refinancing, cash paid for interest during the quarter ended March 31, 2021, was $ 88 million. Note 11 - Derivative Instruments We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates. Our use of foreign currency contracts to manage foreign currency exchange rates is currently not significant. 16 Interest Rate Swaps We have entered into interest rate swaps, with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments primarily under our Term Loan B Facility. At both March 31, 2022 and December 31, 2021, we had interest rate swaps expiring in March 2025 with notional amounts of $ 1.5 billion. These interest rate swaps have been designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of March 31, 2022 or December 31, 2021. Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Through March 31, 2022, the swaps were highly effective cash flow hedges. As a result of the use of interest rate swaps, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with major financial institutions carefully selected based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At March 31, 2022, all of the counterparties to our interest rate swaps had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations. Gains and losses on these interest rate swaps recognized in OCI and reclassifications from AOCI into Net Income were as follows: Quarter ended Gains/(Losses) Recognized in OCI (Gains)/Losses Reclassified from AOCI into Net Income 2022 2021 2022 2021 Interest rate swaps $ 59 $ 24 $ 11 $ 4 Income tax benefit/(expense) ( 14 ) ( 6 ) ( 3 ) ( 1 ) As of March 31, 2022, the estimated net loss included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $ 17 million, based on current LIBOR interest rates. Total Return Swaps We have entered into total return swap derivative contracts, with the objective of reducing our exposure to market-driven changes in certain of the liabilities associated with compensation deferrals into our Executive Income Deferral (“EID”) plan. While these total return swaps represent economic hedges, we have not designated them as hedges for accounting purposes. As a result, the changes in the fair value of these derivatives are recognized immediately in earnings within General and administrative expenses in our Condensed Consolidated Statements of Income largely offsetting the changes in the associated EID liabilities. The fair value associated with the total return swaps as of March 31, 2022, was not significant. See Note 12 for the fair value of our derivative assets and liabilities. Note 12 - Fair Value Disclosures As of March 31, 2022, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair value of borrowings under our Revolving Facility, our notes receivable, net of allowances, and lease guarantees, less reserves for expected losses, approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations: 17 3/31/2022 12/31/2021 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Securitization Notes (a) $ 3,802 $ 3,703 $ 3,811 $ 3,872 Subsidiary Senior Unsecured Notes (b) 750 773 750 784 Term Loan A Facility (b) 750 748 750 748 Term Loan B Facility (b) 1,485 1,477 1,489 1,490 YUM Senior Unsecured Notes (b) 4,475 4,452 4,475 4,845 (a) We estimated the fair value of the Securitization Notes using market quotes and calculations. The markets in which the Securitization Notes trade are not considered active markets. (b) We estimated the fair value of the YUM and Subsidiary Senior Unsecured Notes, Term Loan A Facility and Term Loan B Facility using market quotes and calculations based on market rates. Recurring Fair Value Measurements The Company has interest rate swaps and other investments, all of which are required to be measured at fair value on a recurring basis (see Note 11 for discussion regarding derivative instruments). The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall. Fair Value Condensed Consolidated Balance Sheet Level 3/31/2022 12/31/2021 Assets Other Investments Other assets 1 125 119 Other Investments Other assets 3 5 5 Liabilities Interest Rate Swaps Accounts payable and other current liabilities 2 17 38 Interest Rate Swaps Other liabilities and deferred credits 2 5 54 The fair value of the Company’s interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based on observable inputs. The other investments primarily include an approximate 5 % minority interest in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India, with a fair value of Indian Rupee 9.3 billion (or approximately $ 122 million) and Indian Rupee 8.8 billion (or approximately $ 118 million) at March 31, 2022 and December 31, 2021, respectively. For the quarter ended March 31, 2022, we recognized pre-tax investment income of Indian Rupee 540 million (or approximately $ 7 million) related to changes in fair value of our investment in Devyani. Note 13 - Contingencies Internal Revenue Service Proposed Adjustment As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on 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 Revenue Agent’s Report (“RAR”) including the IRS’s calculation of the tax assessment in the second quarter of 2022. 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. 18 The final resolution of this matter is uncertain, but the Company believes that it is more likely than not the Company’s tax position will be sustained; therefore, no reserve is recorded with respect to this matter. An unfavorable resolution of this matter could have a material, adverse impact on our consolidated Financial Statements in future periods. Lease Guarantees As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065 . As of March 31, 2022, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $ 400 million. The present value of these potential payments discounted at our pre-tax cost of debt at March 31, 2022, was approximately $ 325 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases, although such risk may not be reduced in the context of a bankruptcy or other similar restructuring of a large franchisee or group of franchisees. The liability recorded for our expected losses under such leases as of March 31, 2022, was not material. Legal Proceedings We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable. Yum! Restaurants India Private Limited (“YRIPL”), a YUM subsidiary that operates KFC and Pizza Hut restaurants in India, is the subject of a regulatory enforcement action in India (the “Action”). The Action alleges, among other things, that KFC International Holdings, Inc. and Pizza Hut International failed to satisfy certain conditions imposed by the Secretariat for Industrial Approval in 1993 and 1994 when those companies were granted permission for foreign investment and operation in India. The conditions at issue include an alleged minimum investment commitment and store build requirements as well as limitations on the remittance of fees outside of India. The Action originated with a complaint and show cause notice filed in 2009 against YRIPL by the Deputy Director of the Directorate of Enforcement (“DOE”) of the Indian Ministry of Finance following an income tax audit for the years 2002 and 2003. The matter was argued at various hearings in 2015, but no order was issued. Following a change in the incumbent official holding the position of Special Director of DOE (the “Special Director”), the matter resumed in 2018 and several additional hearings were conducted. On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $145 million. Of this amount, $140 million relates to the alleged failure to invest a total of $80 million in India within an initial seven-year period. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. The stay order remains in effect and the next hearing is now scheduled for August 31, 2022. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable. We are currently engaged in various other legal proceedings and have certain unresolved claims pending, the ultimate liability for which, if any, cannot be determined at this time. However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Consolidated Financial Statements. 19