YUM BRANDS INC - Quarter Report: 2020 September (Form 10-Q)



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	September 30, 2020

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 October 29, 2020 was 301,668,133 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	24

	Item 3 - Quantitative and Qualitative Disclosures About Market Risk	41

	Item 4 – Controls and Procedures	41

	Report of Independent Registered Public Accounting Firm	43

Part II.	Other Information and Signatures

	Item 1 – Legal Proceedings	44

	Item 1A – Risk Factors	44

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	45

	Item 6 – Exhibits	46

	Signatures	47

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements


CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
	Quarter ended				Year to date
Revenues	9/30/2020		9/30/2019		9/30/2020		9/30/2019
Company sales	$	486	$	364	$	1,244	$	1,056
Franchise and property revenues	639		645		1,760		1,890
Franchise contributions for advertising and other services	323		330		905		957
Total revenues	1,448		1,339		3,909		3,903
Costs and Expenses, Net
Company restaurant expenses	399		292		1,046		850
General and administrative expenses	257		208		724		617
Franchise and property expenses	13		43		107		124
Franchise advertising and other services expense	313		325		887		941
Refranchising (gain) loss	(9)		(8)		(30)		(18)
Other (income) expense	4		(1)		154		5
Total costs and expenses, net	977		859		2,888		2,519
Operating Profit	471		480		1,021		1,384
Investment (income) expense, net	(10)		59		(67)		50
Other pension (income) expense	4		1		9		4
Interest expense, net	161		120		411		354
Income Before Income Taxes	316		300		668		976
Income tax provision	33		45		96		170
Net Income	$	283	$	255	$	572	$	806

Basic Earnings Per Common Share	$	0.94	$	0.83	$	1.89	$	2.63

Diluted Earnings Per Common Share	$	0.92	$	0.81	$	1.86	$	2.57

Dividends Declared Per Common Share	$	0.47	$	0.42	$	1.41	$	1.26

See accompanying Notes to Condensed Consolidated Financial Statements.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Quarter ended				Year to date
	9/30/2020		9/30/2019		9/30/2020		9/30/2019

Net Income	$	283	$	255	$	572	$	806
Other comprehensive income (loss), net of tax
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature
Adjustments and gains (losses) arising during the period	35		(42)		1		(37)
	35		(42)		1		(37)
Tax (expense) benefit	—		5		—		5
	35		(37)		1		(32)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	—		—		—		—
Reclassification of (gains) losses into Net Income	4		3		14		8
	4		3		14		8
Tax (expense) benefit	(2)		(1)		(4)		(2)
	2		2		10		6
Changes in derivative instruments
Unrealized gains (losses) arising during the period	(8)		(5)		(101)		(65)
Reclassification of (gains) losses into Net Income	6		(12)		1		(26)
	(2)		(17)		(100)		(91)
Tax (expense) benefit	1		4		25		23
	(1)		(13)		(75)		(68)

Other comprehensive income (loss), net of tax	36		(48)		(64)		(94)
Comprehensive Income	$	319	$	207	$	508	$	712

See accompanying Notes to Condensed Consolidated Financial Statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Year to date
	9/30/2020		9/30/2019
Cash Flows – Operating Activities
Net Income	$	572	$	806
Depreciation and amortization	100		84
Impairment and closure (income) expenses	156		—
Refranchising (gain) loss	(30)		(18)
Investment (income) expense, net	(67)		50
Contributions to defined benefit pension plans	(2)		(13)
Deferred income taxes	(32)		(10)
Share-based compensation expense	44		45
Changes in accounts and notes receivable	46		(4)
Changes in prepaid expenses and other current assets	11		(9)
Changes in accounts payable and other current liabilities	105		(96)
Changes in income taxes payable	(152)		(64)
Other, net	102		112
Net Cash Provided by Operating Activities	853		883

Cash Flows – Investing Activities
Capital spending	(99)		(109)
Acquisition of The Habit Restaurants, Inc., net of cash acquired	(408)		—
Proceeds from sale of investment in Grubhub, Inc. common stock	206		—
Proceeds from refranchising of restaurants	13		55
Other, net	19		—
Net Cash Used in Investing Activities	(269)		(54)

Cash Flows – Financing Activities
Proceeds from long-term debt	1,650		800
Repayments of long-term debt	(1,142)		(311)
Revolving credit facility, three months or less, net	—		—
Short-term borrowings by original maturity
More than three months - proceeds	85		80
More than three months - payments	(90)		(70)
Three months or less, net	—		—
Repurchase shares of Common Stock	—		(472)
Dividends paid on Common Stock	(425)		(385)
Debt issuance costs	(20)		(9)
Other, net	(34)		(73)
Net Cash Provided by (Used in) Financing Activities	24		(440)
Effect of Exchange Rates on Cash and Cash Equivalents	(1)		(27)
Net Increase in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents	607		362
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period	768		474
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period	$	1,375	$	836





See accompanying Notes to Condensed Consolidated Financial Statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	(Unaudited) 9/30/2020		12/31/2019
ASSETS
Current Assets
Cash and cash equivalents	$	1,110	$	605
Accounts and notes receivable, net	522		584
Prepaid expenses and other current assets	398		338
Total Current Assets	2,030		1,527

Property, plant and equipment, net	1,229		1,170
Goodwill	590		530
Intangible assets, net	339		244
Other assets	1,361		1,313
Deferred income taxes	512		447
Total Assets	$	6,061	$	5,231

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	1,100	$	960
Income taxes payable	9		150
Short-term borrowings	444		431
Total Current Liabilities	1,553		1,541

Long-term debt	10,647		10,131
Other liabilities and deferred credits	1,780		1,575
Total Liabilities	13,980		13,247

Shareholders’ Deficit
Common Stock, no par value, 750 shares authorized; 302 shares issued in 2020 and 300 issued in 2019	23		—
Accumulated deficit	(7,490)		(7,628)
Accumulated other comprehensive loss	(452)		(388)
Total Shareholders’ Deficit	(7,919)		(8,016)
Total Liabilities and Shareholders’ Deficit	$	6,061	$	5,231

See accompanying Notes to Condensed Consolidated Financial Statements.


CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
Quarters and years to date ended September 30, 2020 and 2019
(in millions)
	Yum! Brands, Inc.
	Issued Common Stock			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Shareholders' Deficit
	Shares	Amount
Balance at June 30, 2020	301	$	11	$	(7,631)	$	(488)	$	(8,108)
Net Income				283				283
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						35		35
Pension and post-retirement benefit plans (net of tax impact of $2 million)						2		2
Net loss on derivative instruments (net of tax impact of $1 million)						(1)		(1)
Comprehensive Income								319
Dividends declared				(142)				(142)
Repurchase of shares of Common Stock								—
Employee share-based award exercises	1	(3)						(3)
Share-based compensation events		15						15
Balance at September 30, 2020	302	$	23	$	(7,490)	$	(452)	$	(7,919)

Balance at December 31, 2019	300	$	—	$	(7,628)	$	(388)	$	(8,016)
Net Income				572				572
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature						1		1

Pension and post-retirement benefit plans (net of tax impact of $4 million)						10		10
Net loss on derivative instruments (net of tax impact of $25 million)						(75)		(75)
Comprehensive Income								508
Dividends declared				(426)				(426)
Repurchase of shares of Common Stock								—
Employee share-based award exercises	2	(34)						(34)
Share-based compensation events		57						57
Adoption of accounting standard				(8)				(8)
Balance at September 30, 2020	302	$	23	$	(7,490)	$	(452)	$	(7,919)

Balance at June 30, 2019	304	$	—	$	(7,614)	$	(380)	$	(7,994)
Net Income				255				255
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)						(37)		(37)
Pension and post-retirement benefit plans (net of tax impact of $1 million)						2		2
Net loss on derivative instruments (net of tax impact of $4 million)						(13)		(13)
Comprehensive Income								207
Dividends declared				(130)				(130)
Repurchase of shares of Common Stock	(2)	—		(174)				(174)
Employee share-based award exercises	1	(15)		(5)				(20)
Share-based compensation events		15		(1)				14
Balance at September 30, 2019	303	$	—	$	(7,669)	$	(428)	$	(8,097)

Balance at December 31, 2018	306	$	—	$	(7,592)	$	(334)	$	(7,926)
Net Income				806				806
Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)						(32)		(32)

Pension and post-retirement benefit plans (net of tax impact of $2 million)						6		6
Net loss on derivative instruments (net of tax impact of $23 million)						(68)		(68)
Comprehensive Income								712
Dividends declared				(387)				(387)
Repurchase of shares of Common Stock	(5)	(1)		(475)				(476)
Employee share-based award exercises	2	(53)		(18)				(71)
Share-based compensation events		54		(1)				53
Adoption of accounting standard				(2)				(2)
Balance at September 30, 2019	303	$	—	$	(7,669)	$	(428)	$	(8,097)

See accompanying Notes to Condensed Consolidated Financial Statements.

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, 2019 (“2019 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 50,000 restaurants in more than 150 countries and territories. As of September 30, 2020, 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, 2020, 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 2019 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year.

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

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 30, 2020. These reclassifications had no effect on previously reported Net Income.

COVID-19

In late 2019 a novel strain of coronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. Throughout 2020, COVID-19 has spread throughout the U.S. and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19. These measures include restrictions on travel outside the home and other limitations on business and other activities as well as encouraging social distancing. Moreover, COVID-19 cases have recently been increasing in the U.S. and various other regions of the world in which we have operations, which has resulted in some governmental authorities, including some in Western Europe, re-imposing restrictions on business and other activities that were previously lifted or reduced. As a result of COVID-19, we and

our franchisees have experienced significant store closures and instances of reduced and limited store-level operations, including reduced operating hours and full or partial dining-room closures. The impacts of COVID-19 significantly impacted our results in the quarter and year to date ended September 30, 2020.

As a result of the impact of COVID-19 on the Habit Burger Grill's results as well as general market conditions, we recognized an after-tax goodwill impairment charge of $107 million during the quarter ended March 31, 2020 related to our Habit Burger Grill reporting unit (See Note 2). As we continued to refine our preliminary purchase price allocation for Habit in the quarter ended September 30, 2020 the after-tax goodwill impairment charge was adjusted upward by $4 million. Due to the uncertainty surrounding our current assumptions regarding the expected severity and duration of the impact of COVID-19 on our and our franchisees' operations, we currently believe it is reasonably possible that certain significant estimates underlying long- lived asset and goodwill impairment evaluations as well as expected credit loss assessments within these Financial Statements will change in the near term. The effect of such a change may be material.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued a standard that requires measurement and recognition of expected versus incurred credit losses for financial assets held. As required, we adopted this standard on January 1, 2020 which resulted in the recording of a cumulative adjustment to Accumulated deficit of $8 million primarily to establish an expected credit loss liability for the contingent aspect of our financial guarantees. Substantially all of our financial guarantees relate to lease payments that our franchisees are primarily liable for and for which we are secondarily liable. See Note 14.

Upon adoption of the standard the Company's accounting policy for the measurement of credit losses related to our primary financial asset, our receivables from our franchisees, is as shown below.

Expected credit losses for uncollectible franchisee receivable balances consider both current conditions and reasonable and supportable forecasts of future conditions. Current conditions we consider include pre-defined aging criteria as well as specified events that indicate we may not collect the balance due. Reasonable and supportable forecasts used in determining the probability of future collection consider publicly available data regarding default probability.

In January 2017, the FASB issued a standard that eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an impairment charge is recognized based on the excess of a reporting unit’s carrying amount over its fair value. We adopted this standard, which requires prospective application, beginning with the quarter ended March 31, 2020. As a result, the goodwill impairment charge related to our Habit Burger Grill reporting unit (See Note 2) was measured as the excess of its carrying value over its fair value.

Note 2 - Habit Burger Grill Acquisition

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

Total cash consideration paid in connection with the acquisition was $408 million, net of acquired cash of $20 million. This included $9 million for the settlement of existing share-based awards previously issued to The Habit Restaurants, Inc. employees and $53 million associated with an obligation to former shareholders of The Habit Restaurants, Inc. related to a tax receivable agreement entered into in connection with its initial public offering in 2014. The acquisition was accounted for as a business combination using the acquisition method of accounting.

During the quarter ended September 30, 2020, we adjusted our preliminary estimate of the fair value of net assets acquired. The components of the preliminary purchase price allocation upon the March 18, 2020 acquisition, subsequent to the adjustments to the allocation in the quarter ended September 30, 2020, were as follows:


Total Current Assets	$	12
Property, plant and equipment, net	112
Habit Burger Grill brand (included in Intangible assets, net)	96
Operating lease right-of-use assets (included in Other assets)	198
Other assets	23
Total Assets	441
Total Current Liabilities	(70)
Operating lease liabilities (included in Other liabilities and deferred credits)	(170)
Other liabilities	(1)
Total Liabilities	(241)
Total identifiable net assets	200
Goodwill	208
Net consideration transferred	$	408

The adjustments to the preliminary estimate of identifiable net assets acquired resulted in a corresponding $11 million decrease in estimated goodwill due to the following changes to the preliminary purchase price allocation.


Change in	Increase (Decrease) in Goodwill
Property, plant and equipment, net	$	17
Habit Burger Grill brand (included in Intangible assets, net)	2
Operating lease right-of-use assets (included in Other assets)	(35)
Other assets	(1)
Total Current Liabilities	2
Operating lease liabilities (included in Other liabilities and deferred credits)	5
Other liabilities	(1)
Total decrease in goodwill	$	(11)

The preliminary allocation of the purchase price was based on management's analysis as of March 18, 2020. We will continue to obtain information to assist in determining the fair value of net assets acquired during the remaining measurement period.

The Habit Burger Grill brand, which includes the related trademarks, was valued by applying the income approach through a relief from royalty analysis and it has been assigned an indefinite life and, therefore, will not be amortized. The brand asset will be tested for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicate impairment might exist.

The excess of the purchase price over the preliminary estimated fair value of the net, identifiable assets acquired was recorded as goodwill. The factors contributing to the recognition of goodwill were several strategic and synergistic benefits that are expected to be realized by Habit Burger Grill from the acquisition. These benefits include leveraging YUM's scale and resources in unit development, primarily through franchising, supply chain and global brand-building. Goodwill determined through the purchase price allocation will be entirely allocated to the Habit Burger Grill Division and goodwill of approximately $200 million is expected to be deductible for tax purposes.

Habit's total operating lease liabilities represent the present value of minimum lease payments, including rental payments for lease renewal options we are reasonably certain to exercise. The nominal value of these minimum lease payments as of September 30, 2020 approximated $225 million. Additionally, the nominal value of minimum lease payments associated with Habit leases that have not yet commenced approximated $45 million as of September 30, 2020. The pro forma impact on our results of operations if the acquisition had been completed as of the beginning of 2019 would not have been significant.

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. The amount of the goodwill impairment charge and related tax benefit could change again as we finalize the purchase price allocation associated with the acquisition.

Note 3 - Earnings Per Common Share (“EPS”)


	Quarter ended				Year to date
	2020		2019		2020		2019
Net Income	$	283	$	255	$	572	$	806

Weighted-average common shares outstanding (for basic calculation)	303		306		302		307
Effect of dilutive share-based employee compensation	4		7		5		7
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	307		313		307		314

Basic EPS	$	0.94	$	0.83	$	1.89	$	2.63

Diluted EPS	$	0.92	$	0.81	$	1.86	$	2.57
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)	4.7		0.1		4.6		1.9

(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 - Accumulated Other Comprehensive Loss (“AOCI”)

Changes in 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 June 30, 2020, net of tax	$	(255)	$	(96)	$	(137)	$	(488)

OCI, net of tax

Gains (losses) arising during the period classified into AOCI, net of tax	35		—		(6)		29

(Gains) losses reclassified from AOCI, net of tax	—		2		5		7
	35		2		(1)		36
Balance at September 30, 2020, net of tax	$	(220)	$	(94)	$	(138)	$	(452)

Balance at December 31, 2019, net of tax	$	(221)	$	(104)	$	(63)	$	(388)

OCI, net of tax

Gains (losses) arising during the period classified into AOCI, net of tax	1		—		(76)		(75)

(Gains) losses reclassified from AOCI, net of tax	—		10		1		11
	1		10		(75)		(64)
Balance at September 30, 2020, net of tax	$	(220)	$	(94)	$	(138)	$	(452)

Note 5 - Other (Income) Expense


	Quarter ended				Year to date
	9/30/2020		9/30/2019		9/30/2020		9/30/2019
Foreign exchange net (gain) loss and other(a)	$	(6)	$	—	$	(2)	$	5
Closure and impairment (income) expense(b)	10		(1)		156		—
Other (income) expense	$	4	$	(1)	$	154	$	5

(a) The year to date ended September 30, 2019 includes the settlement of contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses of $8 million.

(b) The quarter and year to date ended September 30, 2020 includes 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 includes 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.


	9/30/2020		12/31/2019
Accounts and notes receivable, gross	$	594	$	656
Allowance for doubtful accounts	(72)		(72)
Accounts and notes receivable, net	$	522	$	584

Property, Plant and Equipment, net


	9/30/2020		12/31/2019
Property, plant and equipment, gross	$	2,430	$	2,306
Accumulated depreciation and amortization	(1,201)		(1,136)
Property, plant and equipment, net	$	1,229	$	1,170

Assets held-for-sale totaled $10 million and $25 million, respectively, as of September 30, 2020 and December 31, 2019 and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.


Other Assets	9/30/2020		12/31/2019
Operating lease right-of-use assets	$	821	$	642
Investment in Grubhub, Inc. common stock(a)	—		137
Franchise incentives	163		174
Other	377		360
Other assets	$	1,361	$	1,313

(a) In the quarter ended September 30, 2020 we sold our entire investment in Grubhub, Inc. common stock and received proceeds of $206 million.

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


	9/30/2020		12/31/2019
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	1,110	$	605
Restricted cash included in Prepaid expenses and other current assets(a)	230		138
Restricted cash and restricted cash equivalents included in Other assets(b)	35		25
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows	$	1,375	$	768

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

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

Note 7 - Income Taxes


	Quarter ended						Year to date
	2020			2019			2020			2019
Income tax provision	$	33		$	45		$	96		$	170
Effective tax rate	10.5		%	15.1		%	14.4		%	17.4		%

Our third quarter and year to date effective tax rates are lower than prior year primarily due to the favorable impact of the remeasurement of our deferred tax assets in the United Kingdom resulting from an increase in the corporate tax rate enacted in the quarter ended September 30, 2020 and return to provision adjustments from completing the 2019 U.S. federal income tax return. These favorable impacts were partially offset by lapping the favorable resolution in the prior year of an uncertain tax position in a foreign market and lapping higher excess tax benefits on share-based compensation.

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.


	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


	Quarter ended 9/30/2019
		KFC Division		Pizza Hut Division		Taco Bell Division		Total
U.S.
Company sales		$	17	$	5	$	216	$	238
Franchise revenues		40		63		142		245
Property revenues		5		2		10		17
Franchise contributions for advertising and other services		2		71		114		187

China
Franchise revenues		57		16		—		73

Other
Company sales		118		8		—		126
Franchise revenues		226		61		6		293
Property revenues		16		1		—		17
Franchise contributions for advertising and other services		128		14		1		143
		$	609	$	241	$	489	$	1,339


	Year to date ended 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


	Year to date ended 9/30/2019
		KFC Division		Pizza Hut Division		Taco Bell Division		Total
U.S.
Company sales		$	51	$	15	$	624	$	690
Franchise revenues		119		197		410		726
Property revenues		16		5		31		52
Franchise contributions for advertising and other services		7		223		327		557

China
Franchise revenues		165		46		—		211

Other
Company sales		344		20		2		366
Franchise revenues		649		181		19		849
Property revenues		50		2		—		52
Franchise contributions for advertising and other services		358		41		1		400
		$	1,759	$	730	$	1,414	$	3,903

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 2020 is presented below.


	Deferred Franchise Fees
Balance at December 31, 2019	$	441
Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period	(55)
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period	36
Other(a)	(8)
Balance at September 30, 2020	$	414

(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	$	64
1 - 2 years	59
2 - 3 years	54
3 - 4 years	49
4 - 5 years	43
Thereafter	145
Total	$	414

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	2020		2019		2020		2019
KFC Division	$	586	$	609	$	1,561	$	1,759
Pizza Hut Division	243		241		713		730
Taco Bell Division	501		489		1,403		1,414
Habit Burger Grill Division	118		—		232		—
	$	1,448	$	1,339	$	3,909	$	3,903


	Quarter ended				Year to date
Operating Profit	2020		2019		2020		2019
KFC Division	$	278	$	270	$	655	$	767
Pizza Hut Division	89		86		252		279
Taco Bell Division	186		161		484		458
Habit Burger Grill Division	(7)		—		(15)		—
Corporate and unallocated G&A expenses(a)	(81)		(41)		(229)		(122)
Unallocated Company restaurant expenses	1		—		—		—
Unallocated Franchise and property expenses	—		(2)		(3)		(5)
Unallocated Refranchising gain (loss)	9		8		30		18
Unallocated Other income (expense) (See Note 5)	(4)		(2)		(153)		(11)
Operating Profit	$	471	$	480	$	1,021	$	1,384
Investment income (expense), net(b)	10		(59)		67		(50)
Other pension income (expense) (See Note 10)	(4)		(1)		(9)		(4)
Interest expense, net	(161)		(120)		(411)		(354)
Income before income taxes	$	316	$	300	$	668	$	976

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 $32 million associated with a voluntary early retirement program offered to our U.S. based employees and a worldwide severance program in the quarter and year to date ended September 30, 2020. Also included in the year to date ended September 30, 2020 are a $50 million contribution to Yum! Brands Foundation, Inc. (a stand-alone, not-for-profit organization that is not consolidated in the Company's results) in the second quarter of 2020 related to our "Unlocking Opportunity Initiative" and costs related to our acquisition of Habit Burger Grill of $9 million.

(b)Includes changes in the value of Grubhub, Inc. common stock and other investments (see Notes 6 and 13).

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
	2020		2019		2020		2019
Service cost	$	2	$	1	$	6	$	4
Interest cost	9		10		26		30
Expected return on plan assets	(10)		(11)		(32)		(33)
Amortization of net loss	4		—		11		1
Amortization of prior service cost	—		2		3		4
Net periodic benefit cost	$	5	$	2	$	14	$	6

Additional loss recognized due to settlements(a)	$	—	$	1	$	—	$	3

(a) Loss is a result of settlement transactions which exceeded the sum of annual service and interest costs for the applicable plan. These losses were recorded in Other pension (income) expense.

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


Short-term Borrowings	9/30/2020		12/31/2019
Current maturities of long-term debt	$	454	$	437
Other	—		4
	454		441
Less current portion of debt issuance costs and discounts	(10)		(10)
Short-term borrowings	$	444	$	431

Long-term Debt
Securitization Notes	$	2,876	$	2,898
Subsidiary Senior Unsecured Notes	1,800		2,850
Term Loan A Facility	441		463
Term Loan B Facility	1,920		1,935
YUM Senior Unsecured Notes	4,075		2,425
Finance lease obligations	71		77
	$	11,183	$	10,648
Less debt issuance costs and discounts	(82)		(80)
Less current maturities of long-term debt	(454)		(437)
Long-term debt	$	10,647	$	10,131

Details of our short-term borrowings and long-term debt as of December 31, 2019 can be found within our 2019 Form 10-K. On March 24, 2020 we borrowed $525 million under our Revolving Facility in order to increase our liquidity position in light of the impacts on our business from the COVID-19 pandemic. This borrowing, together with $425 million borrowed under the Revolving Facility on March 18, 2020 to fund amounts associated with the acquisition of The Habit Restaurants, Inc., resulted in an aggregate of $950 million outstanding under the Revolving Facility as of March 31, 2020. In the second and third quarters of 2020, we made repayments of $375 million and $575 million, respectively, and as of September 30, 2020 our Revolving Facility is undrawn.

YUM Senior Unsecured Note Issuances

On April 1, 2020, YUM! Brands, Inc. issued $600 million aggregate principal amount of 7.75% YUM Senior Unsecured Notes due April 1, 2025 (the “2025 Notes”). The net proceeds from the issuance were used to pay the fees and expenses of the offering with remaining amounts to be used for general corporate purposes. Interest on the 2025 Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2020. On September 25, 2020, YUM! Brands, Inc. issued $1,050 million aggregate principal amount of 3.625% YUM Senior Unsecured Notes due March 15, 2031 (the “2031 Notes”). Interest on the 2031 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021. The indentures governing the 2025 Notes and the 2031 Notes contain 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 2025 Notes and the 2031 Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled.

On September 9, 2020, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, each of which is a wholly-owned subsidiary of the Company, issued a notice of redemption for October 9, 2020 for $1,050 million aggregate principal amount of 5.00% Subsidiary Senior Unsecured Notes due in 2024 (the “2024 Notes”). On September 25, 2020, using the net proceeds from the 2031 Notes and cash on hand the Company prepaid the 2024 Notes and deposited sufficient funds with The Bank of New York Mellon Trust Company, N.A., as trustee under the related indenture, to redeem the 2024 Notes at their aggregate redemption price and the indenture with respect to the 2024 Notes was discharged.

The redemption amount was equal to 102.50% of the principal amount redeemed, reflecting a $26 million “call premium”, plus accrued and unpaid interest to the date of redemption. We recognized the call premium, $6 million of unamortized debt issuance costs associated with the 2024 Notes and $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 within Interest expense, net in the quarter ended September 30, 2020 as the amounts were paid to the trustee and our liability was extinguished prior to that date. The Company paid debt issuance costs of $13 million in connection with the 2031 Notes. These debt issuance costs are being amortized to Interest expense, net over the life of the notes using the effective interest rate method. As of September 30, 2020, the effective interest rate, including the amortization of debt issuance costs, was 3.765% for the 2031 Notes.

Excluding the payments associated with the extinguishment of the 2024 Notes discussed above, cash paid for interest during the years to date ended September 30, 2020 and 2019 was $329 million and $324 million, respectively.

Note 12 - Derivative Instruments

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

Interest Rate Swaps

We have entered into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments under our Term Loan B Facility. At both September 30, 2020 and December 31, 2019, our interest rate swaps expiring in July 2021 had notional amounts of $1.55 billion and our interest rate swaps expiring in March 2025 had notional amounts of $1.5 billion. These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of September 30, 2020 or December 31, 2019.

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, 2020, 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, 2020, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of September 30, 2020 and December 31, 2019, outstanding foreign currency contracts related to intercompany receivables and payables had total notional amounts of $53 million and $20 million, respectively. These foreign currency forward contracts all have durations that expire in 2020.

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, 2020, 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
	2020		2019		2020		2019		2020		2019		2020		2019

Interest rate swaps	$	(6)	$	(18)	$	4	$	(4)	$	(104)	$	(88)	$	6	$	(14)

Foreign currency contracts	(2)		13		2		(8)		3		23		(5)		(12)

Income tax benefit/(expense)	2		3		(1)		1		25		19		—		4

As of September 30, 2020, 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 $19 million, based on current LIBOR interest rates.

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

Note 13 - Fair Value Disclosures

As of September 30, 2020, 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:


	9/30/2020				12/31/2019
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)

Securitization Notes(a)	$	2,876	$	3,000	$	2,898	$	3,040
Subsidiary Senior Unsecured Notes(b)	1,800		1,908		2,850		3,004
Term Loan A Facility(b)	441		437		463		464
Term Loan B Facility(b)	1,920		1,898		1,935		1,949
YUM Senior Unsecured Notes(b)	4,075		4,382		2,425		2,572

(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	9/30/2020		12/31/2019
Assets
Interest Rate Swaps	Prepaid expenses and other current assets	2	$	—	$	6
Foreign Currency Contracts	Prepaid expenses and other current assets	2	2		—
Interest Rate Swaps	Other assets	2	—		3
Investment in Grubhub, Inc. Common Stock	Other assets	1	—		137
Other Investments	Other assets	1	40		43

Liabilities
Interest Rate Swaps	Accounts payable and other current liabilities	2	21		—
Interest Rate Swaps	Other liabilities and deferred credits	2	139		71

The fair value of the Company’s foreign currency contracts and 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. The fair value of our investment in 2.8 million shares of Grubhub, Inc. common stock at December 31, 2019 was determined primarily based on closing market price for the shares. In the quarter ended September 30, 2020 we sold our entire investment in Grubhub, Inc. common stock (see Note 6). The other investments primarily include investments in mutual funds, which are used to offset fluctuations for a portion of our deferred compensation liabilities and whose fair values were determined based on the closing market prices of the respective mutual funds as of September 30, 2020 and December 31, 2019.

Note 14 - Contingencies

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, 2020, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $450 million. The present value of these potential payments discounted at our pre-tax cost of debt at September 30, 2020, was approximately $375 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, 2020 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 continues until the next hearing scheduled for December 8, 2020. 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.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

The following Management's Discussion and Analysis (“MD&A”), should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”). All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding.

Yum! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 50,000 restaurants in more than 150 countries and territories. At September 30, 2020, 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.

YUM currently consists of four operating segments:

•The KFC Division which includes our worldwide operations of the KFC concept

•The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept

•The Taco Bell Division which includes our worldwide operations of the Taco Bell concept

•The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept

Through our Recipe for Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of technology and better leverage of our systemwide scale.

Our Recipe for Growth is based on four key drivers:

•Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success

•Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences

•Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion

•Bold Restaurant Development: Drive market and franchise expansion with strong economics and value

Our Recipe for Good reflects our global citizenship and sustainability strategy and practices, while reinforcing our public commitment to drive socially responsible growth, risk management and sustainable stewardship of our food, planet and people.

We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. Throughout this MD&A, we commonly discuss the following performance metrics:

•Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more (with the exception of Habit Burger Grill restaurants we recently acquired), including those temporarily closed. From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues. During the first three quarters of 2020 we had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as of a result of COVID-19. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends.

•Net new unit growth reflects new unit openings offset by permanent store closures, by us and our franchisees. To determine whether a restaurant meets the definition of a unit we consider whether the restaurant has operations that are ongoing and

independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales. We believe net new unit growth is useful to investors because we depend on net new units for a significant portion of our growth. Additionally, net new unit growth is generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants.

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

•Company restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales. Restaurant profit is useful to investors as it provides a measure of profitability for our Company-owned restaurants.

In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”), the Company provides the following non-GAAP measurements:

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

•Effective Tax Rate excluding Special Items;

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

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

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

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

Results of Operations

Summary

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

For the quarter ended September 30, 2020, GAAP diluted EPS increased 14% to $0.92 per share, and diluted EPS, excluding Special Items, increased 27% to $1.01 per share.

For the year to date ended September 30, 2020, GAAP diluted EPS decreased 27% to $1.86 per share, and diluted EPS, excluding Special Items, decreased 3% to $2.47 per share.

Quarterly Financial highlights:

% Change

System Sales, ex FX

Same-Store Sales

Net New Units

GAAP Operating Profit

Core Operating Profit

KFC Division

(1)

(4)

Pizza Hut Division

(4)

(3)

(4)

Taco Bell Division

+16

Worldwide(1)

(2)

Year to date Financial highlights:


	% Change
	System Sales, ex FX	Same-Store Sales	Net New Units	GAAP Operating Profit	Core Operating Profit
KFC Division	(7)	(11)	+5	(15)	(13)
Pizza Hut Division	(8)	(8)	(4)	(10)	(9)
Taco Bell Division	+1	(2)	+3	+6	+6

Worldwide(1)	(5)	(8)	+2	(26)	(8)

(1) Worldwide system sales ex F/X and net-new units include the benefit of our acquisition of Habit Burger Grill on March 18, 2020. Same-store sales reflects the inclusion of Habit Burger Grill in the prior year base. Operating profit results of Habit Burger Grill for the period subsequent to our acquisition are reflected in the consolidated figures.

Additionally:

•Net units declined by 267 for the quarter and 44 for the year to date (including our acquisition of Habit Burger Grill in the first quarter of 2020).

•During the quarter, we recognized pre-tax income of $8 million related to the change in fair value of our investment in Grubhub, Inc. common stock (“Grubhub”) that we sold in the quarter ended September 30, 2020, which added $0.02 to diluted EPS for the quarter. When coupled with $60 million of pre-tax investment expense recorded in the third quarter of 2019, which resulted in a negative $0.15 impact to diluted EPS, our Grubhub investment favorably impacted year-over-year diluted EPS growth by $0.17.

•For the year to date ended September 30, 2020, we recognized pre-tax income of $69 million related to the change in fair value of our Grubhub investment that we sold in the quarter ended September 30, 2020, which added $0.17 to diluted EPS for the year to date. When coupled with $56 million of pre-tax investment expense for the year to date ended September 30, 2019, which resulted in a negative $0.14 impact to diluted EPS, our Grubhub investment favorably impacted year-over-year diluted EPS growth by $0.31.

•Foreign currency translation unfavorably impacted Divisional Operating Profit for the quarter and year to date by $2 million and $14 million, respectively.

Worldwide

GAAP Results


	Quarter ended								Year to date
	2020			2019			% B/(W)		2020			2019			% B/(W)
Company sales	$	486		$	364		34		$	1,244		$	1,056		18
Franchise and property revenues	639			645			(1)		1,760			1,890			(7)
Franchise contributions for advertising and other services	323			330			(2)		905			957			(6)
Total revenues	$	1,448		$	1,339		8		$	3,909		$	3,903		—

Restaurant profit	$	87		$	72		18		$	198		$	206		(4)
Restaurant margin %	17.8		%	20.2		%	(2.4)	ppts.	15.9		%	19.6		%	(3.7)	ppts.

G&A expenses	$	257		$	208		(24)		$	724		$	617		(17)
Franchise and property expenses	13			43			71		107			124			14
Franchise advertising and other services expense	313			325			4		887			941			6
Refranchising (gain) loss	(9)			(8)			17		(30)			(18)			70
Other (income) expense	4			(1)			NM		154			5			NM
Operating Profit	$	471		$	480		(2)		$	1,021		$	1,384		(26)

Investment (income) expense, net	$	(10)		$	59		NM		$	(67)		$	50		NM
Other pension (income) expense	4			1			NM		9			4			NM
Interest expense, net	161			120			(34)		411			354			(16)
Income tax provision	33			45			26		96			170			44
Net Income	$	283		$	255		11		$	572		$	806		(29)

Diluted EPS(a)	$	0.92		$	0.81		14		$	1.86		$	2.57		(27)
Effective tax rate	10.5		%	15.1		%	4.6	ppts.	14.4		%	17.4		%	3.0	ppts.

(a)See Note 3 for the number of shares used in this calculation.

Performance Metrics


Unit Count	9/30/2020	9/30/2019	% Increase (Decrease)
Franchise	49,003	48,275	2
Company-owned	1,123	883	27
Total	50,126	49,158	2


	Quarter ended		Year to date
	2020	2019	2020	2019
Same-store Sales Growth (Decline) %	(2)	3	(8)	4
System Sales Growth (Decline) %, reported	1	6	(6)	6
System Sales Growth (Decline) %, excluding FX	1	8	(5)	9

Our system sales breakdown by Company and franchise sales was as follows:


	Quarter ended				Year to date
	2020		2019		2020		2019

Consolidated
Company sales(a)	$	486	$	364	$	1,244	$	1,056
Franchise sales	12,457		12,468		34,108		36,433
System sales	12,943		12,832		35,352		37,489
Foreign Currency Impact on System sales(b)	(4)		N/A		(395)		N/A
System sales, excluding FX	$	12,947	$	12,832	$	35,747	$	37,489

KFC Division
Company sales(a)	$	130	$	135	$	346	$	395
Franchise sales	6,779		6,833		18,138		19,768
System sales	6,909		6,968		18,484		20,163
Foreign Currency Impact on System sales(b)	(20)		N/A		(334)		N/A
System sales, excluding FX	$	6,929	$	6,968	$	18,818	$	20,163

Pizza Hut Division
Company sales(a)	$	20	$	13	$	57	$	35
Franchise sales	2,974		3,079		8,491		9,286
System sales	2,994		3,092		8,548		9,321
Foreign Currency Impact on System sales(b)	16		N/A		(58)		N/A
System sales, excluding FX	$	2,978	$	3,092	$	8,606	$	9,321

Taco Bell Division
Company sales(a)	$	218	$	216	$	610	$	626
Franchise sales	2,696		2,556		7,464		7,379
System sales	2,914		2,772		8,074		8,005
Foreign Currency Impact on System sales(b)	—		N/A		(3)		N/A
System sales, excluding FX	$	2,914	$	2,772	$	8,077	$	8,005

Habit Burger Grill Division
Company sales(a)	$	118	N/A		$	231	N/A
Franchise sales	8		N/A		15		N/A
System sales	126		N/A		246		N/A
Foreign Currency Impact on System sales(b)	—		N/A		—		N/A
System sales, excluding FX	$	126	N/A		$	246	N/A

(a)Company sales represents sales from our Company-operated stores as presented on our Condensed Consolidated Statements of Income.

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


Non-GAAP Items

Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below.

	Quarter ended				Year to date
	2020		2019		2020		2019
Core Operating Profit Growth (Decline) %	7		6		(8)		12
Diluted EPS Growth (Decline) %, excluding Special Items	27		(23)		(3)		(7)
Effective Tax Rate excluding Special Items	19.3	%	15.1	%	19.0	%	17.6	%


	Quarter ended				Year to date
Detail of Special Items	2020		2019		2020		2019
Refranchising gain (loss)(a)	$	2	$	8	$	8	$	18
Costs associated with acquisition and integration of Habit Burger Grill (See Note 2)	—		—		(9)		—
Impairment of Habit Burger Grill goodwill (See Note 2)	(5)		—		(144)		—
Unlocking Opportunity Initiative contribution(b)	—		—		(50)		—
Charges associated with resource optimization(c)	(32)		—		(32)		—
Other Special Items Income (Expense)(d)	1		(3)		(6)		(14)
Special Items Income (Expense) - Operating Profit	(34)		5		(233)		4
Charges associated with resource optimization - Other Pension Expense(c)	(1)		—		(1)		—
Interest expense, net(d)(e)	(34)		—		(34)		(2)
Special Items Income (Expense) before Income Taxes	(69)		5		(268)		2
Tax Benefit on Special Items(f)	17		—		57		2
Tax Benefit - Intra-entity transfer of intellectual property(g)	25		—		25		—
Special Items Income (Expense), net of tax	$	(27)	$	5	$	(186)	$	4
Average diluted shares outstanding	307		313		307		314
Special Items diluted EPS	$	(0.09)	$	0.01	$	(0.61)	$	0.02

Reconciliation of GAAP Operating Profit to Core Operating Profit

Consolidated
GAAP Operating Profit	$	471	$	480	$	1,021	$	1,384
Special Items Income (Expense)	(34)		5		(233)		4
Foreign Currency Impact on Divisional Operating Profit(h)	(2)		N/A		(14)		N/A
Core Operating Profit	$	507	$	475	$	1,268	$	1,380

KFC Division
GAAP Operating Profit	$	278	$	270	$	655	$	767
Foreign Currency Impact on Divisional Operating Profit(h)	(2)		N/A		(13)		N/A
Core Operating Profit	$	280	$	270	$	668	$	767

Pizza Hut Division
GAAP Operating Profit	$	89	$	86	$	252	$	279
Foreign Currency Impact on Divisional Operating Profit(h)	—		N/A		(1)		N/A
Core Operating Profit	$	89	$	86	$	253	$	279

Taco Bell Division
GAAP Operating Profit	$	186	$	161	$	484	$	458
Foreign Currency Impact on Divisional Operating Profit(h)	—		N/A		—		N/A
Core Operating Profit	$	186	$	161	$	484	$	458

Habit Burger Grill Division
GAAP Operating Profit	$	(7)	N/A		$	(15)	N/A


Foreign Currency Impact on Divisional Operating Profit(h)	—			N/A			—			N/A
Core Operating Profit	$	(7)		N/A			$	(15)		N/A

Reconciliation of Diluted EPS to Diluted EPS excluding Special Items
Diluted EPS	$	0.92		$	0.81		$	1.86		$	2.57
Special Items Diluted EPS	(0.09)			0.01			(0.61)			0.02
Diluted EPS excluding Special Items	$	1.01		$	0.80		$	2.47		$	2.55

Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items
GAAP Effective Tax Rate	10.5		%	15.1		%	14.4		%	17.4		%
Impact on Tax Rate as a result of Special Items(f)	(8.8)		%	—		%	(4.6)		%	(0.2)		%
Effective Tax Rate excluding Special Items	19.3		%	15.1		%	19.0		%	17.6		%

(a)We have reflected as Special Items those refranchising gains and losses that were recorded in connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018. As such, refranchising gains and losses recorded during the quarters and years to date ended September 30, 2020 and 2019 as Special Items primarily include true-ups to refranchising gains and losses recorded prior to December 31, 2018.

During the quarters ended September 30, 2020 and 2019, we recorded net refranchising gains of $2 million and $8 million, respectively, that have been reflected as Special Items. During the years to date ended September 30, 2020 and 2019, we recorded net refranchising gains of $8 million and $18 million, respectively, that have been reflected as Special Items.

Additionally, during the quarter and year to date ended September 30, 2020 we recorded refranchising gains of $7 million and $22 million, respectively, that have not been reflected as a Special Item. These gains relate to refranchising of restaurants in 2020 that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our ongoing operations.

(b)On June 24, 2020, the YUM! Brands, Inc. Board of Directors approved the establishment of the Company’s new global “Unlocking Opportunity Initiative” including a $100 million investment over the next five years to fight inequality by unlocking opportunities for employees, restaurant team members and communities. The Company contributed $50 million in the quarter ended June 30, 2020 to Yum! Brands Foundation, Inc. (a stand-alone, not-for-profit organization that is not consolidated in the Company's results) as part of these efforts and investment. As a result of the size and specific nature of this contribution we have reflected the associated expense as a Special Item.

(c)During the quarter ended September 30, 2020, we recorded charges of $32 million and $1 million to General and administrative expenses and Other pension (income) expense, respectively, associated with a voluntary early retirement program offered to our U.S. based employees and a worldwide severance program. These programs were 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. Due to their scope and size, these charges have been reflected as Special Items.

(d)During the second quarter of 2019, we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses. Consistent with prior adjustments to the recorded contingent consideration, we have reflected this as a Special Item.

(e)During the quarter ended September 30, 2020, certain subsidiaries of the Company issued a notice of redemption for $1,050 million aggregate principal amount of 5.00% Subsidiary Senior Unsecured Notes due in 2024 (the "2024 Notes"). The redemption amount included a $26 million call premium plus accrued and unpaid interest to the date of redemption of October 9, 2020. We recorded the call premium, $6 million of unamortized debt issuance costs associated with the 2024 Notes and $2 million of accrued and unpaid interest associated with the period of time from prepayment of the 2024 Notes with the Trustee on September 25, 2020 to their redemption date within Interest expense, net and reflected the charges as Special Items due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense. See Note 11.

(f)Tax Expense on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

(g)In the fourth quarter of 2019, we completed an intercompany restructuring that resulted in the transfer of certain intellectual property rights held by wholly owned foreign subsidiaries to the United Kingdom (UK). As a result of the transfer of certain of these rights, we received a step-up in the tax basis to fair market value for UK tax purposes. To the extent this step-up in tax basis will be amortizable against future taxable income, we recognized a one-time deferred tax benefit of $220 million as a Special Item in the quarter ended December 31, 2019. During the quarter ended September 30, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%. As a result, in the quarter ended September 30, 2020, we remeasured the related deferred tax asset originally recorded in the fourth quarter of 2019 and recognized an additional $25 million deferred tax benefit as a Special Item.

(h)The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit growth percentages, the Core Operating Profit for the current year should be compared to the prior year GAAP Operating Profit adjusted only for any prior year Special Items Income (Expense).

Items Impacting Current Quarter and Expected to Impact Future Results

The following items impacted reported results in 2020 and/or 2019 and/or are expected to impact future results. See also the Detail of Special Items section of this MD&A for other items similarly impacting results.

COVID-19

In late 2019, a novel strain of coronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. Throughout 2020, COVID-19 has spread throughout the U.S. and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19. These measures include restrictions on travel outside the home and other limitations on business and other activities as well as encouraging social distancing. As a result of COVID-19, we and our franchisees have experienced significant store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures.

Our results were significantly impacted by the impacts of COVID-19 in the quarter and year to date ended September 30, 2020 as evidenced by our worldwide same-store sales declines of 2% and 8%, respectively. The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities to reduce the spread of COVID-19, as well as our reliance on dine-in sales in the market. Overall, our sales declines have been primarily driven by temporary store closures, which peaked in early April at about 11,000 restaurants. Since then, temporarily closed restaurants have been gradually reopening and as of October 29, 2020 about 1,000 restaurants remained fully closed, which means roughly 98% of our system was open for business in a full or limited capacity as of that date. Assets located in malls, transportation centers, airports and the like continued to be pressured and made up many of the full closures. Geographically, Pizza Hut U.S., Latin America, Asia and India made up the majority of these closures.

Globally, same-store sales for stores that were open for some or all of the quarter ended September 30, 2020 were approximately flat, in aggregate, while they were open. This was in spite of the fact that significant sales loss has occurred, and continues to occur, due to the significant number of our open restaurants subject to dining room closures or other limitations on access. We have been able to offset the loss of sales due to dining room closures or other limitations on access through the strength of our off-premise channels, aided by increasing consumer access to our brands via digital channels.

The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company's remaining 2020 results. Moreover, COVID-19 cases have recently been increasing in the U.S., Western Europe and various other regions of the world in which we have operations, which has resulted in some governmental authorities, including some in Western Europe, re-imposing restrictions on business and other activities that were previously lifted or reduced. The ultimate pace of recovery will largely depend on the pace of restaurant reopenings and the continuation of current sales trends, although we expect continuing adverse impacts from COVID-19.

As 98% of our restaurants are operated by approximately 2,000 independent franchisees across the world, we are also closely monitoring the impact of COVID-19 on our franchisees' financial condition. To help our franchise partners, we are providing assistance to those who are in good standing and need more access to capital, primarily through deferrals of capital obligations for remodels and new development. Additionally, where necessary we are providing grace periods for certain near-term

payments due to YUM. The grace periods generally provide franchisees who face cash flow constraints an additional 60 days to pay certain of their period or monthly royalty payments. As of September 30, 2020, outstanding payments due to YUM under these grace periods were approximately $23 million with the vast majority of these amounts coming due in the current year.

Net New Unit Growth

In addition to the restaurants that have been, or continue to be, temporarily closed during 2020, the uncertainties associated with COVID-19 have contributed to fewer new restaurant openings and greater permanent restaurant closures during the first three quarters of 2020 versus both our recent history and expectations. Additionally, we have seen higher closures in the Pizza Hut system of certain asset types primarily due to business model pressures as discussed in the following paragraph. For the year to date ended September 30, 2020, our Concepts have collectively opened 1,399 new units while permanently closing 1,719 units.

While net new unit growth at each of KFC, Taco Bell and Habit Burger Grill has been lower than expected in 2020, each Concept to date has realized, and is expected to further realize in the fourth quarter of 2020, positive net new unit growth. Pizza Hut has experienced a net new unit decline of 860 restaurants in the first three quarters of 2020, largely due to 1,205 global closures, including 700 closures in the U.S., nearly 300 of which were stores operated by NPC International, Inc. ("NPC") as discussed under the Franchise Bad Debt Expense heading below. These closures, which were largely casual dining-based and license units, have hastened the transition of the Pizza Hut system to a more delivery-focused and modern estate, which we believe will optimize our ability to grow the Pizza Hut system going forward. However, these and continued closures within our Pizza Hut Division will present a headwind to the Division's net unit and operating profit growth in the quarter ended December 31, 2020 and into next year.

Taking this dynamic into account along with lingering COVID-19-related uncertainties on our global development across all of our brands, we currently estimate the number of overall YUM units at the end of 2020 to be approximately flat with the number of units at September 30, 2020 as fourth quarter net new unit growth at KFC, Taco Bell and Habit Burger Grill is expected to be offset by further net new unit declines at Pizza Hut.

The Habit Restaurants, Inc. Acquisition

On March 18, 2020 we acquired The Habit Restaurants, Inc. for total cash consideration of $408 million, net of cash acquired. We have reflected the ongoing results of Habit Burger Grill’s operations from March 18, 2020 through September 30, 2020 in our Financial Statements. These ongoing results had an insignificant impact on our consolidated results of operations. Additionally, we have included the system sales of Habit Burger Grill for the period from March 18, 2020 through September 30, 2020 in our consolidated system sales and reflected Habit Burger Grill’s same-store sales results for this same period in our consolidated same-store sales results, as applicable, for both the quarter and year to date ended September 30, 2020. Third quarter consolidated system sales growth would have been flat absent the inclusion of Habit Burger Grill while same-store sales results were not significantly impacted.

As a result of the impacts of COVID-19 on the results of Habit Burger Grill’s operations, as well as general market conditions, we recorded an after-tax impairment charge of $107 million in the first quarter of 2020 related to the goodwill arising from the preliminary purchase price allocation associated with the acquisition. As we continued to refine our preliminary purchase price allocation for Habit in the quarter ended September 30, 2020 the after-tax impairment charge was adjusted upward by $4 million. We have reflected this impairment as a Special Item, resulting in a Special Item EPS charge for the quarter and year to date ended September 30, 2020 of approximately $0.01 and $0.36, respectively. See Note 2.

Franchise Bad Debt Expense

During the quarter ended September 30, 2020 we recognized net bad debt recoveries of $21 million related to short-term accounts receivable due from our franchisees for royalties, rent and other services we provide, which were primarily reflected within Franchise and property expenses. These net bad debt recoveries of $21 million compared to $9 million of bad debt expense recognized in the quarter ended September 30, 2019 and represented an improvement to Operating Profit of $30 million quarter-over-quarter.

These net bad debt recoveries were primarily attributable to recoveries of past due amounts from certain KFC Division franchisees located outside the U.S. Reserves for these past due amounts were largely established in the first half of 2020. Additionally, within our Pizza Hut Division, we saw recoveries of receivables from NPC for which reserves were established in the quarter ended June 30, 2020 due to uncertainties surrounding collections in light of NPC's financial distress.

NPC, our largest Pizza Hut U.S. franchisee, filed voluntary petitions on July 1, 2020 to restructure under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. In connection with the bankruptcy filing, we consented to up to 300 mutually selected closures of underperforming units, primarily dine-in assets. These units were largely closed during the quarter ended September 30, 2020. Our current expectation is that the approximately 900 remaining NPC units, or about 14% of the Pizza Hut U.S. system, will be transferred to one or more other franchise partners.

For the year to date ended September 30, 2020 we have recorded bad debt expense of $21 million compared to $18 million of bad debt expense recognized in the year to date ended September 30, 2019. While we continue to pursue payments from any franchisee whose receivables we have currently reserved, the amount, if any, and timing of such payments is uncertain, particularly in light of the potential impacts on their financial condition from COVID-19.

Investment in Grubhub, Inc. (“Grubhub”)

In April of 2018 we purchased 2.8 million shares of Grubhub common stock for $200 million. In the quarter ended September 30, 2020 we sold our entire investment in Grubhub and received proceeds of $206 million. While we held our investment in Grubhub common stock we recognized changes in the fair value in our investment in our Consolidated Statements of Income. For the quarters ended September 30, 2020 and 2019, we recognized pre-tax investment income of $8 million and pre-tax investment expense of $60 million, respectively. For the years to date ended September 30, 2020 and 2019, we recognized pre-tax investment income of $69 million and pre-tax investment expense of $56 million, respectively. See Note 6 for further discussion of our investment in Grubhub.

KFC Division

The KFC Division has 24,602 units, 84% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of September 30, 2020.


	Quarter ended										Year to date
							% B/(W)										% B/(W)
	2020			2019			Reported		Ex FX		2020			2019			Reported		Ex FX
System Sales	$	6,909		$	6,968		(1)		(1)		$	18,484		$	20,163		(8)		(7)
Same-Store Sales Growth (Decline) %	(4)			3			N/A		N/A		(11)			5			N/A		N/A

Company sales	$	130		$	135		(3)		(1)		$	346		$	395		(12)		(9)
Franchise and property revenues	340			344			(1)		(1)		906			999			(9)		(8)
Franchise contributions for advertising and other services	116			130			(11)		(10)		309			365			(15)		(13)
Total revenues	$	586		$	609		(4)		(3)		$	1,561		$	1,759		(11)		(9)

Restaurant profit	$	21		$	22		(2)		(2)		$	39		$	61		(36)		(35)
Restaurant margin %	16.3		%	16.1		%	0.2	ppts.	—	ppts.	11.2		%	15.3		%	(4.1)	ppts.	(4.4)	ppts.

G&A expenses	$	81		$	80		(1)		(2)		$	224		$	233		4		2
Franchise and property expenses	7			23			66		72		69			70			1		(1)
Franchise advertising and other services expense	111			126			12		11		301			358			16		14
Operating Profit	$	278		$	270		3		4		$	655		$	767		(15)		(13)


			% Increase (Decrease)
Unit Count	9/30/2020	9/30/2019
Franchise	24,302	23,103	5
Company-owned	300	332	(10)
Total	24,602	23,435	5

Company sales and Restaurant margin percentage

The quarterly decrease in Company sales, excluding the impacts of foreign currency translation, was driven by refranchising, partially offset by net new unit growth and company same-store sales growth of 3%.

The year to date decrease in Company sales, excluding the impacts of foreign currency translation, was driven by company same-store sales declines of 9% and refranchising, partially offset by net new unit growth.

The quarterly increase in Restaurant margin percentage was driven by same-store sales growth, partially offset by increased restaurant-level costs.

The year to date decrease in Restaurant margin percentage was driven by same-store sales declines as well as increased restaurant-level costs, including increased cost of labor, including one-time bonuses and other costs incurred as a result of COVID-19.

Franchise and property revenues

The quarterly and year to date decreases in Franchise and property revenues, excluding the impacts of foreign currency translation, were driven by franchise same-store sales declines of 5% and 11% for the quarter and year to date, respectively, partially offset by net new unit growth.

G&A

The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our incentive compensation program and higher salaries, partially offset by lower travel related costs.

The year to date decrease in G&A, excluding the impacts of foreign currency translation, was driven by lower travel related costs, partially offset by higher salaries and higher expenses related to our incentive compensation program.

Operating Profit

The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by lower Franchise and property expenses due to recoveries for past due receivables and net new unit growth, partially offset by same-store sales declines and higher G&A.

The year to date decrease in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales declines, higher Franchise and property expenses due to increased provisions for past due receivables, and the write-off of software no longer being used, partially offset by net new unit growth and lower G&A.

Pizza Hut Division

The Pizza Hut Division has 17,842 units, 63% of which are located outside the U.S. The Pizza Hut Division uses multiple distribution channels including delivery, dine-in and express (e.g. airports) and includes units operating under both the Pizza Hut and Telepizza brands. Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of September 30, 2020.


	Quarter ended										Year to date
							% B/(W)										% B/(W)
	2020			2019			Reported		Ex FX		2020			2019			Reported		Ex FX

System Sales	$	2,994		$	3,092		(3)		(4)		$	8,548		$	9,321		(8)		(8)
Same-Store Sales Growth (Decline) %	(3)			Even			N/A		N/A		(8)			1			N/A		N/A

Company sales	$	20		$	13		54		48		$	57		$	35		62		62
Franchise and property revenues	134			143			(5)		(5)		393			431			(9)		(8)
Franchise contributions for advertising and other services	89			85			3		3		263			264			(1)		—
Total revenues	$	243		$	241		1		—		$	713		$	730		(2)		(2)

Restaurant profit	$	2		$	—		NM		NM		$	2		$	1		72		65
Restaurant margin %	8.2		%	4.0		%	4.2	ppts.	4.1	ppts.	3.4		%	3.2		%	0.2	ppts.	0.1	ppts.

G&A expenses	$	51		$	47		(7)		(7)		$	141		$	138		(2)		(3)
Franchise and property expenses	(2)			9			NM		NM		11			23			52		51
Franchise advertising and other services expense	85			86			—		1		256			258			1		1
Operating Profit	$	89		$	86		3		3		$	252		$	279		(10)		(9)


			% Increase (Decrease)
Unit Count	9/30/2020	9/30/2019
Franchise	17,745	18,455	(4)
Company-owned	97	77	26
Total	17,842	18,532	(4)

Company sales

The quarterly and year to date increases in Company sales, excluding the impacts of foreign currency translation, were driven by the acquisition of stores in the UK in the quarter ended September 30, 2019 and company same-store sales growth of 11% and 5%, respectively.

Franchise and property revenues

The quarterly and year to date decreases in Franchise and property revenues, excluding the impacts of foreign currency translation, were driven by franchise same-store sales declines of 3% and 8%, respectively, and net new unit declines.

G&A

The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher expenses related to our incentive compensation program and higher headcount, partially offset by lower travel related costs.

The year to date increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and higher expenses related to our incentive and deferred compensation programs, partially offset by lower travel related costs.

Operating Profit

The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by recoveries on past due receivables, partially offset by the write-off of software no longer being used, higher G&A, net new unit declines and same-store sales declines.

The year to date decrease in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales declines, net new unit declines, higher G&A, and the write-off of software no longer being used, partially offset by recoveries on past due receivables.

Taco Bell Division

The Taco Bell Division has 7,400 units, the vast majority of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of September 30, 2020.


	Quarter ended										Year to date
							% B/(W)										% B/(W)
	2020			2019			Reported		Ex FX		2020			2019			Reported		Ex FX

System Sales	$	2,914		$	2,772		5		5		$	8,074		$	8,005		1		1
Same-Store Sales Growth %	3			4			N/A		N/A		(2)			5			N/A		N/A

Company sales	$	218		$	216		1		1		$	610		$	626		(3)		(3)
Franchise and property revenues	165			158			4		4		460			460			Even		Even
Franchise contributions for advertising and other services	118			115			3		3		333			328			1		1
Total revenues	$	501		$	489		2		2		$	1,403		$	1,414		(1)		(1)

Restaurant profit	$	60		$	50		19		19		$	152		$	144		6		6
Restaurant margin %	27.8		%	23.6		%	4.2	ppts.	4.2	ppts.	25.0		%	23.1		%	1.9	ppts.	1.9	ppts.

G&A expenses	$	33		$	40		16		16		$	108		$	124		13		13
Franchise and property expenses	8			9			19		19		24			26			10		10
Franchise advertising and other services expense	117			113			(3)		(3)		330			325			(2)		(2)
Operating Profit	$	186		$	161		16		16		$	484		$	458		6		6


			% Increase (Decrease)
Unit Count	9/30/2020	9/30/2019
Franchise	6,925	6,717	3
Company-owned	475	474	—
Total	7,400	7,191	3

Company sales and Restaurant margin percentage

The quarterly increase in Company sales was driven by net new unit growth and same-store sales growth of 1% partially offset by refranchising.

The year to date decrease in Company sales was driven by refranchising and same-store sales declines of 3% partially offset by net new unit growth.

The quarterly increase in restaurant margin percentage was driven by the favorable impact of higher guest check, lower restaurant operating costs such as labor costs due to dining room closures as a result of COVID-19 and lower advertising costs, partially offset by transaction declines.

The year to date increase in restaurant margin percentage was driven by the favorable impact of higher guest check, lower restaurant operating costs such as labor and repairs and maintenance costs due to dining room closures as a result of COVID-19 and lower advertising costs, partially offset by transaction declines and a COVID-19 related bonus for restaurant employees.

Franchise and property revenues

The quarterly increase in Franchise and property revenues was driven by franchise same-store sales growth of 3% and net new unit growth.

Franchise and property revenues were flat for the year, as net new unit growth was offset by franchise same-store sales declines of 1%.

G&A

The quarterly decrease in G&A was driven by lower travel related costs and professional fees.

The year to date decrease in G&A was driven by lower travel related costs, decreased professional fees and lower expenses related to our deferred and incentive compensation programs.

Operating Profit

The quarterly increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth, lower G&A costs, lower restaurant operating costs and net new unit growth.

The year to date increase in Operating Profit, excluding the impact of foreign currency translation, was driven by lower G&A costs, net new unit growth and lower restaurant operating costs partially offset by same-store sales declines.

Habit Burger Grill Division

The Habit Burger Grill Division has 282 units, the vast majority of which are in the U.S. The Company owned 92% of the Habit Burger Grill units in the U.S. as of September 30, 2020. During the quarter ended September 30, 2020 we opened 5 gross new restaurants and reported a same-store sales decline of 3%. Total revenues and Operating loss were $118 million and $7 million, respectively, for the quarter ended September 30, 2020. Total revenues and Operating loss were $232 million and $15 million, respectively, for the period from March 18, 2020 through September 30, 2020.

Corporate & Unallocated


	Quarter ended								Year to date
(Expense) / Income	2020			2019			% B/(W)		2020			2019			% B/(W)
Corporate and unallocated G&A	$	(81)		$	(41)		(99)		$	(229)		$	(122)		(87)
Unallocated Company restaurant expenses	1			—			NM		—			—			NM
Unallocated Franchise and property expenses	—			(2)			NM		(3)			(5)			47
Unallocated Refranchising gain (loss)	9			8			17		30			18			70
Unallocated Other income (expense)	(4)			(2)			NM		(153)			(11)			NM
Investment income (expense), net (See Note 9)	10			(59)			NM		67			(50)			NM
Other pension income (expense) (See Note 10)	(4)			(1)			NM		(9)			(4)			NM
Interest expense, net	(161)			(120)			(34)		(411)			(354)			(16)
Income tax provision (See Note 7)	(33)			(45)			26		(96)			(170)			44
Effective tax rate (See Note 7)	10.5		%	15.1		%	4.6	ppts.	14.4		%	17.4		%	3.0	ppts.

Corporate and unallocated G&A

The quarterly increase in Corporate and unallocated G&A expense was driven by costs associated with a voluntary early retirement program offered to our U.S. based employees and a worldwide severance program (see previous discussion within the Non-GAAP Items section of this MD&A) and charitable contributions in the quarter ended September 30, 2020.

The year to date increase in Corporate and unallocated G&A expense was driven by charitable contributions including $50 million related to our “Unlocking Opportunity Initiative” (see previous discussion within the Non-GAAP Items section of this MD&A), costs associated with a voluntary early retirement program offered to our U.S. based employees and a worldwide severance program (see previous discussion within the Non-GAAP Items section of this MD&A) and higher professional fees associated with the acquisition of The Habit Burger Grill.

Unallocated Other income (expense)

Unallocated Other income (expense) for the quarter and year to date ended September 30, 2020 includes charges of $5 million and $144 million, respectively, related to the impairment of Habit Burger Grill goodwill (see Note 2). The year to date ended September 30, 2019 includes a settlement of contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses (see Note 5).

Interest expense, net

The quarterly and year to date increases in Interest expense, net were driven by increased outstanding borrowings, partially offset by a decrease in the rate on our floating rate debt.

Consolidated Cash Flows

Net cash provided by operating activities was $853 million in 2020 versus $883 million in 2019. The decrease was largely driven by a decrease in Operating profit before Special Items, the $50 million contribution related to our "Unlocking Opportunity Initiative" and higher income tax payments, partially offset by lower advertising spending.

Net cash used in investing activities was $269 million in 2020 versus $54 million in 2019. The increase was primarily driven by the acquisition of Habit Burger Grill and lower refranchising proceeds in the current year, partially offset by the sale of our investment in Grubhub, Inc. common stock and lower capital spending.

Net cash provided by financing activities was $24 million in 2020 versus net cash used in financing activities of $440 million in 2019. The change was primarily driven by lower share repurchases.

Consolidated Financial Condition

Our Condensed Consolidated Balance Sheet was impacted by the issuance of the 2025 Notes (see Note 11) and the acquisition of The Habit Restaurants, Inc. (See Note 2).

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash generated by operations and our revolving facilities. We have historically generated substantial cash flows from the operations of our Company-owned stores and from our extensive franchise operations, which require a limited YUM investment. Our annual operating cash flows have historically been in excess of $1 billion. Decreases in operating cash flows from the operation of fewer Company-owned stores due to refranchising have been offset, and are expected to continue to be offset, with savings generated from decreased capital investment and G&A required to support company operations.

In light of the impacts on our business from the COVID-19 pandemic, the Company has taken the following steps to bolster our cash balance and increase our liquidity position during 2020.

•During the first quarter of 2020, we suspended our share repurchase program, pursuant to which the Company's Board of Directors previously authorized repurchases of up to $2 billion of the Company's common stock through June 30, 2021 (the “Share Repurchase Program”). Commensurate with the performance of the business, health of our balance sheet and liquidity position, including our repayment of remaining borrowings under our Revolving Facility during the quarter ended September 30, 2020, and our confidence that we will grow back into our ~5.0x EBITDA consolidated net leverage target by second-quarter 2021, we resumed share repurchases in the fourth quarter of 2020.

•On March 24, 2020, Pizza Hut Holdings, LLC, KFC Holding Co. and Taco Bell of America, LLC (collectively, the “Borrowers”), each a wholly-owned subsidiary of YUM! Brands, Inc., borrowed $525 million under our existing Revolving Facility. This borrowing, together with $425 million borrowed under the Revolving Facility on March 18, 2020 to fund amounts associated with the acquisition of The Habit Restaurants, Inc., resulted in an aggregate of $950 million outstanding under the Revolving Facility as of March 31, 2020. In the second and third quarters of 2020 we made repayments of $375 million and $575 million, respectively, and as of September 30, 2020 our Revolving Facility is undrawn. The current interest rate for borrowings under the Revolving Facility is LIBOR plus 1.50%.

•On April 1, 2020, YUM! Brands, Inc. issued $600 million aggregate principal amount of 7.75% YUM Senior Unsecured Notes due April 1, 2025. See Note 11 for more detail.

•On September 25, 2020, YUM! Brands, Inc. issued $1,050 million aggregate principal amount of 3.625% YUM Senior Unsecured Notes due March 15, 2031. The net proceeds from the issuance, together with cash on hand, were used to repay $1,050 million aggregate principal amount of Subsidiary Senior Unsecured Notes due in 2024. See Note 11 for more detail.

Debt Instruments

As of September 30, 2020, approximately 93%, including the impact of interest rate swaps, of our $11.1 billion of total debt outstanding, excluding finance leases, is fixed with an effective overall interest rate of approximately 4.7%. We are currently managing towards a capital structure which reflects consolidated leverage, net of available cash, in-line with our target of ~5.0x EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years. We have credit ratings of BB (Standard & Poor's)/Ba2 (Moody's) with a balance sheet consistent with highly-levered peer restaurant franchise companies.

The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of September 30, 2020.


	2020		2021		2022		2023		2024		2025		2026		2027		2028		2030		2031		2037		2043		Total
Securitization Notes	$	7	$	29	$	29	$	1,281	$	16	$	16	$	921	$	6	$	571									$	2,876
Credit Agreement	14		76		395		20		20		1,836																2,361
Subsidiary Senior Unsecured Notes													1,050		750												1,800
YUM Senior Unsecured Notes	350		350				325				600								$	800	$	1,050	$	325	$	275	4,075

Total	$	371	$	455	$	424	$	1,626	$	36	$	2,452	$	1,971	$	756	$	571	$	800	$	1,050	$	325	$	275	$	11,112

Securitization Notes include four series of senior secured notes issued by Taco Bell Funding, LLC (the “Issuer”) totaling $2.9 billion with fixed interest rates ranging from 4.318% to 4.970%. The Securitization Notes are secured by substantially all of the

assets of the Issuer and the Issuer’s special purpose, wholly-owned subsidiaries (collectively with the Issuer, the “Securitization Entities”), and include a lien on all existing and future U.S. Taco Bell franchise and license agreements and the royalties payable thereunder, existing and future U.S. Taco Bell intellectual property, certain transaction accounts and a pledge of the equity interests in asset-owning Securitization Entities. The Securitization Notes contain cross-default provisions whereby the failure to pay principal on any outstanding Securitization Notes will constitute an event of default under any other Securitization Notes.

Credit Agreement includes senior secured credit facilities consisting of a $441 million Term Loan A facility (the “Term Loan A Facility"), a $1.9 billion Term Loan B facility (the “Term Loan B Facility”) and a $1.0 billion revolving facility (the “Revolving Facility”) issued by the Borrowers. Our Revolving Facility was undrawn as of September 30, 2020. The interest rates applicable to the Credit Agreement range from 1.25% to 1.75% plus LIBOR or from 0.25% to 0.75% plus the Base Rate, at the Borrowers’ election, based upon the total net leverage ratio of the Borrowers and the Specified Guarantors (as defined in the Credit Agreement). Our Term Loan A Facility and Term Loan B Facility contain cross-default provisions whereby the failure to pay principal of or otherwise perform any agreement or condition under indebtedness of certain subsidiaries with a principal amount in excess of $100 million will constitute an event of default under the Credit Agreement.

Subsidiary Senior Unsecured Notes include $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes due 2026 and $750 million aggregate principal amount of 4.75% Subsidiary Senior Unsecured Notes due 2027. Our Subsidiary Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of the indebtedness of certain subsidiaries with a principal amount in excess of $100 million or the failure to pay principal of such indebtedness will constitute an event of default under the Subsidiary Senior Unsecured Notes.

YUM Senior Unsecured Notes include eight series of senior unsecured notes issued by Yum! Brands, Inc. totaling $4.1 billion with fixed interest rates ranging from 3.625% to 7.75%. Our YUM Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of any of our indebtedness or the failure to pay principal of such indebtedness above certain thresholds will constitute an event of default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates, including the impact on our interest rate swaps. As of September 30, 2020, our interest rate swaps expiring in July 2021 had notional amounts of $1.55 billion and our interest rate swaps expiring in March 2025 had notional amounts of $1.5 billion. These interest rate swaps are designated cash flow hedges. We do not anticipate the impact of adopting this standard will be material to our Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes during the quarter ended September 30, 2020 to the disclosures made in Item 7A of the Company’s 2019 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the report.

Changes in Internal Control

There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended September 30, 2020.

Forward-Looking Statements

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “seek,” “project,” “model,” “ongoing,” “will,” “should,” “forecast,” “outlook” or similar terminology. Forward-looking statements are based on our current expectations, estimates, assumptions and/or projections, our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those indicated by those statements. There can be no assurance that our expectations, estimates, assumptions and/or projections will be achieved. Factors that could cause actual results and events to differ materially from our expectations and forward-looking statements include (i) the factors described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2 of this report, (ii) any risks and uncertainties described in the Risk Factors included in Part II, Item 1A of this report, (iii) the factors described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the year ended December 31, 2019 and (iv) the risks and uncertainties described in the Risk Factors included in Part I, Item 1A of our Form 10-K for the year ended December 31, 2019. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We are not undertaking to update any of these statements.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Yum! Brands, Inc.:

Results of Review of Interim Financial Information

We have reviewed the condensed consolidated balance sheet of Yum! Brands, Inc. and subsidiaries (YUM) as of September 30, 2020, the related condensed consolidated statements of income, comprehensive income and shareholders’ deficit for the quarter and year-to-date periods ended September 30, 2020 and 2019, the related condensed consolidated statements of cash flows for the year-to-date periods ended September 30, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of YUM as of December 31, 2019, and the related consolidated statements of income, comprehensive income, shareholders’ deficit, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of YUM’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to YUM in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Louisville, Kentucky

November 5, 2020

PART II – OTHER INFORMATION AND SIGNATURES

Item 1. Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.

Item 1A. Risk Factors

We face a variety of risks that are inherent in our business and our industry, including operational, legal, regulatory and product risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. Information about our most significant risk factors is disclosed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. There has been no material change to this information, except for the updated discussion related to the novel coronavirus, COVID-19, included below.

The novel coronavirus (COVID-19) global pandemic has had and is expected to continue to have an adverse effect on our business and results of operations.

In late 2019, COVID-19 was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. Throughout 2020, COVID-19 has spread throughout the U.S. and the rest of the world and governmental authorities have implemented measures to reduce the spread of COVID-19. These measures include restrictions on travel outside the home or other limitations on business and other activities, as well as encouraging social distancing. Moreover, COVID-19 cases have recently been increasing in the U.S. and various other regions of the world in which we have operations, which has resulted in some governmental authorities, including some in Western Europe, re-imposing restrictions on business and other activities that were previously lifted or reduced. As a result of COVID-19, we and our franchisees have experienced significant store closures and instances of reduced and limited store-level operations, including reduced operating hours and full or partial dining-room closures.

We are unable to fully predict the impact that COVID-19 will have on our and our franchisees' operations going forward due to various uncertainties, including the severity and duration of the outbreak, the timing and availability of effective medical treatments and vaccines, the extent to which COVID-19 may cause customers to continue to be reluctant to return to in- restaurant dining or otherwise change their consumption patterns, additional actions that may be taken by governmental authorities, and the length and severity of ongoing negative economic conditions in the U.S. and globally arising from the pandemic. However, developments related to COVID-19 have had and are expected to continue to have an adverse effect on our business and results of operations. These potential impacts include the ongoing loss of revenues due to continued or increased dining room closures and other restrictions on our business and operations, continued delays in reopening or permanent closures of the approximately 1,000 restaurants that were closed as of October 29, 2020 due to COVID-19, or additional temporary or permanent closures that may arise in the future. Additionally, we and our franchisees have made operational changes intended to safeguard employees and customers in response to COVID-19, including increased cleaning and sanitization, installation of counter screens and purchasing personal protective equipment, which have increased and may continue to increase restaurant operating costs and impact restaurant-level margins. Our and our franchisees' restaurants may experience interruptions of food and other supplies as well as labor shortages as a result of COVID-19, thereby disrupting our and our franchisee's operations and impacting same-store sales negatively.

Our success is heavily reliant on our Concepts' franchisees, and the COVID-19 pandemic has caused and may continue to cause financial distress for certain franchisees, particularly those located in areas most significantly impacted by the pandemic. As a result of this distress, our franchisees may not be able to meet their financial obligations to us as they come due, including the payment of royalties, rent, or other amounts due to the Company. This has led to, and may continue to lead to, write-offs of amounts we have currently due from our franchisees beyond amounts we have reserved, as well as decreased future collections from franchisees. Additionally, in certain instances, we have offered grace periods to our franchisees who are in good standing with the Company and need greater access to capital for certain near-term payments due to us. Such grace periods have negatively impacted, and may continue to negatively impact, the Company's cash flows in the near-term and there is no guarantee that our franchisees will ultimately pay amounts due. Additionally, our franchisees may not be able to make payments to landlords, distributors and key suppliers, as well as payments to service any debt they may have outstanding. Franchisee financial distress has also led to, and may continue to lead to, permanent store closures and delayed or reduced new franchisee development, which may further harm our results and liquidity. Further, in some cases, we are contingently liable for franchisee lease obligations, and a failure by a franchisee to perform its obligations under such lease could result in direct payment obligations for YUM.

Moreover, if conditions related to the pandemic result in significant disruptions to capital and financial markets, or negatively impact our credit ratings, our cost of borrowing, our ability to access capital on favorable terms and our overall liquidity could be adversely impacted. Finally, if negative economic conditions arising from the pandemic persist and continue to adversely affect our business, this could give rise to an impairment in the value of our tangible or intangible assets, in addition to the goodwill impairment charge we incurred with respect to our Habit Burger Grill reporting unit in the first quarter of 2020.

To the extent the COVID-19 pandemic continues to adversely affect the business and financial results of us and our franchisees, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those relating to our high level of indebtedness, cybersecurity and our increasing dependence on digital commerce, supply chain interruptions and changes in labor and other operating costs.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2020 we did not repurchase shares of Common Stock. During the first quarter of 2020 as a result of the ongoing uncertainty regarding the evolving COVID-19 pandemic, the Company suspended its previously announced Share Repurchase Program, pursuant to which the Company's Board of Directors authorized repurchases of up to $2 billion of the Company's Common Stock through June 30, 2021. We ended this suspension in July of 2020 and resumed share repurchases beginning in the fourth quarter of 2020.

Item 6. Exhibits

(a)

Exhibit Index

Exhibit No.

Exhibit Description

4.1

Indenture, dated as of September 25, 2020, by and between the Company and U.S. Bank National Association, as trustee (incorporated by reference to E xhibit 4.1 of the Company's Current Report on Form 8-K filed on September 25, 2020 ).

4.2

First Supplemental Indenture, dated as of September 25, 2020, by and between the Company and U.S. Bank National Association, as trustee, relating to the Company's 3.625% Senior Notes due March 15, 2031 (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed on September 25, 2020 ).

Letter from KPMG LLP regarding Unaudited Interim Financial Information (Acknowledgement of Independent Registered Public Accounting Firm)

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized officer of the registrant.


			YUM! BRANDS, INC.
			(Registrant)


Date:	November 5, 2020	/s/ David E. Russell
		Senior Vice President, Finance and Corporate Controller
		(Principal Accounting Officer)