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, 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 August 2, 2023, was 280,211,281 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	22
	Item 3 - Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4 - Controls and Procedures	39
	Report of Independent Registered Public Accounting Firm	40
Part II.	Other Information and Signatures
	Item 1 - Legal Proceedings	41
	Item 1A - Risk Factors	41
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 6 - Exhibits	42
	Signatures	43

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	6/30/2023		6/30/2022		6/30/2023		6/30/2022
Company sales	$	511	$	499	$	985	$	969
Franchise and property revenues	785		737		1,555		1,451
Franchise contributions for advertising and other services	391		400		792		763
Total revenues	1,687		1,636		3,332		3,183
Costs and Expenses, Net
Company restaurant expenses	415		415		818		817
General and administrative expenses	291		254		573		507
Franchise and property expenses	32		29		68		61
Franchise advertising and other services expense	388		396		783		757
Refranchising (gain) loss	(17)		(8)		(21)		(12)
Other (income) expense	5		(4)		15		(10)
Total costs and expenses, net	1,114		1,082		2,236		2,120
Operating Profit	573		554		1,096		1,063
Investment (income) expense, net	(29)		15		(5)		8
Other pension (income) expense	(1)		1		(3)		1
Interest expense, net	125		148		255		266
Income Before Income Taxes	478		390		849		788
Income tax provision	60		166		131		165
Net Income	$	418	$	224	$	718	$	623
Basic Earnings Per Common Share	$	1.49	$	0.78	$	2.55	$	2.16
Diluted Earnings Per Common Share	$	1.46	$	0.77	$	2.51	$	2.13
Dividends Declared Per Common Share	$	0.605	$	0.57	$	1.21	$	1.14
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
	6/30/2023		6/30/2022		6/30/2023		6/30/2022
Net Income	$	418	$	224	$	718	$	623
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	4		(21)		12		(44)
Reclassification of adjustments and (gains) losses into Net Income	60		—		60		—
	64		(21)		72		(44)
Tax (expense) benefit	—		—		—		—
	64		(21)		72		(44)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	—		—		—		—
Reclassification of (gains) losses into Net Income	1		4		1		9
	1		4		1		9
Tax (expense) benefit	—		(1)		(2)		(2)
	1		3		(1)		7
Changes in derivative instruments
Unrealized gains (losses) arising during the period	26		15		18		72
Reclassification of (gains) losses into Net Income	(8)		6		(11)		18
	18		21		7		90
Tax (expense) benefit	(5)		(5)		(2)		(22)
	13		16		5		68
Other comprehensive income, net of tax	78		(2)		76		31
Comprehensive Income	$	496	$	222	$	794	$	654
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
	6/30/2023		6/30/2022
Cash Flows – Operating Activities
Net Income	$	718	$	623
Depreciation and amortization	67		71
Refranchising (gain) loss	(21)		(12)
Investment (income) expense, net	(5)		8
Deferred income taxes	(73)		—
Share-based compensation expense	47		45
Changes in accounts and notes receivable	(21)		(4)
Changes in prepaid expenses and other current assets	(19)		(2)
Changes in accounts payable and other current liabilities	(107)		(213)
Changes in income taxes payable	19		(23)
Other, net	73		29
Net Cash Provided by Operating Activities	678		522
Cash Flows – Investing Activities
Capital spending	(122)		(97)
Proceeds from sale of KFC Russia	121		—
Proceeds from refranchising of restaurants	31		41
Other, net	(4)		(8)
Net Cash Provided by (Used In) Investing Activities	26		(64)
Cash Flows – Financing Activities
Proceeds from long-term debt	—		999
Repayments of long-term debt	(40)		(658)
Revolving credit facility, three months or less, net	(249)		—
Repurchase shares of Common Stock	(50)		(557)
Dividends paid on Common Stock	(339)		(327)
Debt issuance costs	—		(11)
Other, net	(20)		(32)
Net Cash Used in Financing Activities	(698)		(586)
Effect of Exchange Rates on Cash and Cash Equivalents	6		(15)
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents	12		(143)
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	$	659	$	628
See accompanying Notes to Condensed Consolidated Financial Statements.

6

CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	(Unaudited) 6/30/2023		12/31/2022
ASSETS
Current Assets
Cash and cash equivalents	$	437	$	367
Accounts and notes receivable, net	656		648
Prepaid expenses and other current assets	422		594
Total Current Assets	1,515		1,609
Property, plant and equipment, net	1,162		1,171
Goodwill	641		638
Intangible assets, net	369		354
Other assets	1,340		1,324
Deferred income taxes	821		750
Total Assets	$	5,848	$	5,846
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	1,063	$	1,251
Income taxes payable	50		16
Short-term borrowings	374		398
Total Current Liabilities	1,487		1,665
Long-term debt	11,194		11,453
Other liabilities and deferred credits	1,603		1,604
Total Liabilities	14,284		14,722
Shareholders’ Deficit
Common Stock, no par value, 750 shares authorized; 280 shares issued in 2023 and 2022	13		—
Accumulated deficit	(8,156)		(8,507)
Accumulated other comprehensive loss	(293)		(369)
Total Shareholders’ Deficit	(8,436)		(8,876)
Total Liabilities and Shareholders’ Deficit	$	5,848	$	5,846
See accompanying Notes to Condensed Consolidated Financial Statements.

7

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
Quarters and years to date ended June 30, 2023 and 2022
(in millions)
	Yum! Brands, Inc.
	Issued Common Stock			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Shareholders' Deficit
	Shares	Amount
Balance at March 31, 2023	280	$	—	$	(8,403)	$	(371)	$	(8,774)
Net Income				418				418
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						4		4
Reclassification of translation adjustments into income						60		60
Pension and post-retirement benefit plans						1		1
Net gain on derivative instruments (net of tax impact of $5 million)						13		13
Comprehensive Income								496
Dividends declared				(171)				(171)
Repurchase of shares of Common Stock								—
Employee share-based award exercises	—	(10)						(10)
Share-based compensation events		23						23
Balance at June 30, 2023	280	$	13	$	(8,156)	$	(293)	$	(8,436)
Balance at December 31, 2022	280	$	—	$	(8,507)	$	(369)	$	(8,876)
Net Income				718				718
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						12		12
Reclassification of translation adjustments into income						60		60
Pension and post-retirement benefit plans (net of tax impact of $2 million)						(1)		(1)
Net gain on derivative instruments (net of tax impact of $2 million)						5		5
Comprehensive Income								794
Dividends declared				(341)				(341)
Repurchase of shares of Common Stock	—	(24)		(26)				(50)
Employee share-based award exercises	—	(20)						(20)
Share-based compensation events		57						57
Balance at June 30, 2023	280	$	13	$	(8,156)	$	(293)	$	(8,436)
Balance at March 31, 2022	286	$	—	$	(8,199)	$	(292)	$	(8,491)
Net Income				224				224
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						(21)		(21)
Pension and post-retirement benefit plans (net of tax impact of $1 million)						3		3
Net gain on derivative instruments (net of tax impact of $5 million)						16		16
Comprehensive Income								222
Dividends declared				(164)				(164)
Repurchase of shares of Common Stock	(2)	(15)		(135)				(150)
Employee share-based award exercises	1	(5)						(5)
Share-based compensation events		20						20
Balance at June 30, 2022	285	$	—	$	(8,274)	$	(294)	$	(8,568)
Balance at December 31, 2021	289	$	—	$	(8,048)	$	(325)	$	(8,373)
Net Income				623				623
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						(44)		(44)
Pension and post-retirement benefit plans (net of tax impact of $2 million)						7		7
Net gain on derivative instruments (net of tax impact of $22 million)						68		68
Comprehensive Income								654
Dividends declared				(329)				(329)
Repurchase of shares of Common Stock	(5)	(37)		(520)				(557)
Employee share-based award exercises	1	(21)						(21)
Share-based compensation events		58						58
Balance at June 30, 2022	285	$	—	$	(8,274)	$	(294)	$	(8,568)
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 56,000 restaurants in more than 155 countries and territories.  As of June 30, 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 June 30, 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 items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended June 30, 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. We recorded a loss in the quarter of

9

$4 million to Other income (expense) as the write-off of our net investment in KFC Russia, including the related cumulative foreign currency translation losses of $60 million, exceeded the consideration received from the sale which primarily included cash proceeds of $121 million.

Our operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC and Pizza Hut prior to the dates of sale or transfer, 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 subsequent to that date from the Division segment results in which they were earned to Unallocated Other income (expense).

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

	Quarter ended				Year to date
	2023		2022		2023		2022
Net Income	$	418	$	224	$	718	$	623
Weighted-average common shares outstanding (for basic calculation)	281		286		281		288
Effect of dilutive share-based employee compensation	5		4		5		4
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	286		290		286		292
Basic EPS	$	1.49	$	0.78	$	2.55	$	2.16
Diluted EPS	$	1.46	$	0.77	$	2.51	$	2.13
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)	1.7		2.4		1.6		1.8

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

Note 3 - Shareholders' Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years ended June 30, 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	—	4,635	—		557		—
September 2022	387	—	50		—		1,700
Total	387	4,635	$	50	$	557	$	1,700

In September 2022, our Board of Directors authorized share repurchases of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock through June 30, 2024. As of June 30, 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 March 31, 2023, net of tax	$	(282)	$	(96)	$	7	$	(371)
OCI, net of tax
Gains (losses) arising during the period classified into AOCI, net of tax	4		—		19		23
(Gains) losses reclassified from AOCI, net of tax	60		1		(6)		55
	64		1		13		78
Balance at June 30, 2023, net of tax	$	(218)	$	(95)	$	20	$	(293)
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	12		(2)		13		23
(Gains) losses reclassified from AOCI, net of tax	60		1		(8)		53
	72		(1)		5		76
Balance at June 30, 2023, net of tax	$	(218)	$	(95)	$	20	$	(293)

Note 4 - Other (Income) Expense

	Quarter ended				Year to date
	6/30/2023		6/30/2022		6/30/2023		6/30/2022
Foreign exchange net (gain) loss	$	1	$	(8)	$	4	$	(12)
Impairment and closure expense	—		(1)		1		(1)
Other	4		5		10		3
Other (income) expense	$	5	$	(4)	$	15	$	(10)

Other (income) expense includes a $4 million loss in the quarter and year to date ended June 30, 2023, related to the sale of our KFC Russia business.

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.

11

	6/30/2023		12/31/2022
Accounts and notes receivable, gross	$	702	$	685
Allowance for doubtful accounts	(46)		(37)
Accounts and notes receivable, net	$	656	$	648

Property, Plant and Equipment, net

	6/30/2023		12/31/2022
Property, plant and equipment, gross	$	2,466	$	2,454
Accumulated depreciation and amortization	(1,304)		(1,283)
Property, plant and equipment, net	$	1,162	$	1,171

Assets held-for-sale totaled $6 million and $190 million as of June 30, 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 $2 million and $65 million as of June 30, 2023 and December 31, 2022, respectively, and are included in Accounts payable and other current liabilities in our Condensed Consolidated Balance Sheets. Assets and liabilities held-for-sale as of December 31, 2022, primarily included the assets and liabilities of our KFC Russia business.

Other Assets	6/30/2023		12/31/2022
Operating lease right-of-use assets(a)	$	753	$	742
Franchise incentives	185		172
Investment in Devyani International Limited (See Note 12)	122		116
Other	280		294
Other assets	$	1,340	$	1,324

(a)    Non-current operating lease liabilities of $744 million and $731 million as of June 30, 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

	6/30/2023		12/31/2022
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	437	$	367
Restricted cash included in Prepaid expenses and other current assets(a)	188		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	—		25
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows	$	659	$	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						Year to date
	2023			2022			2023			2022
Income tax (benefit) provision	$	60		$	166		$	131		$	165
Effective tax rate	12.6		%	42.6		%	15.4		%	21.0		%

Our second quarter effective tax rate was lower than the prior year primarily due to the following:

12

•$71 million of net tax expense recorded in the quarter ended June 30, 2022, resulting from the Company’s decision to exit KFC Russia. We remeasured and reassessed the need for a valuation allowance on deferred tax assets in Switzerland due to the then expected reduction in the tax basis of intellectual property rights associated with the loss of the Russian royalty income. In addition, we reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the existing basis difference was going to reverse by way of sale.

•$18 million tax benefit recorded in the quarter ended June 30, 2023, associated with the reversal of a reserve established in prior years due to the favorable resolution of a tax audit in a foreign jurisdiction.

•$10 million tax benefit recorded in the quarter ended June 30, 2023, associated with establishing additional net operating loss carryforward deferred tax assets in a foreign jurisdiction.

Our year to date effective tax rate was lower than the prior year primarily due to the items discussed above, partially offset by:

•$82 million of tax benefit discretely recorded in the quarter ended March 31, 2022, from the release of a valuation allowance on foreign tax credit carryforwards. In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year. These regulations 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. 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.

	Quarter ended 6/30/2023
		KFC Division		Taco Bell Division		Pizza Hut Division		Habit Burger Grill Division		Total
U.S.
Company sales		$	17	$	253	$	4	$	139	$	413
Franchise revenues		49		194		66		2		311
Property revenues		3		10		1		—		14
Franchise contributions for advertising and other services		8		148		74		1		231
China
Franchise revenues		61		—		16		—		77
Other
Company sales		98		—		—		—		98
Franchise revenues		290		14		65		—		369
Property revenues		13		—		1		—		14
Franchise contributions for advertising and other services		143		2		15		—		160
		$	682	$	621	$	242	$	142	$	1,687

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	Quarter ended 6/30/2022
	KFC Division		Taco Bell Division		Pizza Hut Division		Habit Burger Grill Division		Total
U.S.
Company sales	$	16	$	243	$	5	$	136	$	400
Franchise revenues	47		178		64		2		291
Property revenues	3		10		1		—		14
Franchise contributions for advertising and other services	7		142		72		—		221
China
Franchise revenues	48		—		13		—		61
Other
Company sales	99		—		—		—		99
Franchise revenues	283		11		63		—		357
Property revenues	13		—		1		—		14
Franchise contributions for advertising and other services	161		2		16		—		179
	$	677	$	586	$	235	$	138	$	1,636

	Year to date 6/30/2023
		KFC Division		Taco Bell Division		Pizza Hut Division		Habit Burger Grill Division		Total
U.S.
Company sales		$	33	$	482	$	9	$	269	$	793
Franchise revenues		95		372		136		3		606
Property revenues		6		20		2		1		29
Franchise contributions for advertising and other services		16		288		152		1		457
China
Franchise revenues		127		—		34		—		161
Other
Company sales		192		—		—		—		192
Franchise revenues		574		27		131		—		732
Property revenues		26		—		1		—		27
Franchise contributions for advertising and other services		300		4		31		—		335
		$	1,369	$	1,193	$	496	$	274	$	3,332

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	Year to date 6/30/2022
		KFC Division		Taco Bell Division		Pizza Hut Division		Habit Burger Grill Division		Total
U.S.
Company sales		$	31	$	457	$	10	$	261	$	759
Franchise revenues		92		335		128		3		558
Property revenues		6		21		2		—		29
Franchise contributions for advertising and other services		13		265		144		—		422
China
Franchise revenues		109		—		29		—		138
Other
Company sales		210		—		—		—		210
Franchise revenues		543		22		133		—		698
Property revenues		27		—		1		—		28
Franchise contributions for advertising and other services		306		3		32		—		341
		$	1,337	$	1,103	$	479	$	264	$	3,183

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.

	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	(43)
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period	37
Other(a)	(9)
Balance at June 30, 2023	$	419

(a)    Includes impact of foreign currency translation as well as the recognition of deferred franchise fees into Refranchising (gain) loss upon the termination of existing franchise agreements when entering into master franchise agreements.

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

Less than 1 year	$	69
1 - 2 years	63
2 - 3 years	57
3 - 4 years	50
4 - 5 years	43
Thereafter	137
Total	$	419

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:

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	Quarter ended				Year to date
Revenues	2023		2022		2023		2022
KFC Division	$	682	$	677	$	1,369	$	1,337
Taco Bell Division	621		586		1,193		1,103
Pizza Hut Division	242		235		496		479
Habit Burger Grill Division	142		138		274		264
	$	1,687	$	1,636	$	3,332	$	3,183

	Quarter ended				Year to date
Operating Profit	2023		2022		2023		2022
KFC Division	$	326	$	293	$	631	$	584
Taco Bell Division	228		215		432		400
Pizza Hut Division	91		93		195		195
Habit Burger Grill Division	3		(2)		(2)		(10)
Corporate and unallocated G&A expenses(a)	(86)		(65)		(170)		(136)
Unallocated Franchise and property expenses(a)	(1)		(4)		(2)		(4)
Unallocated Refranchising gain (loss)	17		8		21		12
Unallocated Other income (expense)(a)	(5)		16		(9)		22
Operating Profit	$	573	$	554	$	1,096	$	1,063
Investment income (expense), net(b)	29		(15)		5		(8)
Other pension income (expense)	1		(1)		3		(1)
Interest expense, net(c)	(125)		(148)		(255)		(266)
Income before income taxes	$	478	$	390	$	849	$	788

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)Our operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC and Pizza Hut prior to the dates of sale or transfer (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 subsequent to that date 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 from KFC Division Other income (expense) to Unallocated Other income (expense) during the year to date ended June 30, 2023, and net operating profit of $9 million and $11 million from Divisional Other income (expense) to Unallocated Other income (expense) during the quarter and year to date ended June 30, 2022, respectively. Additionally, we recorded a $4 million loss to Unallocated Other income (expense) during the quarter and year to date ended June 30, 2023 from the sale of our KFC Russia business.

Also, included in Unallocated Other income (expense) were $1 million in foreign exchange losses attributable to fluctuations in the value of the Russian Ruble during the quarter and year to date ended June 30, 2023, and foreign exchange gains of $11 million and $16 million during the quarter and year to date ended June 30, 2022, respectively. Additionally, we recorded charges of $3 million and $4 million to Corporate and unallocated G&A expenses and $1 million and $2 million to Unallocated Franchise and property expenses during the quarter and year to date ended June 30, 2023, respectively, for certain expenses related to the disposition of the businesses and other costs related to our exit from Russia. We recorded similar charges of $2 million and $4 million to Corporate and Unallocated G&A expenses and Unallocated Franchise and property expenses, respectively, during the quarter and year to date ended June 30, 2022.

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

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(c)Includes a $23 million call premium and $5 million of unamortized debt issuance costs written off related to the redemption of the 2025 Notes (as discussed in our 2022 Form 10-K) during the quarter ended June 30, 2022.

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				Year to date
	2023		2022		2023		2022
Service cost	$	1	$	1	$	2	$	3
Interest cost	11		8		21		16
Expected return on plan assets	(13)		(11)		(25)		(23)
Amortization of net (gain) / loss	(1)		2		(1)		5
Amortization of prior service cost	1		2		1		3
Net periodic benefit cost	$	(1)	$	2	$	(2)	$	4

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

Short-term Borrowings	6/30/2023		12/31/2022
Current maturities of long-term debt	$	381	$	405
Less current portion of debt issuance costs and discounts	(7)		(7)
Short-term borrowings	$	374	$	398
Long-term Debt
Securitization Notes	$	3,753	$	3,772
Subsidiary Senior Unsecured Notes	750		750
Revolving Facility	30		279
Term Loan A Facility	727		736
Term Loan B Facility	1,466		1,474
YUM Senior Unsecured Notes	4,875		4,875
Finance lease obligations	52		57
	$	11,653	$	11,943
Less long-term portion of debt issuance costs and discounts	(78)		(85)
Less current maturities of long-term debt	(381)		(405)
Long-term debt	$	11,194	$	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 year to date ended June 30, 2023, was $293 million. Excluding the $28 million associated with the extinguishment of the 2025 Notes (as discussed in our 2022 Form 10-K), cash paid for interest during the year to date ended June 30, 2022 was $239 million.

Note 11 - Derivative Instruments

We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates. Our use of foreign currency contracts to manage foreign currency exchange rates associated with certain foreign currency denominated intercompany receivables and payables is currently not significant.

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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, 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 June 30, 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 June 30, 2023, the swaps were highly effective cash flow hedges.

Gains and losses on these interest rate swaps recognized in OCI and reclassifications from AOCI into Net Income were as follows:

	Quarter ended								Year to date
	Gains/(Losses) Recognized in OCI				(Gains)/Losses Reclassified from AOCI into Net Income				Gains/(Losses) Recognized in OCI				(Gains)/Losses Reclassified from AOCI into Net Income
	2023		2022		2023		2022		2023		2022		2023		2022
Interest rate swaps	$	24	$	12	$	(7)	$	9	$	17	$	71	$	(12)	$	20
Income tax benefit/(expense)	(7)		(3)		2		(2)		(5)		(17)		3		(5)

As of June 30, 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 $33 million, based on current SOFR interest rates.

Total Return Swaps

We have entered into total return swap derivative contracts, with the objective of reducing our exposure to market-driven changes in certain of the liabilities associated with compensation deferrals into our Executive Income Deferral (“EID”) plan. While these total return swaps represent economic hedges, we have not designated them as hedges for accounting purposes. As a result, the changes in the fair value of these derivatives are recognized immediately in earnings within General and administrative expenses in our Condensed Consolidated Statements of Income largely offsetting the changes in the associated EID liabilities. The fair value associated with the total return swaps as of both June 30, 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 June 30, 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 June 30, 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:

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	6/30/2023				12/31/2022
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
Securitization Notes(a)	$	3,753	$	3,296	$	3,772	$	3,273
Subsidiary Senior Unsecured Notes(b)	750		729		750		731
Term Loan A Facility(b)	727		723		736		729
Term Loan B Facility(b)	1,466		1,458		1,474		1,459
YUM Senior Unsecured Notes(b)	4,875		4,605		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.

(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	6/30/2023		12/31/2022
Assets
Investments	Other assets	1	$	124	$	118
Investments	Other assets	3	5		5
Interest Rate Swaps	Prepaid expenses and other current assets	2	33		26
Interest Rate Swaps	Other assets	2	14		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 $122 million and $116 million at June 30, 2023 and December 31, 2022, respectively. For the quarter and year to date ended June 30, 2023, we recognized pre-tax investment gains of $28 million and $5 million, respectively, 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 $880 million through the second 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 and the case has been accepted by the IRS Office of Appeals.

19

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.