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Item 1. Financial Statements

2022-08-08 compared with 2022-05-10 · 176 added, 81 removed, 408 unchanged (39% of the section changed)

3 unchanged sentences

(in millions, except per share data)

Quarter ended

Quarter ended Year to date

Revenues 6/30/2022 6/30/2021 6/30/2022 6/30/2021

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Income Before Income Taxes 390 407 788 816

Income tax (benefit) provision ( 1 ) 83

Income tax provision 166 16 165 99

Net Income $ 224 $ 391 $ 623 $ 717

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(in millions)

Quarter ended

Quarter ended Year to date

6/30/2022 6/30/2021 6/30/2022 6/30/2021

3 unchanged sentences

Adjustments and gains (losses) arising during the period

( 21 ) 14 ( 44 ) 17

Tax (expense) benefit

( 21 ) 14 ( 44 ) 17

Changes in pension and post-retirement benefits

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Tax (expense) benefit

( 1 ) ( 4 ) ( 2 ) ( 17 )

Changes in derivative instruments

Unrealized gains (losses) arising during the period

15 ( 8 ) 72 16

Reclassification of (gains) losses into Net Income

21 ( 4 ) 90 24

Tax (expense) benefit

( 5 ) 1 ( 22 ) ( 6 )

16 ( 3 ) 68 18

Other comprehensive income, net of tax ( 2 ) 22 31 87

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(in millions)

Quarter ended

6/30/2022 6/30/2021

16 unchanged sentences

Other, net ( 8 ) 33

Net Cash Provided by (Used In) Investing Activities ( 29 ) 14

Net Cash Used In Investing Activities ( 64 ) ( 8 )

Cash Flows – Financing Activities

1 unchanged sentence

Repayments of long-term debt ( 658 ) ( 2,002 )

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 ( 557 ) ( 530 )

Dividends paid on Common Stock ( 327 ) ( 299 )

Debt issuance costs ( 11 ) ( 18 )

Other, net ( 32 ) ( 17 )

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AND SUBSIDIARIES

Quarters ended March 31, 2022 and 2021

Quarters ended June 30, 2022 and 2021

(in millions)

2 unchanged sentences

Shares Amount

Balance at March 31, 2022

286 $ — $ ( 8,199 ) $ ( 292 ) $ ( 8,491 )

Net Income 224 224

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 21 ) ( 21 )

Pension and post-retirement benefit plans (net of tax impact of $ 1 million)

Net gain on derivative instruments (net of tax impact of $ 5 million)

Comprehensive Income 222

Dividends declared ( 164 ) ( 164 )

Repurchase of shares of Common Stock ( 2 ) ( 15 ) ( 135 ) ( 150 )

Employee share-based award exercises 1 ( 5 ) ( 5 )

Share-based compensation events 20 20

Balance at June 30, 2022

285 $ — $ ( 8,274 ) $ ( 294 ) $ ( 8,568 )

Balance at December 31, 2021

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Share-based compensation events 58 58

Balance at June 30, 2022

285 $ — $ ( 8,274 ) $ ( 294 ) $ ( 8,568 )

Balance at March 31, 2021

298 $ — $ ( 7,566 ) $ ( 346 ) $ ( 7,912 )

Net Income 391 391

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 14 14

Pension and post-retirement benefit plans (net of tax impact of $ 4 million)

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

Comprehensive Income 413

Dividends declared ( 149 ) ( 149 )

Repurchase of shares of Common Stock ( 2 ) ( 10 ) ( 245 ) ( 255 )

Employee share-based award exercises — ( 7 ) ( 7 )

Share-based compensation events 17 17

Balance at June 30, 2021

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

Balance at December 31, 2020

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Share-based compensation events 41 41

Balance at March 31, 2021

Balance at June 30, 2021

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

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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”).

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.

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 155 countries and territories.

As of June 30, 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:

As of June 30, 2022, YUM consisted of four operating segments:

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

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

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.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended June 30, 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.

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.

In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia.

We also suspended all operations of our 70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our master franchisee.

Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts.

During the second quarter, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator who has initiated the process of re-branding locations to a non-YUM concept.

We are also in the process of transferring ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of franchised restaurants, to a local operator who will be responsible for re-branding locations to a non-YUM concept.

Upon the completion of this process, we will have fully exited from Russia.

Our long-lived asset base in Russia at June 30, 2022 primarily includes approximately $ 115 million in property, plant and equipment and lease right-of-use assets related primarily to our company-owned KFC restaurants.

Additionally, we have approximately $ 10 million in goodwill and $ 13 million of cumulative foreign currency translation losses associated with Russian assets recorded within Shareholders’ Deficit at June 30, 2022.

We review long-lived assets 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 paragraphs, we conducted an impairment review of our long-lived asset base and goodwill during the quarter ended June 30, 2022.

As a result of our review, there was no impairment recorded during the quarter ended June 30, 2022.

We will continue to monitor developments in Russia, including the status of our ownership transfer process, and update our impairment reviews accordingly.

Subsequent to the end of the second quarter we initiated the bidding process for the KFC Russia business and, as a result, those operations will qualify for held-for-sale accounting beginning in our quarter ended September 30, 2022.

The transaction is expected to be completed by the end of 2022, subject to regulatory approvals and other customary closing conditions.

Note 2 - Earnings Per Common Share (“EPS”)

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Net Income $ 224 $ 391 $ 623 $ 717

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Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation (a)

2.4 1.5 1.8 2.1

(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.

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended June 30, 2022 and 2021 as indicated below.

All amounts exclude applicable transaction fees.

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May 2021 4,635 — 557 — 393

Total 3,359 (a)

(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.

Total 4,635 4,746 $ 557 $ 530 $ 393

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

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

Balance at March 31, 2022, net of tax $ ( 229 ) $ ( 30 ) $ ( 33 ) $ ( 292 )

OCI, net of tax

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

( 21 ) — 11 ( 10 )

(Gains) losses reclassified from AOCI, net of tax

( 21 ) 3 16 ( 2 )

Balance at June 30, 2022, net of tax $ ( 250 ) $ ( 27 ) $ ( 17 ) $ ( 294 )

Balance at December 31, 2021, net of tax $ ( 206 ) $ ( 34 ) $ ( 85 ) $ ( 325 )

4 unchanged sentences

( 44 ) 7 68 31

Balance at March 31, 2022, net of tax $ ( 229 ) $ ( 30 ) $ ( 33 ) $ ( 292 )

Balance at June 30, 2022, net of tax $ ( 250 ) $ ( 27 ) $ ( 17 ) $ ( 294 )

Note 4 - Other (Income) Expense

Quarter ended

Quarter ended Year to date

6/30/2022 6/30/2021 6/30/2022 6/30/2021

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Impairment and closure expense ( 1 ) — ( 1 ) 1

Other 5 ( 5 ) 3 ( 14 )

Other (income) expense $ ( 4 ) $ ( 4 ) $ ( 10 ) $ ( 10 )

(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

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Allowance for doubtful accounts ( 41 ) ( 36 )

Accounts and notes receivable, net (a)

(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.

Accounts and notes receivable, net $ 598 $ 596

Property, Plant and Equipment, net

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Property, plant and equipment, net $ 1,192 $ 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.

Assets held-for-sale totaled $ 3 million and $ 12 million as of June 30, 2022 and December 31, 2021, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Other Assets 6/30/2022 12/31/2021

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Other assets $ 1,457 $ 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.

(a) Non-current operating lease liabilities of $ 759 million and $ 793 million as of June 30, 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

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Note 6 - Income Taxes

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Income tax (benefit) provision $ 166 $ 16 $ 165 $ 99

Effective tax rate 42.6 % 4.0 % 21.0 % 12.1 %

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.

Our second quarter effective tax rate was higher than the prior year primarily due to the following:

• $ 71 million of net tax expense recorded in the quarter ended June 30, 2022, resulting from the Company’s decision to exit KFC Russia.

We anticipate a reduction in the tax basis of intellectual property rights held in Switzerland due to the expected loss of the Russian royalty income associated with such rights going forward.

As a result, we remeasured and reassessed the need for a valuation allowance on those deferred tax assets.

In addition, we reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the existing basis difference will now reverse by way of sale.

• $ 64 million of tax benefit recorded in the quarter ended June 30, 2021, to remeasure deferred tax assets necessitated by the enactment of the United Kingdom (“UK”) Finance Act 2021.

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

Our year to date effective tax rate was also higher than the prior year primarily due to the items discussed above, offset by:

• $ 82 million of 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.

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$ 682 $ 532 $ 249 $ 139 $ 1,602

Year to date 6/30/2022

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

Company sales $ 31 $ 457 $ 10 $ 261 $ 759

Franchise revenues 92 335 128 3 558

Property revenues 6 21 2 — 29

Franchise contributions for advertising and other services 13 265 144 — 422

Franchise revenues 109 — 29 — 138

Company sales 210 — — — 210

Franchise revenues 543 22 133 — 698

Property revenues 27 — 1 — 28

Franchise contributions for advertising and other services 306 3 32 — 341

$ 1,337 $ 1,103 $ 479 $ 264 $ 3,183

Year to date 6/30/2021

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

Company sales $ 30 $ 431 $ 10 $ 259 $ 730

Franchise revenues 92 304 134 2 532

Property revenues 7 20 2 — 29

Franchise contributions for advertising and other services 13 245 153 — 411

Franchise revenues 120 — 32 — 152

Company sales 250 — 16 — 266

Franchise revenues 485 17 119 — 621

Property revenues 29 — 1 — 30

Franchise contributions for advertising and other services 281 3 33 — 317

$ 1,307 $ 1,020 $ 500 $ 261 $ 3,088

Contract Liabilities

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Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 42

Balance at March 31, 2022 $ 418

Balance at June 30, 2022 $ 426

(a) Primarily includes impact of foreign currency translation.

We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows:

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The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:

Quarter ended

Quarter ended Year to date

Revenues 2022 2021 2022 2021

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$ 1,636 $ 1,602 $ 3,183 $ 3,088

Quarter ended

Quarter ended Year to date

Operating Profit 2022 2021 2022 2021

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Habit Burger Grill Division ( 2 ) 5 ( 10 ) 5

Corporate and unallocated G&A expenses ( 71 ) ( 50 )

Unallocated Company restaurant expenses — —

Unallocated Franchise and property expenses — —

Corporate and unallocated G&A expenses (a)

( 65 ) ( 63 ) ( 136 ) ( 113 )

Unallocated Franchise and property expenses (a)

( 4 ) — ( 4 ) —

Unallocated Refranchising gain (loss) 8 7 12 22

Unallocated Other income (expense) 6 ( 2 )

Unallocated Other income (expense) (a)

16 ( 1 ) 22 ( 3 )

Operating Profit $ 554 $ 567 $ 1,063 $ 1,110

Investment income (expense), net (a)

Investment income (expense), net (b)

( 15 ) 1 ( 8 ) 1

Other pension income (expense) ( 1 ) ( 2 ) ( 1 ) ( 5 )

Interest expense, net (b)

Interest expense, net (c)

( 148 ) ( 159 ) ( 266 ) ( 290 )

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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.

(a) Our operating results for the quarter and year to date ended June 30, 2022, continue to reflect royalty revenues and expenses to support the Russian operations for Pizza Hut prior to the date of transfer and for KFC for the entire quarter and year to date (see Note 1) within their historical financial statement line items and operating segments.

However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we have reclassed such net profits from the Division segment results in which they were earned to Corporate and unallocated.

Additionally, we have incurred certain expenses related to the transfer of the businesses and other one-time costs related to our exit from Russia which we have recorded within Corporate and unallocated.

As a result of these reclasses of net profits and the other costs and expenses we have incurred, we recorded charges of $ 2 million to Corporate and unallocated G&A expenses and $ 4 million to Unallocated Franchise and property expenses during both the quarter and year to date ended June 30, 2022, as well as income of $ 20 million and $ 27 million to Unallocated Other (income) expense during the quarter and year to date ended June 30, 2022, respectively.

(b) Includes changes in the value of our investment in Devyani International Limited (see Note 12).

(c) Includes a $ 23 million call premium and $ 5 million of unamortized debt issuance costs written off related to the redemption of the 2025 Notes (see Note 10) during the quarter ended June 30, 2022.

Includes a $ 28 million call premium and $ 6 million of unamortized debt issuance costs written off related to the redemption of the $ 1,050 million aggregate principal amount of 5.25 % Subsidiary Senior Unsecured Notes due in 2026 during the quarter ended June 30, 2021.

Includes fees expensed and unamortized debt issuance costs written off totaling $ 12 million related to the refinancing of the Credit Agreement (as described within our 2021 Form 10-K) during the quarter ended March 31, 2021.

Note 9 - Pension Benefits

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pension plans are as follows:

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Service cost $ 1 $ 2 $ 3 $ 4

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Subsidiary Senior Unsecured Notes 750 750

Revolving Facility 174 —

Term Loan A Facility 745 750

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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!

The 2025 Notes were redeemed 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.

We recognized the call premium and the write-off of $ 5 million of unamortized debt issuance costs associated with the 2025 Notes within Interest expense, net in the quarter ended June 30, 2022.

Also on April 1, 2022, Yum!

issued $ 1 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.

Interest on the April 2032 Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2022.

The indenture governing the April 2032 Notes contains covenants and events of default that are customary for debt securities of this type, including cross-default provisions whereby the acceleration of the maturity of any of our indebtedness in a principal amount of $100 million or more or the failure to pay the principal of such indebtedness at its stated maturity will constitute an event of default under the April 2032 Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.

The Company paid debt issuance costs of $ 12 million in connection with the April 2032 Notes.

The debt issuance costs will be amortized to Interest expense, net over the life of the April 2032 Notes using the effective interest method.

We used the net proceeds from the April 2032 Notes to fund the redemption of the 2025 Notes discussed above and for general corporate purposes.

Excluding the amounts associated with the extinguishment of the 2025 Notes discussed above, cash paid for interest during the year to date ended June 30, 2022, was $ 239 million.

Excluding $ 12 million associated with the Credit Agreement refinancing and $ 34 million associated with the extinguishment of the 2026 Notes (as discussed in our 2021 Form 10-K), cash paid for interest during the year to date ended June 30, 2021, was $ 235 million.

Note 11 - Derivative Instruments

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

At both 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.

At both June 30, 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 June 30, 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.

Through June 30, 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.

At June 30, 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

Quarter ended Year to date

Gains/(Losses) Recognized in OCI (Gains)/Losses Reclassified from AOCI into Net Income Gains/(Losses) Recognized in OCI (Gains)/Losses Reclassified from AOCI into Net Income

2022 2021 2022 2021 2022 2021 2022 2021

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Income tax benefit/(expense) ( 3 ) 2 ( 2 ) ( 1 ) ( 17 ) ( 4 ) ( 5 ) ( 2 )

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.

As of June 30, 2022, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is less than $ 1 million, based on current LIBOR interest rates.

Total Return Swaps

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

The fair value associated with the total return swaps as of March 31, 2022, was not significant.

The fair value associated with the total return swaps as of both June 30, 2022 and December 31, 2021, 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.

As of June 30, 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.

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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.

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 8.2 billion (or approximately $ 104 million) and Indian Rupee 8.8 billion (or approximately $ 118 million) at June 30, 2022 and December 31, 2021, respectively.

For the quarter and year to date ended June 30, 2022, we recognized pre-tax investment losses of Indian Rupee 1.1 billion (or approximately $ 14 million) and Indian Rupee 0.5 billion (or approximately $ 7 million), respectively, 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.

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;

As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, in August 2022, we received a Revenue Agent’s Report (“RAR”) from the IRS asserting an underpayment of tax of $2.1 billion plus $418 million in penalties for the 2014 fiscal year.

Additionally, interest on the underpayment is estimated to be approximately $700 million through the second quarter of 2022.

The proposed underpayment relates primarily 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 transactions resulted in taxable distributions of approximately $6.0 billion.

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

The Company does not expect resolution of this matter within twelve months and cannot predict with certainty the timing of such resolution.

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.

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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.

As of June 30, 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 June 30, 2022, was approximately $ 325 million.

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

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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.

The liability recorded for our expected losses under such leases as of June 30, 2022, was not material.

Legal Proceedings

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An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable.

India Regulatory Matter

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”).

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

Yum China License Fee Dispute

Yum China Holdings, Inc.

(“Yum China”) is disputing license fees due on certain amounts of its gross revenue under the terms of the Master License Agreement (“MLA”) between the Company and Yum China.

The parties are proceeding under the dispute resolution process pursuant to the MLA to resolve the disagreement over these license fees, which total approximately $4 million for the year to date ended June 30, 2022.

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.

Yum China has paid the $4 million, under protest and without any prejudice to Yum China’s position that they are not obligated to pay under the MLA.

Other Matters

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.

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

What changed 10-Q

Item 1. Financial Statements