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Item 1.	Financial Statements

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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 June 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 June 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 June 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. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19, including 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. Recently, COVID-19 cases have been increasing in the U.S. and certain other regions of the world, which has resulted in some governmental authorities re-imposing restrictions on business and other activities that were previously lifted or reduced. The impacts of COVID-19 significantly impacted our results in the quarter and year to date ended June 30, 2020.

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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). There were no other significant impairments recorded during the year to date ended June 30, 2020. 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.

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. The preliminary allocation of the purchase price is based on management's analysis, including preliminary work performed by third party valuation specialists, as of March 18, 2020. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. There were no changes to this preliminary purchase price allocation during the quarter ended June 30, 2020.

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The components of the preliminary purchase price allocation upon the March 18, 2020 acquisition were as follows:

Total Current Assets		$	12
Property, plant and equipment, net		129
Habit Burger Grill brand (included in Intangible assets, net)		98
Operating lease right-of-use assets (included in Other assets)		163
Other assets		22
Total Assets		424
Total Current Liabilities		(68		)
Operating lease liabilities (included in Other liabilities and deferred credits)		(165		)
Other liabilities		(2		)
Total Liabilities		(235		)
Total identifiable net assets		189
Goodwill		219
Net consideration transferred		$	408

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 June 30, 2020 approximated $225 million. Additionally, the nominal value of minimum lease payments associated with Habit leases that have not yet commenced approximated $35 million as of June 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.

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		Quarter ended								Year to date
		2020				2019				2020				2019
Net Income		$	206			$	289			$	289			$	551
Weighted-average common shares outstanding (for basic calculation)		303				307				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				314				307				314
Basic EPS		$	0.68			$	0.94			$	0.96			$	1.79
Diluted EPS		$	0.67			$	0.92			$	0.94			$	1.75
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)		5.2				2.3				4.7				1.8

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

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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 March 31, 2020, net of tax		$	(323	)		$	(100	)		$	(126	)		$	(549	)
OCI, net of tax
Gains (losses) arising during the period classified into AOCI, net of tax		68				—				(14		)		54
(Gains) losses reclassified from AOCI, net of tax		—				4				3				7
		68				4				(11		)		61
Balance at June 30, 2020, net of tax		$	(255	)		$	(96	)		$	(137	)		$	(488	)
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		(34		)		—				(70		)		(104		)
(Gains) losses reclassified from AOCI, net of tax		—				8				(4		)		4
		(34		)		8				(74		)		(100		)
Balance at June 30, 2020, net of tax		$	(255	)		$	(96	)		$	(137	)		$	(488	)

		Quarter ended								Year to date
		6/30/2020				6/30/2019				6/30/2020				6/30/2019
Foreign exchange net (gain) loss and other(a)		$	(8	)		$	5			$	4			$	5
Closure and impairment expense(b)		6				1				146				1
Other (income) expense		$	(2	)		$	6			$	150			$	6

(a)	The quarter and year to date ended June 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 year to date ended June 30, 2020 includes a charge of $139 million related to the impairment of Habit Burger Grill goodwill. See Note 2. The quarter and year to date ended June 30, 2020 also includes a charge of $6 million related to the write-off of software no longer being used.

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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.

	6/30/2020				12/31/2019
Accounts and notes receivable, gross	$	631			$	656
Allowance for doubtful accounts	(101		)		(72		)
Accounts and notes receivable, net	$	530			$	584

Property, Plant and Equipment, net

	6/30/2020				12/31/2019
Property, plant and equipment, gross	$	2,432			$	2,306
Accumulated depreciation and amortization	(1,167		)		(1,136		)
Property, plant and equipment, net	$	1,265			$	1,170

Assets held-for-sale totaled $16 million and $25 million, respectively, as of June 30, 2020 and December 31, 2019 and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

Other Assets	6/30/2020				12/31/2019
Operating lease right-of-use assets	$	794			$	642
Investment in Grubhub, Inc. common stock(a)	—				137
Franchise incentives	170				174
Other	349				360
Other assets	$	1,313			$	1,313

(a)	Our investment in Grubhub, Inc. common stock is presented within Prepaid expenses and other current assets as of June 30, 2020 (see Note 13).

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

	6/30/2020				12/31/2019
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	1,243			$	605
Restricted cash included in Prepaid expenses and other current assets(a)	175				138
Restricted cash and restricted cash equivalents included in Other assets(b)	30				25
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents as presented in Condensed Consolidated Statements of Cash Flows	$	1,448			$	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.

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	Quarter ended								Year to date
	2020				2019				2020				2019
Income tax provision	$	51			$	88			$	63			$	125
Effective tax rate	19.8		%		23.3		%		17.8		%		18.5		%

Disaggregation of Total Revenues

The following tables disaggregate revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors.

	Quarter ended 6/30/2020
		KFC Division				Pizza Hut Division				Taco Bell Division				Habit Burger Grill Division				Total
U.S.
Company sales		$	13			$	5			$	194			$	104			$	316
Franchise revenues		44				66				132				1				243
Property revenues		3				2				11				—				16
Franchise contributions for advertising and other services		5				78				107				—				190
China
Franchise revenues		47				12				—				—				59
Other
Company sales		73				14				—				—				87
Franchise revenues		146				46				4				—				196
Property revenues		11				—				—				—				11
Franchise contributions for advertising and other services		67				12				1				—				80
		$	409			$	235			$	449			$	105			$	1,198

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	Quarter ended 6/30/2019
		KFC Division				Pizza Hut Division				Taco Bell Division				Total
U.S.
Company sales		$	18			$	5			$	212			$	235
Franchise revenues		41				67				140				248
Property revenues		5				1				11				17
Franchise contributions for advertising and other services		3				78				109				190
China
Franchise revenues		52				15				—				67
Other
Company sales		117				6				1				124
Franchise revenues		218				60				7				285
Property revenues		16				—				—				16
Franchise contributions for advertising and other services		114				14				—				128
		$	584			$	246			$	480			$	1,310

	Year to date ended 6/30/2020
		KFC Division				Pizza Hut Division				Taco Bell Division				Habit Burger Grill Division				Total
U.S.
Company sales		$	29			$	10			$	392			$	113			$	544
Franchise revenues		82				128				263				1				474
Property revenues		7				3				21				—				31
Franchise contributions for advertising and other services		9				148				214				—				371
China
Franchise revenues		94				22				—				—				116
Other
Company sales		187				27				—				—				214
Franchise revenues		358				105				11				—				474
Property revenues		25				1				—				—				26
Franchise contributions for advertising and other services		184				26				1				—				211
		$	975			$	470			$	902			$	114			$	2,461

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	Year to date ended 6/30/2019
		KFC Division				Pizza Hut Division				Taco Bell Division				Total
U.S.
Company sales		$	34			$	10			$	408			$	452
Franchise revenues		79				134				268				481
Property revenues		11				3				21				35
Franchise contributions for advertising and other services		5				152				213				370
China
Franchise revenues		108				30				—				138
Other
Company sales		226				12				2				240
Franchise revenues		423				120				13				556
Property revenues		34				1				—				35
Franchise contributions for advertising and other services		230				27				—				257
		$	1,150			$	489			$	925			$	2,564

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		(37		)
Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period		24
Other(a)		(8		)
Balance at June 30, 2020		$	420

(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	50
4 - 5 years	44
Thereafter	149
Total	$	420

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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	$	409			$	584			$	975			$	1,150
Pizza Hut Division	235				246				470				489
Taco Bell Division	449				480				902				925
Habit Burger Grill Division	105				—				114				—
	$	1,198			$	1,310			$	2,461			$	2,564

	Quarter ended								Year to date
Operating Profit	2020				2019				2020				2019
KFC Division	$	153			$	261			$	377			$	497
Pizza Hut Division	87				96				163				193
Taco Bell Division	154				159				298				297
Habit Burger Grill Division	(6		)		—				(8		)		—
Corporate and unallocated G&A expenses(a)	(98		)		(38		)		(148		)		(81		)
Unallocated Company restaurant expenses	—				—				(1		)		—
Unallocated Franchise and property expenses	(1		)		(2		)		(3		)		(3		)
Unallocated Refranchising gain (loss)	8				4				21				10
Unallocated Other income (expense) (See Note 5)	3				(9		)		(149		)		(9		)
Operating Profit	$	300			$	471			$	550			$	904
Investment income (expense), net(b)	91				25				57				9
Other pension income (expense) (See Note 10)	(2		)		—				(5		)		(3		)
Interest expense, net	(132		)		(119		)		(250		)		(234		)
Income before income taxes	$	257			$	377			$	352			$	676

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 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". Also included are costs related to our acquisition of Habit Burger Grill in the quarter and year to date ended June 30, 2020 of $3 million and $9 million, respectively.

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

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.  

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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			$	4			$	3
Interest cost	8				10				17				20
Expected return on plan assets	(11		)		(11		)		(22		)		(22		)
Amortization of net loss	3				1				7				1
Amortization of prior service cost	2				1				3				2
Net periodic benefit cost	$	4			$	2			$	9			$	4
Additional loss recognized due to settlements(a)	$	—			$	—			$	—			$	2

(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.

Short-term Borrowings		6/30/2020				12/31/2019
Current maturities of long-term debt		$	444			$	437
Other		—				4
		444				441
Less current portion of debt issuance costs and discounts		(10		)		(10		)
Short-term borrowings		$	434			$	431
Long-term Debt
Securitization Notes		$	2,883			$	2,898
Subsidiary Senior Unsecured Notes		2,850				2,850
Revolving Facility		575				—
Term Loan A Facility		450				463
Term Loan B Facility		1,926				1,935
YUM Senior Unsecured Notes		3,025				2,425
Finance lease obligations		71				77
		$	11,780			$	10,648
Less debt issuance costs and discounts		(84		)		(80		)
Less current maturities of long-term debt		(444		)		(437		)
Long-term debt		$	11,252			$	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. Cash paid for interest during the years to date ended June 30, 2020 and 2019 was $243 million and $253 million, respectively. 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 quarter, we made repayments of $375 million under the Revolver Facility that resulted in an outstanding balance of $575 million as of June 30, 2020.

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YUM Senior Unsecured Note Issuance

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 June 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 June 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 June 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 June 30, 2020, all foreign currency contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of June 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 June 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.

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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	$	(17	)		$	(43	)		$	3			$	(5	)		$	(98	)		$	(70	)		$	2			$	(10	)
Foreign currency contracts	(2		)		(1		)		1				6				5				10				(7		)		(4		)
Income tax benefit/(expense)	5				11				(1		)		—				23				16				1				3

As of June 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 $11 million, based on current LIBOR interest rates.

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

As of June 30, 2020, the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings, accounts payable and borrowings under our Revolving Facility approximated their fair values because of the short-term nature of these instruments. The fair value of 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:

	6/30/2020								12/31/2019
	Carrying Value				Fair Value (Level 2)				Carrying Value				Fair Value (Level 2)
Securitization Notes(a)	$	2,883			$	2,993			$	2,898			$	3,040
Subsidiary Senior Unsecured Notes(b)	2,850				2,932				2,850				3,004
Term Loan A Facility(b)	450				434				463				464
Term Loan B Facility(b)	1,926				1,868				1,935				1,949
YUM Senior Unsecured Notes(b)	3,025				3,158				2,425				2,572

(a)	We estimated the fair value of the Securitization Notes by obtaining broker quotes from two separate brokerage firms that are knowledgeable about and, at times, trade these notes. 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, an investment in Grubhub, Inc. common stock 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.  

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							Fair Value
		Condensed Consolidated Balance Sheet		Level			6/30/2020				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			4				—
Investment in Grubhub, Inc. Common Stock		Prepaid expenses and other current assets		1			198				—
Interest Rate Swaps		Other assets		2			—				3
Investment in Grubhub, Inc. Common Stock		Other assets		1			—				137
Other Investments		Other assets		1			37				43
Liabilities
Interest Rate Swaps		Accounts payable and other current liabilities		2			15				—
Interest Rate Swaps		Other liabilities and deferred credits		2			143				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 we own was determined primarily based on closing market prices for the shares. 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 June 30, 2020 and December 31, 2019.

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 June 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 June 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 June 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.

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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 $145 million. Of this amount, $140 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 October 1, 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.

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

•	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

•	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

•

Same-store sales growth is the estimated percentage change in 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 two quarters of 2020 we had a significant number of restaurants that were temporarily closed including restaurants closed due to government restrictions as of a result of COVID-19. The 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 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.

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•

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. Franchise restaurant sales are not included in Company sales on the Condensed Consolidated Statements of Income; however, the franchise and license fees 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.

•	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.

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(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.

•	Net units declined by 118 for the quarter and increased 223 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 $84 million related to the change in fair value of our investment in Grubhub, Inc. common stock (“Grubhub”), which added $0.21 to diluted EPS for the quarter. When coupled with $24 million of pre-tax investment income recorded in the second quarter of 2019, which added $0.06 to EPS, our Grubhub investment favorably impacted year-over-year EPS growth by $0.15.

•

For the year to date ended June 30, 2020, we recognized pre-tax income of $62 million related to the change in fair value of our investment in Grubhub, Inc. common stock, which added $0.15 to diluted EPS for the year to date. When coupled with $4 million of pre-tax investment income for the year to date ended June 30, 2019, which added $0.01 to EPS, our Grubhub investment favorably impacted year-over-year EPS growth by $0.14.

•	Foreign currency translation unfavorably impacted Divisional Operating Profit for the quarter and year to date by $6 million and $12 million, respectively.

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

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(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.

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(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 June 30, 2020 and 2019 as Special Items primarily include true-ups to refranchising gains and losses recorded prior to December 31, 2018.

(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 June 30, 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.

(d)

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. Additionally, we increased our Income tax provision by $5 million in the quarter ended June 30, 2020 to record a reserve against the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item.

(e)	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).

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•

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”). We ended this suspension in July of 2020. We may resume share repurchases should business trends persist and should we continue to gain confidence in the timeline for achieving a healthy balance sheet including continued repayment of borrowings under our Revolving Facility and growing back into our ~5.0x EBITDA consolidated net leverage target over time. As of the date of this filing, no shares have been repurchased under the Share Repurchase Program.

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•

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 quarter of 2020 we made repayments of $375 million under the Revolving Facility that resulted in an outstanding balance of $575 million as of June 30, 2020. 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.

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