Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. 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 Consolidated Financial Statements (“Financial Statements”) in Item 8 and the Forward-Looking Statements and the Risk Factors set forth in Item 1A. 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, primarily under the concepts of KFC, Pizza Hut, Taco Bell and The Habit Burger Grill (collectively, the "Concepts"). The Company's KFC, Pizza Hut and Taco Bell brands are global leaders of the chicken, pizza and Mexican-style food categories, respectively. The Habit Burger Grill, a concept we acquired on March 18, 2020, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 50,000 restaurants, 98% are operated by franchisees.

As of December 31, 2020, YUM consists of four operating segments:

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

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

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

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

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

Our Recipe for Growth is based on four key drivers:

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

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

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

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

Our global citizenship and sustainability strategy, called the Recipe for Good, reflects our priorities for socially responsible growth, risk management and sustainable stewardship of our people, food and planet.

On October 11, 2016, YUM announced our transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands (“YUM's Strategic Transformation Initiatives”) following the spin-off of our China business into an independent publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). At this time, we established transformation goals to be met by the end of 2019 including becoming:

  • More Focused. By focusing on four growth drivers similar to those that make up our Recipe for Growth above we accelerated system sales growth to 8% in 2019 (excluding the impacts of the 53rd week and foreign currency translation).

  • More Franchised. The Company successfully increased franchise restaurant ownership to 98% as of the end of 2018.

  • More Efficient. The Company revamped its financial profile, improving the efficiency of its organization and cost structure globally, by:

  • Reducing annual capital expenditures associated with Company-operated restaurant maintenance and other projects and funded additional capital for new Company units through the refranchising of existing Company units. Capital spending in 2019 net of refranchising proceeds was $86 million.

  • Lowering General and administrative expenses ("G&A") to 1.7% of system sales in 2019; and

  • Maintaining an optimized capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) net leverage.

From 2017 through 2019, we returned $6.5 billion to shareholders through share repurchases and cash dividends. We funded these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our ~5.0x EBITDA consolidated net leverage. We generated pre-tax proceeds of $2.8 billion through our refranchising initiatives to achieve targeted franchise ownership of 98%. Refer to the Liquidity and Capital Resources section of this MD&A for additional details.

As a result of the impacts on our business due to the COVID-19 pandemic, certain measures we established as part of our transformation goals were negatively impacted in 2020. For the full year 2020, G&A, excluding the impact of Special Items, represented 1.9% of consolidated system sales, primarily due to sales pressures resulting from the COVID-19 pandemic. While we took certain austerity measures to reduce G&A spending such as lower travel related costs and a reduction of our Chief Executive Officer's salary, these reductions were offset by accelerated digital and technology spending to enhance our customer experience and off-premise capabilities. We expect our G&A as a percentage of consolidated system sales to move back toward our historical target of 1.7% as sustained growth resumes. Additionally, during 2020 our EBITDA was negatively impacted by the impacts of the COVID-19 pandemic, which increased our consolidated leverage, net of available cash. We currently estimate we will grow back into our ~5.0x EBITDA consolidated net leverage by second quarter 2021.

Going forward, we expect to:

  • Maintain a capital structure of ~5.0x EBITDA consolidated net leverage;

  • Invest capital in a manner consistent with an asset light, franchisor model; and

  • Allocate G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives.

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, including those temporarily closed. From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues. Throughout 2020 we had a significant number of restaurants that were temporarily closed, including restaurants closed due to government and landlord restrictions, as a result of COVID-19. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends. In 2020, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of our acquisition of The Habit Restaurants, Inc. on March 18, 2020, and that were open for one year or more. In 2019, when calculating same-store sales growth we also included in our prior year base the sales of stores that were added as a result of the Telepizza strategic alliance in December 2018 and that were open for one year or more. See additional discussion of the acquisition of The Habit Restaurants, Inc. and Telepizza strategic alliance within this MD&A.

  • 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, System sales excluding the impacts of foreign currency translation ("FX"), and System sales excluding FX and the impact of the 53rd week in 2019 for our U.S. subsidiaries and certain international subsidiaries that operate on a weekly period calendar. System sales 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 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 and Core Operating Profit excluding the impact of the 53rd week in 2019. 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.

For 2019 we provided Core Operating Profit excluding the impact of the 53rd week and System sales excluding FX and the impact of the 53rd week to further enhance the comparability given the 53rd week that was part of our fiscal calendar in 2019.

Results of Operations

Summary

All comparisons within this summary are versus the same period a year ago and unless otherwise stated include the impact of a 53rd week in 2019. For discussion of our results of operations for 2019 compared to 2018, refer to 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 fiscal year ended December 31, 2019, filed with the SEC on February 19, 2020.

For 2020, GAAP diluted EPS decreased 29% to $2.94 per share, and diluted EPS, excluding Special Items, increased 2% to $3.62 per share.

2020 financial highlights:

% Change
System Sales, ex FXSame-Store SalesNet New UnitsGAAP Operating ProfitCore Operating Profit
KFC Division(5)(9)+4(12)(12)
Pizza Hut Division(7)(6)(6)(9)(9)
Taco Bell DivisionEven(1)+1+2+2
Worldwide(4)(6)Even(22)(8)
Results Excluding 53rd Week in 2019 (% Change)
System Sales, ex FXCore Operating Profit
KFC Division(5)(11)
Pizza Hut Division(6)(8)
Taco Bell Division+1+4
Worldwide(3)(7)

Additionally:

  • During the year, net units increased by 183 units (including our acquisition of The Habit Burger Grill in the first quarter of 2020).

  • During the year, we repurchased 2.4 million shares totaling $250 million at an average price of $103.

  • During the year, we recognized pre-tax investment income of $69 million related to the change in fair value of our investment in Grubhub, Inc. common stock that we sold in the third quarter of 2020, which added $0.17 to diluted EPS for the year. When coupled with $77 million of pre-tax investment expense in 2019, which resulted in a negative $0.19 impact to diluted EPS, our Grubhub investment favorably impacted year-over-year diluted EPS growth by $0.36.

  • Foreign currency translation impacted Divisional Operating Profit unfavorably for the year by $9 million.

Worldwide

GAAP Results

Amount% B/(W)
20202019201820202019
Company sales$1,810$1,546$2,00017(23)
Franchise and property revenues2,5102,6602,482(6)7
Franchise contributions for advertising and other services1,3321,3911,206(4)15
Total revenues$5,652$5,597$5,6881(2)
Restaurant profit$304$311$366(2)(15)
Restaurant margin %16.8%20.1%18.3%(3.3)ppts.1.8ppts.
G&A expenses$1,064$917$895(16)(2)
Franchise and property expenses145180188204
Franchise advertising and other services expense1,3141,3681,2084(13)
Refranchising (gain) loss(34)(37)(540)(9)(93)
Other (income) expense15447NMNM
Operating Profit$1,503$1,930$2,296(22)(16)
Investment (income) expense, net(74)67(9)NMNM
Other pension (income) expense14414NM71
Interest expense, net543486452(12)(8)
Income tax provision11679297(48)74
Net Income$904$1,294$1,542(30)(16)
Diluted EPS(a)$2.94$4.14$4.69(29)(12)
Effective tax rate11.4%5.7%16.2%(5.7)ppts.10.5ppts.

(a)See Note 4 for the number of shares used in this calculation.

Performance Metrics

% Increase (Decrease)
Unit Count20202019201820202019
Franchise49,25549,25747,268—4
Company-owned1,098913856207
Total50,35350,17048,124—4
202020192018
Same-Store Sales Growth (Decline) %(6)32
System Sales Growth (Decline) %, reported(4)75
System Sales Growth (Decline) %, excluding FX(4)95
System Sales Growth (Decline) %, excluding FX and 53rd week(3)8N/A

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

Year
202020192018
Consolidated
GAAP Company sales(a)$1,810$1,546$2,000
Franchise sales48,54951,03847,237
System sales50,35952,58449,237
Foreign Currency Impact on System sales(b)(199)(1,169)N/A
System sales, excluding FX50,55853,75349,237
Impact of 53rd weekN/A454N/A
System sales, excluding FX and 53rd Week$50,558$53,299$49,237
KFC Division
GAAP Company sales(a)$506$571$894
Franchise sales25,78327,32925,345
System sales26,28927,90026,239
Foreign Currency Impact on System sales(b)(192)(898)N/A
System sales, excluding FX26,48128,79826,239
Impact of 53rd weekN/A167N/A
System sales, excluding FX and 53rd Week$26,481$28,631$26,239
Pizza Hut Division
GAAP Company sales(a)$76$54$69
Franchise sales11,87912,84612,143
System sales11,95512,90012,212
Foreign Currency Impact on System sales(b)(5)(259)N/A
System sales, excluding FX11,96013,15912,212
Impact of 53rd weekN/A103N/A
System sales, excluding FX and 53rd Week$11,960$13,056$12,212
Taco Bell Division
GAAP Company sales(a)$882$921$1,037
Franchise sales10,86310,8639,749
System sales11,74511,78410,786
Foreign Currency Impact on System sales(b)(2)(12)N/A
System sales, excluding FX11,74711,79610,786
Impact of 53rd weekN/A184N/A
System sales, excluding FX and 53rd Week$11,747$11,612$10,786
Habit Burger Grill Division(c)
GAAP Company sales(a)$346N/AN/A
Franchise sales24N/AN/A
System sales370N/AN/A
Foreign Currency Impact on System sales(b)—N/AN/A
System sales, excluding FX$370N/AN/A

(a)Company sales represents sales from our Company-operated stores as presented on our 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 prior to adjustment for the prior year FX impact.

(c)System sales for the Habit Burger Grill Division is shown since our March 18, 2020 acquisition date.

Non-GAAP Items
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
202020192018
Core Operating Profit Growth %(8)12—
Core Operating Profit Growth %, excluding 53rd week(7)11N/A
Diluted EPS Growth %, excluding Special Items2127
Effective Tax Rate excluding Special Items15.9%19.8%20.4%
Year
Detail of Special Items202020192018
Refranchising gain (loss)(a)$8$12$540
Costs associated with acquisition and integration of Habit Burger Grill (See Note 3)(9)(1)—
Impairment of Habit Burger Grill goodwill (See Note 3)(144)——
Unlocking Opportunity Initiative contribution (See Note 5)(50)——
COVID-19 relief contribution (See Note 5)(25)——
Charges associated with resource optimization (See Note 5)(36)——
Costs associated with Pizza Hut U.S. Transformation Agreement(b)(5)(13)(6)
YUM's Strategic Transformation Initiatives(c)——(8)
Other Special Items Income (Expense)(d)(6)(9)4
Special Items Income (Expense) - Operating Profit(267)(11)530
Charges associated with resource optimization - Other Pension Expense (See Note 5)(2)——
Interest expense, net(d) (See Note 5)(34)(2)—
Special Items Income (Expense) before Income Taxes(303)(13)530
Tax Benefit (Expense) on Special Items(e)65(30)(96)
Tax Benefit - Intra-entity transfer of intellectual property(f)28226—
Tax Benefit - U.S. Tax Act(g)——66
Special Items Income (Expense), net of tax$(210)$183$500
Average diluted shares outstanding307313329
Special Items diluted EPS$(0.68)$0.59$1.52
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week
Consolidated
GAAP Operating Profit$1,503$1,930$2,296
Special Items Income (Expense) - Operating Profit(267)(11)530
Foreign Currency Impact on Divisional Operating Profit(h)(9)(46)N/A
Core Operating Profit1,7791,9871,766
Impact of 53rd WeekN/A24N/A
Core Operating Profit, excluding 53rd Week$1,779$1,963$1,766
KFC Division
GAAP Operating Profit$922$1,052$959
Foreign Currency Impact on Divisional Operating Profit(h)(9)(39)N/A
Core Operating Profit9311,091959
Impact of 53rd WeekN/A8N/A
Core Operating Profit, excluding 53rd Week$931$1,083$959
Pizza Hut Division
GAAP Operating Profit$335$369$348
Foreign Currency Impact on Divisional Operating Profit(h)—(7)N/A
Core Operating Profit335376348
Impact of 53rd WeekN/A3N/A
Core Operating Profit, excluding 53rd Week$335$373$348
Taco Bell Division
GAAP Operating Profit$696$683$633
Foreign Currency Impact on Divisional Operating Profit(h)——N/A
Core Operating Profit696683633
Impact of 53rd WeekN/A13N/A
Core Operating Profit, excluding 53rd Week$696$670$633
Habit Burger Grill Division
GAAP Operating Profit$(22)N/AN/A
Foreign Currency Impact on Divisional Operating Profit(h)—N/AN/A
Core Operating Profit$(22)N/AN/A
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items
Diluted EPS$2.94$4.14$4.69
Special Items Diluted EPS(0.68)0.591.52
Diluted EPS excluding Special Items$3.62$3.55$3.17
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items
GAAP Effective Tax Rate11.4%5.7%16.2%
Impact on Tax Rate as a result of Special Items(e)(f)(g)(4.5)%(14.1)%(4.2)%
Effective Tax Rate excluding Special Items15.9%19.8%20.4%

(a)Due to their size and volatility 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 2020 as Special Items primarily include true-ups to refranchising gains and losses recorded prior to December 31, 2018. Refranchising gains and losses recorded during 2019 as Special Items primarily include gains or losses associated with sales of underlying real estate associated with stores that were franchised as of December 31, 2018, or true-ups to refranchising gains and losses recorded prior to December 31, 2018.

During the years ended December 31, 2020, 2019 and 2018, we recorded net refranchising gains of $8 million, $12 million and $540 million, respectively, that have been reflected as Special Items.

Additionally, during the years ended December 31, 2020, and 2019 we recorded refranchising gains of $26 million and $25 million, respectively, that have not been reflected as Special Items as such amounts are considered indicative of our expected ongoing refranchising activity. These net gains relate to the refranchising of restaurants in 2020 and 2019 that were not part of our aforementioned plans to achieve 98% franchise ownership.

(b)In May 2017, we reached an agreement with our Pizza Hut U.S. franchisees that improved brand marketing alignment, accelerated enhancements in operations and technology and that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees. In connection with this agreement, we recognized charges of $5 million, $13 million and $6 million in the years ended December 31, 2020, 2019 and 2018, respectively, related to operating investments required as part of this agreement. The majority of these costs were recorded within Franchise and property expenses. Based on their nature and the significance in related spending in 2017, these charges have been reflected as Special Items.

(c)In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated spin-off of our China business (the "Separation") on October 31, 2016, into an independent, publicly-traded company under the name of Yum China Holdings, Inc. ("Yum China"). Major features of the Company’s strategic transformation plans involved being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. We incurred charges of $8 million related to our Strategic Transformation Initiatives in the year ended December 31, 2018, primarily recorded in G&A, including contract termination costs and relocation and severance costs for restaurant-support center employees. Due to the scope of these initiatives as well as the significance in related spending in 2017 and 2016, these charges were recognized 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)Tax Benefit (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. Additionally, we increased our Income tax provision by $34 million in the fourth quarter of 2019 to record a reserve against and by $19 million in the second quarter of 2018 to correct an error related to the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item.

(f)In the fourth quarter of 2019, we completed intra-entity transfers of certain intellectual property rights. As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom (“UK”), we received a step-up in tax basis to current fair value under applicable tax law. To the extent this step-up in tax basis will be amortizable against future taxable income, we recognized one-time deferred tax benefits of $3 million and $226 million as a Special Item in the quarters ended December 31, 2020 and December 31, 2019, respectively. 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. This remeasurement resulted in the recognition of an additional $25 million deferred tax benefit as a Special Item in the quarter ended September 30, 2020.

(g)In 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") that was reported as a Special Item. We also recorded a Special Items tax benefit of $31 million in 2018 related to 2018 U.S. foreign tax credits that became realizable directly as a result of the impact of deemed repatriation tax expense associated with the Tax Act.

(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 Operating Profit, prior to adjustment for the prior year FX impact.

Items Impacting Reported Results and/or 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 M&DA 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 year ended December 31, 2020, as evidenced by our worldwide same-store sales decline of 6%. 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. From that date, temporarily closed restaurants gradually reopened until, as of the end of our third quarter, we had approximately 1,100 units temporarily closed. We continued to see reopenings through the balance of the fourth-quarter; however, due to the second-wave impacts of COVID-19, including increased government restrictions, temporary closures climbed back to approximately 1,000 as of February 4, 2021. As a result, roughly 98% of our system is currently open in a full or limited capacity. Geographies experiencing temporary closures have evolved and we are now seeing more closures in Europe, Canada and the Middle East, offset by some re-openings in Latin America and India. Assets located in malls, transportation centers, airports and other similar locations continue to be pressured, making up many of the temporary closures. In addition to the loss of sales due to restaurants being temporarily closed, we have also lost sales due to the significant number of our open restaurants subject to dining room closures or other limitations on access. We have been able to mitigate 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. Our worldwide same-store sales decline of 1% for the fourth quarter of 2020 represents an improvement from the same-store sales declines of 7%, 15% and 2% in the respective first, second and third quarters of 2020.

The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company's 2021 results. 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. In addition, for our restaurants that prominently feature drive-thru, carryout and delivery options, COVID-19 has in many cases contributed to an increase in sales during 2020. If the impact of COVID-19 recedes, in-person dining restrictions are lifted or lessened and the restaurant industry in general returns to more normal operations, the benefits to sales experienced by certain of our restaurants, including our Pizza Hut delivery restaurants, could wane and our results could be negatively impacted. As 98% of our restaurants are operated by approximately 2,000 independent franchisees across the world, we are closely monitoring the impact of COVID-19 on our franchisees' financial condition.

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 contributed to fewer new restaurant openings and increased permanent restaurant closures during 2020 versus both our recent history and expectations. In addition to permanent closures due to the impacts of COVID-19, the Pizza Hut system also experienced increased permanent closures of certain asset types primarily due to business model pressures as discussed in the following paragraph. For the year ended December 31, 2020, our Concepts collectively opened 2,423 new units while permanently closing 2,516 units.

While net new unit growth at each of KFC, Taco Bell and The Habit Burger Grill was lower than expected in 2020, each Concept realized positive net new unit growth for the year. Pizza Hut experienced a net new unit decline of 1,064 restaurants in

2020, largely due to 1,745 global closures, including 867 closures in the U.S., nearly 300 of which were stores operated by NPC International, Inc. ("NPC") as discussed in the following paragraph. These global closures, which were largely underperforming or low volume 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 2021.

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. In January 2021, Flynn Restaurant Group, an existing YUM franchisee, announced its intention to acquire NPC’s approximately 950 remaining Pizza Hut U.S. restaurants.

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 years ended December 31, 2020, 2019 and 2018, we recognized pre-tax investment income of $69 million, pre-tax investment expense of $77 million and pre-tax investment income of $14 million, respectively.

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 December 31, 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 December 31, 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 the year ended December 31, 2020. Consolidated system sales in 2020, excluding the impact of FX and the lapping of the 53rd week in 2019, were positively impacted by one percentage point due to the inclusion of Habit Burger Grill while consolidated same-store sales results were not 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 year ended December 31, 2020, of approximately $0.36. See Note 3.

Extra Week in 2019

Fiscal 2019 included a 53rd week for all of our U.S. and certain international subsidiaries that operate on a period calendar. See Note 2 for additional details related to our fiscal calendar. The following table summarizes the estimated impact of the 53rd week on Revenues and Operating Profit for the year ended December 31, 2019. The 53rd week in 2019 favorably impacted Diluted EPS by $0.05 per share.

KFC DivisionPizza Hut DivisionTaco Bell DivisionTotal
Revenues
Company sales$8$1$15$24
Franchise and property revenues951024
Franchise contributions for advertising and other services55818
Total revenues$22$11$33$66
Operating Profit
Franchise and property revenues$9$5$10$24
Franchise contributions for advertising and other services55818
Restaurant profit1—56
Franchise and property expenses—(1)—(1)
Franchise advertising and other services expenses(5)(5)(8)(18)
G&A expenses(2)(1)(2)(5)
Operating Profit$8$3$13$24

KFC Division

The KFC Division has 25,000 units, 84% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of the end of 2020.

% B/(W)% B/(W)
20202019
202020192018ReportedEx FXEx FX and 53rd Week in 2019ReportedEx FXEx FX and 53rd Week in 2019
System Sales$26,289$27,900$26,239(6)(5)(5)6109
Same-Store Sales Growth %(9)N/AN/A4N/AN/A
Company sales$506$571$894(11)(9)(8)(36)(33)(34)
Franchise and property revenues1,2951,3901,294(7)(6)(5)71110
Franchise contributions for advertising and other services471530456(11)(10)(9)162120
Total revenues$2,272$2,491$2,644(9)(8)(7)(6)(2)(3)
Restaurant profit$67$87$119(24)(24)(22)(26)(23)(24)
Restaurant margin %13.2%15.3%13.3%(2.1)ppts.(2.4)ppts.(2.4)ppts.2.0ppts.2.0ppts.2.0ppts.
G&A expenses$346$346$350—(1)(1)1(1)(1)
Franchise and property expenses9189107(2)(2)(3)171313
Franchise advertising and other services expense4655204521198(15)(20)(19)
Operating Profit$922$1,052$959(12)(12)(11)101413
% Increase (Decrease)
Unit Count20202019201820202019
Franchise24,71023,75922,29747
Company-owned290345324(16)6
Total25,00024,10422,62147

Company sales and Restaurant margin percentage

In 2020, the decrease in Company sales, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by refranchising and company same-store sales declines of 6%, partially offset by net new unit growth.

In 2020, the decrease in Restaurant margin percentage was driven by transaction declines and increased restaurant costs, including one-time bonuses and other costs incurred as a result of COVID-19, partially offset by the favorable impact of higher guest check.

Franchise and property revenues

In 2020, the decrease in Franchise and property revenues, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by franchise same-store sales declines of 9%, partially offset by net new unit growth.

G&A

In 2020, the increase in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by higher professional fees, higher share-based compensation and higher salaries, partially offset by lower travel related costs and lower incentive compensation.

Operating Profit

In 2020, the decrease in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by same-store sales declines, partially offset by net new unit growth.

Pizza Hut Division

The Pizza Hut Division has 17,639 units, 63% of which are located outside the U.S. Over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2020. 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.

On December 30, 2018, the Company consummated a strategic alliance with Telepizza Group S.A. (“Telepizza”), to be the master franchisee of Pizza Hut in Latin America and portions of Europe, which added approximately 1,300 Telepizza units to our Pizza Hut Division unit count on December 30, 2018. The addition of the Telepizza units positively impacted 2019 Pizza Hut Division system sales growth, excluding the impacts of foreign currency and 53rd week, by 5 percentage points. The impact to Operating Profit for the year ended December 31, 2019, as a result of the strategic alliance was not significant.

% B/(W)% B/(W)
20202019
202020192018ReportedEx FXEx FX and 53rd Week in 2019ReportedEx FXEx FX and 53rd Week in 2019
System Sales$11,955$12,900$12,212(7)(7)(6)687
Same-Store Sales Growth (Decline) %(6)N/AN/A—N/AN/A
Company sales$76$54$69424142(23)(21)(21)
Franchise and property revenues552597598(8)(8)(7)—11
Franchise contributions for advertising and other services374376321(1)(1)1171816
Total revenues$1,002$1,027$988(2)(2)(1)454
Restaurant profit$3$3$—726769NMNMNM
Restaurant margin %5.1%4.2%(0.1)%0.9ppts.0.7ppts.0.8ppts.4.3ppts.4.2ppts.4.1ppts.
G&A expenses$215$202$197(7)(7)(8)(2)(3)(2)
Franchise and property expenses173945565654121113
Franchise advertising and other services expense365367328——(1)(12)(12)(11)
Operating Profit$335$369$348(9)(9)(8)687
% Increase (Decrease)
Unit Count20202019201820202019
Franchise17,55918,60318,369(6)1
Company-owned8010062(20)61
Total17,63918,70318,431(6)1

Company sales

In 2020, the increase in Company sales, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by the acquisition of stores in the UK in the quarter ended September 30, 2019, and company same-store sales growth of 4%.

Franchise and property revenues

In 2020, the decrease in Franchise and property revenues, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by franchise same-store sales declines of 6% and net new unit declines.

G&A

In 2020, the increase in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by higher share-based compensation, higher professional fees, higher incentive compensation and higher headcount, partially offset by lower travel related costs.

Operating Profit

In 2020, the decrease in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by same-store sales declines, higher G&A, net new unit declines, 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 7,427 units, 92% of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of the end of 2020.

% B/(W)% B/(W)
20202019
202020192018ReportedEx FXEx FX and 53rd Week in 2019ReportedEx FXEx FX and 53rd Week in 2019
System Sales$11,745$11,784$10,786——1998
Same-Store Sales Growth %(1)N/AN/A5N/AN/A
Company sales$882$921$1,037(4)(4)(3)(11)(11)(13)
Franchise and property revenues662673590(2)(2)—141412
Franchise contributions for advertising and other services487485429——2131311
Total revenues$2,031$2,079$2,056(2)(2)(1)11—
Restaurant profit$225$221$244224(9)(9)(11)
Restaurant margin %25.5%24.0%23.5%1.5ppts.1.5ppts.1.6ppts.0.5ppts.0.5ppts.0.4ppts.
G&A expenses$158$181$177131312(2)(3)(2)
Franchise and property expenses333828161515(33)(33)(32)
Franchise advertising and other services expense484481428(1)(1)(2)(12)(12)(11)
Operating Profit$696$683$633224886
% Increase (Decrease)
Unit Count20202019201820202019
Franchise6,9526,8956,60214
Company-owned4754684701—
Total7,4277,3637,07214

Company sales and Restaurant margin percentage

In 2020, the decrease in Company Sales, excluding the impact of lapping the 53rd week in 2019, was driven by company same-store sales declines of 3% and refranchising offset by net new unit growth.

In 2020, the 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

In 2020, Franchise and property revenues were flat for the year, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, as net new unit growth was offset by franchise same-store sales declines of 1%.

G&A

In 2020, the decrease in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by lower incentive compensation, lower travel related costs, decreased professional fees and decreased salaries, partially offset by higher share-based compensation.

Operating Profit

In 2020, the increase in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2019, was driven by lower G&A costs, net new unit growth and lower restaurant operating costs partially offset by same-store sales declines and higher restaurant asset impairment charges.

Habit Burger Grill Division

The Habit Burger Grill Division has 287 units, the vast majority of which are in the U.S. The Company owned 91% of the Habit Burger Grill units in the U.S. as of December 31, 2020. From March 18, 2020, the date we acquired The Habit Burger Grill, through December 31, 2020, we reported a same-store sales decline of 11%. Total revenues and Operating loss were $347 million and $22 million, respectively, for the period from March 18, 2020 through December 31, 2020. During this period we also opened 14 gross new restaurants.

Corporate & Unallocated

% B/(W)
(Expense)/Income20202019201820202019
Corporate and unallocated G&A$(312)$(188)$(171)(66)(10)
Unallocated Company restaurant expenses——3NM(95)
Unallocated Franchise and property expenses(4)(14)(8)68(72)
Unallocated Refranchising gain (loss) (See Note 5)3437540(9)(93)
Unallocated Other income (expense)(146)(9)(8)NMNM
Investment income (expense), net (See Note 5)74(67)9NMNM
Other pension income (expense) (See Note 15)(14)(4)(14)NM71
Interest expense, net(543)(486)(452)(12)(8)
Income tax provision (See Note 18)(116)(79)(297)(48)74
Effective tax rate (See Note 18)11.4%5.7%16.2%(5.7)ppts.10.5ppts.

Corporate and unallocated G&A

In 2020, the increase in Corporate and unallocated G&A expense was driven by charitable contributions of $50 million related to our “Unlocking Opportunity Initiative” and $25 million related to COVID-19 relief (see Note 5). The increase was also driven by costs associated with a voluntary early retirement program offered to our U.S. based employees and a related worldwide severance program (see Note 5), higher professional fees including costs associated with the acquisition of The Habit Burger Grill and higher share-based compensation, partially offset by lower expenses related to our incentive and deferred compensation programs.

Unallocated Franchise and property expenses

Unallocated Franchise and property expenses reflect charges related to the Pizza Hut U.S. Transformation Agreement and/or the KFC U.S. Acceleration Agreement.

Unallocated Other income (expense)

Unallocated Other income (expense) for the year ended December 31, 2020, includes a charge of $144 million related to the impairment of Habit Burger Grill goodwill (see Note 3). The year ended December 31, 2019, includes a settlement of contingent consideration charge of $8 million associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses (see Note 8).

Interest expense, net

The increase in Interest expense, net for 2020 was driven by increased outstanding borrowings and $34 million of premiums paid and other costs associated with extinguishment of debt (see Note 5), partially offset by a decrease in the rate on our floating rate debt.

Consolidated Cash Flows

Net cash provided by operating activities was $1,305 million in 2020 compared to $1,315 million in 2019. The decrease was largely driven by a decrease in Operating Profit before Special Items and higher charitable contributions reflected as Special Items, partially offset by lower advertising spending.

Net cash used in investing activities was $335 million in 2020 compared to $88 million in 2019. The increase was primarily driven by the acquisition of The Habit Restaurants, Inc. and lower refranchising proceeds in the current year, partially offset by proceeds from the sale of our investment in Grubhub, Inc. common stock and lower capital spending.

Net cash used in financing activities was $738 million in 2020 compared to $938 million in 2019. The decrease was primarily driven by lower share repurchases, partially offset by lower net borrowings.

Consolidated Financial Condition

Our Consolidated Balance Sheet was impacted by the acquisition of The Habit Restaurants, Inc. (See Note 3).

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash generated by operations and our revolving facilities. As of December 31, 2020, we had Cash and cash equivalents of $730 million. We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores. 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 in recent years 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.

We believe that our existing cash on hand, cash from operations and availability under our Revolving Facility (as defined below), will be sufficient to fund our operations, anticipated capital expenditures and debt repayment obligations over the next twelve months. Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM. Our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur and Company sales are paid in cash or by credit card (which is quickly converted into cash). Substantial amounts of cash received have historically been either returned to shareholders or invested in new restaurant assets which are non-current in nature. As part of our working capital strategy, we negotiate favorable credit terms with vendors and, as a result, our on-hand inventory turns faster than the related short-term liabilities. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations.

During 2020 net cash provided by operating activities was negatively impacted by lower Operating Profit due in large part to the impacts of the COVID-19 pandemic. In light of the impacts on our business from the COVID-19 pandemic, the Company took 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 both December 31, 2020 and September 30, 2020, our Revolving Facility was 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 December 31, 2020, approximately 93%, including the impact of interest rate swaps, of our $10.7 billion of total debt outstanding, excluding finance leases and debt issuance costs and discounts, 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 December 31, 2020.

202120222023202420252026202720282030203120372043Total
Securitization Notes$29$29$1,281$16$16$921$6$571$2,869
Credit Agreement7639520201,8362,347
Subsidiary Senior Unsecured Notes1,0507501,800
YUM Senior Unsecured Notes3503256008001,0503252753,725
Total$455$424$1,626$36$2,452$1,971$756$571$800$1,050$325$275$10,741

Securitization Notes include four 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 $431 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 December 31, 2020. The interest rates applicable to the Term Loan A Facility and Revolving Facility 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). The interest rates applicable to the Term Loan B Facility are 1.75% plus LIBOR or 0.75% plus the Base Rate, at the Borrowers' election. 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 seven series of senior unsecured notes issued by Yum! Brands, Inc. totaling $3.7 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.

See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes**.**

Contractual Obligations

Our significant contractual obligations and payments as of December 31, 2020, included:

TotalLess than 1 Year1-3 Years3-5 YearsMore than 5 Years
Long-term debt obligations(a)$14,037$945$2,993$3,249$6,850
Finance leases(b)1029191658
Operating leases(b)1,225128256218623
Purchase obligations(c)4732301416735
Benefit plans and other(d)19729363498
Total contractual obligations$16,034$1,341$3,445$3,584$7,664

(a)Amounts include maturities of debt outstanding as of December 31, 2020, and expected interest payments on those outstanding amounts on a nominal basis. The estimated interest payments related to the variable rate portion of our debt are based on current LIBOR interest rates. See Note 11.

(b)These obligations, which are shown on a nominal basis and represent the non-cancellable term of the lease, relate primarily to approximately 800 Company-owned restaurants and 350 units that we sublease land, building or both to our franchisees. See Note 12.

(c)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancellable without penalty. Purchase obligations relate primarily to marketing, information technology and supply agreements.

(d)Includes actuarially-determined timing of payments from our most significant unfunded pension plan as well as scheduled payments from our deferred compensation plan and other unfunded benefit plans where payment dates are determinable. This table excludes $37 million of future benefit payments for deferred compensation and other unfunded benefit plans to be paid upon separation of employee's service or retirement from the company, as we cannot reasonably estimate the dates of these future cash payments.

We sponsor noncontributory defined benefit pension plans covering certain salaried and hourly employees, the most significant of which are in the U.S. and UK. The most significant of the U.S. plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from our other significant U.S. plan are paid by the Company as incurred (see footnote (d) above). Our funding

policy for the Plan is to contribute annually amounts that will at least equal the minimum amounts required to comply with the Pension Protection Act of 2006. However, additional voluntary contributions are made from time-to-time to improve the Plan’s funded status. At December 31, 2020, the Plan was in a net underfunded position of $20 million. The UK pension plans were in a net overfunded position of $78 million at our 2020 measurement date.

We do not anticipate making any significant contributions to the Plan in 2021. Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumptions. Future changes in investment performance and corporate bond rates could impact our funded status and the timing and amounts of required contributions in 2021 and beyond.

Our post-retirement health care plan in the U.S. is not required to be funded in advance, but is pay as you go. We made post-retirement benefit payments of $3 million in 2020 and no future funding amounts are included in the contractual obligations table. See Note 15.

We have excluded from the contractual obligations table payments we may make for exposures for which we are self-insured, including workers’ compensation, employment practices liability, general liability, automobile liability, product liability and property losses (collectively “property and casualty losses”) and employee healthcare and long-term disability claims. The majority of our recorded liability for self-insured property and casualty losses and employee healthcare and long-term disability claims represents estimated reserves for incurred claims that have yet to be filed or settled. See Note 20.

We have not included in the contractual obligations table $64 million of liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities.

As discussed further in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement in India imposing a penalty on Yum! Restaurants India Private Limited of approximately Indian Rupee 11 billion, or approximately $150 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. The stay order remains in effect, and the next hearing is scheduled for March 24, 2021. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable.

Off-Balance Sheet Arrangements

See the Lease Guarantees section of Note 20 for discussion of our off-balance sheet arrangements.

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 December 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.

Critical Accounting Policies and Estimates

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results of operations and financial condition and cash flows in future years. A description of what we consider to be our most significant critical accounting policies follows.

Business Combinations

The acquisition of The Habit Restaurants, Inc. was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations. The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions to derive fair values and to complete the allocation. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at 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.

As discussed below, during the year ended December 31, 2020, we recorded an impairment charge related to Habit Burger Grill reporting unit goodwill resulting from the impacts of COVID-19 on substantially all Habit Burger grill restaurants. In the event that actual results further vary from any of the estimates or assumptions used in applying the acquisition method of accounting, we may be required to record an additional impairment charge or an increase in depreciation or amortization in future periods, or both.

See Note 3 for additional information about accounting for the acquisition of The Habit Restaurants, Inc.

Impairment or Disposal of Long-Lived Assets

We review long-lived assets of restaurants we intend to continue operating as Company restaurants (primarily PP&E, right-of-use operating lease assets and allocated intangible assets subject to amortization) annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We evaluate recoverability based on the restaurant’s forecasted undiscounted cash flows, which incorporate our best estimate of sales growth and margin improvement based upon our plans for the unit and actual results at comparable restaurants. For restaurant assets that are deemed to not be recoverable, we write-down the impaired restaurant to its estimated fair value. Key assumptions in the determination of fair value are the future after-tax cash flows of the restaurant, which are reduced by future royalties a franchisee would pay, and a discount rate. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the determination of a purchase price for the restaurant. Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions.

In each of the years ended December 31, 2019 and 2018 our primary indicator of potential impairment for our restaurant assets was two consecutive years of operating losses. For the year ended December 31, 2020, as a result of the impacts of the COVID-19 pandemic this indicator was expanded to include restaurants that were open less than two years with operating losses as of our annual impairment test. This expanded impairment indicator resulted in an increase in the number of store assets reviewed for potential impairment. As a result of our annual impairment review, we recognized store impairment charges of $12 million, which is presented within Other (income) expense in our Consolidated Statement of Income. The magnitude of the charges recorded during the year ended December 31, 2020, was not particularly sensitive to variations in fair value input as, in most situations, the fair value of the store assets, except the value of any right-of-use lease asset, if applicable, was fully impaired. Fair value estimates of right-of-use lease assets in such instances included an estimate of sublease income from a non-franchisee that could be reasonably obtained, which typically resulted in a partial impairment of the right-of-use lease assets.

We perform an impairment evaluation at a restaurant group level when it is more likely than not that we will refranchise restaurants as a group. Expected net sales proceeds are generally based on actual bids from the buyer, if available, or anticipated bids given the discounted projected after-tax cash flows for the group of restaurants. Historically, these anticipated bids have been reasonably accurate estimations of the proceeds ultimately received. The after-tax cash flows used in determining the anticipated bids incorporate reasonable assumptions we believe a franchisee would make such as sales growth and margin improvement as well as expectations as to the useful lives of the restaurant assets. These after-tax cash flows also include a deduction for the anticipated, future royalties we would receive under a franchise agreement with terms substantially at market entered into simultaneously with the refranchising transaction.

The discount rate used in the fair value calculations is our estimate of the required rate of return that a franchisee would expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

We evaluate indefinite-lived intangible assets 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 indicates impairment might exist. Fair value is an estimate of the

price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset. Our most significant indefinite-lived intangible asset is our Habit Burger Grill brand asset with a book value of $96 million at December 31, 2020. As of our fourth quarter 2020 annual impairment testing date, the Habit Burger Grill's forecasted results have improved from those used in determining the brand asset value as part of the initial valuation at the date of the acquisition and we determined that it was not more likely than not that the Habit Burger Grill brand asset was impaired.

Impairment of Goodwill

We evaluate goodwill 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 indicates impairment might exist. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our business units (which are aligned based on geography) in our KFC, Pizza Hut, Taco Bell and Habit Burger Grill Divisions. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from franchise royalties and Company-owned restaurant operations, if any. Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting unit.

Future cash flows are based on growth expectations relative to recent historical performance and incorporate sales growth (from net new units or same-store sales growth) and margin improvement (for those reporting units which include Company-owned restaurant operations) assumptions that we believe a third-party buyer would assume when determining a purchase price for the reporting unit. Any margin improvement assumptions that factor into the discounted cash flows are highly correlated with sales growth as cash flow growth can be achieved through various interrelated strategies such as product pricing and restaurant productivity initiatives. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

Other than the Habit Burger Grill reporting unit, the fair values of all our reporting units with goodwill balances were substantially in excess of their respective carrying values as of the 2020 goodwill testing date. 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 performed through application of the acquisition method of accounting. 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. As of the beginning of our fourth quarter, the date of our annual goodwill impairment assessment, Habit’s forecasted results have improved from those relied upon in our March 31, 2020, interim impairment test and we determined that it was not more likely than not that the fair value of the Habit Burger Grill reporting unit was less than its carrying value.

When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit that will be retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which include a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transaction. Appropriate adjustments are made to the fair value determinations if such franchise agreement is determined to not be at prevailing market rates. When determining whether such franchise agreement is at prevailing market rates our primary consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world. The Company

believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.

The discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee is reduced by future royalties the franchisee will pay the Company. The Company thus considers the fair value of future royalties to be received under the franchise agreement as fair value retained in its determination of the goodwill to be written off when refranchising. Others may consider the fair value of these future royalties as fair value disposed of and thus would conclude that a larger percentage of a reporting unit’s fair value is disposed of in a refranchising transaction.

During 2020, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was less than $1 million.

See Note 2 for a further discussion of our policies regarding goodwill.

Pension Plans

Certain of our employees are covered under defined benefit pension plans. Our two most significant plans are in the U.S. and combined had a projected benefit obligation (“PBO”) of $1,133 million and a fair value of plan assets of $1,014 million at December 31, 2020.

The PBO reflects the actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBOs are highly sensitive to changes in discount rates. For our U.S. plans, we measured our PBOs using a discount rate of 2.80% at December 31, 2020. The primary basis for this discount rate determination is a model that consists of a hypothetical portfolio of ten or more corporate debt instruments rated Aa or higher by Moody’s or Standard & Poor's ("S&P") with cash flows that mirror our expected benefit payment cash flows under the plans. We exclude from the model those corporate debt instruments flagged by Moody’s or S&P for a potential downgrade (if the potential downgrade would result in a rating below Aa by both Moody's and S&P) and bonds with yields that were two standard deviations or more above the mean. In considering possible bond portfolios, the model allows the bond cash flows for a particular year to exceed the expected benefit payment cash flows for that year. Such excesses are assumed to be reinvested at appropriate one-year forward rates and used to meet the benefit payment cash flows in a future year. The weighted-average yield of this hypothetical portfolio was used to arrive at an appropriate discount rate. We also ensure that changes in the discount rate as compared to the prior year are consistent with the overall change in prevailing market rates and make adjustments as necessary. A 50 basis-point increase in this discount rate would have decreased these U.S. plans’ PBOs by approximately $71 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased our U.S. plans’ PBOs by approximately $79 million at our measurement date.

The net periodic benefit cost we will record in 2021 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date. We expect net periodic benefit cost plus expected pension settlement charges for our U.S. plans to increase approximately $4 million in 2021. A 50 basis-point change in our discount rate assumption at our 2020 measurement date would impact our 2021 U.S. net periodic benefit cost by approximately $8 million. The impacts of changes in net periodic benefit costs are reflected primarily in Other pension (income) expense.

Our estimated long-term rate of return on U.S. plan assets is based upon the weighted-average of historical and expected future returns for each asset category. Our expected long-term rate of return on U.S. plan assets, for purposes of determining 2021 pension expense, at December 31, 2020, was 5.25%, net of administrative and investment fees paid from plan assets. We believe this rate is appropriate given the composition of our plan assets and historical market returns thereon. A 100 basis point change in our expected long-term rate of return on plan assets assumption would impact our 2021 U.S. net periodic benefit cost by approximately $8 million. Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 5.25% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $96 million included in AOCI for these U.S. plans at December 31, 2020. We will recognize approximately $22 million of such loss in net periodic benefit cost in 2021 versus $14 million recognized in 2020. See Note 15.

Income Taxes

At December 31, 2020, we had valuation allowances of approximately $789 million to reduce our $1,636 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to temporary differences in profitable U.S. federal, state and foreign jurisdictions and net operating losses in certain foreign jurisdictions, the majority of which do not expire. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions as well as carryforward periods and restrictions on usage. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans. Thus, recorded valuation allowances may be subject to material future changes.

As a matter of course, we are regularly audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income tax provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2020, we had $175 million of unrecognized tax benefits, $132 million of which would impact the effective tax rate if recognized. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.

The 2017 Tax Cuts and Jobs Act included a mandatory deemed repatriation tax on accumulated earnings of foreign subsidiaries, and as a result, previously unremitted earnings for which no U.S. deferred tax liability had been provided have now been subject to U.S. tax. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. federal tax. Undistributed foreign earnings may still be subject to certain state and foreign income and withholding taxes upon repatriation. Our cash currently held overseas is primarily limited to that necessary to fund working capital requirements. Thus, we have not provided taxes on our foreign unremitted earnings, including U.S. state income and foreign withholding taxes, as we believe they are indefinitely reinvested. See Note 18 for a further discussion of our Income taxes.

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