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 52,000 restaurants in more than 150 countries and territories. As of September 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 September 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 - Acquisitions
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.
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|
|
|
|
|
|
|
|
|
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.
Dragontail Systems Acquisition
On September 7, 2021, we completed the acquisition of Dragontail Systems Limited (“Dragontail”). The Dragontail acquisition advances our digital capabilities and its AI-based integrated kitchen order management and delivery technologies are intended to strengthen store operations, enhance the customer experience and make it easier for team members to run a restaurant. Total cash consideration paid in connection with the acquisition was $66 million, net of cash acquired of $3 million. This net consideration has been classified within Other, net cash flows from investing activities within our Condensed Consolidated Statements of Cash Flows.
The acquisition was accounted for as a business combination using the acquisition method of accounting. The primary assets recorded as a result of the preliminary purchase price allocation were goodwill of $57 million and amortizable intangible assets of $11 million. The amortizable intangible assets, which consist of software, have an estimated weighted average useful life of 7 years. The goodwill recorded resulted from synergies expected to be achieved through leveraging our scale and resources to enhance these technologies and deploy them globally to our brands and franchisees over time. We anticipate that all of the goodwill recognized will be non-deductible for income tax purposes. The purchase price allocation for Dragontail is preliminary and subject to completion of valuation analyses. The final assignment of goodwill to our reporting units has not yet been completed as of the date of these financial statements.
The financial results of Dragontail have been included in our Condensed Consolidated Financial Statements since the date of the acquisition but did not significantly impact our results for the quarter or year-to-date periods ended September 30, 2021. The pro forma impact on our results of operations if the acquisition had been completed as of the beginning of 2020 would not have been significant. The direct transaction costs associated with the acquisition were also not material and were expensed as incurred.
Note 3 - Earnings Per Common Share (“EPS”)
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net Income
|
|
$
|
528
|
|
|
$
|
283
|
|
|
$
|
1,245
|
|
|
$
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (for basic calculation)
|
|
296
|
|
|
303
|
|
|
298
|
|
|
302
|
|
|
Effect of dilutive share-based employee compensation
|
|
6
|
|
|
4
|
|
|
6
|
|
|
5
|
|
|
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
|
|
302
|
|
|
307
|
|
|
304
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.78
|
|
|
$
|
0.94
|
|
|
$
|
4.17
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
1.75
|
|
|
$
|
0.92
|
|
|
$
|
4.10
|
|
|
$
|
1.86
|
|
|
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)
|
|
0.1
|
|
|
4.7
|
|
|
1.5
|
|
|
4.6
|
|
(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 4 - Shareholders' Deficit
Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended September 30, 2021 and 2020 as indicated below. All amounts exclude applicable transaction fees.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased
(thousands)
|
|
Dollar Value of Shares
Repurchased
|
|
Remaining Dollar Value of Shares that may be Repurchased
|
|
Authorization Date
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
November 2019
|
|
4,746
|
|
|
|
—
|
|
|
|
$
|
530
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
May 2021
|
|
2,602
|
|
|
|
—
|
|
|
|
330
|
|
|
|
—
|
|
|
|
1,670
|
|
|
Total
|
|
7,348
|
|
(a)
|
|
—
|
|
|
|
$
|
860
|
|
(a)
|
|
$
|
—
|
|
|
|
$
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes the effect of $14 million in share repurchases (0.1 million shares) with trade dates on, or prior to, September 30, 2021, but cash settlement dates subsequent to September 30, 2021 and excludes the effect of $11 million in share repurchases (0.1 million shares) with trade dates on, or prior to, December 31, 2020, but cash settlement dates subsequent to December 31, 2020.
In May 2021, our Board of Directors authorized share repurchases from July 1, 2021 through December 31, 2022, of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock. 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.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature
|
|
Pension and Post-Retirement Benefits
|
|
Derivative Instruments
|
|
Total
|
|
Balance at June 30, 2021, net of tax
|
|
$
|
(165)
|
|
|
$
|
(44)
|
|
|
$
|
(115)
|
|
|
$
|
(324)
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the period classified into AOCI, net of tax
|
|
(19)
|
|
|
2
|
|
|
—
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified from AOCI, net of tax
|
|
—
|
|
|
4
|
|
|
6
|
|
|
10
|
|
|
|
|
(19)
|
|
|
6
|
|
|
6
|
|
|
(7)
|
|
|
Balance at September 30, 2021, net of tax
|
|
$
|
(184)
|
|
|
$
|
(38)
|
|
|
$
|
(109)
|
|
|
$
|
(331)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(2)
|
|
|
46
|
|
|
12
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified from AOCI, net of tax
|
|
—
|
|
|
12
|
|
|
12
|
|
|
24
|
|
|
|
|
(2)
|
|
|
58
|
|
|
24
|
|
|
80
|
|
|
Balance at September 30, 2021, net of tax
|
|
$
|
(184)
|
|
|
$
|
(38)
|
|
|
$
|
(109)
|
|
|
$
|
(331)
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 - Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
|
|
9/30/2021
|
|
9/30/2020
|
|
9/30/2021
|
|
9/30/2020
|
|
Foreign exchange net (gain) loss and other
|
|
$
|
(3)
|
|
|
$
|
(6)
|
|
|
$
|
(14)
|
|
|
$
|
(2)
|
|
|
Impairment and closure expense(a)
|
|
1
|
|
|
10
|
|
|
2
|
|
|
156
|
|
|
Other (income) expense
|
|
$
|
(2)
|
|
|
$
|
4
|
|
|
$
|
(12)
|
|
|
$
|
154
|
|
(a) The quarter and year to date ended September 30, 2020, include charges of $5 million and $144 million, respectively, related to the impairment of Habit Burger Grill goodwill. See Note 2. The quarter and year to date ended September 30, 2020 also include charges of $5 million and $11 million, respectively, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2021
|
|
12/31/2020
|
|
Accounts and notes receivable, gross
|
$
|
584
|
|
|
$
|
579
|
|
|
Allowance for doubtful accounts
|
(36)
|
|
|
(45)
|
|
|
Accounts and notes receivable, net
|
$
|
548
|
|
|
$
|
534
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2021
|
|
12/31/2020
|
|
Property, plant and equipment, gross
|
$
|
2,467
|
|
|
$
|
2,465
|
|
|
Accumulated depreciation and amortization
|
(1,274)
|
|
|
(1,230)
|
|
|
Property, plant and equipment, net
|
$
|
1,193
|
|
|
$
|
1,235
|
|
Assets held-for-sale totaled $27 million and $7 million as of September 30, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets. Liabilities held-for-sale totaled $10 million as of September 30, 2021, and are included in Accounts payable and other current liabilities in our Condensed Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
9/30/2021
|
|
12/31/2020
|
|
Operating lease right-of-use assets(a)
|
$
|
835
|
|
|
$
|
851
|
|
|
|
|
|
|
|
Franchise incentives
|
164
|
|
|
163
|
|
|
Other
|
460
|
|
|
421
|
|
|
Other assets
|
$
|
1,459
|
|
|
$
|
1,435
|
|
(a) Non-current operating lease liabilities of $811 million and $823 million as of September 30, 2021 and December 31, 2020, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2021
|
|
12/31/2020
|
|
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets
|
$
|
1,001
|
|
|
$
|
730
|
|
|
Restricted cash included in Prepaid expenses and other current assets(a)
|
276
|
|
|
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
|
$
|
1,311
|
|
|
$
|
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 (benefit) provision
|
$
|
(77)
|
|
|
$
|
33
|
|
|
$
|
22
|
|
|
$
|
96
|
|
|
Effective tax rate
|
(17.0)
|
%
|
|
10.5
|
%
|
|
1.8
|
%
|
|
14.4
|
%
|
Our third quarter effective tax rate was lower than the prior year primarily due to tax benefits resulting from a KFC Europe reorganization executed in the quarter ended September 30, 2021. In July 2021, we concentrated management responsibility for European (excluding the United Kingdom (“UK”)) KFC franchise development, support operations and management oversight in Switzerland. Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC intellectual property rights from subsidiaries in the UK to subsidiaries in Switzerland. With the transfer of these rights, we
received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a net, one-time tax benefit of $152 million in the quarter ended September 30, 2021. In the quarter ended September 30, 2020, our effective rate was favorably impacted by $25 million due to the remeasurement of our deferred tax assets in the UK resulting from an increase in the UK corporate tax rate from 17% to 19% enacted during the quarter.
Our year to date effective tax rate was also lower than the prior year due to tax benefits resulting from a $64 million favorable impact due to the remeasurement of our deferred tax assets in the UK resulting from an increase in the UK corporate tax rate from 19% to 25% enacted during the quarter ended June 30, 2021.
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.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 9/30/2021
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Habit Burger Grill Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
15
|
|
|
$
|
5
|
|
|
$
|
225
|
|
|
$
|
132
|
|
|
$
|
377
|
|
|
Franchise revenues
|
|
46
|
|
|
63
|
|
|
156
|
|
|
1
|
|
|
266
|
|
|
Property revenues
|
|
3
|
|
|
2
|
|
|
11
|
|
|
—
|
|
|
16
|
|
|
Franchise contributions for advertising and other services
|
|
7
|
|
|
70
|
|
|
130
|
|
|
—
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
61
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
128
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
136
|
|
|
Franchise revenues
|
|
265
|
|
|
66
|
|
|
10
|
|
|
—
|
|
|
341
|
|
|
Property revenues
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
Franchise contributions for advertising and other services
|
|
151
|
|
|
17
|
|
|
2
|
|
|
—
|
|
|
170
|
|
|
|
|
$
|
692
|
|
|
$
|
247
|
|
|
$
|
534
|
|
|
$
|
133
|
|
|
$
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 9/30/2020
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Habit Burger Grill Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
218
|
|
|
$
|
118
|
|
|
$
|
355
|
|
|
Franchise revenues
|
|
44
|
|
|
62
|
|
|
148
|
|
|
—
|
|
|
254
|
|
|
Property revenues
|
|
4
|
|
|
1
|
|
|
10
|
|
|
—
|
|
|
15
|
|
|
Franchise contributions for advertising and other services
|
|
4
|
|
|
76
|
|
|
117
|
|
|
—
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
56
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
116
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
131
|
|
|
Franchise revenues
|
|
219
|
|
|
55
|
|
|
7
|
|
|
—
|
|
|
281
|
|
|
Property revenues
|
|
17
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Franchise contributions for advertising and other services
|
|
112
|
|
|
13
|
|
|
1
|
|
|
—
|
|
|
126
|
|
|
|
|
$
|
586
|
|
|
$
|
243
|
|
|
$
|
501
|
|
|
$
|
118
|
|
|
$
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date 9/30/2021
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Habit Burger Grill Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
45
|
|
|
$
|
15
|
|
|
$
|
656
|
|
|
$
|
391
|
|
|
$
|
1,107
|
|
|
Franchise revenues
|
|
138
|
|
|
197
|
|
|
460
|
|
|
3
|
|
|
798
|
|
|
Property revenues
|
|
10
|
|
|
4
|
|
|
31
|
|
|
—
|
|
|
45
|
|
|
Franchise contributions for advertising and other services
|
|
20
|
|
|
223
|
|
|
375
|
|
|
—
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
181
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
378
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
402
|
|
|
Franchise revenues
|
|
750
|
|
|
185
|
|
|
27
|
|
|
—
|
|
|
962
|
|
|
Property revenues
|
|
45
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
46
|
|
|
Franchise contributions for advertising and other services
|
|
432
|
|
|
50
|
|
|
5
|
|
|
—
|
|
|
487
|
|
|
|
|
$
|
1,999
|
|
|
$
|
747
|
|
|
$
|
1,554
|
|
|
$
|
394
|
|
|
$
|
4,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date 9/30/2020
|
|
|
|
KFC Division
|
|
Pizza Hut Division
|
|
Taco Bell Division
|
|
Habit Burger Grill Division
|
|
Total
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
$
|
43
|
|
|
$
|
15
|
|
|
$
|
610
|
|
|
$
|
231
|
|
|
$
|
899
|
|
|
Franchise revenues
|
|
126
|
|
|
190
|
|
|
411
|
|
|
1
|
|
|
728
|
|
|
Property revenues
|
|
11
|
|
|
4
|
|
|
31
|
|
|
—
|
|
|
46
|
|
|
Franchise contributions for advertising and other services
|
|
13
|
|
|
224
|
|
|
331
|
|
|
—
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues
|
|
150
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
|
303
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
345
|
|
|
Franchise revenues
|
|
577
|
|
|
160
|
|
|
18
|
|
|
—
|
|
|
755
|
|
|
Property revenues
|
|
42
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
Franchise contributions for advertising and other services
|
|
296
|
|
|
39
|
|
|
2
|
|
|
—
|
|
|
337
|
|
|
|
|
$
|
1,561
|
|
|
$
|
713
|
|
|
$
|
1,403
|
|
|
$
|
232
|
|
|
$
|
3,909
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(53)
|
|
|
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period
|
|
52
|
|
|
Other(a)
|
|
(3)
|
|
|
Balance at September 30, 2021
|
|
$
|
411
|
|
(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
|
$
|
66
|
|
|
|
1 - 2 years
|
60
|
|
|
|
2 - 3 years
|
56
|
|
|
|
3 - 4 years
|
49
|
|
|
|
4 - 5 years
|
43
|
|
|
|
Thereafter
|
137
|
|
|
|
Total
|
$
|
411
|
|
|
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
|
$
|
692
|
|
|
$
|
586
|
|
|
$
|
1,999
|
|
|
$
|
1,561
|
|
|
Pizza Hut Division
|
247
|
|
|
243
|
|
|
747
|
|
|
713
|
|
|
Taco Bell Division
|
534
|
|
|
501
|
|
|
1,554
|
|
|
1,403
|
|
|
Habit Burger Grill Division
|
133
|
|
|
118
|
|
|
394
|
|
|
232
|
|
|
|
$
|
1,606
|
|
|
$
|
1,448
|
|
|
$
|
4,694
|
|
|
$
|
3,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Year to date
|
|
Operating Profit
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
KFC Division
|
$
|
314
|
|
|
$
|
278
|
|
|
$
|
932
|
|
|
$
|
655
|
|
|
Pizza Hut Division
|
101
|
|
|
89
|
|
|
306
|
|
|
252
|
|
|
Taco Bell Division
|
184
|
|
|
186
|
|
|
560
|
|
|
484
|
|
|
Habit Burger Grill Division
|
1
|
|
|
(7)
|
|
|
6
|
|
|
(15)
|
|
|
Corporate and unallocated G&A expenses(a)
|
(70)
|
|
|
(81)
|
|
|
(183)
|
|
|
(229)
|
|
|
Unallocated Company restaurant expenses
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Unallocated Franchise and property expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
Unallocated Refranchising gain (loss)
|
(1)
|
|
|
9
|
|
|
21
|
|
|
30
|
|
|
Unallocated Other income (expense)(b)
|
(2)
|
|
|
(4)
|
|
|
(5)
|
|
|
(153)
|
|
|
Operating Profit
|
$
|
527
|
|
|
$
|
471
|
|
|
$
|
1,637
|
|
|
$
|
1,021
|
|
|
Investment income (expense), net(c)
|
51
|
|
|
10
|
|
|
52
|
|
|
67
|
|
|
Other pension income (expense)
|
(1)
|
|
|
(4)
|
|
|
(6)
|
|
|
(9)
|
|
|
Interest expense, net(d)
|
(126)
|
|
|
(161)
|
|
|
(416)
|
|
|
(411)
|
|
|
Income before income taxes
|
$
|
451
|
|
|
$
|
316
|
|
|
$
|
1,267
|
|
|
$
|
668
|
|
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 charges related to a resource optimization program initiated in the third quarter of 2020. This program is part of our efforts to optimize our resources, reallocating them toward critical areas of the business that will drive future growth. These critical areas include accelerating our digital, technology and innovation capabilities to deliver a modern, world-class team member and customer experience and improve unit economics. We recorded charges of $4 million and $32 million during the quarters ended September 30, 2021 and 2020, respectively, for this program. We recorded charges of $7 million and $32 million during the years to date ended September 30, 2021 and 2020, respectively, for this program. Also included in the year to date ended September 30, 2020, is a $50 million charitable contribution to Yum! Brands Foundation, Inc. (a standalone, 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” and costs related to our acquisition of Habit Burger Grill of $9 million.
(b)Includes charges of $5 million and $144 million in the quarter and year to date ended September 30, 2020, respectively, related to the impairment of Habit Burger Grill goodwill. See Note 2.
(c)Includes changes in the value of our investment in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India. During the quarter ended September 30, 2021, Devyani executed an initial public offering and subsequently the fair value of our investment became readily determinable. As a result, we began recording changes in fair value in Investment income (expense), net. In the quarter ended September 30, 2021, we recognized pre-tax investment income of $52 million related to changes in fair value of our investment in Devyani. See Note 13.
Also includes changes in the value of Grubhub, Inc. (“Grubhub”) common stock. For the quarter and year to date ended September 30, 2020, we recognized pre-tax investment income of $8 million and $69 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 year to date ended September 30, 2021. See Note 11.
Also includes a $26 million call premium and $6 million of unamortized debt issuance costs written off associated with the early redemption of YUM Subsidiary Senior Unsecured Notes due in 2024 as well as $2 million of accrued and unpaid interest associated with the period of time from prepayment of the notes with the trustee to their redemption date during the quarter and year to date ended September 30, 2020.
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
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
Interest cost
|
8
|
|
|
9
|
|
|
24
|
|
|
26
|
|
|
Expected return on plan assets
|
(11)
|
|
|
(10)
|
|
|
(32)
|
|
|
(32)
|
|
|
Amortization of net loss
|
3
|
|
|
4
|
|
|
12
|
|
|
11
|
|
|
Amortization of prior service cost
|
1
|
|
|
—
|
|
|
4
|
|
|
3
|
|
|
Net periodic benefit cost
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Note 11 - Short-term Borrowings and Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
9/30/2021
|
|
12/31/2020
|
|
Current maturities of long-term debt
|
|
$
|
71
|
|
|
$
|
463
|
|
|
Less current portion of debt issuance costs and discounts
|
|
(7)
|
|
|
(10)
|
|
|
Short-term borrowings
|
|
$
|
64
|
|
|
$
|
453
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
|
|
|
|
Securitization Notes
|
|
$
|
3,815
|
|
|
$
|
2,869
|
|
|
Subsidiary Senior Unsecured Notes
|
|
750
|
|
|
1,800
|
|
|
Term Loan A Facility
|
|
750
|
|
|
431
|
|
|
Term Loan B Facility
|
|
1,493
|
|
|
1,916
|
|
|
YUM Senior Unsecured Notes
|
|
4,475
|
|
|
3,725
|
|
|
Finance lease obligations
|
|
67
|
|
|
72
|
|
|
|
|
$
|
11,350
|
|
|
$
|
10,813
|
|
|
Less debt issuance costs and discounts
|
|
(90)
|
|
|
(78)
|
|
|
Less current maturities of long-term debt
|
|
(71)
|
|
|
(463)
|
|
|
Long-term debt
|
|
$
|
11,189
|
|
|
$
|
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. Our Revolving Facility was undrawn as of September 30, 2021.
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. The debt issuance costs will be amortized to Interest expense, net through the contractual maturities of the Credit Agreement using the effective interest method. 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.
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 principal amount of the 2021 Notes, plus accrued interest to the date of redemption.
On August 19, 2021, Taco Bell Funding, LLC (the “Issuer”), a special purpose limited liability company and a direct, wholly-owned subsidiary of Taco Bell Corp. (“TBC”), completed a refinancing transaction and issued $900 million of its Series 2021-1 1.946% Fixed Rate Senior Secured Notes, Class A-2-I (the “2021 Class A-2-I Notes”), $600 million of its Series 2021-1 2.294% Fixed Rate Senior Secured Notes, Class A-2-II (the “2021 Class A-2-II Notes”) and $750 million of its Series 2021-1 2.542% Fixed Rate Senior Secured Notes, Class A-2-III (the “2021 Class A-2-III Notes” and, together with the 2021 Class A-2-I Notes and the 2021 Class A-2-II Notes, the “2021 Class A-2 Notes”). The net proceeds from the issuance of the 2021 Class A-2 Notes were used to repay in full the 2016-1 Class A-2-II Notes of $480 million and 2018-1 Class A-2-I Notes of $804 million. The remaining net proceeds were distributed to TBC to pay certain transaction-related expenses, for general corporate purposes and to return capital to shareholders of the Company. The remaining 2016-1 Class A-2-III Notes of $957 million and 2018-1 Class A-2-II Notes of $608 million, together with the 2021 Class A-2 Notes are collectively referred to as the “Securitization Notes”.
The legal final maturity date of the 2021 Class A-2 Notes is in August 2051. However, the anticipated repayment dates of the 2021 Class A-2-I Notes, the 2021 Class A-2-II Notes and the 2021 Class A-2-III Notes are approximately 6, 8 and 10 years (the “Anticipated Repayment Dates”), respectively, from the date of issuance. If the Issuer has not repaid or refinanced a series of Securitization Notes prior to its respective Anticipated Repayment Dates, rapid amortization of principal on all Securitization Notes will occur and additional interest will accrue on the Securitization Notes, as provided in the Indenture for the Securitization Notes.
As a result of the issuance of the 2021 Class A-2 Notes, $19 million of fees were capitalized as debt issuance costs. The debt issuance costs are being amortized to Interest expense, net through the Anticipated Repayment Dates of the Securitization Notes utilizing the effective interest rate method. As of September 30, 2021, the effective interest rates, including the amortization of debt issuance costs, were 2.11%, 2.42% and 2.64% for the 2021 Class A-2-I Notes, 2021 Class A-2-II Notes and 2021 Class A-2-III Notes, respectively. During the quarter ended September 30, 2021, previously recorded unamortized debt issuance costs written off totaling approximately $5 million were recognized within Interest expense, net due to the extinguishment of the 2016 Class A-2-II Notes and 2018 Class A-2-I Notes.
Excluding the payments associated with the extinguishment of the 2026 Notes discussed above, cash paid for interest during the year to date ended September 30, 2021 was $328 million. Excluding $28 million of call premium and interest associated with the period of time from prepayment to redemption associated with the extinguishment of $1,050 million aggregate principal amount of 5.00% Subsidiary Senior Unsecured Notes due in 2024, cash paid for interest during the year to date September 30, 2020 was $329 million.
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 September 30, 2021 and December 31, 2020, we had interest rate swaps expiring in March 2025 with notional amounts of $1.5 billion. At December 31, 2020, we also had interest rate swaps that expired in July 2021 with notional amounts of $1.55 billion. These interest rate swaps have been designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of September 30, 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 September 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 September 30, 2021, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.
As of September 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 September 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.
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
|
$
|
—
|
|
|
$
|
(6)
|
|
|
$
|
9
|
|
|
$
|
4
|
|
|
$
|
17
|
|
|
$
|
(104)
|
|
|
$
|
17
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
1
|
|
|
(2)
|
|
|
(2)
|
|
|
2
|
|
|
—
|
|
|
3
|
|
|
(2)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit/(expense)
|
(1)
|
|
|
2
|
|
|
(1)
|
|
|
(1)
|
|
|
(5)
|
|
|
25
|
|
|
(3)
|
|
|
—
|
|
As of September 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 $43 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 September 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 September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2021
|
|
12/31/2020
|
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
Carrying Value
|
|
Fair Value (Level 2)
|
|
|
|
|
|
|
|
|
|
|
Securitization Notes(a)
|
$
|
3,815
|
|
|
$
|
3,921
|
|
|
$
|
2,869
|
|
|
$
|
3,015
|
|
|
Subsidiary Senior Unsecured Notes(b)
|
750
|
|
|
796
|
|
|
1,800
|
|
|
1,890
|
|
|
Term Loan A Facility(b)
|
750
|
|
|
751
|
|
|
431
|
|
|
428
|
|
|
Term Loan B Facility(b)
|
1,493
|
|
|
1,495
|
|
|
1,916
|
|
|
1,907
|
|
|
YUM Senior Unsecured Notes(b)
|
4,475
|
|
|
4,877
|
|
|
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 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
|
|
9/30/2021
|
|
12/31/2020
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
|
Prepaid expenses and other current assets
|
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Other Investments
|
|
Other assets
|
|
1
|
|
|
85
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Accounts payable and other current liabilities
|
|
2
|
|
|
44
|
|
|
28
|
|
|
Interest Rate Swaps
|
|
Other liabilities and deferred credits
|
|
2
|
|
|
77
|
|
|
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 September 30, 2021, primarily include an approximate 5% minority interest in Devyani International Limited (“Devyani”) with a fair value of $83 million. The minority interest was received in lieu of cash proceeds upon the refranchising of approximately 60 KFC restaurants in India. At the time of the refranchisings, the fair value of this minority interest was estimated to be approximately $31 million. During the quarter ended September 30, 2021, Devyani executed an initial public offering and subsequently the fair value of these equity securities became readily determinable. As a result, concurrent with the initial public offering we began recording changes in fair value in Investment (income) expense, net. Prior to the initial public offering the fair value of these equity securities was not readily determinable and we applied the measurement alternative in accordance with ASC Topic 321. For both the quarter and year to date ended September 30, 2021, we recognized pre-tax investment income of $52 million related to changes in fair value of our investment in Devyani.
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 - 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 October 13, 2021, we received a Notice of Proposed Adjustment (“NPA”) 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 $6.0 billion. We expect to receive the Revenue Agent’s Report (“RAR”) including the IRS’s calculation of the tax assessment in early 2022. The amount of additional tax that may be asserted by the IRS in the RAR cannot be quantified at this time; however, based on the NPA, the amount of additional tax to be proposed is expected to be material. We disagree with the IRS’s position as asserted in the NPA 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 September 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 September 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 September 30, 2021, 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.
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 now scheduled for November 24, 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.