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Item 1. Financial Statements

2023-05-09 compared with 2022-11-08 · 88 added, 199 removed, 404 unchanged (42% of the section changed)

3 unchanged sentences

(in millions, except per share data)

Quarter ended Year to date

Quarter ended

Revenues 3/31/2023 3/31/2022

25 unchanged sentences

(in millions)

Quarter ended Year to date

Quarter ended

3/31/2023 3/31/2022

3 unchanged sentences

Adjustments and gains (losses) arising during the period

( 55 ) ( 19 ) ( 99 ) ( 2 )

Tax (expense) benefit

( 55 ) ( 19 ) ( 99 ) ( 2 )

Changes in pension and post-retirement benefits

2 unchanged sentences

Tax (expense) benefit

( 6 ) ( 2 ) ( 8 ) ( 19 )

Changes in derivative instruments

2 unchanged sentences

Tax (expense) benefit

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

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

Other comprehensive income, net of tax ( 2 ) 33

Comprehensive Income $ 298 $ 432

3 unchanged sentences

(in millions)

Quarter ended

3/31/2023 3/31/2022

18 unchanged sentences

Cash Flows – Financing Activities

Proceeds from long-term debt 999 4,150

Repayments of long-term debt ( 20 ) ( 15 )

Revolving credit facility, three months or less, net ( 85 ) 174

Repurchase shares of Common Stock ( 50 ) ( 343 )

Dividends paid on Common Stock ( 169 ) ( 165 )

Debt issuance costs ( 11 ) ( 37 )

Other, net ( 10 ) ( 28 )

1 unchanged sentence

Effect of Exchange Rates on Cash and Cash Equivalents 3 —

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

Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 38 ) ( 153 )

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 647 771

27 unchanged sentences

Common Stock, no par value, 750 shares authorized;

284 shares issued in 2022 and 289 issued in 2021

280 shares issued in 2023 and 2022

Accumulated deficit ( 8,403 ) ( 8,507 )

5 unchanged sentences

AND SUBSIDIARIES

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

Quarters ended March 31, 2023 and 2022

(in millions)

2 unchanged sentences

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)

Net gain on derivative instruments (net of tax impact of $ 11 million)

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, 2022

3 unchanged sentences

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

Net gain on derivative instruments (net of tax impact of $ 33 million)

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)

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

Net loss on derivative instruments (net of tax impact of $ 3 million)

Comprehensive Income 298

3 unchanged sentences

Share-based compensation events 34 34

Balance at September 30, 2021

Balance at March 31, 2023

280 $ — $ ( 8,403 ) $ ( 371 ) $ ( 8,774 )

10 unchanged sentences

Share-based compensation events 38 38

Balance at September 30, 2021

Balance at March 31, 2022

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

6 unchanged sentences

Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”).

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.

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.

As of March 31, 2023, 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 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:

As of March 31, 2023, YUM consisted of four operating segments:

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

4 unchanged sentences

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.

subsidiaries 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.

3 unchanged sentences

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.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2023.

These reclassifications had no effect on previously reported Net Income.

3 unchanged sentences

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.

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.

During the second quarter of 2022, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator.

In April 2023, we completed our exit from the Russian market by selling the KFC business in Russia to Smart Service Ltd., including all Russian company-owned KFC restaurants, operating system, and master franchise rights as well as the trademark for the Rostik’s brand.

Under the sale and purchase agreement, the buyer has agreed to lead the process to rebrand KFC restaurants in Russia to Rostik's and to retain the Company's employees in Russia.

The fair value of consideration received from

the sale is expected to approximate the carrying value of our net assets in Russia of $ 166 million, which includes $ 51 million of cumulative foreign currency translation losses, as of the quarter ended March 31, 2023.

Our operating results presented herein continue to reflect revenues from and expenses to support the Russian operations for KFC for the entirety of the quarter ended March 31, 2023, and for both Pizza Hut and KFC for the entirety of the quarter ended March 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 the resulting net profits or losses from the Division segment results in which they were earned to Unallocated Other income (expense).

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

Quarter ended Year to date

2022 2021 2022 2021

Quarter ended

Net Income $ 300 $ 399

5 unchanged sentences

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.

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.

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 31, 2023 and 2022 as indicated below.

All amounts exclude applicable transaction fees.

3 unchanged sentences

Authorization Date 2023 2022 2023 2022 2023

November 2019 —

May 2021 — 3,359 — 407 —

2 unchanged sentences

$ 50 $ 407 (a)

(a) Includes the effect of $ 14 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, September 30, 2021, but cash settlement dates subsequent to September 30, 2021, and excludes the effect of $ 11 million in share repurchases ( 0.1 million shares) with trade dates on, or prior to, December 31, 2020, but cash settlement dates subsequent to December 31, 2020.

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

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

(a) 2022 amount includes the effect of $ 64 million in share repurchases ( 0.5 million shares) with trade dates on, or prior to, March 31, 2022, but cash settlement dates subsequent to March 31, 2022.

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.

As of March 31, 2023, we have remaining capacity to repurchase up to $ 1.7 billion of Common Stock under the September 2022 authorization.

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 )

Balance at December 31, 2022, net of tax

$ ( 290 ) $ ( 94 ) $ 15 $ ( 369 )

OCI, net of tax

3 unchanged sentences

— — ( 2 ) ( 2 )

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

8 ( 2 ) ( 8 ) ( 2 )

(Gains) losses reclassified from AOCI, net of tax

Balance at March 31, 2023, net of tax

$ ( 282 ) $ ( 96 ) $ 7 $ ( 371 )

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

Note 4 - Other (Income) Expense

Quarter ended Year to date

Quarter ended

3/31/2023 3/31/2022

17 unchanged sentences

Property, plant and equipment, net $ 1,162 $ 1,171

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.

Assets held-for-sale totaled $ 186 million and $ 190 million as of March 31, 2023 and December 31, 2022, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Liabilities held-for-sale totaled $ 66 million and $ 65 million as of March 31, 2023 and December 31, 2022, respectively, and are included in Accounts

payable and other current liabilities in our Condensed Consolidated Balance Sheets.

KFC Russia assets held-for-sale accounted for $ 177 million including property, plant and equipment of $ 58 million, of the $ 186 million, while KFC Russia liabilities held-for-sale accounted for $ 62 million of the $ 66 million as of March 31, 2023.

Other Assets 3/31/2023 12/31/2022

4 unchanged sentences

Other assets $ 1,299 $ 1,324

(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.

(a) Non-current operating lease liabilities of $ 744 million and $ 731 million as of March 31, 2023 and December 31, 2022, 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

8 unchanged sentences

Note 6 - Income Taxes

Quarter ended Year to date

2022 2021 2022 2021

Quarter ended

Income tax (benefit) provision $ 71 $ ( 1 )

Effective tax rate 19.1 % ( 0.2 ) %

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.

These regulations made foreign taxes paid to certain countries no longer creditable in the U.S., which was expected to result in additional foreign tax credit carryforward utilization prospectively.

As a result, we reversed a valuation allowance associated with existing foreign tax credit carryforwards.

This valuation allowance reversal resulted in a one-time discrete tax benefit of $ 82 million in the quarter ended March 31, 2022.

Treasury published clarifying guidance in November 2022 which resulted in foreign taxes originally determined to be non-creditable under the January 2022 regulations to now be treated as creditable taxes.

As such, the valuation allowance on foreign tax credit carryforwards that was released in the quarter ended March 31, 2022, was re-established in the quarter ended December 31, 2022.

Note 7 - Revenue Recognition

26 unchanged sentences

$ 660 $ 517 $ 244 $ 126 $ 1,547

Year to date 9/30/2022

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

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

Franchise revenues 170 — 46 — 216

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

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

Franchise revenues 181 — 48 — 229

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

5 unchanged sentences

Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 24

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

Balance at September 30, 2022 $ 404

(a) Primarily includes impact of foreign currency translation.

Balance at March 31, 2023

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

8 unchanged sentences

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

Quarter ended Year to date

Quarter ended

Revenues 2023 2022

4 unchanged sentences

$ 1,645 $ 1,547

Quarter ended Year to date

Quarter ended

Operating Profit 2023 2022

8 unchanged sentences

Unallocated Other income (expense) (a)

14 ( 2 ) 36 ( 5 )

Operating Profit $ 523 $ 509

1 unchanged sentence

Other pension income (expense) 2 —

Interest expense, net (c)

( 124 ) ( 126 ) ( 390 ) ( 416 )

Interest expense, net ( 130 ) ( 118 )

Income before income taxes $ 371 $ 398

1 unchanged sentence

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.

(a) Our operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC for the entire quarter ended March 31, 2023, as well as for both Pizza Hut and KFC for the quarter ended March 31, 2022 (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 reclassed such net profits and losses from the Division segment results in which they were earned to Unallocated Other income (expense).

As a result, we reclassed net operating losses of $ 1 million and net operating profit of $ 2 million from KFC Division Other income (expense) to Unallocated Other income (expense) during the quarters ended March 31, 2023 and 2022, respectively.

Also, included in Unallocated Other income (expense) for the quarter ended March 31, 2022, were $ 5 million in foreign exchange gains attributable to fluctuations in the value of the Russian Ruble.

Additionally, we recorded charges of $ 1 million to Corporate and unallocated G&A expenses and $ 1 million to Unallocated Franchise and property expenses during the quarter ended March 31, 2023 for certain expenses related to the transfer of the business and other costs related to our exit from Russia.

(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

3 unchanged sentences

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.

Our two significant U.S.

plans, including the Plan and a supplemental plan, were previously amended such that any salaried employee hired or rehired by YUM after September 30, 2001, is not eligible to participate in those plans.

Additionally, these two plans in the U.S.

are currently closed to new 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

Quarter ended

Service cost $ 1 $ 2

4 unchanged sentences

Net periodic benefit cost $ ( 1 ) $ 2

Additional loss recognized due to settlements (a)

$ 2 $ — $ 2 $ —

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

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

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

6 unchanged sentences

Subsidiary Senior Unsecured Notes 750 750

Revolving Facility 194 279

Term Loan A Facility 731 736

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Details of our Short-term borrowings and Long-term debt as of December 31, 2022 can be found within our 2022 Form 10-K.

On February 23, 2022, Yum!

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!

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.

Cash paid for interest during the quarters ended March 31, 2023 and March 31, 2022, was $ 117 million and $ 90 million, respectively.

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.

Our use of foreign currency contracts to manage foreign currency exchange rates associated with certain foreign currency denominated intercompany receivables and payables 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

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.

At both March 31, 2023 and December 31, 2022, we had interest rate swaps expiring in March 2025 with notional amounts of $ 1.5 billion.

These interest rate swaps have been designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt.

There were no other interest rate swaps outstanding as of March 31, 2023 or December 31, 2022.

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.

Through March 31, 2023, the swaps were highly effective cash flow hedges.

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

Quarter ended

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

2023 2022 2023 2022

1 unchanged sentence

Income tax benefit/(expense) 2 ( 14 ) 1 ( 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.

As of March 31, 2023, 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 $ 24 million, based on current LIBOR interest rates.

Total Return Swaps

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

The fair value associated with the total return swaps as of both September 30, 2022 and December 31, 2021, was not significant.

The fair value associated with the total return swaps as of both March 31, 2023 and December 31, 2022, was not significant.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations.

At March 31, 2023, all of the counterparties to our derivative instruments had investment grade ratings according to the three major ratings agencies.

To date, all counterparties have performed in accordance with their contractual obligations.

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.

As of March 31, 2023, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable and borrowings under our Revolving Facility 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.

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Condensed Consolidated Balance Sheet Level 3/31/2023 12/31/2022

Other Investments

Other assets 1 $ 128 $ 119

Other Investments Other assets 3 5 5

Investments Other assets 1 $ 95 $ 118

Investments Other assets 3 5 5

Interest Rate Swaps Prepaid expenses and other current assets 2 24 26

Interest Rate Swaps Other assets 2 6 16

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.

Investments primarily include our approximate 5 % minority interest in Devyani International Limited (“Devyani”), a franchise entity that operates KFC and Pizza Hut restaurants in India, with a fair value of $ 93 million and $ 116 million at March 31, 2023 and December 31, 2022, respectively.

For the quarter ended March 31, 2023, we recognized pre-tax investment losses of $ 23 million, related to changes in fair value of our investment in Devyani.

Note 13 - Contingencies

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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

during that year in connection with the business realignment of our corporate and management reporting structure along brand lines.

Additionally, interest on the underpayment is estimated to be approximately $830 million through the first quarter of 2023.

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.

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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.

We have received the IRS Examination Division’s Rebuttal to our Protest.

We expect the case to be transmitted to the IRS Office of Appeals for independent review within the next several months.

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

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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.

An unfavorable resolution of this matter could have a material, adverse impact on our Condensed Consolidated Financial Statements in future periods.

Lease Guarantees

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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.

As of March 31, 2023, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $ 350 million.

The present value of these potential payments discounted at our pre-tax cost of debt at March 31, 2023, was approximately $ 300 million.

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

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We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases, although such risk may not be reduced in the context of a bankruptcy or other similar restructuring of a large franchisee or group of franchisees.

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

The liability recorded for our expected losses under such leases as of March 31, 2023, was not material.

Legal Proceedings

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We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020.

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

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 with the administrative tribunal that had been scheduled for March has been rescheduled to August 3, 2023.

The stay order remains in effect and the next hearing in the Delhi High Court is now 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.

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

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

What changed 10-Q

Item 1. Financial Statements