YUM BRANDS INC 10-Q

Item 1. Financial Statements 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions, except per share data) Quarter ended Revenues 3/31/2024 3/31/2023 Company sales $ 474 $ 474 Franchise and property revenues 757 770 Franchise contributions for advertising and other services 367 401 Total revenues 1,598 1,645 Costs and Expenses, Net Company restaurant expenses 400 403 General and administrative expenses 286 282 Franchise and property expenses 31 36 Franchise advertising and other services expense 367 395 Refranchising (gain) loss ( 5 ) ( 4 ) Other (income) expense ( 1 ) 10 Total costs and expenses, net 1,078 1,122 Operating Profit 520 523 Investment (income) expense, net 22 24 Other pension (income) expense ( 2 ) ( 2 ) Interest expense, net 117 130 Income Before Income Taxes 383 371 Income tax provision 69 71 Net Income $ 314 $ 300 Basic Earnings Per Common Share $ 1.11 $ 1.07 Diluted Earnings Per Common Share $ 1.10 $ 1.05 Dividends Declared Per Common Share $ 0.67 $ 0.605 See accompanying Notes to Condensed Consolidated Financial Statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Quarter ended 3/31/2024 3/31/2023 Net Income $ 314 $ 300 Other comprehensive income, net of tax Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature Adjustments and gains (losses) arising during the period ( 10 ) 8 Reclassification of adjustments and (gains) losses into Net Income — — ( 10 ) 8 Tax (expense) benefit — — ( 10 ) 8 Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the period — — Reclassification of (gains) losses into Net Income — — — — Tax (expense) benefit — ( 2 ) — ( 2 ) Changes in derivative instruments Unrealized gains (losses) arising during the period 12 ( 8 ) Reclassification of (gains) losses into Net Income ( 8 ) ( 3 ) 4 ( 11 ) Tax (expense) benefit ( 1 ) 3 3 ( 8 ) Other comprehensive income (loss), net of tax ( 7 ) ( 2 ) Comprehensive Income $ 307 $ 298 See accompanying Notes to Condensed Consolidated Financial Statements. 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) Quarter ended 3/31/2024 3/31/2023 Cash Flows – Operating Activities Net Income $ 314 $ 300 Depreciation and amortization 35 29 Refranchising (gain) loss ( 5 ) ( 4 ) Investment (income) expense, net 22 24 Deferred income taxes 21 ( 4 ) Share-based compensation expense 23 25 Changes in accounts and notes receivable 44 23 Changes in prepaid expenses and other current assets ( 32 ) ( 7 ) Changes in accounts payable and other current liabilities ( 66 ) ( 101 ) Changes in income taxes payable ( 26 ) 28 Other, net 33 36 Net Cash Provided by Operating Activities 363 349 Cash Flows – Investing Activities Capital spending ( 49 ) ( 62 ) Proceeds from the sale of Devyani International Limited common stock 104 — Proceeds from refranchising of restaurants 11 5 Other, net ( 21 ) 1 Net Cash Provided by (Used in) Investing Activities 45 ( 56 ) Cash Flows – Financing Activities Repayments of long-term debt ( 10 ) ( 20 ) Revolving credit facility, three months or less, net — ( 85 ) Repurchase shares of Common Stock — ( 50 ) Dividends paid on Common Stock ( 189 ) ( 169 ) Other, net ( 48 ) ( 10 ) Net Cash Used in Financing Activities ( 247 ) ( 334 ) Effect of Exchange Rates on Cash and Cash Equivalents ( 7 ) 3 Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents 154 ( 38 ) Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 724 647 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period $ 878 $ 609 See accompanying Notes to Condensed Consolidated Financial Statements. 6 CONDENSED CONSOLIDATED BALANCE SHEETS YUM! BRANDS, INC. AND SUBSIDIARIES (in millions) (Unaudited) 3/31/2024 12/31/2023 ASSETS Current Assets Cash and cash equivalents $ 652 $ 512 Accounts and notes receivable, net 686 737 Prepaid expenses and other current assets 436 360 Total Current Assets 1,774 1,609 Property, plant and equipment, net 1,190 1,197 Goodwill 641 642 Intangible assets, net 370 377 Other assets 1,228 1,361 Deferred income taxes 1,021 1,045 Total Assets $ 6,224 $ 6,231 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current Liabilities Accounts payable and other current liabilities $ 1,095 $ 1,169 Income taxes payable 35 55 Short-term borrowings 58 53 Total Current Liabilities 1,188 1,277 Long-term debt 11,130 11,142 Other liabilities and deferred credits 1,662 1,670 Total Liabilities 13,980 14,089 Shareholders’ Deficit Common Stock, no par value, 750 shares authorized; 281 shares issued in 2024 and 2023 45 60 Accumulated deficit ( 7,492 ) ( 7,616 ) Accumulated other comprehensive loss ( 309 ) ( 302 ) Total Shareholders’ Deficit ( 7,756 ) ( 7,858 ) Total Liabilities and Shareholders’ Deficit $ 6,224 $ 6,231 See accompanying Notes to Condensed Consolidated Financial Statements. 7 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited) YUM! BRANDS, INC. AND SUBSIDIARIES Quarters ended March 31, 2024 and 2023 (in millions) Yum! Brands, Inc. Issued Common Stock Accumulated Deficit Accumulated Other Comprehensive Loss Total Shareholders' Deficit Shares Amount Balance at December 31, 2023 281 $ 60 $ ( 7,616 ) $ ( 302 ) $ ( 7,858 ) Net Income 314 314 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature ( 10 ) ( 10 ) Pension and post-retirement benefit plans — — Net gain on derivative instruments (net of tax impact of $ 1 million) 3 3 Comprehensive Income 307 Dividends declared ( 190 ) ( 190 ) Repurchase of shares of Common Stock — — — — Employee share-based award exercises — ( 47 ) ( 47 ) Share-based compensation events 32 32 Balance at March 31, 2024 281 $ 45 $ ( 7,492 ) $ ( 309 ) $ ( 7,756 ) Balance at December 31, 2022 280 $ — $ ( 8,507 ) $ ( 369 ) $ ( 8,876 ) Net Income 300 300 Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 8 8 Pension and post-retirement benefit plans (net of tax impact of $ 2 million) ( 2 ) ( 2 ) Net loss on derivative instruments (net of tax impact of $ 3 million) ( 8 ) ( 8 ) Comprehensive Income 298 Dividends declared ( 170 ) ( 170 ) Repurchase of shares of Common Stock — ( 24 ) ( 26 ) ( 50 ) Employee share-based award exercises — ( 10 ) ( 10 ) Share-based compensation events 34 34 Balance at March 31, 2023 280 $ — $ ( 8,403 ) $ ( 371 ) $ ( 8,774 ) See accompanying Notes to Condensed Consolidated Financial Statements. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Tabular amounts in millions, except per share data) Note 1 - Financial Statement Presentation We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 Form 10-K”). Yum! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 59,000 restaurants in more than 155 countries and territories. As of March 31, 2024, 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 March 31, 2024, YUM consisted of four operating segments: • The KFC Division which includes our worldwide operations of the KFC concept • The Taco Bell Division which includes our worldwide operations of the Taco Bell concept • The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept • The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. The majority of our U.S. subsidiaries 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. For subsidiaries that operate on this weekly periodic calendar, 2024 will include a 53rd week. Our remaining international subsidiaries operate on a monthly calendar similar to that on which YUM operates. Our preparation of the accompanying Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2023 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate. We have reclassified certain items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2024. These reclassifications had no effect on previously reported Net Income. 9 Note 2 - Earnings Per Common Share (“EPS”) Quarter ended 2024 2023 Net Income $ 314 $ 300 Weighted-average common shares outstanding (for basic calculation) 282 281 Effect of dilutive share-based employee compensation 4 4 Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) 286 285 Basic EPS $ 1.11 $ 1.07 Diluted EPS $ 1.10 $ 1.05 Unexercised employee SARs, RSUs, PSUs and stock options (in millions) excluded from the diluted EPS computation (a) 1.7 1.5 (a) These unexercised employee stock appreciation rights (“SARs”), restricted stock units (“RSUs”), performance share units (“PSUs”) and stock options 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 quarters ended March 31, 2024 and 2023 as indicated below. All amounts exclude applicable transaction fees. Shares Repurchased (thousands) Dollar Value of Shares Repurchased Remaining Dollar Value of Shares that may be Repurchased Authorization Date 2024 2023 2024 2023 2024 September 2022 — 387 — 50 1,700 Total — 387 $ — $ 50 $ 1,700 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. As of March 31, 2024, we have remaining capacity to repurchase up to $ 1.7 billion of Common Stock under the September 2022 authorization. 10 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 December 31, 2023, net of tax $ ( 201 ) $ ( 104 ) $ 3 $ ( 302 ) OCI, net of tax Gains (losses) arising during the period classified into AOCI, net of tax ( 10 ) — 9 ( 1 ) (Gains) losses reclassified from AOCI, net of tax — — ( 6 ) ( 6 ) ( 10 ) — 3 ( 7 ) Balance at March 31, 2024, net of tax $ ( 211 ) $ ( 104 ) $ 6 $ ( 309 ) Note 4 - Other (Income) Expense Quarter ended 3/31/2024 3/31/2023 Foreign exchange net (gain) loss $ 5 $ 3 Impairment and closure expense — 1 Other ( 6 ) 6 Other (income) expense $ ( 1 ) $ 10 Note 5 - Supplemental Balance Sheet Information Accounts and Notes Receivable, net The Company’s receivables are primarily generated from ongoing business relationships with our franchisees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable, net in our Condensed Consolidated Balance Sheets. Accounts and notes receivable, net also includes receivables generated from advertising cooperatives that we consolidate. 3/31/2024 12/31/2023 Accounts and notes receivable, gross $ 741 $ 776 Allowance for doubtful accounts ( 55 ) ( 39 ) Accounts and notes receivable, net $ 686 $ 737 Property, Plant and Equipment, net 3/31/2024 12/31/2023 Property, plant and equipment, gross $ 2,536 $ 2,529 Accumulated depreciation and amortization ( 1,346 ) ( 1,332 ) Property, plant and equipment, net $ 1,190 $ 1,197 11 Other Assets 3/31/2024 12/31/2023 Operating lease right-of-use assets (a) $ 755 $ 764 Franchise incentives 180 175 Investment in Devyani International Limited (See Note 12) — 124 Other 293 298 Other assets $ 1,228 $ 1,361 (a) Non-current operating lease liabilities of $ 748 million and $ 757 million as of March 31, 2024 and December 31, 2023, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets. Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows 3/31/2024 12/31/2023 Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets $ 652 $ 512 Restricted cash included in Prepaid expenses and other current assets (a) 191 177 Restricted cash and restricted cash equivalents included in Other assets (b) 35 35 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows $ 878 $ 724 (a) Restricted cash within Prepaid expenses and other current assets primarily reflects the cash related to advertising cooperatives which we consolidate that can only be used to settle obligations of the respective cooperatives and cash held in reserve for Taco Bell Securitization interest payments. (b) Primarily trust accounts related to our self-insurance program. Note 6 - Income Taxes Quarter ended 2024 2023 Income tax provision $ 69 $ 71 Effective tax rate 18.0 % 19.1 % Our estimated effective tax rate for the full fiscal year is expected to be higher than the U.S. federal statutory rate of 21 %, primarily due to state income taxes and U.S. taxes on foreign earnings partially offset by taxes on income earned in foreign jurisdictions with statutory tax rates below 21 %. The first quarter effective tax rate was lower than the prior year primarily due to favorable developments in the current quarter related to uncertain tax positions as well as favorability associated with higher tax deductions for share-based compensation, partially offset by higher taxes paid in foreign jurisdictions where our intellectual property rights are domiciled. Note 7 - Revenue Recognition Disaggregation of Total Revenues The following tables disaggregate revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors. 12 Quarter ended 3/31/2024 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 14 $ 240 $ 2 $ 127 $ 383 Franchise revenues 43 188 68 1 300 Property revenues 3 9 1 1 14 Franchise contributions for advertising and other services 10 146 73 1 230 China Franchise revenues 68 — 17 — 85 Other Company sales 91 — — — 91 Franchise revenues 272 13 62 — 347 Property revenues 11 — — — 11 Franchise contributions for advertising and other services 120 2 15 — 137 $ 632 $ 598 $ 238 $ 130 $ 1,598 Quarter ended 3/31/2023 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Total U.S. Company sales $ 16 $ 229 $ 5 $ 130 $ 380 Franchise revenues 46 178 70 1 295 Property revenues 3 10 1 1 15 Franchise contributions for advertising and other services 8 140 78 — 226 China Franchise revenues 66 — 18 — 84 Other Company sales 94 — — — 94 Franchise revenues 284 13 66 — 363 Property revenues 13 — — — 13 Franchise contributions for advertising and other services 157 2 16 — 175 $ 687 $ 572 $ 254 $ 132 $ 1,645 Contract Liabilities Our contract liabilities are comprised of unamortized upfront fees received from franchisees and are presented within Accounts payable and other current liabilities and Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets. A summary of significant changes to the contract liability balance during 2024 is presented below. 13 Deferred Franchise Fees Balance at December 31, 2023 $ 444 Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period ( 20 ) Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 19 Other (a) ( 3 ) Balance at March 31, 2024 $ 440 (a) Primarily includes impact of foreign currency translation. We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows: Less than 1 year $ 72 1 - 2 years 65 2 - 3 years 59 3 - 4 years 53 4 - 5 years 44 Thereafter 147 Total $ 440 Note 8 - Reportable Operating Segments We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments: Quarter ended Revenues 2024 2023 KFC Division $ 632 $ 687 Taco Bell Division 598 572 Pizza Hut Division 238 254 Habit Burger Grill Division 130 132 $ 1,598 $ 1,645 Quarter ended Operating Profit 2024 2023 KFC Division $ 313 $ 305 Taco Bell Division 208 204 Pizza Hut Division 93 104 Habit Burger Grill Division ( 5 ) ( 5 ) Corporate and unallocated G&A expenses ( 89 ) ( 84 ) Unallocated Franchise and property income (expenses) — ( 1 ) Unallocated Refranchising gain (loss) 5 4 Unallocated Other income (expense) ( 5 ) ( 4 ) Operating Profit $ 520 $ 523 Investment income (expense), net (a) ( 22 ) ( 24 ) Other pension income (expense) 2 2 Interest expense, net ( 117 ) ( 130 ) Income before income taxes $ 383 $ 371 14 Our chief operating decision maker ( “ CODM ” ) does not consider the impact of Corporate and unallocated amounts when assessing Divisional segment performance. As such, we do not allocate such amounts to our Divisional segments for performance reporting purposes. (a) Includes changes in the value of our investment in Devyani International Limited (see Note 12). Note 9 - Pension Benefits We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the “Plan”), is qualified and funded. We fund our other U.S. plans as benefits are paid. 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 2024 2023 Service cost $ 1 $ 1 Interest cost 11 10 Expected return on plan assets ( 13 ) ( 12 ) Net periodic benefit cost (income) $ ( 1 ) $ ( 1 ) Note 10 - Short-term Borrowings and Long-term Debt Short-term Borrowings 3/31/2024 12/31/2023 Current maturities of long-term debt $ 61 $ 56 Less current portion of debt issuance costs and discounts ( 3 ) ( 3 ) Short-term borrowings $ 58 $ 53 Long-term Debt Securitization Notes $ 3,743 $ 3,743 Subsidiary Senior Unsecured Notes 750 750 Revolving Facility — — Term Loan A Facility 713 717 Term Loan B Facility 1,455 1,459 YUM Senior Unsecured Notes 4,550 4,550 Finance lease obligations 49 50 $ 11,260 $ 11,269 Less long-term portion of debt issuance costs and discounts ( 69 ) ( 71 ) Less current maturities of long-term debt ( 61 ) ( 56 ) Long-term debt $ 11,130 $ 11,142 Details of our Short-term borrowings and Long-term debt as of December 31, 2023 can be found within our 2023 Form 10-K. Subsequent to the first quarter, on April 26, 2024, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC (collectively, the "Borrowers"), each of which is a wholly-owned subsidiary of the Company, completed the refinancing of the then outstanding $ 713 million under the Term Loan A Facility and $ 1.25 billion capacity under the Revolving Facility through the issuance of a $ 500 million term loan A facility and a $ 1.5 billion revolving facility pursuant to an amendment to the Credit Agreement (as defined in our 2023 Form 10-K). The transaction did not add any additional net new debt to the Company's Balance Sheet. The new term loan A facility and the revolving facility will mature on the earliest of (i) April 26, 2029, (ii) the date that is 91 days prior to the March 15, 2028 maturity of the Borrowers’ existing Term Loan B Facility if more than $250 15 million of such Term Loan B remains outstanding as of such date and (iii) the date that is 91 days prior to the June 1, 2027 maturity of the Borrowers’ existing Subsidiary Senior Unsecured Notes if more than $250 million of such Subsidiary Senior Unsecured Notes remains outstanding as of such date. Further, the Amendment removes the excess cash flow mandatory prepayment requirement with respect to the new term loan A facility. All other material provisions of the Credit Agreement remain unchanged. Cash paid for interest during the quarter ended March 31, 2024, was $ 101 million. Cash paid for interest during the quarter ended March 31, 2023 was $ 104 million. Note 11 - Derivative Instruments We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates. Our use of foreign currency contracts to manage foreign currency exchange rates 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 March 31, 2024 and December 31, 2023, 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, 2024 or December 31, 2023. 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 March 31, 2024, 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 Gains/(Losses) Recognized in OCI (Gains)/Losses Reclassified from AOCI into Net Income 2024 2023 2024 2023 Interest rate swaps $ 11 $ ( 7 ) $ ( 9 ) $ ( 5 ) Income tax benefit/(expense) ( 3 ) 2 2 1 As of March 31, 2024, 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 $ 28 million, based on current Secured Overnight Financing Rate ("SOFR") interest rates. Total Return Swaps We have entered into total return swap derivative contracts, with the objective of reducing our exposure to market-driven changes in certain of the liabilities associated with compensation deferrals into our Executive Income Deferral (“EID”) plan. While these total return swaps represent economic hedges, we have not designated them as hedges for accounting purposes. As a result, the changes in the fair value of these derivatives are recognized immediately in earnings within General and administrative expenses in our Condensed Consolidated Statements of Income largely offsetting the changes in the associated EID liabilities. The fair value associated with the total return swaps as of both March 31, 2024 and December 31, 2023, 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. 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 March 31, 2024, all of the counterparties to our derivative instruments had investment grade ratings 16 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 March 31, 2024, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair value of our notes receivable, net of allowances, and lease guarantees, less reserves for expected losses, approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations: 3/31/2024 12/31/2023 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Securitization Notes (a) $ 3,743 $ 3,423 $ 3,743 $ 3,391 Subsidiary Senior Unsecured Notes (b) 750 742 750 742 Term Loan A Facility (b) 713 709 717 716 Term Loan B Facility (b) 1,455 1,460 1,459 1,466 YUM Senior Unsecured Notes (b) 4,550 4,361 4,550 4,439 (a) We estimated the fair value of the Securitization Notes using market quotes and calculations. The markets in which the Securitization Notes trade are not considered active markets. (b) We estimated the fair value of the YUM and Subsidiary Senior Unsecured Notes, Term Loan A Facility and Term Loan B Facility using market quotes and calculations based on market rates. Recurring Fair Value Measurements The Company has interest rate swaps and other investments, all of which are required to be measured at fair value on a recurring basis (see Note 11 for discussion regarding derivative instruments). The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall. Fair Value Condensed Consolidated Balance Sheet Level 3/31/2024 12/31/2023 Assets Investments Other assets 1 $ 1 $ 125 Investments Other assets 3 7 7 Interest Rate Swaps Prepaid expenses and other current assets 2 28 24 Interest Rate Swaps Other assets 2 — 2 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. Investments as of December 31, 2023, primarily included 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 $ 124 million. During the quarter ended March 31, 2024, we sold our ownership interest in Devyani for pre-tax proceeds of $ 104 million and recognized pre-tax investment losses of $ 20 million related to changes in fair value during the quarter prior to the date of sale. 17 Note 13 - Contingencies Internal Revenue Service Proposed Adjustment As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, in August 2022, we received a Revenue Agent’s Report (“RAR”) from the IRS asserting an underpayment of tax of $2.1 billion plus $418 million in penalties for the 2014 fiscal year. Additionally, interest on the underpayment is estimated to be approximately $1.2 billion through the first quarter of 2024. 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 have received the IRS Examination Division’s Rebuttal to our Protest and the case has been accepted by the IRS Office of Appeals. The Company does not expect resolution of this matter within twelve months and cannot predict with certainty the timing of such resolution. The Company believes that it is more likely than not the Company’s tax position will be sustained; therefore, no reserve is recorded with respect to this matter. An unfavorable resolution of this matter could have a material, adverse impact on our Condensed Consolidated Financial Statements in future periods. Lease Guarantees As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065 . As of March 31, 2024, 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 March 31, 2024, was approximately $ 300 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases, although such risk may not be reduced in the context of a bankruptcy or other similar restructuring of a large franchisee or group of franchisees. The liability recorded for our expected losses under such leases as of March 31, 2024, was not material. Legal Proceedings We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable. India Regulatory Matter Yum! Restaurants India Private Limited (“YRIPL”), a YUM subsidiary that operates KFC and Pizza Hut restaurants in India, is the subject of a regulatory enforcement action in India (the “Action”). The Action alleges, among other things, that KFC International Holdings, Inc. and Pizza Hut International failed to satisfy certain conditions imposed by the Secretariat for Industrial Approval in 1993 and 1994 when those companies were granted permission for foreign investment and operation in India. The conditions at issue include an alleged minimum investment commitment and store build requirements as well as limitations on the remittance of fees outside of India. The Action originated with a complaint and show cause notice filed in 2009 against YRIPL by the Deputy Director of the Directorate of Enforcement (“DOE”) of the Indian Ministry of Finance following an income tax audit for the years 2002 and 2003. The matter was argued at various hearings in 2015, but no order was issued. Following a change in the incumbent official holding the position of Special Director of DOE (the “Special Director”), the matter resumed in 2018 and several additional hearings were conducted. 18 On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $135 million. Of this amount, $130 million relates to the alleged failure to invest a total of $80 million in India within an initial seven-year period. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. 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 4, 2024 has been rescheduled to July 30, 2024. A hearing held on March 21, 2024, before the Delhi High Court has been continued to July 4, 2024, and the stay order remains in effect. 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. Other Matters We are currently engaged in various other legal proceedings and have certain unresolved claims pending, the ultimate liability for which, if any, cannot be determined at this time. However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Condensed Consolidated Financial Statements. Note 14 - Subsequent Event KFC U.K. and Ireland Store Acquisition On April 29, 2024, we completed the previously announced acquisition of 216 KFC restaurants from a franchisee in the U.K. and Ireland. Consideration for this acquisition consists of approximately $ 180 million in cash, subject to customary post-closing adjustments. 19