What changed in this filing

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Item 1. Financial Statements

2022-11-08 compared with 2022-08-08 · 92 added, 73 removed, 511 unchanged (24% of the section changed)

22 unchanged sentences

Income Before Income Taxes 447 451 1,235 1,267

Income tax provision 166 16 165 99

Income tax provision (benefit) 116 ( 77 ) 281 22

Net Income $ 331 $ 528 $ 954 $ 1,245

23 unchanged sentences

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

( 11 ) ( 2 ) ( 33 ) ( 8 )

16 ( 3 ) 68 18

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

Other comprehensive income (loss), net of tax ( 4 ) ( 7 ) 27 80

Comprehensive Income $ 327 $ 521 $ 981 $ 1,325

31 unchanged sentences

Effect of Exchange Rates on Cash and Cash Equivalents ( 43 ) ( 1 )

Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 143 ) ( 190 )

Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 108 ) 287

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 771 1,024

35 unchanged sentences

AND SUBSIDIARIES

Quarters ended June 30, 2022 and 2021

Quarters and years to date ended September 30, 2022 and 2021

(in millions)

2 unchanged sentences

Shares Amount

Balance at March 31, 2022

Balance at June 30, 2022

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

8 unchanged sentences

Share-based compensation events 21 21

Balance at June 30, 2022

Balance at September 30, 2022

284 $ — $ ( 8,244 ) $ ( 298 ) $ ( 8,542 )

10 unchanged sentences

Share-based compensation events 79 79

Balance at June 30, 2022

Balance at September 30, 2022

284 $ — $ ( 8,244 ) $ ( 298 ) $ ( 8,542 )

Balance at March 31, 2021

Balance at June 30, 2021

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

2 unchanged sentences

Pension and post-retirement benefit plans (net of tax impact of $ 2 million)

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

Net gain on derivative instruments (net of tax impact of $ 2 million)

Comprehensive Income 521

3 unchanged sentences

Share-based compensation events 21 21

Balance at June 30, 2021

Balance at September 30, 2021

294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 )

10 unchanged sentences

Share-based compensation events 62 62

Balance at June 30, 2021

Balance at September 30, 2021

294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 )

6 unchanged sentences

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 53,000 restaurants in 155 countries and territories.

As of June 30, 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 nearly 54,000 restaurants in more than 155 countries and territories.

As of September 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:

As of September 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 June 30, 2022.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 30, 2022.

These reclassifications had no effect on previously reported Net Income.

4 unchanged sentences

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.

During the third quarter, we initiated the bidding process for the KFC Russia business and, as a result, those operations qualified for held-for-sale accounting at September 30, 2022.

Total KFC Russia assets held-for-sale of $ 224 million and total KFC Russia liabilities held-for-sale of $ 82 million are included in Prepaid expenses and other current assets and Accounts payable and other current liabilities, respectively, in our Condensed Consolidated Balance Sheet at September 30, 2022.

At September 30, 2022, we determined the carrying value of the KFC Russia asset group was recoverable based on expected sale proceeds.

In October 2022, we announced that we have entered into a sale and purchase agreement to transfer ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of KFC franchised restaurants, to Smart Service Ltd., a business operated by one of our existing KFC franchisees in Russia.

Under the agreement, the buyer will be responsible for re-branding locations to a non-YUM concept and retaining the Company's employees in Russia.

Completion of the transaction is subject to regulatory and governmental approvals, as well as other conditions.

Following the completion of the transaction, we will have ceased our corporate presence in Russia.

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

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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.

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

All amounts exclude applicable transaction fees.

5 unchanged sentences

May 2021 5,987 2,602 714 330 236

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

September 2022 — — — — 2,000

Total 5,987 7,348 (a)

$ 714 $ 860 (a)

(a) Includes the effect of $ 14 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, September 30, 2021, but cash settlement dates subsequent to September 30, 2021, and 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.

As of September 30, 2022, $ 236 million remains available under this authorization.

In September 2022, our Board of Directors authorized share repurchases of up to $ 2 billion (excluding applicable transaction fees) of our outstanding Common Stock through June 30, 2024.

The new authorization will take effect upon the earlier of the exhaustion or expiration of the authorization approved in May 2021.

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 )

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

OCI, net of tax

3 unchanged sentences

( 55 ) 19 32 ( 4 )

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

Balance at September 30, 2022, net of tax $ ( 305 ) $ ( 8 ) $ 15 $ ( 298 )

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

4 unchanged sentences

( 99 ) 26 100 27

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

Balance at September 30, 2022, net of tax $ ( 305 ) $ ( 8 ) $ 15 $ ( 298 )

Note 4 - Other (Income) Expense

19 unchanged sentences

Property, plant and equipment, net $ 1,114 $ 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.

Assets held-for-sale totaled $ 228 million and $ 12 million as of September 30, 2022 and December 31, 2021, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Liabilities held-for-sale totaled $ 82 million as of September 30, 2022, and are included in Accounts payable and other current liabilities in our Condensed Consolidated Balance Sheets as of September 30, 2022.

KFC Russia assets held-for-sale accounted for $ 224 million including property, plant and equipment of $ 69 million, of the $ 228 million, while KFC Russia liabilities held-for-sale accounted for all of the $ 82 million as of September 30, 2022.

Other Assets 9/30/2022 12/31/2021

4 unchanged sentences

Other assets $ 1,429 $ 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.

(a) Non-current operating lease liabilities of $ 721 million and $ 793 million as of September 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

3 unchanged sentences

Restricted cash and restricted cash equivalents included in Other assets (b)

Cash and restricted cash related to KFC Russia included in assets held-for-sale 41 —

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows $ 663 $ 771

6 unchanged sentences

Effective tax rate 25.8 % ( 17.0 ) % 22.7 % 1.8 %

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.

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

• Lapping a $ 152 million tax benefit recorded in the quarter ended September 30, 2021, resulting from a KFC Europe reorganization in which we concentrated management responsibility for European (excluding the United Kingdom ("UK")) KFC franchise development, support operation and management oversight in Switzerland.

Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC intellectual property rights from subsidiaries in the UK to subsidiaries in Switzerland.

With the transfer of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law which resulted in the recording of the one-time tax benefit to record the deferred tax asset.

• Lower excess tax benefits on share-based compensation than those recognized in the quarter ended September 30, 2021.

• Higher tax expense recognized in the quarter ended September 30, 2022, associated with adjustments related to prior year taxes.

Our year-to-date effective tax rate was also higher than the prior year due to the items discussed above, as well as the following:

• Our decision to exit the Russia market is anticipated to result in 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 have remeasured and reassessed the need for a valuation allowance on those deferred tax assets.

In addition, we have 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.

Primarily as a result of these items, we recorded $ 69 million of net tax expense in the year to date ended September 30, 2022 associated with our decision to exit the Russia market.

• Lapping a $ 64 million tax benefit that was recorded in the quarter ended June 30, 2021, to remeasure deferred taxes necessitated by the enactment of the UK Finance Act 2021.

The UK Finance Act 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.

• The items above were partially 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.

61 unchanged sentences

Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 65

Balance at June 30, 2022 $ 426

Deferred franchise fees related to KFC Russia reclassified to liabilities held-for-sale ( 20 )

Balance at September 30, 2022 $ 404

(a) Primarily includes impact of foreign currency translation.

25 unchanged sentences

Unallocated Franchise and property expenses (a)

( 4 ) — ( 4 ) —

Unallocated Refranchising gain (loss) 3 ( 1 ) 15 21

3 unchanged sentences

Investment income (expense), net (b)

( 15 ) 1 ( 8 ) 1

Other pension income (expense) ( 2 ) ( 1 ) ( 3 ) ( 6 )

4 unchanged sentences

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.

(a) Our operating results for the year to date ended September 30, 2022, continue to reflect royalty revenues from 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 operating profits from the Division segment results in which they were earned to Corporate and unallocated Other income (expense).

As a result, we reclassed net operating profits of $ 18 million and $ 44 million from KFC and Pizza Hut Other income (expense) to Unallocated Other (income) expense during the quarter and year to date ended September 30, 2022, respectively.

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.

As a result of these other costs and expenses we have incurred, we recorded charges of $ 1 million to Corporate and unallocated G&A expenses and less than $ 1 million to Unallocated Franchise and property expenses during the quarter ended September 30, 2022.

During the year to date ended September 30, 2022, we recorded charges of $ 3 million to Corporate and unallocated G&A expenses and $ 4 million to Unallocated Franchise and property expenses.

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

8 unchanged sentences

The Plan and our non-qualified plans in the U.S.

are closed to new salaried participants.

are currently closed to new salaried and hourly participants.

The components of net periodic benefit cost associated with our U.S.

8 unchanged sentences

Net periodic benefit cost $ 3 $ 3 $ 7 $ 14

Additional loss recognized due to settlements (a)

$ 2 $ — $ 2 $ —

(a) Loss is a result of settlement transactions which exceeded the sum of annual service and interest costs for the applicable plan.

This loss was recorded in Other pension (income) expense.

Note 10 - Short-term Borrowings and Long-term Debt

11 unchanged sentences

$ 11,680 $ 11,339

Less debt issuance costs and discounts ( 87 ) ( 86 )

Less long-term portion of debt issuance costs and discounts ( 84 ) ( 86 )

Less current maturities of long-term debt ( 79 ) ( 75 )

12 unchanged sentences

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.

Excluding the amounts associated with the extinguishment of the 2025 Notes discussed above, cash paid for interest during the year to date ended September 30, 2022, was $ 341 million.

Note 11 - Derivative Instruments

3 unchanged sentences

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

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.

At both September 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 September 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.

Through September 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.

At September 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.

5 unchanged sentences

Income tax benefit/(expense) ( 10 ) ( 1 ) ( 1 ) ( 1 ) ( 27 ) ( 5 ) ( 6 ) ( 3 )

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.

As of September 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 $ 19 million, based on current LIBOR interest rates.

Total Return Swaps

2 unchanged sentences

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.

The fair value associated with the total return swaps as of both September 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.

As of September 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 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:

21 unchanged sentences

Other Investments Other assets 3 5 5

Interest Rate Swaps Prepaid expenses and other current assets 2 19 —

Interest Rate Swaps Other assets 2 23 —

Interest Rate Swaps

3 unchanged sentences

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.

The other investments primarily include a 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 10.3 billion (or approximately $ 127 million) and Indian Rupee 8.8 billion (or approximately $ 118 million) at September 30, 2022 and December 31, 2021, respectively.

For the quarter and year to date ended September 30, 2022, we recognized pre-tax investment gains of Indian Rupee 2.1 billion (or approximately $ 27 million) and Indian Rupee 1.6 billion (or approximately $ 20 million), respectively, related to changes in fair value of our investment in Devyani.

Note 13 - Contingencies

1 unchanged sentence

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.

Additionally, interest on the underpayment is estimated to be approximately $740 million through the third 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.

We disagree with the IRS’s position as asserted in the RAR and intend to contest that position vigorously.

In September 2022, we filed a Protest with the IRS Examination Division disputing on multiple grounds the proposed underpayment of tax and penalties.

We are awaiting the IRS Examination Division’s Rebuttal to our Protest.

When that Rebuttal is filed we intend to pursue independent review by 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.

5 unchanged sentences

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.

As of September 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 $ 375 million.

The present value of these potential payments discounted at our pre-tax cost of debt at September 30, 2022, was approximately $ 300 million.

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

1 unchanged sentence

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.

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

Legal Proceedings

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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.

The stay order remains in effect and the next hearing is now scheduled for January 31, 2023.

We deny liability and intend to continue vigorously defending this matter.

3 unchanged sentences

(“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.

These license fees total approximately $7 million for the year to date ended September 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.

4 unchanged sentences

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