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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934 for the quarterly period ended
June 30, 2021
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to _________________
 
 Commission file number 1-13163
________________________
YUM! BRANDS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (502)  874-8300
Securities registered pursuant to Section 12(b) of the Act
  Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
  Common Stock, no par value YUM New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No x
The number of shares outstanding of the registrant’s Common Stock as of July 29, 2021, was 295,646,558 shares.



YUM! BRANDS, INC.

INDEX
 
    Page
    No.
Part I. Financial Information  
     
  Item 1 - Financial Statements  
   
 
Condensed Consolidated Statements of Income
4
   
Condensed Consolidated Statements of Comprehensive Income
5
 
Condensed Consolidated Statements of Cash Flows
6
   
 
Condensed Consolidated Balance Sheets
7
Condensed Consolidated Statements of Shareholders' Deficit
8
   
 
Notes to Condensed Consolidated Financial Statements
9
   
  Item 2 - Management’s Discussion and Analysis of Financial Condition
              and Results of Operations
   
  Item 3 - Quantitative and Qualitative Disclosures About Market Risk
   
  Item 4 – Controls and Procedures
   
  Report of Independent Registered Public Accounting Firm
   
Part II. Other Information and Signatures
   
  Item 1 – Legal Proceedings
   
  Item 1A – Risk Factors
   
  Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
  Item 6 – Exhibits
   
  Signatures

2


PART I - FINANCIAL INFORMATION

Item 1.Financial Statements
3


CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
  Quarter ended Year to date
Revenues 6/30/2021 6/30/2020 6/30/2021 6/30/2020
Company sales $ 520  $ 403  $ 996  $ 758 
Franchise and property revenues 706  525  1,364  1,121 
Franchise contributions for advertising and other services 376  270  728  582 
Total revenues 1,602  1,198  3,088  2,461 
Costs and Expenses, Net
Company restaurant expenses 417  349  809  647 
General and administrative expenses 230  259  436  467 
Franchise and property expenses 27  36  50  94 
Franchise advertising and other services expense 372  264  715  574 
Refranchising (gain) loss (7) (8) (22) (21)
Other (income) expense (4) (2) (10) 150 
Total costs and expenses, net 1,035  898  1,978  1,911 
Operating Profit 567  300  1,110  550 
Investment (income) expense, net (1) (91) (1) (57)
Other pension (income) expense
Interest expense, net 159  132  290  250 
Income Before Income Taxes 407  257  816  352 
Income tax provision 16  51  99  63 
Net Income $ 391  $ 206  $ 717  $ 289 
Basic Earnings Per Common Share $ 1.31  $ 0.68  $ 2.39  $ 0.96 
Diluted Earnings Per Common Share $ 1.29  $ 0.67  $ 2.35  $ 0.94 
Dividends Declared Per Common Share $ 0.50  $ 0.47  $ 1.00  $ 0.94 
See accompanying Notes to Condensed Consolidated Financial Statements.

4


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
Quarter ended Year to date
6/30/2021 6/30/2020 6/30/2021 6/30/2020
Net Income $ 391  $ 206  $ 717  $ 289 
Other comprehensive income (loss), 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
14  68  17  (34)
14  68  17  (34)
Tax (expense) benefit
—  —  —  — 
14  68  17  (34)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period
11  —  58  — 
Reclassification of (gains) losses into Net Income
11  10 
15  69  10 
Tax (expense) benefit
(4) (1) (17) (2)
11  52 
Changes in derivative instruments
Unrealized gains (losses) arising during the period
(8) (19) 16  (93)
Reclassification of (gains) losses into Net Income
(5)
(4) (15) 24  (98)
Tax (expense) benefit
(6) 24 
(3) (11) 18  (74)
Other comprehensive income (loss), net of tax 22  61  87  (100)
Comprehensive Income (Loss) $ 413  $ 267  $ 804  $ 189 
See accompanying Notes to Condensed Consolidated Financial Statements.

5


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
  Year to date
  6/30/2021 6/30/2020
Cash Flows – Operating Activities    
Net Income $ 717  $ 289 
Depreciation and amortization 78  53 
Impairment and closure expense 146 
Refranchising (gain) loss (22) (21)
Investment (income) expense, net (1) (57)
Contributions to defined benefit pension plans (3) (1)
Deferred income taxes (41) (20)
Share-based compensation expense 38  29 
Changes in accounts and notes receivable 25 
Changes in prepaid expenses and other current assets (11) (26)
Changes in accounts payable and other current liabilities (95) (76)
Changes in income taxes payable (25) (49)
Other, net 112  91 
Net Cash Provided by Operating Activities 773  362 
Cash Flows – Investing Activities
Capital spending (84) (67)
Acquisition of The Habit Restaurants, Inc., net of cash acquired —  (408)
Proceeds from refranchising of restaurants 43 
Other, net 33  — 
Net Cash Used in Investing Activities (8) (472)
Cash Flows – Financing Activities
Proceeds from long-term debt 1,900  600 
Repayments of long-term debt (2,002) (41)
Revolving credit facility, three months or less, net —  575 
Short-term borrowings by original maturity
More than three months - proceeds
—  85 
More than three months - payments
—  (90)
Three months or less, net
—  — 
Repurchase shares of Common Stock (530) — 
Dividends paid on Common Stock (299) (283)
Debt issuance costs (18) (7)
Other, net (17) (31)
Net Cash Provided by (Used in) Financing Activities (966) 808 
Effect of Exchange Rates on Cash and Cash Equivalents 11  (18)
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents (190) 680 
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period 1,024  768 
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period $ 834  $ 1,448 
See accompanying Notes to Condensed Consolidated Financial Statements.    

6


CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
(Unaudited) 6/30/2021
12/31/2020
ASSETS    
Current Assets    
Cash and cash equivalents $ 552  $ 730 
Accounts and notes receivable, net 525  534 
Prepaid expenses and other current assets 437  425 
Total Current Assets 1,514  1,689 
Property, plant and equipment, net 1,211  1,235 
Goodwill 597  597 
Intangible assets, net 352  343 
Other assets 1,408  1,435 
Deferred income taxes 567  553 
Total Assets $ 5,649  $ 5,852 
LIABILITIES AND SHAREHOLDERS’ DEFICIT    
Current Liabilities    
Accounts payable and other current liabilities $ 1,142  $ 1,189 
Income taxes payable 16  33 
Short-term borrowings 400  453 
Total Current Liabilities 1,558  1,675 
Long-term debt 10,258  10,272 
Other liabilities and deferred credits 1,726  1,796 
Total Liabilities 13,542  13,743 
Shareholders’ Deficit    
Common Stock, no par value, 750 shares authorized; 296 shares issued in 2021 and 300 issued in 2020
—  — 
Accumulated deficit (7,569) (7,480)
Accumulated other comprehensive loss (324) (411)
Total Shareholders’ Deficit (7,893) (7,891)
Total Liabilities and Shareholders’ Deficit $ 5,649  $ 5,852 
See accompanying Notes to Condensed Consolidated Financial Statements.    
7


CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
Quarters ended June 30, 2021 and 2020
(in millions)
  Yum! Brands, Inc.  
  Issued Common Stock Accumulated Deficit Accumulated
Other Comprehensive Loss
Total Shareholders' Deficit
  Shares Amount
Balance at March 31, 2021
298  $ —  $ (7,566) $ (346) $ (7,912)
Net Income 391  391 
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 14  14 
Pension and post-retirement benefit plans (net of tax impact of $4 million)
11  11 
Net loss on derivative instruments (net of tax impact of $1 million)
(3) (3)
Comprehensive Income 413 
Dividends declared (149) (149)
Repurchase of shares of Common Stock (2) (10) (245) (255)
Employee share-based award exercises —  (7) (7)
Share-based compensation events 17  17 
Balance at June 30, 2021
296  $ —  $ (7,569) $ (324) $ (7,893)
Balance at December 31, 2020
300  $ —  $ (7,480) $ (411) $ (7,891)
Net Income 717  717 
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 17  17 
Pension and post-retirement benefit plans (net of tax impact of $17 million)
52  52 
Net gain on derivative instruments (net of tax impact of $6 million)
18  18 
Comprehensive Income 804 
Dividends declared (300) (300)
Repurchase of shares of Common Stock (5) (24) (506) (530)
Employee share-based award exercises (17) (17)
Share-based compensation events 41  41 
Balance at June 30, 2021
296  $ —  $ (7,569) $ (324) $ (7,893)
Balance at March 31, 2020
301  $ 15  $ (7,695) $ (549) $ (8,229)
Net Income 206  206 
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature 68  68 
Pension and post-retirement benefit plans (net of tax impact of $1 million)
Net loss on derivative instruments (net of tax impact of $4 million)
(11) (11)
Comprehensive Income 267 
Dividends declared (142) (142)
Repurchase of shares of Common Stock — 
Employee share-based award exercises —  (18) (18)
Share-based compensation events 14  14 
Balance at June 30, 2020
301  $ 11  $ (7,631) $ (488) $ (8,108)
Balance at December 31, 2019
300  $ —  $ (7,628) $ (388) $ (8,016)
Net Income 289  289 
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (34) (34)
Pension and post-retirement benefit plans (net of tax impact of $2 million)
Net loss on derivative instruments (net of tax impact of $24 million)
(74) (74)
Comprehensive Income 189 
Dividends declared (284) (284)
Repurchase of shares of Common Stock — 
Employee share-based award exercises (31) (31)
Share-based compensation events 42  42 
Adoption of Expected Credit Loss accounting standard (8) (8)
Balance at June 30, 2020
301  $ 11  $ (7,631) $ (488) $ (8,108)
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, 2020 (“2020 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 51,000 restaurants in more than 150 countries and territories.  As of June 30, 2021, 98% of these restaurants were owned and operated by franchisees.  The Company’s KFC, Pizza Hut and Taco Bell brands are global leaders of the chicken, pizza and Mexican-style food categories, respectively. The Habit Burger Grill, a concept we acquired on March 18, 2020, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more.

As of June 30, 2021, YUM consisted of four operating segments:  

The KFC Division which includes our worldwide operations of the KFC concept
The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
The Taco Bell Division which includes our worldwide operations of the Taco Bell 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 consists 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. Our Habit Burger Grill Division operates on a weekly periodic calendar where each quarter consists of 13 weeks, except in fiscal years with 53 weeks when the fourth quarter consists of 14 weeks.

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 2020 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.

Note 2 - Habit Burger Grill Acquisition

On March 18, 2020, we completed the acquisition of all of the issued and outstanding common shares of The Habit Restaurants, Inc. As of the date of acquisition, The Habit Restaurants, Inc. operated 245 company-owned and 31 franchised Habit Burger Grill restaurants across the U.S. and in China, offering a flavor-forward variety of made-to-order items chargrilled over an open flame. We expect Habit Burger Grill to benefit from the global scale and resources of YUM and that the acquisition will accelerate and diversify YUM's growth.

Total cash consideration paid in connection with the acquisition was $408 million, net of acquired cash of $20 million. The acquisition was accounted for as a business combination using the acquisition method of accounting. During the quarter ended March 31, 2021, we finalized our estimate of the fair value of the net assets acquired, which resulted in goodwill being reduced by $15 million compared to the initial fair value estimate recorded in the quarter ended March 31, 2020 ($2 million of this reduction was recorded in the quarter ended March 31, 2021). The final allocation of consideration to the net tangible and intangible assets acquired upon the March 18, 2020 acquisition is presented in the table below.
9



Total Current Assets $ 11 
Property, plant and equipment, net 111 
Habit Burger Grill brand (included in Intangible assets, net) 96 
Operating lease right-of-use assets (included in Other assets) 196 
Other assets 28 
Total Assets 442 
Total Current Liabilities (68)
Operating lease liabilities (included in Other liabilities and deferred credits) (170)
Total Liabilities (238)
Total identifiable net assets 204 
Goodwill 204 
Net consideration transferred $ 408 

During the first quarter of 2020, the operations of substantially all Habit Burger Grill restaurants were impacted by COVID-19. As a result, we performed an interim impairment test of the Habit Burger Grill reporting unit goodwill as of March 31, 2020. This test of impairment included comparing the estimated fair value of the Habit Burger Grill reporting unit to its carrying value, including goodwill, as originally determined through our preliminary purchase price allocation. The fair value estimate of the Habit Burger Grill reporting unit was based on the estimated price a willing buyer would pay for the reporting unit and was determined using an income approach through a discounted cash flow analysis using unobservable inputs (Level 3). The most impactful of these inputs included future average unit volumes of Habit Burger Grill restaurants as well as restaurant unit counts. The fair value was determined based upon a probability-weighted average of three scenarios, which included assumed recovery of Habit Burger Grill average unit volumes to a pre—COVID-19 level over periods ranging from the beginning of 2021 to the end of 2022. Factors impacting restaurant unit counts were near-term unit closures as the result of COVID-19 as well as the pace of expected new unit development. Unit counts assumed were correlated with the expected recoveries in average unit volumes. Based upon this fair value estimate, we determined that the carrying value of our Habit Burger Grill reporting unit exceeded its fair value. As a result, during the first quarter of 2020 we recorded a goodwill impairment charge of $139 million to Other (income) expense and a corresponding income tax benefit of $32 million. As we continued to refine our preliminary purchase price allocation in the quarter ended September 30, 2020, the impairment charge was adjusted upward by $5 million, which resulted in a corresponding income tax benefit of $1 million. Subsequent to these 2020 goodwill impairment charges and the finalization during the quarter ended March 31, 2021, of the allocation of consideration to the net assets acquired (described above), the Habit Burger Grill reporting unit goodwill was $60 million.

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Note 3 - Earnings Per Common Share (“EPS”)
  Quarter ended Year to date
  2021 2020 2021 2020
Net Income $ 391  $ 206  $ 717  $ 289 
Weighted-average common shares outstanding (for basic calculation) 298  303  299  302 
Effect of dilutive share-based employee compensation
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) 304  307  304  307 
Basic EPS $ 1.31  $ 0.68  $ 2.39  $ 0.96 
Diluted EPS $ 1.29  $ 0.67  $ 2.35  $ 0.94 
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)
1.5  5.2  2.1  4.7 

(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.

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Note 4 - Shareholders' Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended June 30, 2021 and 2020 as indicated below.  All amounts exclude applicable transaction fees. 

  Shares Repurchased
(thousands)
Dollar Value of Shares
Repurchased
Authorization Date 2021 2020 2021 2020
November 2019 4,746 
(a)
—  $ 530 
(a)
$ — 

(a) Includes the effect of $11 million in share repurchases (0.1 million shares) with trade dates on, or prior to, June 30, 2021, but cash settlement dates subsequent to June 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. Unutilized share repurchase capacity of $1.2 billion under a November 2019 authorization expired on June 30, 2021.

Changes in Accumulated other comprehensive loss ("AOCI") are presented below.
Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature Pension and Post-Retirement Benefits Derivative Instruments Total
Balance at March 31, 2021, net of tax $ (179) $ (55) $ (112) $ (346)
OCI, net of tax
Gains (losses) arising during the period classified into AOCI, net of tax
14  (6) 16 
(Gains) losses reclassified from AOCI, net of tax
— 
14  11  (3) 22 
Balance at June 30, 2021, net of tax $ (165) $ (44) $ (115) $ (324)
Balance at December 31, 2020, net of tax $ (182) $ (96) $ (133) $ (411)
OCI, net of tax
Gains (losses) arising during the period classified into AOCI, net of tax
17  44  12  73 
(Gains) losses reclassified from AOCI, net of tax
—  14 
17  52  18  87 
Balance at June 30, 2021, net of tax $ (165) $ (44) $ (115) $ (324)

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Note 5 - Other (Income) Expense
Quarter ended Year to date
  6/30/2021 6/30/2020 6/30/2021 6/30/2020
Foreign exchange net (gain) loss and other(a)
$ (4) $ (8) $ (11) $
Impairment and closure expense(b)
—  146 
Other (income) expense $ (4) $ (2) $ (10) $ 150 

(a)    The year to date ended June 30, 2021, includes a gain of $6 million associated with the sale of property.

(b)    The year to date ended June 30, 2020, includes a charge of $139 million related to the impairment of Habit Burger Grill goodwill. See Note 2. The quarter and year to date ended June 30, 2020 also includes a charge of $6 million related to the write-off of software no longer being used.


Note 6 - 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.
6/30/2021 12/31/2020
Accounts and notes receivable, gross $ 559  $ 579 
Allowance for doubtful accounts (34) (45)
Accounts and notes receivable, net $ 525  $ 534 

Property, Plant and Equipment, net
6/30/2021 12/31/2020
Property, plant and equipment, gross $ 2,490  $ 2,465 
Accumulated depreciation and amortization (1,279) (1,230)
Property, plant and equipment, net $ 1,211  $ 1,235 

Assets held-for-sale totaled $7 million as of both June 30, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Other Assets 6/30/2021 12/31/2020
Operating lease right-of-use assets(a)
$ 847  $ 851 
Franchise incentives 169  163 
Other 392  421 
Other assets $ 1,408  $ 1,435 

(a)    Non-current operating lease liabilities of $821 million and $823 million as of June 30, 2021 and December 31, 2020, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets.

13


Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows
6/30/2021 12/31/2020
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets $ 552  $ 730 
Restricted cash included in Prepaid expenses and other current assets(a)
248  258 
Restricted cash and restricted cash equivalents included in Other assets(b)
34  36 
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows $ 834  $ 1,024 

(a)    Restricted cash within Prepaid expenses and other current assets reflects the cash related to advertising cooperatives which we consolidate that can only be used to settle obligations of the respective cooperatives and cash held in reserve for Taco Bell Securitization interest payments.

(b)    Primarily trust accounts related to our self-insurance programs.


Note 7 - Income Taxes
  Quarter ended Year to date
  2021 2020 2021 2020
Income tax provision $ 16  $ 51  $ 99  $ 63 
Effective tax rate 4.0  % 19.8  % 12.1  % 17.8  %

Our second quarter and year to date effective tax rates are lower than the prior year primarily due to tax benefits of $64 million recorded associated with the remeasurement of deferred tax assets necessitated by the enactment of the United Kingdom ("UK") Finance Act 2021 during the quarter ended June 30, 2021. The UK Finance Act 2021 increased the UK corporate income tax rate from 19% to 25%, beginning April 1, 2023. In addition, the year-over-year change in uncertain tax positions favorably impacted our effective tax rates for both the quarter and year to date.

KFC Europe Reorganization

In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland. Concurrent with this change in management responsibility, we have completed intra-entity transfers of certain intellectual property rights to subsidiaries in Switzerland subsequent to the end of the quarter ended June 30, 2021. As a result of the transfers of these rights, we received a step-up in tax basis to current fair value under applicable Swiss tax law. To the extent this step-up in tax basis will be amortizable against future Swiss taxable income, we will recognize a one-time deferred tax benefit in the quarter ended September 30, 2021. We currently estimate this tax benefit, net of other tax costs of the reorganization, will exceed $100 million.

Note 8 - 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.
14


Quarter ended 6/30/2021
KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Total
U.S.
Company sales $ 16  $ $ 223  $ 138  $ 382 
Franchise revenues 48  67  160  276 
Property revenues 10  —  15 
Franchise contributions for advertising and other services 74  128  —  209 
China
Franchise revenues 58  16  —  —  74 
Other
Company sales 131  —  —  138 
Franchise revenues 255  62  —  326 
Property revenues 15  —  —  —  15 
Franchise contributions for advertising and other services 149  16  —  167 
$ 682  $ 249  $ 532  $ 139  $ 1,602 

Quarter ended 6/30/2020
KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Total
U.S.
Company sales $ 13  $ $ 194  $ 104  $ 316 
Franchise revenues 44  66  132  243 
Property revenues 11  —  16 
Franchise contributions for advertising and other services 78  107  —  190 
China
Franchise revenues 47  12  —  —  59 
Other
Company sales 73  14  —  —  87 
Franchise revenues 146  46  —  196 
Property revenues 11  —  —  —  11 
Franchise contributions for advertising and other services 67  12  —  80 
$ 409  $ 235  $ 449  $ 105  $ 1,198 
15


Year to date 6/30/2021
KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Total
U.S.
Company sales $ 30  $ 10  $ 431  $ 259  $ 730 
Franchise revenues 92  134  304  532 
Property revenues 20  —  29 
Franchise contributions for advertising and other services 13  153  245  —  411 
China
Franchise revenues 120  32  —  —  152 
Other
Company sales 250  16  —  —  266 
Franchise revenues 485  119  17  —  621 
Property revenues 29  —  —  30 
Franchise contributions for advertising and other services 281  33  —  317 
$ 1,307  $ 500  $ 1,020  $ 261  $ 3,088 

Year to date 6/30/2020
KFC Division Pizza Hut Division Taco Bell Division Habit Burger Grill Division Total
U.S.
Company sales $ 29  $ 10  $ 392  $ 113  $ 544 
Franchise revenues 82  128  263  474 
Property revenues 21  —  31 
Franchise contributions for advertising and other services 148  214  —  371 
China
Franchise revenues 94  22  —  —  116 
Other
Company sales 187  27  —  —  214 
Franchise revenues 358  105  11  —  474 
Property revenues 25  —  —  26 
Franchise contributions for advertising and other services 184  26  —  211 
$ 975  $ 470  $ 902  $ 114  $ 2,461 
Contract Liabilities

Our contract liabilities are comprised of unamortized upfront fees received from franchisees. A summary of significant changes to the contract liability balance during 2021 is presented below.

16


Deferred Franchise Fees
Balance at December 31, 2020 $ 415 
Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period (34)
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period 34 
Other(a)
(2)
Balance at June 30, 2021 $ 413 

(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 $ 65 
1 - 2 years 60 
2 - 3 years 56 
3 - 4 years 50 
4 - 5 years 44 
Thereafter 138 
Total $ 413 

Note 9 - Reportable Operating Segments

We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:
  Quarter ended Year to date
Revenues 2021 2020 2021 2020
KFC Division $ 682  $ 409  $ 1,307  $ 975 
Pizza Hut Division 249  235  500  470 
Taco Bell Division 532  449  1,020  902 
Habit Burger Grill Division 139  105  261  114 
  $ 1,602  $ 1,198  $ 3,088  $ 2,461 

  Quarter ended Year to date
Operating Profit 2021 2020 2021 2020
KFC Division $ 318  $ 153  $ 618  $ 377 
Pizza Hut Division 103  87  205  163 
Taco Bell Division 198  154  376  298 
Habit Burger Grill Division (6) (8)
Corporate and unallocated G&A expenses(a)
(63) (98) (113) (148)
Unallocated Company restaurant expenses —  —  —  (1)
Unallocated Franchise and property expenses —  (1) —  (3)
Unallocated Refranchising gain (loss) 22  21 
Unallocated Other income (expense)(b)
(1) (3) (149)
Operating Profit $ 567  $ 300  $ 1,110  $ 550 
Investment income (expense), net(c)
91  57 
Other pension income (expense) (See Note 10) (2) (2) (5) (5)
Interest expense, net(d)
(159) (132) (290) (250)
Income before income taxes $ 407  $ 257  $ 816  $ 352 
17



Our chief operating decision maker (CODM) does not consider the impact of Corporate and unallocated amounts when assessing Divisional segment performance. As such, we do not allocate such amounts to our Divisional segments for performance reporting purposes.

(a)Includes a $50 million contribution to Yum! Brands Foundation, Inc. (a stand-alone, not-for-profit organization that is not consolidated in the Company's results) in the second quarter of 2020 related to our "Unlocking Opportunity Initiative". Also included are costs related to our acquisition of Habit Burger Grill in the quarter and year to date ended June 30, 2020 of $3 million and $9 million, respectively.

(b)Includes a charge of $139 million related to the impairment of Habit Burger Grill goodwill in the year to date ended June 30, 2020. See Note 2.

(c)Includes changes in the value of Grubhub, Inc. ("Grubhub") common stock and other investments. For the quarter and year to date ended June 30, 2020, we recognized investment income of $84 million and $62 million, respectively, related to changes in fair value of our investment in Grubhub common stock. In the quarter ended September 30, 2020, we sold our investment in Grubhub.

(d)Includes a $28 million call premium and $6 million of unamortized debt issuance costs written off related to the redemption of the 2026 Notes 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 during the year to date ended June 30, 2021. See Note 11.


Note 10 - Pension Benefits

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees.  The most significant of these plans, the YUM Retirement Plan (the Plan), is funded. We fund our other U.S. plan as benefits are paid.  The Plan and our non-qualified plan in the U.S. are closed to new salaried participants.  

The components of net periodic benefit cost associated with our U.S. pension plans are as follows:

  Quarter ended Year to date
  2021 2020 2021 2020
Service cost $ $ $ $
Interest cost 16  17 
Expected return on plan assets (10) (11) (21) (22)
Amortization of net loss
Amortization of prior service cost
Net periodic benefit cost $ $ $ 11  $
18


Note 11 - Short-term Borrowings and Long-term Debt

Short-term Borrowings 6/30/2021 12/31/2020
Current maturities of long-term debt $ 407  $ 463 
Less current portion of debt issuance costs and discounts (7) (10)
Short-term borrowings $ 400  $ 453 
Long-term Debt    
Securitization Notes $ 2,854  $ 2,869 
Subsidiary Senior Unsecured Notes 750  1,800 
Term Loan A Facility 750  431 
Term Loan B Facility 1,497  1,916 
YUM Senior Unsecured Notes 4,825  3,725 
Finance lease obligations 69  72 
$ 10,745  $ 10,813 
Less debt issuance costs and discounts (80) (78)
Less current maturities of long-term debt (407) (463)
Long-term debt $ 10,258  $ 10,272 

Details of our Short-term borrowings and Long-term debt as of December 31, 2020 can be found within our 2020 Form 10-K.

On March 15, 2021, 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 existing $1.9 billion term loan B facility, $431 million term loan A facility and $1.0 billion revolving facility through the issuance of a $1.5 billion term loan B facility maturing March 15, 2028 (the "Term Loan B Facility"), a $750 million term loan A facility maturing March 15, 2026 (the "Term Loan A Facility") and a $1.25 billion revolving facility maturing March 15, 2026 (the "Revolving Facility") pursuant to an amendment to the Credit Agreement (as defined in our 2020 Form 10-K). The amendment reduces the interest rate currently applicable to the refinanced Term Loan A Facility and for borrowings under the refinanced Revolving Facility by 25 basis points. Subsequent to the refinance the interest rate applicable to the Term Loan A Facility and the Revolving Facility ranges from 0.75% to 1.50% plus LIBOR or from 0.00% to 0.50% plus the Base Rate, at the Borrowers' election, based on the total leverage ratio (as defined in the Credit Agreement).

The refinanced Term Loan A Facility is now subject to quarterly amortization payments in an amount equal to 0.625% of the principal amount of the facility as of the refinance date beginning with the second quarter of 2022. The Term Loan A Facility quarterly amortization payments increase to 1.25% of the principal amount of the facility as of the refinance date beginning with the second quarter of 2024. The Term Loan B Facility continues to be subject to quarterly amortization payments in an amount equal to 0.25% of the principal amount of the facility as of the refinance date. All other material provisions under the Credit Agreement remain unchanged.

As a result of this Credit Agreement refinancing, $8 million of fees were capitalized as debt issuance costs, $3 million of which were paid directly to lenders. During the quarter ended March 31, 2021, fees expensed of $4 million as well as previously recorded unamortized debt issuance costs written off of $8 million were recognized within Interest expense, net due to this refinancing.

On April 1, 2021, Yum! Brands, Inc. issued $1.1 billion aggregate principal amount of 4.625% YUM Senior Unsecured Notes due January 31, 2032 (the “2032 Notes”). Interest on the 2032 Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021. The indenture governing the 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 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 $13 million in connection with the 2032 Notes. The debt issuance costs will be amortized to Interest expense, net over the life of the 2032 Notes using the effective interest method. We used the net proceeds from the 2032 Notes to fund the redemption of the 2026 Notes discussed below.

19


On April 23, 2021, the Borrowers issued a notice of redemption for June 1, 2021 for $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 in the quarter ended June 30, 2021.

On June 30, 2021, Yum! Brands, Inc. issued a notice of redemption for $350 million aggregate principal amount of 3.75% YUM Senior Unsecured Notes due November 1, 2021 (the "2021 Notes"). The redemption, which occurred on August 2, 2021, was in an amount equal to 100% of the $350 million aggregate principal amount redeemed, plus accrued interest to the date of redemption.

Excluding the amounts associated with the Credit Agreement refinancing and extinguishment of the 2026 Notes discussed above, cash paid for interest during the years to date ended June 30, 2021 and 2020 was $235 million and $243 million, respectively.

Note 12 - Derivative Instruments

We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates.

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 June 30, 2021 and December 31, 2020, we had interest rate swaps that expired in July 2021 with notional amounts of $1.55 billion and interest rate swaps expiring in March 2025 with notional amounts of $1.5 billion. These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of June 30, 2021 or December 31, 2020.

Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Through June 30, 2021, the swaps were highly effective cash flow hedges.

Foreign Currency Contracts

We have entered into foreign currency forward and swap contracts with the objective of reducing our exposure to earnings volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying intercompany receivables or payables. Our foreign currency contracts are designated cash flow hedges as the future cash flows of the contracts are expected to offset changes in intercompany receivables and payables due to foreign currency exchange rate fluctuations.

Gains or losses on the foreign currency contracts are reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Through June 30, 2021, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of June 30, 2021 and December 31, 2020, outstanding foreign currency contracts related to intercompany receivables and payables had total notional amounts of $34 million and $39 million, respectively. These foreign currency forward contracts all have durations that expire in 2021.

As a result of the use of interest rate swaps and foreign currency contracts, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with major financial institutions carefully selected based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At June 30, 2021, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.

20


Gains and losses on derivative instruments designated as cash flow hedges recognized in OCI and reclassifications from AOCI into Net Income:
  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
  2021   2020   2021   2020 2021   2020   2021   2020
Interest rate swaps $ (7) $ (17) $ $ $ 17  $ (98) $ $
Foreign currency contracts (1) (2) —  (1) —  (7)
Income tax benefit/(expense) (1) (1) (4) 23  (2)

As of June 30, 2021, the estimated net loss included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $42 million, based on current LIBOR interest rates.

Total Return Swaps

Beginning in 2021, 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 June 30, 2021, was not significant.

See Note 13 for the fair value of our derivative assets and liabilities.

Note 13 - Fair Value Disclosures

As of June 30, 2021, 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 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:

6/30/2021 12/31/2020
Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2)
Securitization Notes(a)
$ 2,854  $ 3,001  $ 2,869  $ 3,015 
Subsidiary Senior Unsecured Notes(b)
750  788  1,800  1,890 
Term Loan A Facility(b)
750  743  431  428 
Term Loan B Facility(b)
1,497  1,500  1,916  1,907 
YUM Senior Unsecured Notes(b)
4,825  5,190  3,725  4,094 
(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, foreign currency contracts and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 12 for discussion regarding derivative instruments). The following table
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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 6/30/2021 12/31/2020
Assets
Foreign Currency Contracts
Prepaid expenses and other current assets $ —  $
Other Investments
Other assets 45 
Liabilities
Interest Rate Swaps
Accounts payable and other current liabilities 42  28 
Interest Rate Swaps
Other liabilities and deferred credits 88  127 

The fair value of the Company’s interest rate swaps and foreign currency contracts 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 as of December 31, 2020, primarily include investments in mutual funds, which were historically used to offset fluctuations for a portion of our EID liabilities and whose fair values were determined based on the closing market prices of the respective mutual funds. In the quarter ended March 31, 2021, upon entering into the total return swaps as disclosed in Note 12, we sold the majority of these other investments and received cash proceeds of $44 million. These proceeds have been classified within Other, net cash flows from investing activities within our Condensed Consolidated Statements of Cash Flows.

Note 14 - Commitments and Contingencies

Internal Revenue Service Proposed Adjustment

As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, on June 30, 2021, we received a draft notice of proposed adjustment 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 $5.9 billion. We anticipate that we will soon receive a final notice of proposed adjustment and draft Revenue Agent’s Report (“RAR”) and, thereafter, a final RAR. The amount of additional tax that may be asserted by the IRS in the final RAR cannot be quantified at this time; however, based on the draft notice received, the amount of additional tax to be proposed is likely to be material. We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment 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.

The final resolution of this matter is uncertain, but the Company believes that it is more likely than not the Company’s tax position will be sustained; therefore no reserve is recorded with respect to this matter. An unfavorable resolution of this matter could have a material, adverse impact on our consolidated Financial Statements in future periods.

Lease Guarantees

As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements.  These leases have varying terms, the latest of which expires in 2065.  As of June 30, 2021, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $400 million. The present value of these potential payments discounted at our pre-tax cost of debt at June 30, 2021, was approximately $350 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 June 30, 2021, was not material.

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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.

Yum! Restaurants India Private Limited (“YRIPL”), a Yum subsidiary that operates KFC and Pizza Hut restaurants in India, is the subject of a regulatory enforcement action in India (the “Action”). The Action alleges, among other things, that KFC International Holdings, Inc. and Pizza Hut International failed to satisfy certain conditions imposed by the Secretariat for Industrial Approval in 1993 and 1994 when those companies were granted permission for foreign investment and operation in India. The conditions at issue include an alleged minimum investment commitment and store build requirements as well as limitations on the remittance of fees outside of India.

The Action originated with a complaint and show cause notice filed in 2009 against YRIPL by the Deputy Director of the Directorate of Enforcement (“DOE”) of the Indian Ministry of Finance following an income tax audit for the years 2002 and 2003. The matter was argued at various hearings in 2015, but no order was issued. Following a change in the incumbent official holding the position of Special Director of DOE (the “Special Director”), the matter resumed in 2018 and several additional hearings were conducted.

On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $150 million. Of this amount, $145 million relates to the alleged failure to invest a total of $80 million in India within an initial seven-year period. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. The stay order remains in effect and the next hearing is scheduled for August 9, 2021. 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.

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.

Dragontail Acquisition

On May 26, 2021, we announced our definitive agreement pursuant to which we will acquire all the issued share capital of Dragontail Systems Limited (“Dragontail”) for A$93.5 million in cash. Dragontail is a cutting-edge restaurant technology company whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch and customer order tracking. The transaction is conditional upon, among other matters, Australian Federal Court approval, approval by Dragontail’s shareholders and other certain regulatory waivers and rulings. The transaction is expected to be completed by the end of the third-quarter of 2021. If the transaction is consummated, we intend to fund the acquisition of Dragontail using cash on hand.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

The following Management's Discussion and Analysis (“MD&A”), should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, (“2020 Form 10-K”). All Note references herein refer to the Notes to the Financial Statements.  Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding.

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 51,000 restaurants in more than 150 countries and territories, primarily under the concepts of KFC, Pizza Hut, Taco Bell and The Habit Burger Grill (collectively, the "Concepts").  The Company’s KFC, Pizza Hut and Taco Bell brands are global leaders of the chicken, pizza and Mexican-style food categories, respectively. The Habit Burger Grill, a concept we acquired on March 18, 2020, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 51,000 restaurants, 98% are operated by franchisees.

YUM currently consists of four operating segments:

The KFC Division which includes our worldwide operations of the KFC concept
The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
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:
Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success
Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences
Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion
Bold Restaurant Development: Drive market and franchise expansion with strong economics and value

Our global citizenship 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 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. Throughout this MD&A, we commonly discuss the following performance metrics:

Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more (with the exception of Habit Burger Grill restaurants acquired in the first quarter of 2020 for which we included all sales in the quarter ended March 31, 2020 both before and after the acquisition in the prior year base for purposes of determining 2021 same-store sales growth), including those temporarily closed. 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 continuing into 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. 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). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends.

Net new unit growth reflects new unit openings offset by permanent store closures, by us and our franchisees. To determine whether a restaurant meets the definition of a unit we consider whether the restaurant has operations that are ongoing and
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independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales. We believe net new unit growth is useful to investors because we depend on net new units for a significant portion of our growth. Additionally, net new unit growth is generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants.

System sales and System sales excluding the impacts of foreign currency translation ("FX") reflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants. Sales at franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Increasingly, customers are paying a fee to a third party to deliver or facilitate the ordering of our Concepts' products. We also include in System sales any portion of the amount customers pay these third parties for which the third party is obligated to pay us a license fee as a percentage of such amount. Franchise restaurant sales and fees paid by customers to third parties to deliver or facilitate the ordering of our Concepts' products are not included in Company sales on the Condensed Consolidated Statements of Income; however, any resulting franchise and license fees we receive are included in the Company's revenues. 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.

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:

Diluted Earnings Per Share excluding Special Items (as defined below);

Effective Tax Rate excluding Special Items;

Core Operating Profit. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally.

Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below).

These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations.

Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special Items when assessing segment performance.

Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Condensed Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales ("Company restaurant margin %") is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry.

Certain performance metrics and non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.


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Results of Operations

Summary  

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

For the quarter ended June 30, 2021, GAAP diluted EPS was $1.29 per share, an increase from $0.67 per share in the quarter ended June 30, 2020, and diluted EPS, excluding Special Items, was $1.16 per share, an increase from $0.82 per share in the quarter ended June 30, 2020.

For the year to date ended June 30, 2021, GAAP diluted EPS was $2.35 per share, an increase from $0.94 per share in the year to date ended June 30, 2020, and diluted EPS, excluding Special Items, was $2.22 per share, an increase from $1.46 per share in the year to date ended June 30, 2020.

Quarterly Financial highlights:
% Change
System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit
KFC Division +35 +30 +5 +108 +93
Pizza Hut Division +10 +10 (3) +18 +14
Taco Bell Division +24 +21 +2 +29 +29
Worldwide +26 +23 +2 +89 +53
Year to date Financial highlights:
% Change
System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit
KFC Division +22 +18 +5 +64 +54
Pizza Hut Division +9 +11 (3) +25 +21
Taco Bell Division +17 +15 +2 +26 +26
Worldwide(1)
+18 +16 +2 +102 +42
(1)    Worldwide system sales growth ex F/X for the year to date ended June 30, 2021, includes the benefit of our acquisition of Habit Burger Grill on March 18, 2020. Same-store sales reflects the inclusion of Habit Burger Grill in the prior year base for periods in the first-quarter of 2020 both before and after the acquisition. Operating profit results of Habit Burger Grill for the period subsequent to our acquisition are reflected in the consolidated figures.

Additionally:

Net new units added were 603 for the quarter and 1,038 for the year to date.

During the quarter, we repurchased 2.1 million shares totaling $255 million at an average price of $118.65. During the year to date, we repurchased 4.7 million shares totaling $530 million at an average price of $111.64.

Foreign currency translation favorably impacted Divisional Operating Profit for the quarter and year to date by $27 million and $43 million, respectively.

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Worldwide

GAAP Results
  Quarter ended Year to date
  2021 2020 % B/(W) 2021 2020 % B/(W)
Company sales $ 520  $ 403  29  $ 996  $ 758  31 
Franchise and property revenues 706  525  35  1,364  1,121  22 
Franchise contributions for advertising and other services 376  270  39  728  582  25 
Total revenues 1,602  1,198  34  3,088  2,461  26 
Company restaurant expenses 417  349  (20) 809  647  (25)
G&A expenses 230  259  12  436  467 
Franchise and property expenses 27  36  25  50  94  48 
Franchise advertising and other services expense 372  264  (41) 715  574  (25)
Refranchising (gain) loss (7) (8) (18) (22) (21)
Other (income) expense (4) (2) NM (10) 150  NM
Total costs and expenses, net 1,035  898  (15) 1,978  1,911  (4)
Operating Profit 567  300  89  1,110  550  102 
Investment (income) expense, net (1) (91) (99) (1) (57) (99)
Other pension (income) expense 23 
Interest expense, net 159  132  (21) 290  250  (17)
Income before income taxes 407  257  58  816  352  132 
Income tax provision 16  51  68  99  63  (58)
Net Income $ 391  $ 206  89  $ 717  $ 289  148 
Diluted EPS(a)
$ 1.29  $ 0.67  91  $ 2.35  $ 0.94  150 
Effective tax rate 4.0  % 19.8  % 15.8  ppts. 12.1  % 17.8  % 5.7  ppts.
(a)See Note 3 for the number of shares used in this calculation.


Performance Metrics
Unit Count 6/30/2021 6/30/2020 % Increase (Decrease)
Franchise 50,317  49,249 
Company-owned 1,074  1,144  (6)
Total 51,391  50,393 

Quarter ended Year to date
  2021 2020 2021 2020
Same-store Sales Growth (Decline) % 23  (15) 16  (11)
System Sales Growth (Decline) %, reported 32  (14) 23  (9)
System Sales Growth (Decline) %, excluding FX 26  (12) 18  (8)
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Our system sales breakdown by Company and franchise sales was as follows:
Quarter ended Year to date
2021 2020 2021 2020
Consolidated
Company sales(a)
$ 520  $ 403  $ 996  $ 758 
Franchise sales 13,604  10,312  26,513  21,651 
System sales 14,124  10,715  27,509  22,409 
Foreign Currency Impact on System sales(b)
617  N/A 1,000  N/A
System sales, excluding FX $ 13,507  $ 10,715  $ 26,509  $ 22,409 
KFC Division
Company sales(a)
$ 147  $ 86  $ 280  $ 216 
Franchise sales 7,491  5,202  14,631  11,359 
System sales 7,638  5,288  14,911  11,575 
Foreign Currency Impact on System sales(b)
485  N/A 777  N/A
System sales, excluding FX $ 7,153  $ 5,288  $ 14,134  $ 11,575 
Pizza Hut Division
Company sales(a)
$ 12  $ 19  $ 26  $ 37 
Franchise sales 3,131  2,734  6,213  5,517 
System sales 3,143  2,753  6,239  5,554 
Foreign Currency Impact on System sales(b)
122  N/A 208  N/A
System sales, excluding FX $ 3,021  $ 2,753  $ 6,031  $ 5,554 
Taco Bell Division
Company sales(a)
$ 223  $ 194  $ 431  $ 392 
Franchise sales 2,966  2,370  5,638  4,768 
System sales 3,189  2,564  6,069  5,160 
Foreign Currency Impact on System sales(b)
10  N/A 15  N/A
System sales, excluding FX $ 3,179  $ 2,564  $ 6,054  $ 5,160 
Habit Burger Grill Division
Company sales(a)
$ 138  $ 104  $ 259  $ 113 
Franchise sales 16  31 
System sales 154  110  290  120 
Foreign Currency Impact on System sales(b)
—  N/A —  N/A
System sales, excluding FX $ 154  $ 110  $ 290  $ 120 
(a)Company sales represents sales from our Company-operated stores as presented on our Condensed Consolidated Statements of Income.

(b)    The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales.

Non-GAAP Items
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below.
Quarter ended Year to date
2021 2020 2021 2020
Core Operating Profit Growth (Decline) % 53  (25) 42  (16)
Diluted EPS Growth (Decline) %, excluding Special Items 41  (12) 52  (17)
Effective Tax Rate excluding Special Items 20.0  % 18.8  % 20.1  % 18.7  %
Quarter ended Year to date
2021 2020 2021 2020
Company restaurant profit $ 103  $ 54  $ 187  $ 111 
Company restaurant margin % 19.8  % 13.4  % 18.7  % 14.7  %
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  Quarter ended Year to date
Detail of Special Items 2021 2020 2021 2020
Refranchising gain (loss)(a)
$ $ $ $
Costs associated with acquisition and integration of Habit Burger Grill (See Note 2) —  (3) —  (9)
Impairment of Habit Burger Grill goodwill (See Note 2) —  —  —  (139)
Unlocking Opportunity Initiative contribution(b)
—  (50) —  (50)
Charges associated with resource optimization(c)
(2) —  (3) — 
Other Special Items Income (Expense) —  (4) (7)
Special Items Income (Expense) - Operating Profit —  (54) (199)
Charges associated with resource optimization - Other pension (expense) income(c)
—  — 
Interest expense, net(d)
(34) —  (34) — 
Special Items Expense before Income Taxes (33) (54) (31) (199)
Tax Benefit on Special Items(e)
40 
Tax Benefit - Intra-entity transfer of intellectual property(f)
64  —  64  — 
Special Items Income (Expense), net of tax $ 39  $ (47) $ 40  $ (159)
Average diluted shares outstanding 304  307  304  307 
Special Items diluted EPS $ 0.13  $ (0.15) $ 0.13  $ (0.52)
Reconciliation of GAAP Operating Profit to Core Operating Profit
Consolidated
GAAP Operating Profit $ 567  $ 300  $ 1,110  $ 550 
Special Items Income (Expense) —  (54) (199)
Foreign Currency Impact on Divisional Operating Profit(g)
27  N/A 43  N/A
Core Operating Profit $ 540  $ 354  $ 1,065  $ 749 
KFC Division
GAAP Operating Profit $ 318  $ 153  $ 618  $ 377 
Foreign Currency Impact on Divisional Operating Profit(g)
23  N/A 36  N/A
Core Operating Profit $ 295  $ 153  $ 582  $ 377 
Pizza Hut Division
GAAP Operating Profit $ 103  $ 87  $ 205  $ 163 
Foreign Currency Impact on Divisional Operating Profit(g)
N/A N/A
Core Operating Profit $ 99  $ 87  $ 198  $ 163 
Taco Bell Division
GAAP Operating Profit $ 198  $ 154  $ 376  $ 298 
Foreign Currency Impact on Divisional Operating Profit(g)
—  N/A —  N/A
Core Operating Profit