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 Year to date Revenues 6/30/2022 6/30/2021 6/30/2022 6/30/2021 Company sales $ 499 $ 520 $ 969 $ 996 Franchise and property revenues 737 706 1,451 1,364 Franchise contributions for advertising and other services 400 376 763 728 Total revenues 1,636 1,602 3,183 3,088 Costs and Expenses, Net Company restaurant expenses 415 417 817 809 General and administrative expenses 254 230 507 436 Franchise and property expenses 29 27 61 50 Franchise advertising and other services expense 396 372 757 715 Refranchising (gain) loss ( 8 ) ( 7 ) ( 12 ) ( 22 ) Other (income) expense ( 4 ) ( 4 ) ( 10 ) ( 10 ) Total costs and expenses, net 1,082 1,035 2,120 1,978 Operating Profit 554 567 1,063 1,110 Investment (income) expense, net 15 ( 1 ) 8 ( 1 ) Other pension (income) expense 1 2 1 5 Interest expense, net 148 159 266 290 Income Before Income Taxes 390 407 788 816 Income tax provision 166 16 165 99 Net Income $ 224 $ 391 $ 623 $ 717 Basic Earnings Per Common Share $ 0.78 $ 1.31 $ 2.16 $ 2.39 Diluted Earnings Per Common Share $ 0.77 $ 1.29 $ 2.13 $ 2.35 Dividends Declared Per Common Share $ 0.57 $ 0.50 $ 1.14 $ 1.00 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 Year to date 6/30/2022 6/30/2021 6/30/2022 6/30/2021 Net Income $ 224 $ 391 $ 623 $ 717 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 ( 21 ) 14 ( 44 ) 17 ( 21 ) 14 ( 44 ) 17 Tax (expense) benefit — — — — ( 21 ) 14 ( 44 ) 17 Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the period — 11 — 58 Reclassification of (gains) losses into Net Income 4 4 9 11 4 15 9 69 Tax (expense) benefit ( 1 ) ( 4 ) ( 2 ) ( 17 ) 3 11 7 52 Changes in derivative instruments Unrealized gains (losses) arising during the period 15 ( 8 ) 72 16 Reclassification of (gains) losses into Net Income 6 4 18 8 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 Comprehensive Income $ 222 $ 413 $ 654 $ 804 See accompanying Notes to Condensed Consolidated Financial Statements. 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Year to date 6/30/2022 6/30/2021 Cash Flows – Operating Activities Net Income $ 623 $ 717 Depreciation and amortization 71 78 Refranchising (gain) loss ( 12 ) ( 22 ) Investment (income) expense, net 8 ( 1 ) Deferred income taxes — ( 41 ) Share-based compensation expense 45 38 Changes in accounts and notes receivable ( 4 ) 25 Changes in prepaid expenses and other current assets ( 2 ) ( 11 ) Changes in accounts payable and other current liabilities ( 213 ) ( 95 ) Changes in income taxes payable ( 23 ) ( 25 ) Other, net 29 110 Net Cash Provided by Operating Activities 522 773 Cash Flows – Investing Activities Capital spending ( 97 ) ( 84 ) Proceeds from refranchising of restaurants 41 43 Other, net ( 8 ) 33 Net Cash Used In Investing Activities ( 64 ) ( 8 ) Cash Flows – Financing Activities Proceeds from long-term debt 999 1,900 Repayments of long-term debt ( 658 ) ( 2,002 ) Repurchase shares of Common Stock ( 557 ) ( 530 ) Dividends paid on Common Stock ( 327 ) ( 299 ) Debt issuance costs ( 11 ) ( 18 ) Other, net ( 32 ) ( 17 ) Net Cash Used in Financing Activities ( 586 ) ( 966 ) Effect of Exchange Rates on Cash and Cash Equivalents ( 15 ) 11 Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 143 ) ( 190 ) 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 $ 628 $ 834 See accompanying Notes to Condensed Consolidated Financial Statements. 6 CONDENSED CONSOLIDATED BALANCE SHEETS YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) (Unaudited) 6/30/2022 12/31/2021 ASSETS Current Assets Cash and cash equivalents $ 412 $ 486 Accounts and notes receivable, net 598 596 Prepaid expenses and other current assets 419 450 Total Current Assets 1,429 1,532 Property, plant and equipment, net 1,192 1,207 Goodwill 649 657 Intangible assets, net 361 359 Other assets 1,457 1,487 Deferred income taxes 702 724 Total Assets $ 5,790 $ 5,966 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current Liabilities Accounts payable and other current liabilities $ 1,090 $ 1,334 Income taxes payable 21 13 Short-term borrowings 72 68 Total Current Liabilities 1,183 1,415 Long-term debt 11,540 11,178 Other liabilities and deferred credits 1,635 1,746 Total Liabilities 14,358 14,339 Shareholders’ Deficit Common Stock, no par value, 750 shares authorized; 285 shares issued in 2022 and 289 issued in 2021 — — Accumulated deficit ( 8,274 ) ( 8,048 ) Accumulated other comprehensive loss ( 294 ) ( 325 ) Total Shareholders’ Deficit ( 8,568 ) ( 8,373 ) Total Liabilities and Shareholders’ Deficit $ 5,790 $ 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 June 30, 2022 and 2021 (in millions) Yum! Brands, Inc. Issued Common Stock Accumulated Deficit Accumulated Other Comprehensive Loss Total Shareholders' Deficit 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) 3 3 Net gain on derivative instruments (net of tax impact of $ 5 million) 16 16 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 289 $ — $ ( 8,048 ) $ ( 325 ) $ ( 8,373 ) Net Income 623 623 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 44 ) ( 44 ) Pension and post-retirement benefit plans (net of tax impact of $ 2 million) 7 7 Net gain on derivative instruments (net of tax impact of $ 22 million) 68 68 Comprehensive Income 654 Dividends declared ( 329 ) ( 329 ) Repurchase of shares of Common Stock ( 5 ) ( 37 ) ( 520 ) ( 557 ) Employee share-based award exercises 1 ( 21 ) ( 21 ) 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) 11 11 Net loss on derivative instruments (net of tax impact of $ 1 million) ( 3 ) ( 3 ) 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 300 $ — $ ( 7,480 ) $ ( 411 ) $ ( 7,891 ) Net Income 717 717 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 17 17 Pension and post-retirement benefit plans (net of tax impact of $ 17 million) 52 52 Net gain on derivative instruments (net of tax impact of $ 6 million) 18 18 Comprehensive Income 804 Dividends declared ( 300 ) ( 300 ) Repurchase of shares of Common Stock ( 5 ) ( 24 ) ( 506 ) ( 530 ) Employee share-based award exercises 1 ( 17 ) ( 17 ) Share-based compensation events 41 41 Balance at June 30, 2021 296 $ — $ ( 7,569 ) $ ( 324 ) $ ( 7,893 ) 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 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 June 30, 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 June 30, 2022. These reclassifications had no effect on previously reported Net Income. Russia Invasion of Ukraine 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. 9 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 Year to date 2022 2021 2022 2021 Net Income $ 224 $ 391 $ 623 $ 717 Weighted-average common shares outstanding (for basic calculation) 286 298 288 299 Effect of dilutive share-based employee compensation 4 6 4 5 Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) 290 304 292 304 Basic EPS $ 0.78 $ 1.31 $ 2.16 $ 2.39 Diluted EPS $ 0.77 $ 1.29 $ 2.13 $ 2.35 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. 10 Note 3 - Shareholders' Deficit 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. 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 — 4,746 $ — $ 530 $ — May 2021 4,635 — 557 — 393 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. 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 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 — 3 5 8 ( 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 ) OCI, net of tax Gains (losses) arising during the period classified into AOCI, net of tax ( 44 ) — 54 10 (Gains) losses reclassified from AOCI, net of tax — 7 14 21 ( 44 ) 7 68 31 Balance at June 30, 2022, net of tax $ ( 250 ) $ ( 27 ) $ ( 17 ) $ ( 294 ) 11 Note 4 - Other (Income) Expense Quarter ended Year to date 6/30/2022 6/30/2021 6/30/2022 6/30/2021 Foreign exchange net (gain) loss $ ( 8 ) $ 1 $ ( 12 ) $ 3 Impairment and closure expense ( 1 ) — ( 1 ) 1 Other 5 ( 5 ) 3 ( 14 ) Other (income) expense $ ( 4 ) $ ( 4 ) $ ( 10 ) $ ( 10 ) 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. 6/30/2022 12/31/2021 Accounts and notes receivable, gross $ 639 $ 632 Allowance for doubtful accounts ( 41 ) ( 36 ) Accounts and notes receivable, net $ 598 $ 596 Property, Plant and Equipment, net 6/30/2022 12/31/2021 Property, plant and equipment, gross $ 2,491 $ 2,477 Accumulated depreciation and amortization ( 1,299 ) ( 1,270 ) Property, plant and equipment, net $ 1,192 $ 1,207 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 Operating lease right-of-use assets (a) $ 776 $ 809 Franchise incentives 182 164 Investment in Devyani International Limited (See Note 12) 104 118 Other 395 396 Other assets $ 1,457 $ 1,487 (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 6/30/2022 12/31/2021 Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets $ 412 $ 486 Restricted cash included in Prepaid expenses and other current assets (a) 182 250 Restricted cash and restricted cash equivalents included in Other assets (b) 34 35 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows $ 628 $ 771 12 (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 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 % 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. 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. 13 Quarter ended 6/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 16 $ 243 $ 5 $ 136 $ 400 Franchise revenues 47 178 64 2 291 Property revenues 3 10 1 — 14 Franchise contributions for advertising and other services 7 142 72 — 221 China Franchise revenues 48 — 13 — 61 Other Company sales 99 — — — 99 Franchise revenues 283 11 63 — 357 Property revenues 13 — 1 — 14 Franchise contributions for advertising and other services 161 2 16 — 179 $ 677 $ 586 $ 235 $ 138 $ 1,636 Quarter ended 6/30/2021 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 16 $ 223 $ 5 $ 138 $ 382 Franchise revenues 48 160 67 1 276 Property revenues 3 10 2 — 15 Franchise contributions for advertising and other services 7 128 74 — 209 China Franchise revenues 58 — 16 — 74 Other Company sales 131 — 7 — 138 Franchise revenues 255 9 62 — 326 Property revenues 15 — — — 15 Franchise contributions for advertising and other services 149 2 16 — 167 $ 682 $ 532 $ 249 $ 139 $ 1,602 14 Year to date 6/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. 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 China Franchise revenues 109 — 29 — 138 Other 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 U.S. 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 China Franchise revenues 120 — 32 — 152 Other 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 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. 15 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 ( 38 ) Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 42 Other (a) 1 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: Less than 1 year $ 69 1 - 2 years 63 2 - 3 years 58 3 - 4 years 51 4 - 5 years 45 Thereafter 140 Total $ 426 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: Quarter ended Year to date Revenues 2022 2021 2022 2021 KFC Division $ 677 $ 682 $ 1,337 $ 1,307 Taco Bell Division 586 532 1,103 1,020 Pizza Hut Division 235 249 479 500 Habit Burger Grill Division 138 139 264 261 $ 1,636 $ 1,602 $ 3,183 $ 3,088 Quarter ended Year to date Operating Profit 2022 2021 2022 2021 KFC Division $ 293 $ 318 $ 584 $ 618 Taco Bell Division 215 198 400 376 Pizza Hut Division 93 103 195 205 Habit Burger Grill Division ( 2 ) 5 ( 10 ) 5 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) (a) 16 ( 1 ) 22 ( 3 ) Operating Profit $ 554 $ 567 $ 1,063 $ 1,110 Investment income (expense), net (b) ( 15 ) 1 ( 8 ) 1 Other pension income (expense) ( 1 ) ( 2 ) ( 1 ) ( 5 ) Interest expense, net (c) ( 148 ) ( 159 ) ( 266 ) ( 290 ) Income before income taxes $ 390 $ 407 $ 788 $ 816 16 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) 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 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. The components of net periodic benefit cost associated with our U.S. pension plans are as follows: Quarter ended Year to date 2022 2021 2022 2021 Service cost $ 1 $ 2 $ 3 $ 4 Interest cost 8 8 16 16 Expected return on plan assets ( 11 ) ( 10 ) ( 23 ) ( 21 ) Amortization of net loss 2 3 5 9 Amortization of prior service cost 2 2 3 3 Net periodic benefit cost $ 2 $ 5 $ 4 $ 11 17 Note 10 - Short-term Borrowings and Long-term Debt Short-term Borrowings 6/30/2022 12/31/2021 Current maturities of long-term debt $ 79 $ 75 Less current portion of debt issuance costs and discounts ( 7 ) ( 7 ) Short-term borrowings $ 72 $ 68 Long-term Debt Securitization Notes $ 3,792 $ 3,811 Subsidiary Senior Unsecured Notes 750 750 Term Loan A Facility 745 750 Term Loan B Facility 1,482 1,489 YUM Senior Unsecured Notes 4,875 4,475 Finance lease obligations 62 64 $ 11,706 $ 11,339 Less debt issuance costs and discounts ( 87 ) ( 86 ) Less current maturities of long-term debt ( 79 ) ( 75 ) Long-term debt $ 11,540 $ 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 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! Brands, Inc. issued $ 1 billion aggregate principal amount of 5.375 % YUM Senior Unsecured Notes due April 1, 2032 (the “April 2032 Notes”). 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 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. 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 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 18 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 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 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 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 Interest rate swaps $ 12 $ ( 7 ) $ 9 $ 4 $ 71 $ 17 $ 20 $ 8 Income tax benefit/(expense) ( 3 ) 2 ( 2 ) ( 1 ) ( 17 ) ( 4 ) ( 5 ) ( 2 ) 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 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 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 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. The following table presents the carrying value and estimated fair value of the Company’s debt obligations: 19 6/30/2022 12/31/2021 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Securitization Notes (a) $ 3,792 $ 3,453 $ 3,811 $ 3,872 Subsidiary Senior Unsecured Notes (b) 750 722 750 784 Term Loan A Facility (b) 745 732 750 748 Term Loan B Facility (b) 1,482 1,470 1,489 1,490 YUM Senior Unsecured Notes (b) 4,875 4,465 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 6/30/2022 12/31/2021 Assets Other Investments Other assets 1 $ 106 $ 119 Other Investments Other assets 3 5 5 Liabilities Interest Rate Swaps Accounts payable and other current liabilities 2 — 38 Interest Rate Swaps Other liabilities and deferred credits 2 2 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 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, 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. 20 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. 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 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. 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 June 30, 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. India Regulatory Matter 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 $140 million. Of this amount, $135 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. 21 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 Condensed Consolidated Financial Statements. 22