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 9/30/2022 9/30/2021 9/30/2022 9/30/2021 Company sales $ 479 $ 513 $ 1,448 $ 1,509 Franchise and property revenues 760 716 2,211 2,080 Franchise contributions for advertising and other services 401 377 1,164 1,105 Total revenues 1,640 1,606 4,823 4,694 Costs and Expenses, Net Company restaurant expenses 402 421 1,219 1,230 General and administrative expenses 261 253 768 689 Franchise and property expenses 28 31 89 81 Franchise advertising and other services expense 396 375 1,153 1,090 Refranchising (gain) loss ( 3 ) 1 ( 15 ) ( 21 ) Other (income) expense 10 ( 2 ) — ( 12 ) Total costs and expenses, net 1,094 1,079 3,214 3,057 Operating Profit 546 527 1,609 1,637 Investment (income) expense, net ( 27 ) ( 51 ) ( 19 ) ( 52 ) Other pension (income) expense 2 1 3 6 Interest expense, net 124 126 390 416 Income Before Income Taxes 447 451 1,235 1,267 Income tax provision (benefit) 116 ( 77 ) 281 22 Net Income $ 331 $ 528 $ 954 $ 1,245 Basic Earnings Per Common Share $ 1.16 $ 1.78 $ 3.33 $ 4.17 Diluted Earnings Per Common Share $ 1.14 $ 1.75 $ 3.28 $ 4.10 Dividends Declared Per Common Share $ 0.57 $ 0.50 $ 1.71 $ 1.50 See accompanying Notes to Condensed Consolidated Financial Statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Quarter ended Year to date 9/30/2022 9/30/2021 9/30/2022 9/30/2021 Net Income $ 331 $ 528 $ 954 $ 1,245 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 ( 55 ) ( 19 ) ( 99 ) ( 2 ) ( 55 ) ( 19 ) ( 99 ) ( 2 ) Tax (expense) benefit — — — — ( 55 ) ( 19 ) ( 99 ) ( 2 ) Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the period 20 3 20 61 Reclassification of (gains) losses into Net Income 5 5 14 16 25 8 34 77 Tax (expense) benefit ( 6 ) ( 2 ) ( 8 ) ( 19 ) 19 6 26 58 Changes in derivative instruments Unrealized gains (losses) arising during the period 42 1 114 17 Reclassification of (gains) losses into Net Income 1 7 19 15 43 8 133 32 Tax (expense) benefit ( 11 ) ( 2 ) ( 33 ) ( 8 ) 32 6 100 24 Other comprehensive income (loss), net of tax ( 4 ) ( 7 ) 27 80 Comprehensive Income $ 327 $ 521 $ 981 $ 1,325 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 9/30/2022 9/30/2021 Cash Flows – Operating Activities Net Income $ 954 $ 1,245 Depreciation and amortization 104 117 Refranchising (gain) loss ( 15 ) ( 21 ) Investment (income) expense, net ( 19 ) ( 52 ) Deferred income taxes 3 ( 173 ) Share-based compensation expense 64 58 Changes in accounts and notes receivable ( 26 ) — Changes in prepaid expenses and other current assets ( 3 ) ( 5 ) Changes in accounts payable and other current liabilities ( 149 ) 24 Changes in income taxes payable ( 3 ) ( 45 ) Other, net 65 144 Net Cash Provided by Operating Activities 975 1,292 Cash Flows – Investing Activities Capital spending ( 158 ) ( 138 ) Proceeds from refranchising of restaurants 51 48 Other, net ( 5 ) ( 33 ) Net Cash Used In Investing Activities ( 112 ) ( 123 ) Cash Flows – Financing Activities Proceeds from long-term debt 999 4,150 Repayments of long-term debt ( 678 ) ( 3,647 ) Repurchase shares of Common Stock ( 714 ) ( 857 ) Dividends paid on Common Stock ( 489 ) ( 446 ) Debt issuance costs ( 11 ) ( 37 ) Other, net ( 35 ) ( 44 ) Net Cash Used in Financing Activities ( 928 ) ( 881 ) Effect of Exchange Rates on Cash and Cash Equivalents ( 43 ) ( 1 ) 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 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period $ 663 $ 1,311 See accompanying Notes to Condensed Consolidated Financial Statements. 6 CONDENSED CONSOLIDATED BALANCE SHEETS YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) (Unaudited) 9/30/2022 12/31/2021 ASSETS Current Assets Cash and cash equivalents $ 410 $ 486 Accounts and notes receivable, net 579 596 Prepaid expenses and other current assets 606 450 Total Current Assets 1,595 1,532 Property, plant and equipment, net 1,114 1,207 Goodwill 633 657 Intangible assets, net 341 359 Other assets 1,429 1,487 Deferred income taxes 667 724 Total Assets $ 5,779 $ 5,966 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current Liabilities Accounts payable and other current liabilities $ 1,156 $ 1,334 Income taxes payable 16 13 Short-term borrowings 72 68 Total Current Liabilities 1,244 1,415 Long-term debt 11,517 11,178 Other liabilities and deferred credits 1,560 1,746 Total Liabilities 14,321 14,339 Shareholders’ Deficit Common Stock, no par value, 750 shares authorized; 284 shares issued in 2022 and 289 issued in 2021 — — Accumulated deficit ( 8,244 ) ( 8,048 ) Accumulated other comprehensive loss ( 298 ) ( 325 ) Total Shareholders’ Deficit ( 8,542 ) ( 8,373 ) Total Liabilities and Shareholders’ Deficit $ 5,779 $ 5,966 See accompanying Notes to Condensed Consolidated Financial Statements. 7 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES Quarters and years to date ended September 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 June 30, 2022 285 $ — $ ( 8,274 ) $ ( 294 ) $ ( 8,568 ) Net Income 331 331 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 55 ) ( 55 ) Pension and post-retirement benefit plans (net of tax impact of $ 6 million) 19 19 Net gain on derivative instruments (net of tax impact of $ 11 million) 32 32 Comprehensive Income 327 Dividends declared ( 162 ) ( 162 ) Repurchase of shares of Common Stock ( 1 ) ( 18 ) ( 139 ) ( 157 ) Employee share-based award exercises — ( 3 ) ( 3 ) Share-based compensation events 21 21 Balance at September 30, 2022 284 $ — $ ( 8,244 ) $ ( 298 ) $ ( 8,542 ) Balance at December 31, 2021 289 $ — $ ( 8,048 ) $ ( 325 ) $ ( 8,373 ) Net Income 954 954 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 99 ) ( 99 ) Pension and post-retirement benefit plans (net of tax impact of $ 8 million) 26 26 Net gain on derivative instruments (net of tax impact of $ 33 million) 100 100 Comprehensive Income 981 Dividends declared ( 491 ) ( 491 ) Repurchase of shares of Common Stock ( 6 ) ( 55 ) ( 659 ) ( 714 ) Employee share-based award exercises 1 ( 24 ) ( 24 ) Share-based compensation events 79 79 Balance at September 30, 2022 284 $ — $ ( 8,244 ) $ ( 298 ) $ ( 8,542 ) Balance at June 30, 2021 296 $ — $ ( 7,569 ) $ ( 324 ) $ ( 7,893 ) Net Income 528 528 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 19 ) ( 19 ) Pension and post-retirement benefit plans (net of tax impact of $ 2 million) 6 6 Net gain on derivative instruments (net of tax impact of $ 2 million) 6 6 Comprehensive Income 521 Dividends declared ( 148 ) ( 148 ) Repurchase of shares of Common Stock ( 2 ) — ( 330 ) ( 330 ) Employee share-based award exercises — ( 21 ) ( 5 ) ( 26 ) Share-based compensation events 21 21 Balance at September 30, 2021 294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 ) Balance at December 31, 2020 300 $ — $ ( 7,480 ) $ ( 411 ) $ ( 7,891 ) Net Income 1,245 1,245 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 2 ) ( 2 ) Pension and post-retirement benefit plans (net of tax impact of $ 19 million) 58 58 Net gain on derivative instruments (net of tax impact of $ 8 million) 24 24 Comprehensive Income 1,325 Dividends declared ( 448 ) ( 448 ) Repurchase of shares of Common Stock ( 7 ) ( 24 ) ( 836 ) ( 860 ) Employee share-based award exercises 1 ( 38 ) ( 5 ) ( 43 ) Share-based compensation events 62 62 Balance at September 30, 2021 294 $ — $ ( 7,524 ) $ ( 331 ) $ ( 7,855 ) 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 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 September 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 and year to date ended September 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. 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”) Quarter ended Year to date 2022 2021 2022 2021 Net Income $ 331 $ 528 $ 954 $ 1,245 Weighted-average common shares outstanding (for basic calculation) 285 296 287 298 Effect of dilutive share-based employee compensation 4 6 4 6 Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) 289 302 291 304 Basic EPS $ 1.16 $ 1.78 $ 3.33 $ 4.17 Diluted EPS $ 1.14 $ 1.75 $ 3.28 $ 4.10 Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation (a) 2.0 0.1 1.9 1.5 (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 September 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 5,987 2,602 714 330 236 September 2022 — — — — 2,000 Total 5,987 7,348 (a) $ 714 $ 860 (a) $ 2,236 (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. 11 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 June 30, 2022, net of tax $ ( 250 ) $ ( 27 ) $ ( 17 ) $ ( 294 ) OCI, net of tax Gains (losses) arising during the period classified into AOCI, net of tax ( 55 ) 15 32 ( 8 ) (Gains) losses reclassified from AOCI, net of tax — 4 — 4 ( 55 ) 19 32 ( 4 ) Balance at September 30, 2022, net of tax $ ( 305 ) $ ( 8 ) $ 15 $ ( 298 ) 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 ( 99 ) 15 86 2 (Gains) losses reclassified from AOCI, net of tax — 11 14 25 ( 99 ) 26 100 27 Balance at September 30, 2022, net of tax $ ( 305 ) $ ( 8 ) $ 15 $ ( 298 ) Note 4 - Other (Income) Expense Quarter ended Year to date 9/30/2022 9/30/2021 9/30/2022 9/30/2021 Foreign exchange net (gain) loss $ 4 $ 2 $ ( 8 ) $ 5 Impairment and closure expense 1 1 — 2 Other 5 ( 5 ) 8 ( 19 ) Other (income) expense $ 10 $ ( 2 ) $ — $ ( 12 ) 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. 12 9/30/2022 12/31/2021 Accounts and notes receivable, gross $ 613 $ 632 Allowance for doubtful accounts ( 34 ) ( 36 ) Accounts and notes receivable, net $ 579 $ 596 Property, Plant and Equipment, net 9/30/2022 12/31/2021 Property, plant and equipment, gross $ 2,376 $ 2,477 Accumulated depreciation and amortization ( 1,262 ) ( 1,270 ) Property, plant and equipment, net $ 1,114 $ 1,207 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 Operating lease right-of-use assets (a) $ 734 $ 809 Franchise incentives 174 164 Investment in Devyani International Limited (See Note 12) 127 118 Other 394 396 Other assets $ 1,429 $ 1,487 (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 9/30/2022 12/31/2021 Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets $ 410 $ 486 Restricted cash included in Prepaid expenses and other current assets (a) 178 250 Restricted cash and restricted cash equivalents included in Other assets (b) 34 35 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 (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. 13 Note 6 - Income Taxes Quarter ended Year to date 2022 2021 2022 2021 Income tax (benefit) provision $ 116 $ ( 77 ) $ 281 $ 22 Effective tax rate 25.8 % ( 17.0 ) % 22.7 % 1.8 % 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. • 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. 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. 14 Note 7 - Revenue Recognition Disaggregation of Total Revenues The following tables disaggregate revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors. Quarter ended 9/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 16 $ 234 $ 4 $ 129 $ 383 Franchise revenues 47 173 65 — 285 Property revenues 4 10 1 1 16 Franchise contributions for advertising and other services 7 136 72 1 216 China Franchise revenues 61 — 17 — 78 Other Company sales 96 — — — 96 Franchise revenues 291 13 62 — 366 Property revenues 15 — — — 15 Franchise contributions for advertising and other services 167 2 16 — 185 $ 704 $ 568 $ 237 $ 131 $ 1,640 Quarter ended 9/30/2021 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 15 $ 225 $ 5 $ 132 $ 377 Franchise revenues 46 156 63 1 266 Property revenues 3 11 2 — 16 Franchise contributions for advertising and other services 7 130 70 — 207 China Franchise revenues 61 — 16 — 77 Other Company sales 128 — 8 — 136 Franchise revenues 265 10 66 — 341 Property revenues 16 — — — 16 Franchise contributions for advertising and other services 151 2 17 — 170 $ 692 $ 534 $ 247 $ 133 $ 1,606 15 Year to date 9/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 47 $ 691 $ 14 $ 390 $ 1,142 Franchise revenues 139 508 193 3 843 Property revenues 10 31 3 1 45 Franchise contributions for advertising and other services 20 401 216 1 638 China Franchise revenues 170 — 46 — 216 Other Company sales 306 — — — 306 Franchise revenues 834 35 195 — 1,064 Property revenues 42 — 1 — 43 Franchise contributions for advertising and other services 473 5 48 — 526 $ 2,041 $ 1,671 $ 716 $ 395 $ 4,823 Year to date 9/30/2021 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 45 $ 656 $ 15 $ 391 $ 1,107 Franchise revenues 138 460 197 3 798 Property revenues 10 31 4 — 45 Franchise contributions for advertising and other services 20 375 223 — 618 China Franchise revenues 181 — 48 — 229 Other Company sales 378 — 24 — 402 Franchise revenues 750 27 185 — 962 Property revenues 45 — 1 — 46 Franchise contributions for advertising and other services 432 5 50 — 487 $ 1,999 $ 1,554 $ 747 $ 394 $ 4,694 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. 16 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 ( 57 ) Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 65 Deferred franchise fees related to KFC Russia reclassified to liabilities held-for-sale ( 20 ) Other (a) ( 5 ) Balance at September 30, 2022 $ 404 (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 $ 63 1 - 2 years 60 2 - 3 years 54 3 - 4 years 49 4 - 5 years 43 Thereafter 135 Total $ 404 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 $ 704 $ 692 $ 2,041 $ 1,999 Taco Bell Division 568 534 1,671 1,554 Pizza Hut Division 237 247 716 747 Habit Burger Grill Division 131 133 395 394 $ 1,640 $ 1,606 $ 4,823 $ 4,694 Quarter ended Year to date Operating Profit 2022 2021 2022 2021 KFC Division $ 304 $ 314 $ 888 $ 932 Taco Bell Division 204 184 604 560 Pizza Hut Division 92 101 287 306 Habit Burger Grill Division ( 4 ) 1 ( 14 ) 6 Corporate and unallocated G&A expenses (a) ( 67 ) ( 70 ) ( 203 ) ( 183 ) Unallocated Franchise and property expenses (a) — — ( 4 ) — Unallocated Refranchising gain (loss) 3 ( 1 ) 15 21 Unallocated Other income (expense) (a) 14 ( 2 ) 36 ( 5 ) Operating Profit $ 546 $ 527 $ 1,609 $ 1,637 Investment income (expense), net (b) 27 51 19 52 Other pension income (expense) ( 2 ) ( 1 ) ( 3 ) ( 6 ) Interest expense, net (c) ( 124 ) ( 126 ) ( 390 ) ( 416 ) Income before income taxes $ 447 $ 451 $ 1,235 $ 1,267 17 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 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 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). (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 currently closed to new salaried and hourly 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 $ 2 $ 2 $ 5 $ 6 Interest cost 8 8 24 24 Expected return on plan assets ( 11 ) ( 11 ) ( 34 ) ( 32 ) Amortization of net loss 3 3 8 12 Amortization of prior service cost 1 1 4 4 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. 18 Note 10 - Short-term Borrowings and Long-term Debt Short-term Borrowings 9/30/2022 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 $ 3,782 $ 3,811 Subsidiary Senior Unsecured Notes 750 750 Term Loan A Facility 741 750 Term Loan B Facility 1,478 1,489 YUM Senior Unsecured Notes 4,875 4,475 Finance lease obligations 54 64 $ 11,680 $ 11,339 Less long-term portion of debt issuance costs and discounts ( 84 ) ( 86 ) Less current maturities of long-term debt ( 79 ) ( 75 ) Long-term debt $ 11,517 $ 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 September 30, 2022, was $ 341 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 September 30, 2021, was $ 328 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 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 19 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 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 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. 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 $ 40 $ — $ 3 $ 9 $ 111 $ 17 $ 23 $ 17 Income tax benefit/(expense) ( 10 ) ( 1 ) ( 1 ) ( 1 ) ( 27 ) ( 5 ) ( 6 ) ( 3 ) 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 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 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 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: 20 9/30/2022 12/31/2021 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Securitization Notes (a) $ 3,782 $ 3,429 $ 3,811 $ 3,872 Subsidiary Senior Unsecured Notes (b) 750 708 750 784 Term Loan A Facility (b) 741 728 750 748 Term Loan B Facility (b) 1,478 1,467 1,489 1,490 YUM Senior Unsecured Notes (b) 4,875 4,277 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 9/30/2022 12/31/2021 Assets Other Investments Other assets 1 $ 128 $ 119 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 — Liabilities Interest Rate Swaps Accounts payable and other current liabilities 2 — 38 Interest Rate Swaps Other liabilities and deferred credits 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 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 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 $740 million through the third quarter of 2022. The proposed underpayment relates primarily to a series of reorganizations we undertook 21 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 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. 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 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. 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 September 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 $135 million. Of this amount, $130 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 January 31, 2023. 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. 22 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. 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. Yum China has paid the $7 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. 23