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	March 31, 2023
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 May 3, 2023, was 280,086,983 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	20
	Item 3 - Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4 - Controls and Procedures	34
	Report of Independent Registered Public Accounting Firm	35
Part II.	Other Information and Signatures
	Item 1 - Legal Proceedings	36
	Item 1A - Risk Factors	36
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 6 - Exhibits	37
	Signatures	38

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
Revenues	3/31/2023		3/31/2022
Company sales	$	474	$	470
Franchise and property revenues	770		714
Franchise contributions for advertising and other services	401		363
Total revenues	1,645		1,547
Costs and Expenses, Net
Company restaurant expenses	403		402
General and administrative expenses	282		253
Franchise and property expenses	36		32
Franchise advertising and other services expense	395		361
Refranchising (gain) loss	(4)		(4)
Other (income) expense	10		(6)
Total costs and expenses, net	1,122		1,038
Operating Profit	523		509
Investment (income) expense, net	24		(7)
Other pension (income) expense	(2)		—
Interest expense, net	130		118
Income Before Income Taxes	371		398
Income tax provision (benefit)	71		(1)
Net Income	$	300	$	399
Basic Earnings Per Common Share	$	1.07	$	1.38
Diluted Earnings Per Common Share	$	1.05	$	1.36
Dividends Declared Per Common Share	$	0.605	$	0.57
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
	3/31/2023		3/31/2022
Net Income	$	300	$	399
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	8		(23)
	8		(23)
Tax (expense) benefit	—		—
	8		(23)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	—		—
Reclassification of (gains) losses into Net Income	—		5
	—		5
Tax (expense) benefit	(2)		(1)
	(2)		4
Changes in derivative instruments
Unrealized gains (losses) arising during the period	(8)		57
Reclassification of (gains) losses into Net Income	(3)		12
	(11)		69
Tax (expense) benefit	3		(17)
	(8)		52
Other comprehensive income, net of tax	(2)		33
Comprehensive Income	$	298	$	432
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
	3/31/2023		3/31/2022
Cash Flows – Operating Activities
Net Income	$	300	$	399
Depreciation and amortization	29		37
Refranchising (gain) loss	(4)		(4)
Investment (income) expense, net	24		(7)
Deferred income taxes	(4)		(77)
Share-based compensation expense	25		26
Changes in accounts and notes receivable	23		29
Changes in prepaid expenses and other current assets	(7)		(13)
Changes in accounts payable and other current liabilities	(101)		(176)
Changes in income taxes payable	28		29
Other, net	36		10
Net Cash Provided by Operating Activities	349		253
Cash Flows – Investing Activities
Capital spending	(62)		(42)
Proceeds from refranchising of restaurants	5		24
Other, net	1		(11)
Net Cash Used In Investing Activities	(56)		(29)
Cash Flows – Financing Activities
Repayments of long-term debt	(20)		(15)
Revolving credit facility, three months or less, net	(85)		174
Repurchase shares of Common Stock	(50)		(343)
Dividends paid on Common Stock	(169)		(165)
Other, net	(10)		(28)
Net Cash Used in Financing Activities	(334)		(377)
Effect of Exchange Rates on Cash and Cash Equivalents	3		—
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents	(38)		(153)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period	647		771
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period	$	609	$	618
See accompanying Notes to Condensed Consolidated Financial Statements.

6

CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	(Unaudited) 3/31/2023		12/31/2022
ASSETS
Current Assets
Cash and cash equivalents	$	349	$	367
Accounts and notes receivable, net	622		648
Prepaid expenses and other current assets	575		594
Total Current Assets	1,546		1,609
Property, plant and equipment, net	1,162		1,171
Goodwill	639		638
Intangible assets, net	351		354
Other assets	1,299		1,324
Deferred income taxes	752		750
Total Assets	$	5,749	$	5,846
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	1,128	$	1,251
Income taxes payable	29		16
Short-term borrowings	398		398
Total Current Liabilities	1,555		1,665
Long-term debt	11,349		11,453
Other liabilities and deferred credits	1,619		1,604
Total Liabilities	14,523		14,722
Shareholders’ Deficit
Common Stock, no par value, 750 shares authorized; 280 shares issued in 2023 and 2022	—		—
Accumulated deficit	(8,403)		(8,507)
Accumulated other comprehensive loss	(371)		(369)
Total Shareholders’ Deficit	(8,774)		(8,876)
Total Liabilities and Shareholders’ Deficit	$	5,749	$	5,846
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, 2023 and 2022
(in millions)
	Yum! Brands, Inc.
	Issued Common Stock			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Shareholders' Deficit
	Shares	Amount
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)
Balance at December 31, 2021	289	$	—	$	(8,048)	$	(325)	$	(8,373)
Net Income				399				399
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						(23)		(23)
Pension and post-retirement benefit plans (net of tax impact of $1 million)						4		4
Net gain on derivative instruments (net of tax impact of $17 million)						52		52
Comprehensive Income								432
Dividends declared				(165)				(165)
Repurchase of shares of Common Stock	(3)	(22)		(385)				(407)
Employee share-based award exercises		(16)						(16)
Share-based compensation events		38						38
Balance at March 31, 2022	286	$	—	$	(8,199)	$	(292)	$	(8,491)
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, 2022 (“2022 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 55,000 restaurants in more than 155 countries and territories.  As of March 31, 2023, 98% of these restaurants were owned and operated by franchisees.  The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style and pizza categories, respectively. The Habit Burger Grill is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more.

As of March 31, 2023, 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. 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 2022 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year.

Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2023. These reclassifications had no effect on previously reported Net Income.

Russia Invasion of Ukraine

In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia. We also suspended all operations of our 70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our master franchisee. Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts. During the second quarter of 2022, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator.

In April 2023, we completed our exit from the Russian market by selling the KFC business in Russia to Smart Service Ltd., including all Russian company-owned KFC restaurants, operating system, and master franchise rights as well as the trademark for the Rostik’s brand. Under the sale and purchase agreement, the buyer has agreed to lead the process to rebrand KFC restaurants in Russia to Rostik's and to retain the Company's employees in Russia. The fair value of consideration received from

9

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

Our operating results presented herein continue to reflect revenues from and expenses to support the Russian operations for KFC for the entirety of the quarter ended March 31, 2023, and for both Pizza Hut and KFC for the entirety of the quarter ended March 31, 2022, within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we reclassed the resulting net profits or losses from the Division segment results in which they were earned to Unallocated Other income (expense).

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

	Quarter ended
	2023		2022
Net Income	$	300	$	399
Weighted-average common shares outstanding (for basic calculation)	281		289
Effect of dilutive share-based employee compensation	4		5
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	285		294
Basic EPS	$	1.07	$	1.38
Diluted EPS	$	1.05	$	1.36
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)	1.5		1.2

(a)These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.

Note 3 - Shareholders' Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 31, 2023 and 2022 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	2023	2022		2023		2022			2023
May 2021	—	3,359		—		407			—
September 2022	387	—		50		—			1,700
Total	387	3,359	(a)	$	50	$	407	(a)	$	1,700

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

In September 2022, our Board of Directors authorized share repurchases of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock through June 30, 2024. As of March 31, 2023, 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, 2022, net of tax	$	(290)	$	(94)	$	15	$	(369)
OCI, net of tax
Gains (losses) arising during the period classified into AOCI, net of tax	8		(2)		(6)		—
(Gains) losses reclassified from AOCI, net of tax	—		—		(2)		(2)
	8		(2)		(8)		(2)
Balance at March 31, 2023, net of tax	$	(282)	$	(96)	$	7	$	(371)

Note 4 - Other (Income) Expense

	Quarter ended
	3/31/2023		3/31/2022
Foreign exchange net (gain) loss	$	3	$	(4)
Impairment and closure expense	1		—
Other	6		(2)
Other (income) expense	$	10	$	(6)

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.

	3/31/2023		12/31/2022
Accounts and notes receivable, gross	$	661	$	685
Allowance for doubtful accounts	(39)		(37)
Accounts and notes receivable, net	$	622	$	648

Property, Plant and Equipment, net

	3/31/2023		12/31/2022
Property, plant and equipment, gross	$	2,465	$	2,454
Accumulated depreciation and amortization	(1,303)		(1,283)
Property, plant and equipment, net	$	1,162	$	1,171

Assets held-for-sale totaled $186 million and $190 million as of March 31, 2023 and December 31, 2022, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets. Liabilities held-for-sale totaled $66 million and $65 million as of March 31, 2023 and December 31, 2022, respectively, and are included in Accounts

11

payable and other current liabilities in our Condensed Consolidated Balance Sheets. KFC Russia assets held-for-sale accounted for $177 million including property, plant and equipment of $58 million, of the $186 million, while KFC Russia liabilities held-for-sale accounted for $62 million of the $66 million as of March 31, 2023.

Other Assets	3/31/2023		12/31/2022
Operating lease right-of-use assets(a)	$	753	$	742
Franchise incentives	178		172
Investment in Devyani International Limited (See Note 12)	93		116
Other	275		294
Other assets	$	1,299	$	1,324

(a)    Non-current operating lease liabilities of $744 million and $731 million as of March 31, 2023 and December 31, 2022, respectively, are included in Other liabilities and deferred credits in our Condensed Consolidated Balance Sheets.

Reconciliation of Cash and Cash Equivalents for Condensed Consolidated Statements of Cash Flows

	3/31/2023		12/31/2022
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	349	$	367
Restricted cash included in Prepaid expenses and other current assets(a)	206		220
Restricted cash and restricted cash equivalents included in Other assets(b)	34		35
Cash and restricted cash related to KFC Russia included in assets held-for-sale	20		25
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows	$	609	$	647

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

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

Note 6 - Income Taxes

	Quarter ended
	2023			2022
Income tax (benefit) provision	$	71		$	(1)
Effective tax rate	19.1		%	(0.2)		%

In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year. These regulations made foreign taxes paid to certain countries no longer creditable in the U.S., which was expected to result in additional foreign tax credit carryforward utilization prospectively. As a result, we reversed a valuation allowance associated with existing foreign tax credit carryforwards. This valuation allowance reversal resulted in a one-time discrete tax benefit of $82 million in the quarter ended March 31, 2022. The U.S. Treasury published clarifying guidance in November 2022 which resulted in foreign taxes originally determined to be non-creditable under the January 2022 regulations to now be treated as creditable taxes. As such, the valuation allowance on foreign tax credit carryforwards that was released in the quarter ended March 31, 2022, was re-established in the quarter ended December 31, 2022.

Note 7 - Revenue Recognition

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 3/31/2023
		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

	Quarter ended 3/31/2022
	KFC Division		Taco Bell Division		Pizza Hut Division		Habit Burger Grill Division		Total
U.S.
Company sales	$	15	$	214	$	5	$	125	$	359
Franchise revenues	45		157		64		1		267
Property revenues	3		11		1		—		15
Franchise contributions for advertising and other services	6		123		72		—		201
China
Franchise revenues	61		—		16		—		77
Other
Company sales	111		—		—		—		111
Franchise revenues	260		11		70		—		341
Property revenues	14		—		—		—		14
Franchise contributions for advertising and other services	145		1		16		—		162
	$	660	$	517	$	244	$	126	$	1,547

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 2023 is presented below.

13

	Deferred Franchise Fees
Balance at December 31, 2022	$	434
Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period	(24)
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period	24
Balance at March 31, 2023	$	434

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

Less than 1 year	$	71
1 - 2 years	64
2 - 3 years	58
3 - 4 years	52
4 - 5 years	45
Thereafter	144
Total	$	434

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	2023		2022
KFC Division	$	687	$	660
Taco Bell Division	572		517
Pizza Hut Division	254		244
Habit Burger Grill Division	132		126
	$	1,645	$	1,547

	Quarter ended
Operating Profit	2023		2022
KFC Division	$	305	$	291
Taco Bell Division	204		185
Pizza Hut Division	104		102
Habit Burger Grill Division	(5)		(8)
Corporate and unallocated G&A expenses(a)	(84)		(71)
Unallocated Franchise and property expenses(a)	(1)		—
Unallocated Refranchising gain (loss)	4		4
Unallocated Other income (expense)(a)	(4)		6
Operating Profit	$	523	$	509
Investment income (expense), net(b)	(24)		7
Other pension income (expense)	2		—
Interest expense, net	(130)		(118)
Income before income taxes	$	371	$	398

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.

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(a)Our operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC for the entire quarter ended March 31, 2023, as well as for both Pizza Hut and KFC for the quarter ended March 31, 2022 (see Note 1), within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we reclassed such net profits and losses from the Division segment results in which they were earned to Unallocated Other income (expense). As a result, we reclassed net operating losses of $1 million and net operating profit of $2 million from KFC Division Other income (expense) to Unallocated Other income (expense) during the quarters ended March 31, 2023 and 2022, respectively. Also, included in Unallocated Other income (expense) for the quarter ended March 31, 2022, were $5 million in foreign exchange gains attributable to fluctuations in the value of the Russian Ruble. Additionally, we recorded charges of $1 million to Corporate and unallocated G&A expenses and $1 million to Unallocated Franchise and property expenses during the quarter ended March 31, 2023 for certain expenses related to the transfer of the business and other costs related to our exit from Russia.

(b)Includes changes in the value of our investment in Devyani International Limited (see Note 12).

Note 9 - Pension Benefits

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the “Plan”), is funded. We fund our other U.S. plans as benefits are paid. 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
	2023		2022
Service cost	$	1	$	2
Interest cost	10		8
Expected return on plan assets	(12)		(12)
Amortization of net loss	—		3
Amortization of prior service cost	—		1
Net periodic benefit cost	$	(1)	$	2

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

Short-term Borrowings	3/31/2023		12/31/2022
Current maturities of long-term debt	$	405	$	405
Less current portion of debt issuance costs and discounts	(7)		(7)
Short-term borrowings	$	398	$	398
Long-term Debt
Securitization Notes	$	3,763	$	3,772
Subsidiary Senior Unsecured Notes	750		750
Revolving Facility	194		279
Term Loan A Facility	731		736
Term Loan B Facility	1,470		1,474
YUM Senior Unsecured Notes	4,875		4,875
Finance lease obligations	53		57
	$	11,836	$	11,943
Less long-term portion of debt issuance costs and discounts	(82)		(85)
Less current maturities of long-term debt	(405)		(405)
Long-term debt	$	11,349	$	11,453

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

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

Note 11 - Derivative Instruments

We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates. Our use of foreign currency contracts to manage foreign currency exchange rates 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, 2023 and December 31, 2022, we had interest rate swaps expiring in March 2025 with notional amounts of $1.5 billion. These interest rate swaps have been designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of March 31, 2023 or December 31, 2022.

Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Through March 31, 2023, the swaps were highly effective cash flow hedges.

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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
	2023		2022		2023		2022
Interest rate swaps	$	(7)	$	59	$	(5)	$	11
Income tax benefit/(expense)	2		(14)		1		(3)

As of March 31, 2023, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $24 million, based on current LIBOR interest rates.

Total Return Swaps

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, 2023 and December 31, 2022, was not significant.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. 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, 2023, all of the counterparties to our derivative instruments had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.

See Note 12 for the fair value of our derivative assets and liabilities.

Note 12 - Fair Value Disclosures

As of March 31, 2023, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable and borrowings under our Revolving Facility approximated their fair values because of the short-term nature of these instruments. The fair value of our notes receivable, net of allowances, and lease guarantees, less reserves for expected losses, approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations:

	3/31/2023				12/31/2022
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
Securitization Notes(a)	$	3,763	$	3,346	$	3,772	$	3,273
Subsidiary Senior Unsecured Notes(b)	750		741		750		731
Term Loan A Facility(b)	731		725		736		729
Term Loan B Facility(b)	1,470		1,468		1,474		1,459
YUM Senior Unsecured Notes(b)	4,875		4,644		4,875		4,473

(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.

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(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	3/31/2023		12/31/2022
Assets
Investments	Other assets	1	$	95	$	118
Investments	Other assets	3	5		5
Interest Rate Swaps	Prepaid expenses and other current assets	2	24		26
Interest Rate Swaps	Other assets	2	6		16

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 primarily include our approximate 5% minority interest in Devyani International Limited (“Devyani”), a franchise entity that operates KFC and Pizza Hut restaurants in India, with a fair value of $93 million and $116 million at March 31, 2023 and December 31, 2022, respectively. For the quarter ended March 31, 2023, we recognized pre-tax investment losses of $23 million, related to changes in fair value of our investment in Devyani.

Note 13 - Contingencies

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 $830 million through the first quarter of 2023. The proposed underpayment relates primarily to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines. The IRS asserts that these transactions resulted in taxable distributions of approximately $6.0 billion.

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

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

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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, 2023, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $350 million. The present value of these potential payments discounted at our pre-tax cost of debt at March 31, 2023, was approximately $300 million.  Our franchisees are the primary lessees under the vast majority of these leases.  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, 2023, was not material.

Legal Proceedings

We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable.

India Regulatory Matter

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

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

On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $135 million. Of this amount, $130 million relates to the alleged failure to invest a total of $80 million in India within an initial seven-year period. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. In November 2022, YRIPL was notified that an administrative tribunal bench had been constituted to hear an appeal by DOE of certain findings of the January 2020 order, including claims that certain charges had been wrongly dropped and that an insufficient amount of penalty had been imposed. A hearing with the administrative tribunal that had been scheduled for March has been rescheduled to August 3, 2023. The stay order remains in effect and the next hearing in the Delhi High Court is now scheduled for May 16, 2023. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable.

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.

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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, 2022, (“2022 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 55,000 restaurants in more than 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”).  The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style and pizza categories, respectively. The Habit Burger Grill, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 55,000 restaurants, 98% are operated by franchisees.

YUM currently consists 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