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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-23 · 210 added, 201 removed, 482 unchanged (46% of the section changed)

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Percentages may not recompute due to rounding.

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 157 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”).

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, a concept we acquired in March 2020, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more.

and its subsidiaries (collectively referred to herein as the “Company”, “YUM”, “we”, “us” or “our”) franchise or operate a system of over 55,000 restaurants in more than 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”).

The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style food and pizza categories, respectively.

The Habit Burger Grill is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more.

Of the over 55,000 restaurants, 98% are operated by franchisees.

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• The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept

Through our Recipe for Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth.

Key enablers include accelerated use of technology and better leverage of our systemwide scale.

Our Recipe for Growth is based on four key drivers:

Through our Recipe for Good Growth we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth.

Key enablers include accelerated use of digital and technology and better leverage of our systemwide scale.

Our global citizenship and sustainability strategy is reflected in our Good agenda, which includes our priorities for social responsibility, risk management and sustainable stewardship of our people, food and planet.

Our Growth agenda is based on four key drivers:

• Unrivaled Culture and Talent:

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Drive market and franchise expansion with strong economics and value

Our global citizenship and sustainability strategy, called the Recipe for Good, reflects our priorities for socially responsible growth, risk management and sustainable stewardship of our people, food and planet.

We intend to drive long-term growth and shareholder returns primarily through consistent same-store sales growth and new unit development across all of our Concepts.

We intend to support this growth and development through a capital and operating structure that:

• Targets a capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) consolidated net leverage;

• Invests capital in a manner consistent with an asset light, franchisor model;

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• Pays a competitive dividend and returns excess cash to shareholders through share repurchases;

• Targets a consolidated net leverage ratio that balances shareholder returns, cost of capital and flexibility against various risk factors.

We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company’s performance.

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From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues.

Throughout 2020 and 2021 we have had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as a result of COVID-19.

Throughout 2022, 2021 and 2020 we had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as a result of COVID-19.

The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below).

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on March 18, 2020, and that were open for one year or more.

In 2019, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of the Food Delivery Brands Group, S.A.

(previously named Telepizza Group S.A.

(“Telepizza”)) strategic alliance in December 2018 and that were open for one year or more.

See additional discussion of the acquisition of The Habit Restaurants, Inc.

and Telepizza strategic alliance within this MD&A.

• Gross unit openings reflects new openings by us and our franchisees.

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• System sales, System sales excluding the impacts of foreign currency translation (“FX”) and System sales excluding FX and the impact of the 53rd week in 2019 for our U.S.

subsidiaries and certain international subsidiaries that operate on a weekly period calendar.

subsidiaries or certain international subsidiaries that operate on a weekly period calendar.

System sales reflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants.

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We believe System sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates our primary revenue drivers, Company and franchise same-store sales as well as net unit growth.

As of the beginning of the second quarter of 2022, as a result of our progress towards exiting Russia and our decision to reclass future net profits attributable to Russia subsequent to the date of invasion from the Division segments in which those profits were earned to Unallocated Other income (see Notes 3 and 19), we elected to remove all Russia units from our unit count as well as to begin excluding those units’ associated sales from our system sales totals.

We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut unit counts, respectively.

These units were treated similar to permanent store closures for purposes of our same-store sales calculations and thus they were removed from our same-store sales calculations beginning April 1, 2022.

In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”), the Company provides the following non-GAAP measurements.

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Results of Operations

All comparisons within this summary are versus the same period a year ago and unless otherwise stated include the impact of a 53rd week in 2019.

All comparisons within this summary are versus the same period a year ago.

Comparisons versus 2019, unless otherwise stated, include the impact of a 53rd week in 2019.

For discussion of our results of operations for 2021 compared to 2020, refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.

For 2021, GAAP diluted EPS increased 77% to $5.21 per share, and diluted EPS, excluding Special Items, increased 23% to $4.46 per share.

2022 financial highlights:

System Sales,

ex FX Same-Store Sales Net New Units GAAP Operating Profit Core Operating Profit

ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit

KFC Division +6 +4 +3 (3) +5

Taco Bell Division +11 +8 +5 +12 +12

Pizza Hut Division +6 +7 +4 +16 +13

Pizza Hut Division +3 Even +4 Even +4

Worldwide +6 +4 +4 +2 +6

Additionally:

• During the year, 4,180 gross units were opened contributing to the addition of 3,057 net new units

• During the year, we repurchased 13 million shares totaling $1,580 million at an average price of $121.70.

• Foreign currency translation favorably impacted Divisional Operating Profit for the year by $54 million.

• As of the beginning of the second quarter, we elected to remove 1,165 Russia units from our unit count and begin excluding their associated sales from our total system sales.

We removed 1,112 units and 53 units in Russia from our KFC and Pizza Hut units counts, respectively.

◦ YUM and KFC Division year-over-year unit growth as shown above were negatively impacted by two and four percentage points, respectively.

◦ YUM and KFC Division system sales growth excluding foreign currency as shown above were negatively impacted by two and three percentage points, respectively.

• Also, we elected to reclass future net profits attributable to Russia subsequent to the date of invasion from the Division segments in which those profits were earned to Unallocated Other income and reflected such profits as a Special Item

as they are not indicative of our ongoing results.

As a result of the decline in Core Operating Profits attributable to Russia:

◦ YUM and KFC Division Core Operating Profit as shown above were negatively impacted by two and four percentage points, respectively.

• Foreign currency translation unfavorably impacted Divisional Operating Profit by $118 million for the year ended December 31, 2022.

2022 2021 % Change

GAAP EPS $4.57 $5.21 (12)

Special Items EPS

$0.06 $0.75 NM

EPS Excluding Special Items $4.51 $4.46 +1

• In addition to the aforementioned factors impacting Operating Profit, our diluted EPS, excluding Special Items, was also impacted by lower Investment income, net year over year.

Investment income, net added approximately $0.03 and $0.26 to our diluted EPS, excluding Special Items for the years ended December 31, 2022 and 2021, respectively,

• Gross unit openings for the year were 4,560 units resulting in 3,076 net new units.

Amount % B/(W)

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System Sales Growth (Decline) %, excluding FX 6 13 (4)

System Sales Growth (Decline) %, excluding FX and 53rd week N/A (3) 8

System Sales Growth (Decline) %, excluding FX and 53rd week N/A N/A (3)

Our system sales breakdown by Company and franchise sales was as follows:

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System sales, excluding FX $ 61,936 $ 56,911 $ 50,359

Impact of 53rd week N/A N/A 454

System sales, excluding FX and 53rd Week $ 56,911 $ 50,558 $ 52,130

Company sales (a)

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System sales, excluding FX $ 33,218 $ 30,365 $ 26,289

Impact of 53rd week N/A N/A 167

System sales, excluding FX and 53rd Week $ 30,365 $ 26,481 $ 27,733

Taco Bell Division

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System sales, excluding FX $ 14,705 $ 13,263 $ 11,745

Impact of 53rd week N/A N/A 184

System sales, excluding FX and 53rd Week $ 13,263 $ 11,747 $ 11,600

Pizza Hut Division

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Foreign Currency Impact on System sales (b)

(499) 260 N/A

System sales, excluding FX $ 13,352 $ 12,695 $ 11,955

Impact of 53rd week N/A N/A 103

System sales, excluding FX and 53rd Week $ 12,695 $ 11,960 $ 12,797

Habit Burger Grill Division (c)

Company sales (a)

$ 520 $ 346 N/A

Franchise sales 68 24 N/A

System sales 588 370 N/A

$ 558 $ 520 $ 346

Franchise sales 103 68 24

System sales 661 588 370

Foreign Currency Impact on System sales (b)

System sales, excluding FX $ 588 $ 370 N/A

System sales, excluding FX $ 661 $ 588 $ 370

(a) Company sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income.

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Core Operating Profit Growth % 6 18 (8)

Core Operating Profit Growth %, excluding 53rd week N/A (7) 11

Core Operating Profit Growth %, excluding 53rd week N/A N/A (7)

Diluted EPS Growth %, excluding Special Items 1 23 2

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Refranchising gain (loss) (a)

Costs associated with acquisition and integration of Habit Burger Grill (See Note 3)

Operating profit impact from decision to exit Russia (b)

Charges associated with resource optimization (See Note 5)

(11) (9) (36)

Impairment of Habit Burger Grill goodwill (See Note 5)

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COVID-19 relief contribution (See Note 5)

Charges associated with resource optimization (See Note 5)

Costs associated with Pizza Hut U.S.

Transformation Agreement (b)

Other Special Items Income (Expense) (c)

Other Special Items Income (Expense) (1) (3) (20)

Special Items Income (Expense) - Operating Profit 38 (9) (267)

Charges associated with resource optimization - Other pension (expense) income (see Note 5)

Interest expense, net (c) (d)

Interest expense, net (See Note 5)

(28) (34) (34)

Special Items Income (Expense) before Income Taxes 10 (42) (303)

Tax Benefit (Expense) on Special Items (e)

Tax Benefit - Intra-entity transfer of intellectual property (see Note 5)

Tax (Expense) Benefit on Special Items (c)

Tax Benefit - Intra-entity transfers and valuations of intellectual property (d)

Tax (Expense) - Income tax impacts from decision to exit Russia (e)

Special Items Income (Expense), net of tax $ 17 $ 226 $ (210)

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(a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018.

As such, refranchising gains and losses recorded during 2021, 2020 and 2019 as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018.

As such, refranchising gains and losses recorded as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018.

During the years ended December 31, 2022, 2021 and 2020, we recorded net refranchising gains of $6 million, $3 million and $8 million, respectively, that have been reflected as Special Items.

Additionally, during the years ended December 31, 2022, 2021 and 2020, we recorded net refranchising gains of $21 million, $32 million and $26 million, respectively, that have not been reflected as Special Items.

These gains relate to

refranchising of restaurants in 2021, 2020 and 2019 that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity.

(b) In May 2017, we reached an agreement with our Pizza Hut U.S.

franchisees that improved brand marketing alignment, accelerated enhancements in operations and technology and that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees.

In connection with this agreement, we recognized charges of $5 million and $13 million in the years ended December 31, 2020 and 2019, respectively, related to operating investments required as part of this agreement.

The majority of these costs were recorded within Franchise and property expenses.

Based on their nature and the significance in related spending in 2017, these charges have been reflected as Special Items.

(c) During the second quarter of 2019, we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses.

Consistent with prior adjustments to the recorded contingent consideration we have reflected this as a Special Item.

(d) On June 1, 2021, certain subsidiaries of the Company redeemed $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes due in 2026 (the “2026 Notes”).

The redemption amount was equal to 102.625% of the $1,050 million aggregate principal amount redeemed, reflecting a $28 million “call premium”.

We recognized the call premium and the write-off of $6 million of unamortized debt issuance costs associated with the 2026 Notes within Interest expense, net.

On September 9, 2020, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, each of which a wholly-owned subsidiary of the Company, issued a notice of redemption for $1,050 million aggregate principal amount of 5.00% Subsidiary Senior Unsecured Notes due in 2024 (the "2024 Notes").

The redemption amount included a $26 million call premium plus accrued and unpaid interest to the date of redemption of October 9, 2020.

We recorded the call premium, $6 million of unamortized debt issuance costs associated with the 2024 Notes and $2 million of accrued and unpaid interest associated with the period of time from prepayment of the 2024 Notes with the Trustee on September 25, 2020, to their redemption date within Interest expense, net.

We reflected the call premiums and charges associated with the redemptions as Special Items due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense.

(e) Tax (Expense) Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

During the year ended December 31, 2021, we recorded as a Special Item an $8 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.

Further, in the fourth quarter of 2019, we increased our Income tax provision by $34 million to record a reserve against the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item.

Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week Year

These gains relate to refranchising of restaurants that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity.

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

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

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

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

In October 2022, we announced that we 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.

Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for Pizza Hut, prior to the date of transfer, and KFC, for the entirety of the year ended December 31, 2022, 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 reclassed such resulting net profits from the Division segment results in which they were earned to Unallocated Other income.

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 G&A and Unallocated Franchise and property expenses.

Also recorded in Unallocated Other income were foreign exchange gains attributable to fluctuations in the value of the Russian ruble.

The resulting net Operating Profit from these items of $44 million for the year ended December 31, 2022 has been reflected as a Special Item as the amount is not indicative of our ongoing results.

(c) Tax (Expense) Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

Additionally, during the year ended December 31, 2021, we also recorded as a Special Item an $8 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.

(d) In December of 2019, we completed intra-entity transfers of certain intellectual property (“IP”) rights.

As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom (“UK”), we received a step-up in tax basis to current fair value under applicable UK law, and to the extent this step-up in tax basis was amortizable against future taxable income, we recognized deferred tax assets.

The associated deferred tax benefit was originally recognized as a Special Item in 2019.

On July 22, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%.

As a result, we remeasured the related deferred tax assets originally recorded as described above and recognized an additional $25 million deferred tax benefit as a Special Item in the year ended December 31, 2020.

Additionally, we recognized a related deferred tax benefit of $3 million as a result of an increase in the step-up in the tax basis as described above as a Special Item in the year ended December 31, 2020.

On June 10, 2021, the UK Finance Act 2021 was enacted resulting in an increase in the UK corporate income tax rate from 19% to 25%.

As a result, we remeasured the related deferred tax assets originally recorded as described above and recognized an additional $64 million deferred tax benefit as a Special Item in the year ended December 31, 2021.

In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland (the “KC Europe Reorganization”).

Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC IP 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.

As a result of this transfer, we recorded a net, one-time benefit of $152 million as a Special Item in the year ended December 31, 2021.

In December 2021, we continued our KFC Europe Reorganization and completed intra-entity transfers of additional European KFC IP rights from subsidiaries in the U.S.

to subsidiaries in Switzerland.

With the transfers of these additional

rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law.

As a result of this transfer, we recorded a net one-time tax benefit of $35 million as a Special Item in the year ended December 31, 2021.

In the quarter ended June 30, 2022, as a result of our decision to exit the Russia market, we recorded tax expense associated with the remeasurement of and establishment of a valuation allowance on a portion of the aforementioned deferred tax assets associated with the amortizable tax basis associated with the KFC IP rights held in Switzerland (see Note e).

In the quarter ended December 31, 2022, we performed an annual valuation under Swiss laws of these Swiss IP rights, incorporating current assumptions around the expected future cash flows attributable to the IP.

This valuation supported an increase to tax basis of Swiss IP rights associated with parts of our business that will continue to use these IP rights due to expected royalty growth assumptions in those parts of the business that largely offset the loss of the Russia royalty income associated with such IP rights.

Based on this valuation as well as future forecasting of taxable income, we remeasured and reassessed the need for a valuation allowance on the deferred tax assets associated with the Swiss IP.

As a result, we recorded a net tax benefit of $82 million as a Special Item in the quarter ended December 31, 2022.

(e) Our decision to exit the Russia market in the quarter ended June 30, 2022, resulted in a reduction in the tax basis of KFC IP rights held in Switzerland due to the expected loss of the Russia royalty income associated with such rights going forward.

As a result, we remeasured and reassessed the need for a valuation allowance on the associated 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.

Primarily as a result of these items, we recorded a net tax expense of $72 million in the year ended December 31, 2022, that was reflected as a Special Item.

Reconciliation of GAAP Operating Profit to Core Operating Profit Year

2022 2021 2020

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Core Operating Profit $ 2,267 $ 2,094 $ 1,770

Impact of 53rd Week N/A N/A 24

Core Operating Profit, excluding 53rd Week $ 2,094 $ 1,779 $ 1,917

GAAP Operating Profit $ 1,198 $ 1,230 $ 922

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Core Operating Profit $ 1,296 $ 1,185 $ 922

Impact of 53rd Week N/A N/A 8

Core Operating Profit, excluding 53rd Week $ 1,185 $ 931 $ 1,044

Taco Bell Division

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Core Operating Profit $ 852 $ 757 $ 696

Impact of 53rd Week N/A N/A 13

Core Operating Profit, excluding 53rd Week $ 757 $ 696 $ 670

Pizza Hut Division

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Core Operating Profit $ 405 $ 379 $ 335

Impact of 53rd Week N/A N/A 3

Core Operating Profit, excluding 53rd Week $ 379 $ 335 $ 366

Habit Burger Grill Division

GAAP Operating Profit $ 2 $ (22) N/A

GAAP Operating Profit (Loss) $ (24) $ 2 $ (22)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Profit $ 2 $ (22) N/A

Core Operating Profit (Loss) $ (24) $ 2 $ (22)

Reconciliation of Diluted EPS to Diluted EPS excluding Special Items

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Company restaurant margin % 17.7 % 23.9 % 6.8 % 9.0 % N/A 18.1 %

KFC Division Taco Bell Division Pizza Hut Division Corporate and Unallocated Consolidated

KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 922 $ 696 $ 335 $ (22) $ (428) $ 1,503

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The following items impacted reported results in 2022 and/or 2021 and/or are reasonably likely to impact future results.

See also the Detail of Special Items section of this M&DA for other items similarly impacting results.

See also the Detail of Special Items section of this MD&A for other items similarly impacting results.

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.

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

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

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 agreed to by the parties.

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

As of the beginning of the second quarter of 2022, we elected to remove all Russia units from our unit count and their associated sales from our total system sales.

We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut units counts, respectively.

This negatively impacted YUM and KFC Division year-over-year unit growth by two and four percentage points, respectively at December 31, 2022.

This also negatively impacted our system sales growth excluding foreign currency for YUM and KFC Division by two and three percentage points, respectively, during the year ended December 31, 2022.

Russia units were removed from our same-store sales calculations as of the beginning of the second quarter.

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

The resulting net Operating

Profit of $44 million for the year ended December 31, 2022 has been reflected as a Special Item as the amount is not indicative of our ongoing results.

Historically, our Russian business has constituted approximately 3% of our total Operating Profit and 2% of our total system sales.

During the year ended December 31, 2022, our Core Operating Profits in Russia declined versus the prior year, negatively impacting YUM and KFC Division Core Operating Profit growth by two and four percentage points, respectively.

Our Core Operating Profit growth in the first and second quarters of 2023 will also be negatively impacted as we lap the 2022 Russia results that remained in Core Operating Profit.

We expect YUM and KFC Division Core Operating Profit growth to be negatively impacted by approximately one and two percentage points, respectively, in both the first and second quarters of 2023 due to this lap.

Impact of Foreign Currency Translation on Operating Profit

Changes in foreign currency exchange rates negatively impacted the translation of our foreign currency denominated Divisional Operating Profit by $118 million for the year ended December 31, 2022.

This included a negative impact to our KFC Division Operating Profit of $98 million for the year ended December 31, 2022.

For 2023, we currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $30 to $40 million, primarily in the first half of the year.

In late 2019, a novel strain of coronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic.

Throughout 2020 and 2021, COVID-19 spread throughout the U.S.

and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19.

These measures include restrictions on travel outside the home and other limitations on business and other activities as well as encouraging social distancing.

As a result of COVID-19, we and our franchisees have experienced significant store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures.

As a result of COVID-19, governmental authorities around the world implemented measures to reduce the spread of COVID-19.

These measures have included, and in some instances continue to include, restrictions on travel outside the home and limitations on business and other activities as well as encouraging social distancing.

As a result of COVID-19, we and our franchisees experienced significant store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures.

The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities to reduce the spread of COVID-19, as well as our reliance on dine-in sales in the market.

Our results were significantly impacted by the impacts of COVID-19 in the year ended December 31, 2020, as evidenced by our worldwide same-store sales decline of 6%.

Overall, our sales declines were primarily driven by temporary store closures, which peaked in early April 2020 at about 11,000 restaurants and ended 2020 at about 830 restaurants.

In addition to the loss of sales due to restaurants being temporarily closed, we also lost sales due to dining room closures or other limitations on access.

Beginning in 2020 and continuing throughout 2021 we were able to mitigate the loss of sales due to temporary unit closures, dining room closures or other limitations on access through the strength of our off-premise channels, aided by increasing consumer access to our brands via digital channels.

As a result, each of our Concepts recorded positive same-store sales growth for the year, contributing to our worldwide same-store sales increase of 10% in 2021 which was driven by strong performance in developed markets such as North America and the United Kingdom.

As we ended the year, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in Asia.

We also saw strong gross unit openings of 4,180 units for the year ended December 31, 2021, which we believe is primarily a result of improving unit-level economics, our franchisees’ financial strength and commitment to our Concepts, the inherent competitive advantages of the Quick Service Restaurant sector throughout the COVID-19 pandemic, our Concepts’ off-premise and digital capabilities, as well as selective use of development incentives with certain franchisees.

Throughout 2022, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in China.

Excluding China, our YUM same-store sales growth was 7% and our KFC Division same-store sales growth was 9% for the year ended December 31, 2022.

The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company’s 2023 results.

The ultimate pace of our recovery will largely depend on the continuation of current sales trends, although we expect continuing adverse impacts from COVID-19 in certain parts of the world.

In addition, for our restaurants that prominently

feature drive-thru, carryout and delivery options, COVID-19 has in many cases contributed to an increase in sales during 2021 and 2020.

If the impact of COVID-19 recedes, in-person dining restrictions are lifted or lessened and the restaurant industry in general returns to more normal operations, the benefits to sales experienced by certain of our restaurants, including our Pizza Hut delivery restaurants, could wane and our results could be negatively impacted.

Franchise Bad Debt Expense

We experienced significant quarterly fluctuations in franchise bad debt expense in 2021 and 2020 due in large part to the uncertainties associated with COVID-19.

During the year ended December 31, 2021, we recognized net bad debt recoveries of $8 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were primarily reflected within Franchise and property expenses.

These net bad debt recoveries of $8 million compared to $13 million of net bad debt expense recognized in the year ended December 31, 2020, and thus positively impacted Operating Profit growth by $21 million year-over-year.

Investment in Devyani

In 2020, we received an approximate 5% minority interest in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India.

In 2020, we received an approximate 5% minority interest in Devyani International Limited (“Devyani”), an entity that owns our KFC India and Pizza Hut India master franchisee rights.

The minority interest was received in lieu of cash proceeds upon the refranchising of approximately 60 KFC restaurants in India.

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On August 16, 2021, Devyani executed an initial public offering and subsequently the fair value of this investment became readily determinable.

As a result, concurrent with the initial public offering we began recording changes in fair value in Investment (income) expense, net in our Consolidated Statements of Income and recognized pre-tax investment income of $87 million, in the year ended December 31, 2021.

Investment in Grubhub, Inc.

In April of 2018 we purchased 2.8 million shares of Grubhub common stock for $200 million.

In the quarter ended September 30, 2020, we sold our entire investment in Grubhub and received proceeds of $206 million.

While we held our investment in Grubhub common stock we recognized changes in the fair value in our investment in our Consolidated Statements of Income.

For the years ended December 31, 2020 and 2019, we recognized pre-tax investment income of $69 million and pre-tax investment expense of $77 million, respectively, related to changes in fair value of our investment in Grubhub common stock.

Extra Week in 2019

Fiscal 2019 included a 53rd week for all of our U.S.

and certain international subsidiaries that operate on a period calendar.

See Note 2 for additional details related to our fiscal calendar.

The following table summarizes the estimated impact of the 53rd week on Revenues and Operating Profit for the year ended December 31, 2019.

The 53rd week in 2019 favorably impacted Diluted EPS by $0.05 per share.

KFC Division Taco Bell Division Pizza Hut Division Total

Company sales

$ 8 $ 15 $ 1 $ 24

Franchise and property revenues

Franchise contributions for advertising and other services 5 8 5 18

Total revenues $ 22 $ 33 $ 11 $ 66

Operating Profit

Franchise and property revenues

$ 9 $ 10 $ 5 $ 24

Franchise contributions for advertising and other services

Restaurant profit

Franchise and property expenses

Franchise advertising and other services expenses (5) (8) (5) (18)

(2) (2) (1) (5)

Operating Profit $ 8 $ 13 $ 3 $ 24

The KFC Division has 27,760 units, 86% of which are located outside the U.S.

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% B/(W) % B/(W)

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

2022 2021 2020 Reported Ex FX Reported Ex FX

System Sales $ 31,116 $ 31,365 $ 26,289 (1) 6 19 16

Same-Store Sales Growth % 11 N/A (9) N/A N/A

Same-Store Sales Growth (Decline) % 4 % 11 % (9) % N/A N/A N/A N/A

Company sales $ 491 $ 596 $ 506 (18) (11) 18 12

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Company sales and Company restaurant margin %

In 2021, the increase in Company sales, excluding the impacts of foreign currency translation, was driven by company same-store sales growth of 17%, partially offset by refranchising.

In 2021, the increase in Company restaurant margin percentage was driven by company same-store sales growth, partially offset by higher restaurant operating costs.

In 2022, the decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the suspension of operations of our 70 company-owned KFC restaurants in Russia, partially offset by Company same-store sales growth of 1%.

As discussed in the Introduction and Overview section of this MD&A, all units in Russia, both Company and franchised, were removed from our same-store sales calculations beginning April 1, 2022.

In 2022, the decrease in Company restaurant margin percentage was driven by commodity and wage inflation.

Franchise and property revenues

In 2022, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 4% and unit growth.

In 2021, the increase in G&A, excluding the impact of foreign currency translation, was driven by higher expenses related to our annual incentive compensation program and higher professional fees, partially offset by lower share-based compensation.

As discussed in the Introduction and Overview section of this MD&A, all units in Russia, both Company and franchised, were removed from our same-store sales calculations beginning April 1, 2022.

In 2022, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher travel related costs, partially offset by lower expenses related to our annual incentive compensation program.

Operating Profit

In 2021, the increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth, unit growth, and current year net bad debt recoveries lapping prior year net bad debt expense for past due franchise receivables, partially offset by higher G&A.

In 2022, the increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by the negative impact of 4 percentage points on year-over-year operating profit growth as a result of lower profits in Russia, higher restaurant operating costs, and higher G&A.

Taco Bell Division

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% B/(W) % B/(W)

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

2022 2021 2020 Reported Ex FX Reported Ex FX

System Sales $ 14,653 $ 13,280 $ 11,745 10 11 13 13

Same-Store Sales Growth % 11 N/A (1) N/A N/A

Same-Store Sales Growth (Decline) % 8 % 11 % (1) % N/A N/A N/A N/A

Company sales $ 1,002 $ 944 $ 882 6 6 7 7

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In 2022, the increase in Company sales was driven by same-store sales growth of 8% and unit growth partially offset by refranchising.

In 2021, the decrease in Company restaurant margin percentage was driven by higher restaurant operating costs, principally labor and commodities, partially offset by same-store sales growth.

In 2022, the decrease in Company restaurant margin percentage was driven by commodity and wage inflation partially offset by same-store sales growth.

Franchise and property revenues

In 2022, the increase in Franchise and property revenues was driven by franchise same-store sales growth of 8% and unit growth.

In 2021, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our annual incentive compensation programs, higher professional fees and higher charitable contributions, partially offset by lower headcount and lower share-based compensation.

In 2022, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher travel related costs partially offset by lower charitable contributions.

Operating Profit

In 2021, the increase in Operating Profit was driven by same-store sales growth and unit growth, partially offset by higher restaurant operating costs and higher G&A costs.

In 2022, the increase in Operating Profit was driven by same-store sales growth and unit growth partially offset by higher restaurant operating costs and higher G&A.

Pizza Hut Division

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airports) and includes units operating under both the Pizza Hut and Telepizza brands.

On December 30, 2018, the Company consummated a strategic alliance with Food Delivery Brands Group, S.A.

(previously named Telepizza Group S.A.

(“Telepizza”)), to be the master franchisee of Pizza Hut in Latin America and portions of Europe, which added approximately 1,300 Telepizza units to our Pizza Hut Division unit count on December 30, 2018.

The addition of the Telepizza units positively impacted 2019 Pizza Hut Division system sales growth, excluding the impacts of foreign currency and 53rd week, by 5 percentage points.

The impact to Operating Profit for the year ended December 31, 2019, as a result of the strategic alliance was not significant.

% B/(W) % B/(W)

2021 2020 2019 Reported Ex FX Reported Ex FX Ex FX and 53 rd Week in 2019

2022 2021 2020 Reported Ex FX Reported Ex FX

System Sales $ 12,853 $ 12,955 $ 11,955 (1) 3 8 6

Same-Store Sales Growth (Decline) % 7 N/A (6) N/A N/A

Same-Store Sales Growth (Decline) % Even 7 % (6) % N/A N/A N/A N/A

Company sales $ 21 $ 46 $ 76 (55) (55) (40) (42)

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Total revenues $ 1,004 $ 1,028 $ 1,002 (2) — 3 1

Company restaurant profit $ 3 $ 3 $ 3 (19) (24) 72 67 69

Company restaurant profit $ — $ 3 $ 3 NM NM (19) (24)

Company restaurant margin % (2.2) % 6.8 % 5.1 % (9.0) ppts.

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Franchise advertising and other services expense 382 395 365 3 2 (8) (7)

Operating Profit $ 387 $ 335 $ 369 16 13 (9) (9) (8)

Operating Profit $ 387 $ 387 $ 335 Even 4 16 13

% Increase (Decrease)

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Company sales

In 2021, the decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the refranchising of stores in the United Kingdom, partially offset by company same-store sales growth of 7%.

In 2022, the decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the refranchising of stores in the United Kingdom.

Franchise and property revenues

In 2021, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 7%.

In 2021, the decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower headcount and lower share-based compensation, partially offset by higher expenses related to our annual incentive compensation programs.

In 2022, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by unit growth and the recognition of franchise fees related to unexercised development rights arising from a master franchise agreement.

In 2022, the increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher travel related expenses, partially offset by lower professional fees and lower expenses related to our annual incentive compensation programs.

Operating Profit

In 2021, the increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth, lower G&A and current year net bad debt recoveries lapping prior year net bad debt expense for past due franchise receivables, partially offset by higher Franchise advertising and other services expense primarily related to digital and technology expenses.

In 2022, the increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by unit growth.

Habit Burger Grill Division

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as of December 31, 2022.

2021 2020 Reported Ex FX

% B/(W) % B/(W)

2020 Reported Ex FX Reported Ex FX

System Sales $ 661 $ 588 $ 370 12 12 59 59

Same-Store Sales Growth % 16 N/A

Same-Store Sales Growth (Decline) % (1) % 16 % N/A N/A N/A N/A N/A

Total revenues $ 567 $ 525 $ 347 8 8 51 51

Operating Profit (Loss) $ 2 $ (22) 111 111

Operating Profit (Loss) $ (24) $ 2 $ (22) NM NM 111 111

% Increase (Decrease)

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Corporate and unallocated G&A $ (297) $ (260) $ (312) (14) 17

Unallocated Franchise and property expenses 1 (4) (14) 115 68

Unallocated Franchise and property expenses (6) 1 (4) NM 115

Unallocated Refranchising gain (loss) (See Note 5)

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Corporate and unallocated G&A

In 2021, the decrease in Corporate and unallocated G&A expenses was driven by lapping higher prior year cost for charitable contributions including $50 million related to our “Unlocking Opportunity Initiative” and $25 million related to COVID-19 relief (see Note 5).

The decrease was also driven by lapping prior year costs associated with a voluntary early retirement programs offered to our U.S.

based employees and a worldwide severance program (see Note 5), offset by higher current year expenses related to our annual incentive compensation programs and increased headcount supporting our technology initiatives.

In 2022, the increase in Corporate and Unallocated G&A expenses was driven by higher headcount and salaries including personnel associated with our 2021 investments in digital and technology companies and expenses related to the divestiture of our Russia businesses, partially offset by lower current year expenses due to our annual incentive compensation programs.

Unallocated Other income (expense)

Unallocated Other income (expense) for the year ended December 31, 2020, includes a charge of $144 million related to the impairment of Habit Burger Grill goodwill (see Note 3).

Unallocated Other income (expense) for the year ended December 31, 2022, includes Russia net operating profits of $44 million reclassed from KFC and Pizza Hut Division Other income due to our decision to exit Russia (see Note 19).

Interest expense, net

The increase in Interest expense, net for 2021 was primarily driven by increased outstanding borrowings offset by a lower weighted average-interest rate.

The decrease in Interest expense, net for 2022 was primarily driven by $12 million of previously unamortized debt issuance costs written-off in the prior year due to the refinancing of our Credit Agreement and $6 million lower expense in the current year relating to the call premium and previously unamortized debt issuance costs written-off associated with the redemption of the 2025 Notes as compared to the call premium and previously unamortized debt issuance costs written-off associated with the redemption of the 2026 Notes (as discussed in our 2021 Form 10-K) in the prior year.

The impact on Interest expense, net of higher borrowings was offset by a lower weighted-average interest rate on those borrowings.

Consolidated Cash Flows

Net cash provided by operating activities was $1,427 million in 2022 versus $1,706 million in 2021.

The increase was largely driven by an increase in Operating profit before Special Items, the lapping of charitable contributions reflected as Special Items and an increase in upfront fees received, partially offset by the timing of accounts receivable collections and higher advertising spending.

The decrease was largely driven by an increase in incentive compensation payments, timing of spending on advertising and an increase in income tax payments.

Net cash used in investing activities was $202 million in 2022 versus $173 million in 2021.

The change was primarily driven by the lapping of our prior year acquisition of The Habit Restaurants, Inc., higher refranchising proceeds in the current year and the current year sale of certain mutual fund investments, partially offset by the lapping of prior year proceeds from the sale of our investment in Grubhub, Inc.

common stock, the current year acquisition of Dragontail Systems Limited and higher current year capital spending.

The change was primarily driven by higher current year capital spending and lapping proceeds from our prior year sale of certain mutual fund investments, partially offset by the lapping of our prior year acquisition of Dragontail Systems Limited.

Net cash used in financing activities was $1,323 million in 2022 versus $1,767 million in 2021.

The change was primarily driven by higher share repurchases, partially offset by higher net borrowings.

The change was primarily driven by lower share repurchases and higher current year net borrowings.

Liquidity and Capital Resources

We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores.

Our annual operating cash flows have been in excess of $1.3 billion in each of the past three years and we expect that to continue to be the case in 2022.

Our annual operating cash flows have been in excess of $1.3 billion in each of the past four years and we expect that to continue to be the case in 2023.

It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive dividend, with any remaining excess then returned to shareholders through share repurchases.

To the extent operating cash flows plus other sources of cash do not cover our anticipated cash needs, we maintain a $1.25 billion Revolving Facility under our Credit Agreement (see Note 11) that was undrawn as of December 31, 2021.

We believe that our ongoing cash from operations, cash on hand, which was approximately $375 million at December 31, 2022, and availability under our Revolving Facility will be sufficient to fund our cash requirements over the next twelve months.

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Debt Obligations and Interest Payments

As of December 31, 2021, approximately 93%, including the impact of interest rate swaps, of our $11.3 billion of total debt outstanding, excluding finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.2%.

We currently target a capital structure which reflects consolidated leverage, net of available cash, of ~5.0x EBITDA and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years.

As of December 31, 2022, approximately 94%, including the impact of interest rate swaps, of our $11.6 billion of total debt outstanding, excluding the Revolving Facility balance, finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.4%.

We ended 2022 with a consolidated net leverage ratio of 5.0x EBITDA.

We continually reassess our optimal leverage ratio to maximize shareholder returns.

We target a capital structure which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years.

We have credit ratings of BB (Standard & Poor’s)/Ba2 (Moody’s) with a balance sheet consistent with highly-levered peer restaurant franchise companies.

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Credit Agreement 34 48 53 662 15 1,398 2,210

Revolving Facility 279 279

Subsidiary Senior Unsecured Notes 750 750

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Total $ 398 $ 87 $ 92 $ 1,885 $ 1,640 $ 1,980 $ 565 $ 807 $ 1,732 $ 2,100 $ 325 $ 275 $ 11,886

Interest payments on the outstanding long-term debt in the table above total $3,384 million, with $464 million due within the next twelve months on the outstanding amounts on a nominal basis.

The estimated interest payments related to the variable rate portion of our debt are based on current LIBOR interest rates.

Interest payments on the outstanding long-term debt in the table above total approximately $3.6 billion, with approximately $500 million due within the next twelve months on the outstanding amounts on a nominal basis.

The estimated interest payments related to the variable rate portion of our debt, net of our interest rate swaps, are based on current LIBOR interest rates.

See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.

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• Strategic investments that create incremental value for shareholders and franchisees.

In 2022, we expect that new store investments will exceed refranchising proceeds by $50 to $100 million, primarily driven by our strategy to accelerate growth of the Habit Burger Grill equity estate.

In 2023, we expect that company store investments will exceed refranchising proceeds by $55 to $65 million, primarily driven by our strategy to accelerate growth of Habit Burger Grill company units and continued investments in Taco Bell company restaurants.

This will result in net capital expenditures of approximately $275 million, reflecting up to $315 million of gross capital expenditures and $40 million of refranchising proceeds.

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This quarterly dividend will be distributed March 10, 2023 to shareholders of record at the close of business on February 22, 2023, and will total approximately $170 million.

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 December 31, 2021, we have remaining capacity to repurchase up to $950 million of Common Stock 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.

This authorization took effect during the fourth quarter of 2022 upon the exhaustion of a prior authorization approved in May 2021.

As of December 31, 2022, we have remaining capacity to repurchase up to $1.75 billion of Common Stock under the September 2022 authorization.

This authorization does not obligate the Company to acquire any specific number of shares.

Contingencies

As discussed in Note 20, as a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on October 13, 2021, we received a Notice of Proposed Adjustment (“NPA”) from the IRS for the 2014 fiscal year relating to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines.

The IRS asserts that these reorganizations involved taxable distributions of approximately $6.0 billion.

We expect to receive the final Revenue Agent’s Report (“RAR”) including the IRS’s calculation of the tax assessment in early 2022.

The amount of additional tax that may be asserted by the IRS in the RAR cannot be quantified at this time;

however, based on the NPA, the amount of additional tax to be proposed is expected to be material.

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

Also, as discussed in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement in India imposing a penalty on Yum!

Restaurants India Private Limited of approximately Indian Rupee 11 billion, or approximately $150 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994.

As discussed in Note 20, 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 $780 million through December 31, 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 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.

Also, as discussed in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement (“DOE”) in India imposing a penalty on Yum!

Restaurants India Private Limited (“YRIPL”) of approximately Indian Rupee 11 billion, or approximately $135 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994.

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 scheduled for March 4, 2022.

In November 2022, YRIPL was notified that an administrative tribunal bench had been constituted to hear an appeal by DOE of certain findings of the January 2020 order, including claims that certain charges had been wrongly dropped and that an insufficient amount of penalty had been imposed.

A hearing has been scheduled with the administrative tribunal on March 14, 2023.

The stay order remains in effect, and the next hearing in the Delhi High Court is scheduled for May 16, 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.

See the Lease Guarantees section of Note 20 for discussion of our off-balance sheet arrangements.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board issued guidance related to reference rate reform.

The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates.

The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022.

We are currently evaluating the impact of the transition from LIBOR to alternative reference rates, including the impact on our interest rate swaps.

As of December 30, 2021, our interest rate swaps which expire in March 2025, had notional amounts of $1.5 billion.

These interest rate swaps are designated cash flow hedges.

We do not anticipate the impact of adopting this standard will be material to our Financial Statements.

Critical Accounting Policies and Estimates

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Key assumptions in the determination of fair value are the future after-tax cash flows of the restaurant, which are reduced by future royalties a franchisee would pay, and a discount rate.

The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the determination of a purchase price for the restaurant.

The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the determination of a purchase price for the

Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions.

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Our most significant indefinite-lived intangible asset is our Habit Burger Grill brand asset with a book value of $96 million at December 31, 2022.

As of our fourth quarter 2021 annual impairment testing date, the Habit Burger Grill’s forecasted results have improved from those used in determining the brand asset fair value as part of the prior year impairment test.

As such, the fair values of all of our indefinite-lived intangible assets at December 31, 2021, were in excess of their respective carrying values and no impairment was recorded.

As of our fourth quarter 2022 annual impairment testing date, the fair values of all of our indefinite-lived intangible assets were in excess of their respective carrying values and no impairment was recorded.

Impairment of Goodwill

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We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

The fair values of all our reporting units with goodwill balances were in excess of their respective carrying values as of our fourth quarter 2021 goodwill testing date, with all but the Habit Burger Grill reporting unit having fair values that were substantially in excess of their respective carrying values as of the 2021 goodwill testing date.

As it relates to our Habit Burger Grill reporting unit, assumptions for unit growth and same-store sales growth utilized in the fourth quarter 2021 annual impairment test improved as compared to the prior year impairment test, due in large part to the continued recovery from the impacts of COVID-19.

As such, the fair value of the reporting unit increased versus prior year.

When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit that will be retained.

The fair values of all our reporting units with goodwill balances were in excess of their respective carrying values as of our fourth quarter 2022 goodwill testing date.

As it relates to our Habit Burger Grill reporting unit, which includes a goodwill balance of $66 million as of the end of 2022, the assumptions that are most impactful to our fair value estimate include future average unit volumes (“AUVs”) and restaurant unit counts.

As of the beginning of the fourth quarter of 2022, the date of our annual impairment assessment, Habit’s forecasted results for these key assumptions have improved from those relied upon in our March 31, 2020 interim impairment test (see Note 5), including actual unit closures following the onset of the COVID-19 pandemic being lower and AUVs recovering to pre—COVID levels faster than assumed in that interim impairment test.

that will be retained.

The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which include a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transaction.

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The net periodic benefit cost we will record in 2023 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date.

We expect net periodic benefit cost for our U.S.

plans to decrease approximately $8 million in 2022.

We expect net periodic benefit income for our U.S.

plans of $4 million in 2023 compared to $9 million of periodic benefit cost in 2022, which represents an improvement of $13 million year-over-year.

A 50 basis-point change in our discount rate assumption at our 2022 measurement date would impact our 2023 U.S.

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Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 6.25% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $33 million included in Accumulated other comprehensive income for these U.S.

An increase in actuarial loss due to changes in plan assets, primarily due to 2022 asset returns, has contributed to an unrecognized pre-tax actuarial net loss of $70 million included in Accumulated other comprehensive income for these U.S.

plans at December 31, 2022.

We will recognize approximately $11 million of such loss in net periodic benefit cost in 2022 versus $14 million recognized in 2021.

We will recognize approximately $1 million of gain in net periodic benefit cost in 2023 versus $11 million of loss recognized in 2022.

At December 31, 2022, we had valuation allowances of $458 million to reduce our $1,558 million of deferred tax assets to amounts that are more likely than not to be realized.

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A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

At December 31, 2021, we had $116

million of unrecognized tax benefits, $75 million of which would impact the effective tax rate if recognized.

At December 31, 2022, we had $128 million of unrecognized tax benefits, $82 million of which would impact the effective tax rate if recognized.

We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.

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We believe any such taxes would be immaterial.

Ransomware Attack

On January 18, 2023, the Company announced a ransomware attack that impacted certain Information Technology (“IT”) systems.

Promptly upon the detection of the incident, the Company initiated response protocols and an investigation, engaged the services of industry-leading cybersecurity and forensics professionals and notified Federal law enforcement.

This incident resulted in the closure of fewer than 300 restaurants in one market for one day, and certain of the Company’s IT systems and data were affected.

In addition, although data was taken from our network, there is no evidence that customer databases were accessed.

We have incurred, and may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter.

We remain subject to risks and uncertainties as a result of the incident, including as a result of the data that was taken from the Company’s network as noted above.

While the Company’s response to this incident is ongoing, at this time we do not believe such impact of the incident will ultimately have a material adverse effect on our business, results of operations or financial condition.

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-K

Item 7. Management’s Discussion and Analysis