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.
In the first quarter of 2025, the Company prospectively changed its basis of presentation to round financial figures in the Financial Statements and as presented in the tabular presentations in this MD&A to the nearest whole number in millions in all instances. As a result, some totals and percentages may not recompute based on rounded figures as presented within this MD&A. Previously, amounts were presented to ensure that all numbers herein recomputed, resulting in the presentation of certain figures inconsistent with their underlying 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 63,000 restaurants in 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and Habit Burger & Grill (collectively, the “Concepts”). The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style food and pizza categories, respectively. The Habit Burger & Grill is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 63,000 restaurants, 97% are operated by franchisees.
As of December 31, 2025, YUM consists of four operating segments:
• The KFC Division which includes our worldwide operations of the KFC concept
• The Taco Bell Division which includes our worldwide operations of the Taco Bell concept
• The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
• The Habit Burger & Grill Division which includes our worldwide operations of the Habit Burger & Grill concept
Through our Recipe for Good Growth we strive to grow iconic restaurant brands around the world that are loved by our customers, trusted everywhere we operate and connected through teamwork, technology and our global scale. These three ideas - being loved, trusted and connected - guide how we operate across our global system and engage with our customers, teams and communities:
Loved: We grow by delighting customers with craveable food and distinctive experiences.
Trusted: We operate responsibly with consistency and efficiency in our restaurants, across our system and in our communities. This includes a commitment to our priorities for social responsibility, risk management and sustainable stewardship of resources.
Connected: We use our teamwork, technology and global scale to serve every customer, everywhere, anytime.
As we enter into 2026, we intend to drive the next chapter of growth for YUM by Raising the B.A.R. through three clear priorities that reflect bold aspirations and a commitment to industry-leading performance:
• B attle for the future consumer by staying relentlessly focused on their needs and wants.
• A ccelerate restaurant unit economics for our franchisees and maximize performance of every restaurant, serving as a catalyst for new unit development and keeping our franchise system healthy.
• R each the full potential of Byte by Yum! by effectively operating, innovating and expanding our connected platform built by restaurant operators for restaurant operators to unlock its full potential for our franchise partners and our business.
Key to our success fueling brand performance and franchise success is our unrivaled culture and talent and leading with smart, heart and courage.
We intend to drive long-term growth and shareholder returns primarily through consistent same-store sales growth and new unit development across all of our Concepts. We intend to support this growth and development through a capital and operating structure that:
• Invests capital in a manner consistent with an asset light, franchisor model;
• Allocates G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives;
• Targets a consolidated net leverage ratio that balances shareholder returns, cost of capital and flexibility against various risk factors; and
• Maximizes shareholder return through a combination of paying a competitive dividend and returning excess cash flow through share repurchases.
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, boycotts, social or civil unrest or other issues. 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). Same-store sales growth excludes, for subsidiaries operating on a monthly calendar, the extra day resulting from a leap year and excludes, for subsidiaries operating on a weekly periodic calendar, the last week of the year in fiscal years with 53 weeks. 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.
• Gross unit openings reflects new openings by us and our franchisees. Net new unit growth reflects gross 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 factors such as 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 gross unit openings and net new unit growth are useful to investors because we depend on new units for a significant portion of our growth. Additionally, gross unit openings and net new unit growth are 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, in 2024, System sales excluding FX and the 53rd week for our U.S. subsidiaries and certain international subsidiaries that operate on a weekly periodic calendar, 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 new unit growth.
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 ( “ EP ” ) excluding Special Items (as defined below) and, in 2024, Diluted EPS excluding Special Items and the 53rd week;
• Effective Tax Rate excluding Special Items and, in 2024, Effective Tax Rate excluding Special Items and the 53rd week;
• Core Operating Profit and, in 2024, Core Operating Profit excluding the 53rd week. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally;
• Net Income excluding Special Items and, in 2024, Net Income excluding Special Items and the 53rd week;
• Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below).
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.
Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales (“Company restaurant margin %”) is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Further, while we generally include depreciation and amortization of restaurant-level assets within Divisional Company restaurant expenses used to derive Divisional Company restaurant profit, we record amortization of reacquired franchise rights arising from acquisition accounting within Corporate and unallocated Company restaurant expenses as such amortization is not believed to be indicative of ongoing Divisional results as well as to comparability of acquired stores’ margins with those of existing restaurants. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry.
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 2024 we provided System sales excluding FX and the 53rd week, Core Operating Profit excluding the 53rd week, Net Income excluding Special Items and the 53rd week, Diluted EPS excluding Special Items and the 53rd week and Effective Tax Rate excluding Special Items and the 53rd week to further enhance the comparability given the 53rd week that was part of our fiscal calendar in 2024.
Results of Operations
Summary
All comparisons within this summary are versus the same period a year ago. For discussion of our results of operations for 2024 compared to 2023, 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, 2024, filed with the SEC on February 19, 2025.
2025 financial highlights:
% Change
System Sales,
Same-Store Sales
Units
GAAP Operating Profit
Core Operating Profit
KFC Division
Taco Bell Division
Pizza Hut Division
Worldwide
Results Excluding 53rd Week
(% Change)
System Sales, ex FX
Core Operating Profit
KFC Division
Taco Bell Division
Pizza Hut Division
Worldwide
Additionally:
• Gross unit openings for the year were 4,567 units resulting in 1,939 net new units.
• Foreign currency translation favorably impacted Divisional Operating Profit in our KFC Division by $12 million for the year ended December 31, 2025.
% Change
GAAP EPS
Special Items EPS
EPS Excluding Special Items
• In 2024, the 53rd week favorably impacted EPS by approximately $0.09 per share.
Worldwide
GAAP Results
Amount
Company sales
Franchise and property revenues
Franchise contributions for advertising and other services
Total revenues
Company restaurant expenses
G&A expenses
Franchise and property expenses
Franchise advertising and other services expense
Refranchising (gain) loss
Other (income) expense
Total costs and expenses, net
Operating Profit
Investment (income) expense, net
Other pension (income) expense
Interest expense, net
Income before income taxes
Income tax provision
Net Income
Diluted EPS (a)
Effective tax rate
ppts.
ppts.
(a) See Note 4 for the number of shares used in this calculation.
Performance Metrics
% Increase (Decrease)
Unit Count
Franchise
Company-owned
Total
Same-Store Sales Growth (Decline) %
System Sales Growth %, reported
System Sales Growth %, excluding FX
System Sales Growth %, excluding FX and 53rd week
Our system sales breakdown by Company and franchise sales was as follows:
Year
Consolidated
Company sales (a)
Franchise sales
System sales
Negative (Positive) Foreign Currency Impact (b)
System sales, excluding FX
Impact of 53rd week
System sales, excluding FX and the 53rd Week
KFC Division
Company sales (a)
Franchise sales
System sales
Negative (Positive) Foreign Currency Impact (b)
System sales, excluding FX
Impact of 53rd week
System sales, excluding FX and the 53rd Week
Taco Bell Division
Company sales (a)
Franchise sales
System sales
Negative (Positive) Foreign Currency Impact (b)
System sales, excluding FX
Impact of 53rd week
System sales, excluding FX and the 53rd Week
Pizza Hut Division
Company sales (a)
Franchise sales
System sales
Negative (Positive) Foreign Currency Impact (b)
System sales, excluding FX
Impact of 53rd week
System sales, excluding FX and the 53rd Week
Habit Burger & Grill Division
Company sales (a)
Franchise sales
System sales
Negative (Positive) Foreign Currency Impact (b)
System sales, excluding FX
Impact of 53rd Week
System sales, excluding FX and the 53rd Week
(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.
Non-GAAP Items
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
Core Operating Profit Growth %
Core Operating Profit Growth %, excluding the 53rd week
Diluted EPS Growth %, excluding Special Items
Diluted EPS Growth %, excluding Special Items and the 53rd week
Effective Tax Rate excluding Special Items
Effective Tax Rate excluding Special Items and the 53rd week
Company restaurant profit
Company restaurant margin %
Year
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding the 53rd Week
Consolidated
GAAP Operating Profit
Detail of Special Items:
(Gain) loss associated with market-wide refranchisings (a)
Charges associated with Pizza Hut Strategic Options Review (b)
Charges associated with Brand HQ Consolidation (c)
German acquisition and Turkey termination-related costs (d)
Charges associated with Resource Optimization (e)
Operating (profit) loss impact from decision to exit Russia (f)
Charges associated with TB U.S. restaurant acquisition (g)
Other Special Items (Income) Expense
Special Items Expense - Operating Profit
Negative (Positive) Foreign Currency Impact on Operating Profit
Core Operating Profit
Impact of 53rd Week Operating Profit
Core Operating Profit, excluding the 53rd Week
Special Items as shown above were recorded to the financial statement line items identified below:
Year
Consolidated Statement of Income Line Item
Franchise and property revenues
General and administrative expenses
Franchise and property expenses
Refranchising (gain) loss
Other (income) expense
Special Items Expense - Operating Profit
Year
KFC Division
GAAP Operating Profit
Negative (Positive) Foreign Currency Impact
Core Operating Profit
Impact of 53rd Week
Core Operating Profit, excluding the 53rd Week
Taco Bell Division
GAAP Operating Profit
Negative (Positive) Foreign Currency Impact
Core Operating Profit
Impact of 53rd Week
Core Operating Profit, excluding the 53rd Week
Pizza Hut Division
GAAP Operating Profit
Negative (Positive) Foreign Currency Impact
Core Operating Profit
Impact of 53rd Week
Core Operating Profit, excluding the 53rd Week
Habit Burger & Grill Division
GAAP Operating Profit (Loss)
Negative (Positive) Foreign Currency Impact
Core Operating Profit (Loss)
Impact of 53rd Week
Core Operating Profit (Loss), excluding the 53rd Week
Reconciliation of GAAP Net Income to Net Income excluding Special Items and Net Income excluding Special Items and the 53rd week
GAAP Net Income
Special Items (Income) Expense - Operating Profit
Special Items Tax (Benefit) Expense (h)
Net Income excluding Special Items
Impact of 53rd Week
Net Income excluding Special Items and the 53rd Week
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items and Diluted EPS excluding Special Items and the 53rd Week
Diluted EPS
Less Special Items Diluted EPS
Diluted EPS excluding Special Items
Less Impact of 53rd Week
Diluted EPS excluding Special Items and the 53rd Week
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items and Effective Tax Rate excluding Special Items and the 53rd Week
GAAP Effective Tax Rate
Impact on Tax Rate as a result of Special Items
Effective Tax Rate excluding Special Items
Impact on Tax Rate as a result of the 53rd Week
Effective Tax Rate excluding Special Items and the 53rd Week
(a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with market-wide refranchisings. During the years ended December 31, 2025, 2024 and 2023, we recorded net a refranchising gain of $1 million and net refranchising losses of $1 million and $5 million, respectively, that have been reflected as Special Items.
Additionally, during the years ended December 31, 2025, 2024 and 2023, we recorded net refranchising gains of $47 million, $35 million and $34 million, respectively, that have not been reflected as Special Items. These net refranchising gains relate to refranchising of restaurants unrelated to market-wide refranchisings that we believe are indicative of our expected ongoing refranchising activity.
(b) In 2025, we began a review of strategic options for the Pizza Hut brand. During the year ended December 31, 2025, we incurred charges of approximately $36 million primarily in third-party advising costs associated with this strategic options review and wrote-off approximately $5 million of franchise incentive assets associated with rationalizing the Pizza Hut estate in preparation for a potential transaction. These charges were recorded to Corporate and unallocated General and administrative expenses and Unallocated franchise and property revenues, respectively. Given the significance of the costs expected to be incurred through the course of this strategic options review, we have reflected such amounts as Special Items.
(c) During the year ended December 31, 2025, we recorded charges of approximately $27 million associated with our decision to designate two brand headquarters in the U.S., located in Plano, Texas and Irvine, California, to foster greater collaboration among brands and employees. This involved relocating the KFC U.S. corporate office to the KFC Global headquarters and requiring the majority of our U.S.-based remote employees to relocate to an appropriate headquarter office. These charges included $21 million, primarily for severance for employees who chose not to relocate and consultant fees, recorded to Corporate and unallocated General and administrative expenses. Additionally, we donated our YUM corporate headquarters in Louisville, Kentucky subsequent to the relocation of the KFC U.S. corporate office resulting in a charge of $6 million to Unallocated Other (income) expense representing the net book value of that headquarters. Due to their scope and size, these charges have been reflected as Special Items.
(d) On January 8, 2025, we terminated our franchise agreements with franchisee IS Gida A.S. (IS Gida), the owner and operator of KFC and Pizza Hut restaurants in Turkey and a subsidiary of IS Holding A.S. (IS Holding), after failure by IS Gida to meet our standards. As a result, 283 KFC restaurants and 254 Pizza Hut restaurants in Turkey were closed during the first quarter of 2025. We also re-acquired the master franchise rights in Germany for KFC and Pizza Hut from the owner of IS Holding in December 2024. As a result, we recorded charges of $37 million to Unallocated Other (income) expense, $18 million to Unallocated Franchise and property revenues and $6 million to Corporate and unallocated General and administrative expenses consisting primarily of transaction costs associated with the German acquisition and termination-related costs associated with the Turkey business in year ended December 31, 2024. We recorded a credit of $1 million to Unallocated Other (income) expense and charges of $1 million to Unallocated Franchise and property revenues and $9 million to Corporate and unallocated General and administrative expenses during the year ended December 31, 2025, consisting primarily of transaction costs associated with re-acquiring the master franchise rights in Germany including severance. Due to their scope and size, these charges have been reflected as Special Items.
(e) We recorded charges of $38 million, $79 million and $21 million during the years ended December 31, 2025, 2024 and 2023, respectively, primarily to Corporate and unallocated General and administrative expenses related to a resource optimization program initiated in the third quarter of 2020. Over the past several years, this program has allowed us to reallocate significant resources to accelerate our digital, technology and innovation capabilities to deliver a modern, world-class team member and customer experience and improve unit economics. We expanded the program in 2024 to identify further opportunities to optimize the Company’s spending and identify additional, critical areas in which to potentially allocate resources, both with a goal to enable the acceleration of the Company’s growth rate. Costs incurred to date related to the program primarily include severance associated with positions that have been eliminated or relocated and consultant fees. Due to their scope and size, these charges have been reflected as Special Items.
(f) In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia. We also suspended all operations of our 70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our master franchisee. Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to
humanitarian efforts. During the second quarter of 2022, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator. In April 2023, we completed our exit from the Russia market by selling the KFC business in Russia to Smart Service Ltd.
Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC prior to the date of sale, within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we reclassed such net operating profits or losses from the KFC segment results in which they were earned to Unallocated Other income (expense). Additionally, we incurred certain expenses related to the dispositions of the businesses and other one-time costs related to our exit from Russia which we recorded within Corporate and unallocated G&A and Unallocated Franchise and property expenses. Also recorded in Unallocated Other income (expense) were foreign exchange impacts attributable to fluctuations in the value of the Russian ruble and a charge of $3 million recorded during the year ended December 31, 2023, as a result of the completion of the sale of the KFC Russia business. The resulting net Operating Loss of $11 million for the year ended December 31, 2023 has been reflected as a Special Item.
(g) During the year ended December 31, 2025, we recorded charges of approximately $7 million to Corporate and unallocated General and administrative expenses related to an acquisition of 128 Taco Bell Southeast U.S. restaurants from a franchisee for approximately $670 million. Due to the significant amount of legal and professional fees necessary to complete this large acquisition, these fees have been reflected as Special Items.
(h) The below table includes the detail of Special Items Tax (Benefit) Expense:
Year
Tax (Benefit) on Special Items Expense - Operating Profit
Tax Expense - Foreign tax reserve
Tax Expense - U.S. OBBBA
Tax (Benefit) - Tax audit
Tax (Benefit) - Intra-entity transfers and valuations of intellectual property
Tax (Benefit) - Other Income tax impacts from decision to exit Russia
Tax (Benefit) - Other Income tax impacts recorded as Special
Special Items Tax (Benefit) Expense
Tax (Benefit) on Special Items Expense - Operating Profit was determined by assessing the tax impact of each individual component within Special Items based upon the nature of the item and jurisdictional tax law.
Tax Expense - Foreign tax reserve in the year ended December 31, 2025, is associated with a reserve, and the ongoing foreign exchange and inflationary adjustments, associated with a change in management's judgment around a Mexican subsidiary's ability to utilize losses to offset recapture gains triggered by a historical tax deconsolidation. This tax expense was reflected as a Special Item due to its size and the time elapsed since the years to which the reserve relates.
Tax Expense - U.S. OBBBA in the year ended December 31, 2025, reflects the tax expense recorded upon the July 4, 2025 enactment of H.R.1, commonly known as the One Big Beautiful Bill Act (“OBBBA”) in the United States. The tax expense was primarily associated with a change in management's judgment regarding our ability to utilize U.S. foreign tax credit related deferred tax assets that existed at the date of enactment and has been reflected as a Special Item due to the size of the non-recurring adjustment necessary upon enactment of the legislation.
Tax (Benefit) - Tax audit in the year ended December 31, 2025, reflects the benefit associated with the reversal of a reserve due to a favorable audit resolution. Such reserve was established in prior years and was originally recorded as a Special Item.
Tax (Benefit) - Intra-entity transfers and valuations of intellectual property includes:
• The tax benefit recorded in the year ended December 31, 2025, resulting from an internal reorganization to consolidate the Pizza Hut entities and assets into two isolated ownership structures by aligning the legal ownership, simplifying the organizational footprint and consolidating the Pizza Hut domestic and
international business in connection with our strategic options review. As part of this reorganization, certain Pizza Hut intellectual property (“IP”) rights from subsidiaries in the U.S. were transferred to international subsidiaries resulting in a step-up in amortizable tax basis of those IP rights.
• The tax benefit recorded in the year ended December 31, 2024, resulting primarily from the tax liquidation of certain subsidiaries in Israel and Australia as well as the intra-entity transfer of software from those subsidiaries to subsidiaries in the U.S.
• The tax benefit recorded in the year ended December 31, 2023, resulting primarily from $99 million of deferred tax benefit arising from the remeasurement of deferred tax assets associated with previously transferred IP rights in Switzerland as a result of an increase in our jurisdictional tax rate, as well as a $29 million deferred tax benefit associated with credits granted by local Swiss tax authorities. The benefit recorded in the year ended December 31, 2023, also includes $30 million of deferred tax benefit associated with the intra-entity transfer of certain Asia region IP rights to Singapore or the U.S.
Other Income Tax impacts recorded as Special in the year ended December 31, 2023 included $41 million of expense associated with a correction in the timing of capital loss utilization related to refranchising gains previously recorded as Special Items to tax years with a lower statutory tax rate.
Reconciliation of GAAP Operating Profit to Company Restaurant Profit
KFC Division
Taco Bell Division
Pizza Hut Division
Habit Burger & Grill Division
Corporate and Unallocated
Consolidated
GAAP Operating Profit (Loss)
Less:
Franchise and property revenues
Franchise contributions for advertising and other services
Add:
General and administrative expenses
Franchise and property expenses
Franchise advertising and other services expense
Refranchising (gain) loss
Other (income) expense
Company restaurant profit (loss)
Company sales
Company restaurant margin %
KFC Division
Taco Bell Division
Pizza Hut Division
Habit Burger & Grill Division
Corporate and Unallocated
Consolidated
GAAP Operating Profit (Loss)
Less:
Franchise and property revenues
Franchise contributions for advertising and other services
Add:
General and administrative expenses
Franchise and property expenses
Franchise advertising and other services expense
Refranchising (gain) loss
Other (income) expense
Company restaurant profit (loss)
Company sales
Company restaurant margin %
KFC Division
Taco Bell Division
Pizza Hut Division
Habit Burger & Grill Division
Corporate and Unallocated
Consolidated
GAAP Operating Profit (Loss)
Less:
Franchise and property revenues
Franchise contributions for advertising and other services
Add:
General and administrative expenses
Franchise and property expenses
Franchise advertising and other services expense
Refranchising (gain) loss
Other (income) expense
Company restaurant profit
Company sales
Company restaurant margin %
Items Impacting Reported Results and/or Reasonably Likely to Impact Future Results
The following items impacted reported results in 2025 and/or 2024 and/or are reasonably likely to impact future results. See also the Detail of Special Items section of this MD&A for other items similarly impacting results.
Pizza Hut Strategic Options Review
In 2025, we began a review of strategic options for the Pizza Hut brand. The objective of the review is to create value for YUM, Pizza Hut and its franchise partners by determining the optimal approach to best capitalize on Pizza Hut's structural advantages — strong brand equity, experienced franchise partners and meaningful scale — in the highly fragmented pizza market. We
currently intend to complete this strategic options review in 2026, and there can be no assurance this review will result in any specific outcome or transaction. We incurred certain costs during the year ended December 31, 2025 associated with this strategic review (see Detail of Special Items section of this MD&A) and expect to incur further costs of a currently indeterminate amount as this strategic options review progresses.
Impact of Tax Law Changes
On July 4, 2025, H.R.1, commonly known as the One Big Beautiful Bill Act (“OBBBA”) was enacted into law in the U.S. The OBBBA includes a broad range of domestic and international tax reform provisions, including extending and modifying certain key provisions from the Tax Cuts and Jobs Act, as well as provisions allowing accelerated tax deductions for qualified depreciable property and research expenditures. The OBBBA has multiple effective dates, with certain provisions becoming effective in 2025 and others effective through 2027. We do not currently expect our ongoing effective tax rate to be significantly impacted by the legislation.
Extra Week in 2024
Fiscal 2024 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, 2024. The 53rd week in 2024 favorably impacted Diluted EPS by approximately $0.09 per share.
KFC Division
Taco Bell Division
Pizza Hut Division
Habit Burger & Grill Division
Total
Revenues
Company sales
Franchise and property revenues
Franchise contributions for advertising and other services
Total revenues
Operating Profit
Franchise and property revenues
Franchise contributions for advertising and other services
Restaurant profit
Franchise for advertising and other services expenses
G&A expenses
Operating Profit
Middle East Conflict
During the fourth quarter of 2023, certain of our markets, principally in our KFC and Pizza Hut Divisions, began being impacted by a military conflict in the Middle East region. Our sales continued to be impacted during 2024, most significantly in markets across the Middle East, Malaysia and Indonesia. The impact in these markets represented an approximate one-point headwind to YUM's overall same-store sales growth in the year ended December 31, 2024. Additionally, we believe we experienced conflict-related impacts in a broader set of markets and trade areas, though such amounts are difficult to precisely quantify.
Investment in Devyani
During the quarter ended March 31, 2024, we sold our approximate 5% minority investment in Devyani International Limited (“Devyani”), a franchise entity that operates KFC and Pizza Hut restaurants in India, for pre-tax proceeds of $ 104 million. Changes in the fair value of our ownership interest in Devyani prior to the date of sale resulted in pre-tax investment losses of
$ 20 million in the year ended December 31, 2024 and pre-tax investment income of $ 8 million in the year ended December 31, 2023.
KFC Division
The KFC Division has 33,897 units, 90% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of the end of 2025.
Reported
Ex FX and 53rd Week in 2024
Reported
Ex FX and 53 rd Week in 2024
System Sales
Same-Store Sales Growth (Decline) %
Company sales
Franchise and property revenues
Even
Franchise contributions for advertising and other services
Total revenues
Company restaurant profit
Company restaurant margin %
ppts.
ppts.
ppts.
ppts.
ppts.
G&A expenses
Franchise and property expenses
Franchise advertising and other services expense
Operating Profit
% Increase (Decrease)
Unit Count
Franchise
Company-owned
Total
Company sales and Company restaurant margin %
In 2025, the increase in Company sales, excluding the impacts of foreign currency translation and lapping the 53rd week in 2024, was driven by the KFC U.K. and Ireland restaurant acquisition (see Note 3) in the second quarter of 2024 and Company same-store sales growth of 5%.
In 2025, Company restaurant margin percentage, excluding the impacts of foreign currency translation and lapping the 53rd week in 2024, was flat as lower margin percentages of the units included in the KFC U.K. and Ireland restaurant acquisition were offset by Company same-store sales growth.
Franchise and property revenues
In 2025, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation and lapping the 53rd week in 2024, was driven by unit growth and franchise same-store sales growth of 2%, partially offset by a 1% negative impact from the KFC U.K. and Ireland restaurant acquisition.
In 2025, the increase in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2024, was driven by higher expenses related to our annual incentive compensation programs, partially offset by lower headcount and salaries.
Operating Profit
In 2025, the increase in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2024, was driven by same-store sales growth and unit growth.
Taco Bell Division
The Taco Bell Division has 9,030 units, 86% of which are in the U.S. The Company owned 8% of the Taco Bell units in the U.S. as of the end of 2025.
Reported
Ex FX and 53rd Week in 2024
Reported
Ex FX and 53rd Week in 2024
System Sales
Same-Store Sales Growth %
Company sales
Franchise and property revenues
Franchise contributions for advertising and other services
Total revenues
Company restaurant profit
Company restaurant margin %
ppts.
ppts.
ppts.
ppts.
ppts.
ppts.
G&A expenses
Franchise and property expenses
Franchise advertising and other services expense
Operating Profit
% Increase (Decrease)
Unit Count
Franchise
Company-owned
Total
Company sales and Company restaurant margin %
In 2025, the increase in Company sales, excluding the impacts of lapping the 53 rd week, was driven by acquisitions, company same-store sales growth of 5%, and unit growth.
In 2025, the decrease in Company restaurant margin percentage, excluding the impacts of lapping the 53 rd week, was driven by commodity inflation (primarily beef), higher labor and other restaurant operating costs, partially offset by higher margin percentages of the units included in the Southeast U.S. restaurant acquisition and same store sales growth.
Franchise and property revenues
In 2025, the increase in Franchise and property revenues, excluding the impacts of lapping the 53 rd week, was driven by franchise same-store sales growth of 7% and unit growth.
In 2025, the increase in G&A, excluding the impacts of lapping the 53 rd week, was driven by higher digital and technology expenses, higher expenses related to our annual incentive compensation programs and increased share-based compensation, partially offset by lower professional and legal fees.
Operating Profit
In 2025, the increase in Operating Profit, excluding the impacts of lapping the 53 rd week, was driven by same-store sales growth, unit growth and acquisitions, partially offset by higher restaurant operating costs and higher G&A.
Pizza Hut Division
The Pizza Hut Division has 19,974 units, 68% 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 2025. 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.
Reported
Ex FX and 53rd Week in 2024
Reported
Ex FX and 53rd Week in 2024
System Sales
Same-Store Sales Growth (Decline) %
Company sales
Franchise and property revenues
Even
Even
Franchise contributions for advertising and other services
Total revenues
Even
Even
Company restaurant profit (loss)
Company restaurant margin %
ppts.
ppts.
ppts.
ppts.
ppts.
ppts.
G&A expenses
Even
Even
Franchise and property expenses
Franchise advertising and other services expense
Even
Even
Operating Profit
% Increase (Decrease)
Unit Count
Franchise
Company-owned
Total
Franchise and property revenues
In 2025, the decrease in Franchise and property revenues, excluding the impact of foreign currency translation and lapping the 53 rd week in 2024, was driven by franchise same-store sales declines of (1%) and a unit decline.
In 2025, G&A, excluding the impact of foreign currency translation and lapping the 53 rd week in 2024, was flat, as the impact of restaurant acquisitions and higher expenses related to our annual incentive compensation programs were offset by lower salaries and benefits.
Operating Profit
In 2025, the decrease in Operating Profit, excluding the impact of foreign currency translation and lapping the 53 rd week in 2024, was driven by a same store sales decline, the impact of restaurant acquisitions, higher current year bad debt expense (including bad debt expense associated with franchise entities that have transitioned to new ownership) and a unit decline.
Habit Burger & Grill Division
The Habit Burger & Grill Division has 384 units, the vast majority of which are in the U.S. The Company owned 79% of the Habit Burger & Grill units in the U.S. as of the end of 2025.
Reported
Ex FX and 53rd Week in 2024
Reported
Ex FX and 53rd Week in 2024
System Sales
Same-Store Sales Growth (Decline) %
Total revenues
Operating Profit (Loss)
% Increase (Decrease)
Unit Count
Franchise
Company-owned
Total
Corporate & Unallocated
(Expense)/Income
Corporate and unallocated G&A expense
Unallocated Company restaurant expenses
Unallocated Franchise and property revenues
Unallocated Franchise and property expenses
Unallocated Refranchising gain (loss) (See Note 19)
Unallocated Other income (expense)
Investment income (expense), net (See Note 5)
Other pension income (expense) (See Note 15)
Interest expense, net
Income tax provision (See Note 18)
Effective tax rate (See Note 18)
ppts.
ppts.
Corporate and unallocated G&A expense
In 2025, the increase in Corporate and Unallocated G&A expense was driven by costs associated with the current year Pizza Hut Strategic Options Review, costs associated with our current year Brand Headquarters Consolidation, higher salaries and benefits, higher professional and legal fees and higher current year expenses related to our annual incentive compensation programs, partially offset by lower costs associated with our Resource Optimization Program.
Unallocated Company restaurant expenses
Unallocated Company restaurant expenses include amortization of reacquired franchise rights. In 2025, the increase was driven by the 2025 Taco Bell Southeast U.S. restaurant acquisition and a full year of amortization related to the 2024 KFC U.K. and Ireland restaurant acquisition.
Unallocated Franchise and property revenues
In 2025, the decrease in Unallocated Franchise and property revenue was driven by lapping charges associated with the termination of our franchise agreements with a franchisee in Turkey, partially offset by the current year write-off of franchise incentive assets associated with the Pizza Hut Strategic Options Review.
Unallocated Other income (expense)
In 2025, the decrease in Unallocated Other income (expense) was driven primarily by lapping charges associated with the German master franchise acquisition and termination-related costs associated with the Turkey business.
Consolidated Cash Flows
Net cash provided by operating activities was $2,010 million in 2025 versus $1,689 million in 2024. The increase was primarily driven by an increase in Operating Profit before Special Items, and lower current year incentive compensation and income tax payments.
Net cash used in investing activities was $1,003 million in 2025 versus $422 million in 2024. The change was primarily driven by higher current year spending on restaurant acquisitions, higher current year capital spending and lapping prior year proceeds arising from the sale of our approximate 5% minority investment in Devyani, partially offset by maturities of short-term investments in the current year compared to net purchases of short-term investments in the prior year.
Net cash used in financing activities was $924 million in 2025 versus $1,163 million in 2024. The change was primarily driven by higher net borrowings, partially offset by higher current year share repurchases.
Consolidated Financial Condition
Our Consolidated Balance Sheet was impacted by the Taco Bell U.S. restaurant acquisition (See Note 3).
Liquidity and Capital Resources
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 were in excess of $2 billion in 2025 and we expect continued strong operating cash flows in 2026. It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive dividend, with any remaining excess then returned to shareholders through share repurchases. Subject to market conditions, we expect to maintain our consolidated net leverage ratio at approximately 4.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) over the medium term by issuing incremental debt as our business grows.
To the extent operating cash flows plus other sources of cash do not cover our anticipated cash needs, we maintain a $1.5 billion Revolving Facility under our Credit Agreement (see Note 11) which had $300 million outstanding as of December 31, 2025. Borrowings under our Revolving Facility in 2025 had original maturities of three months or less. We believe that our ongoing cash from operations, cash on hand, which was approximately $700 million at December 31, 2025, and availability under our Revolving Facility will be sufficient to fund our cash requirements over the next twelve months.
Our material cash requirements include the following contractual and other obligations.
Debt Obligations and Interest Payments
As of December 31, 2025, approximately 96%, including the impact of interest rate swaps, of our $11.5 billion of total debt outstanding, excluding the Revolving Facility balance, finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.5%. We target a capital structure 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, and as mentioned above, we expect to maintain our net leverage ratio at approximately 4.0x EBITDA over the medium term by issuing incremental debt as our business grows. We currently have credit ratings of BB+ (Standard & Poor’s)/Ba2 (Moody’s).
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, 2025.
Total
Securitization Notes
Credit Agreement
Revolving Facility
Subsidiary Senior Unsecured Notes
YUM Senior Unsecured Notes
Total
Interest payments on the outstanding long-term debt in the table above total approximately $2.5 billion, with approximately $500 million due within the next twelve months on the outstanding amounts on a nominal basis. The estimated interest payments related to the variable rate portion of our debt, net of our interest rate swaps, are based on current Secured Overnight Financing Rate (“SOFR”) interest rates.
See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.
Operating and Finance Leases
Payments required under our operating and finance leases total $2.0 billion, of which $190 million is payable within the next 12 months. These amounts are on a nominal basis and include payments related to lease renewal options we are reasonably certain to exercise. These leases relate primarily to approximately 1,100 Company-owned restaurants and approximately 225 leased restaurants for which we sublease land, building or both to our franchisees. See Note 12.
Investing Activities
We remain committed to maintaining our asset light, franchisor model. Our allocation strategy for investing activities includes:
• Run-rate capital expenditures consisting of company restaurant repairs, maintenance and remodels, support of our digital and technology initiatives and project-specific capital expenditures,
• Targeted new company unit development to spur additional growth that is partially funded through refranchising a comparable number of existing company units, and
• Strategic investments that create incremental value for shareholders and franchisees.
In 2026, we expect gross capital expenditures of approximately $400 million driven by technology initiatives and continued investments in Taco Bell, KFC and Habit Burger & Grill company restaurants, including regular maintenance of recently acquired restaurants. Additionally, we expect approximately $50 million of refranchising proceeds, resulting in net capital expenditures of approximately $350 million.
Purchase Obligations
Our 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. Our purchase obligations relate primarily to marketing, information technology and supply agreements. We have purchase obligations of approximately $450 million at December 31, 2025, with approximately $300 million due within the next 12 months.
In addition to our contractual and other obligations, we seek to pay a competitive dividend and return excess cash to shareholders through share repurchases. As discussed in Note 20, we are also subject to claims and contingencies related to certain tax and legal matters that may require future cash outlays.
Dividends and Share Repurchases
In February 2026, our Board of Directors declared a quarterly dividend of $0.75 per share of Common Stock, a 6% increase from the quarterly dividend of $0.71 per share of Common Stock paid in 2025. This quarterly dividend will be distributed March 6, 2026, to shareholders of record at the close of business on February 20, 2026, and will total approximately $210 million.
In May 2024, our Board of Directors authorized share repurchases of up to $2.0 billion (excluding applicable transaction fees and excise taxes) of our outstanding Common Stock through December 31, 2026. This authorization took effect on July 1, 2024 upon the exhaustion of a prior authorization approved in September 2022. As of December 31, 2025, we have remaining capacity to repurchase up to $1.1 billion of Common Stock under this authorization. This authorization does not obligate the Company to acquire any specific number of shares.
Contingencies
As discussed in Note 20, following an Internal Revenue Service (“IRS”) audit for the 2013 to 2015 fiscal years, we were unable to resolve underpayments of tax that the IRS proposed resulting from that audit using the IRS Appeals process, a pre-litigation, alternative dispute resolution tool. The IRS asserts an underpayment of tax of approximately $2.1 billion plus $418 million in penalties for fiscal year 2014. Both amounts are subject to interest, with interest of approximately $2.1 billion accruing through December 31, 2025. Those amounts relate primarily to a series of reorganizations that we undertook in 2014 in connection with the business realignment of our corporate and management reporting structure along brand lines. The IRS asserts that these transactions resulted in taxable distributions of approximately $6.0 billion.
We disagree with the IRS’s position and are contesting that position vigorously. On June 4, 2025, we filed a petition in the United States Tax Court disputing the IRS's position as set forth in a Notice of Deficiency. The IRS filed its Answer on September 12, 2025. The litigation is ongoing.
Also, as discussed in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement (“DOE”) in India imposing a penalty on Yum! Restaurants India Private Limited (“YRIPL”) and certain former
directors of approximately Indian Rupee 11 billion, or approximately $125, 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. In November 2022, YRIPL was notified that an administrative tribunal bench had been constituted to hear an appeal by DOE of certain findings of the January 2020 order, including claims that certain charges had been wrongly dropped and that an insufficient amount of penalty had been imposed. A hearing with the administrative tribunal scheduled for February 18, 2026 has been rescheduled to May 21, 2026. A hearing scheduled for December 10, 2025, before the Delhi High Court has been continued to May 5, 2026, and the stay order remains in effect. We deny liability and intend to continue vigorously defending this matter.
See the Lease Guarantees section of Note 20 for discussion of our off-balance sheet arrangements.
New Accounting Pronouncements Not Yet Adopted
In November 2024, the Financial Accounting Standards Board (“FASB”) issued ASU 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40), which requires new financial statement disclosures disaggregating prescribed expense categories within relevant income statement expense captions. The standard is effective for the Company's Annual Report on Form 10-K for fiscal 2027, and subsequent interim periods, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is permitted. We are currently evaluating the impact of the standard on our disclosures.
In September 2025, the FASB issued ASU 2025-06, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, which amends certain aspects of the accounting for software costs, including removing software development project stages and requiring companies to capitalize costs when both 1) management authorizes or commits to funding a software project and 2) it is probable that the project will be completed and the software will be used to perform the function intended. The standard is effective for the Company in our first quarter of fiscal 2028, with early adoption permitted and can be applied on a prospective, retrospective or modified prospective basis. We are currently evaluating the impact of the standard on our consolidated 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 critical accounting policies follows.
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 use two consecutive years of operating losses as our primary indicator of potential impairment for our annual impairment testing of these restaurant assets. 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.
Fair value is an estimate of the price a franchisee would pay for the restaurant and its related assets, including any right-of-use assets, and is determined by discounting the estimated future after-tax cash flows of the restaurant, which include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions as well as expectations as to the useful lives of the restaurant assets that would be used by a franchisee in the determination of a purchase price for the restaurant.
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 similar assumptions to those of a restaurant level assessment.
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.
Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. We formulate these estimates in consideration of historical experience, recent economic and industry trends, and competitive conditions. If our estimates or underlying assumptions, including the discount rate, change, we may experience higher impairment charges in the future.
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, 2025. As of our fourth quarter 2025 annual impairment testing date, the fair values of all of our indefinite-lived intangible assets were in excess of their respective carrying values and no impairment was recorded.
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, Taco Bell, Pizza Hut 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.
The fair values of all our reporting units with goodwill balances were in excess of their respective carrying values as of our fourth quarter 2025 goodwill testing date, with all but the Habit Burger & Grill reporting unit having fair values that were substantially in excess of their respective carrying values. As it relates to our Habit Burger & Grill reporting unit, which includes a goodwill balance of $64 million, the assumptions that were most impactful to our reporting unit fair value estimate in the fourth quarter of 2025 were future same-store sales growth and company restaurant margin improvement. Such assumptions were consistent with our internal plans for the brand and considered reasonable given historical experiences for both the Habit Burger & Grill as well as our other Concepts. However, should future Habit Burger & Grill actual results continue to underperform relative to expectations as was the case in the year ended December 31, 2025, some or all of this goodwill may be impaired in future years.
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. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit retained and includes the value of franchise agreements. Appropriate adjustments are made to the fair value determinations if such franchise agreements are determined to not be at prevailing market rates. As such, the fair value of the reporting unit retained can include expected future cash flows from royalties from those restaurants currently being refranchised, royalties from existing franchise businesses and retained company restaurant operations. As a result, the percentage of a reporting unit’s goodwill that will be written off in a refranchising transaction will be less than the percentage of the reporting unit’s Company-owned restaurants that are refranchised in that transaction and
goodwill can be allocated to a reporting unit with only franchise restaurants. 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 2025, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was approximately $3 million.
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 $774 million and a fair value of plan assets of $670 million at December 31, 2025.
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 these U.S. plans, we measured our PBOs using a discount rate of 5.70% at December 31, 2025. 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 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 $40 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased these U.S. plans’ PBOs by approximately $40 million at our measurement date.
The net periodic benefit cost we record 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. As our two most significant plans in the U.S. are currently closed to new participants (see Note 15), the net periodic benefit cost expected in 2026 for those plans is not significant.
We have an unrecognized pre-tax actuarial net loss of $117 million included in Accumulated other comprehensive income for these U.S. plans at December 31, 2025. We will recognize approximately $2 million of this loss in 2026 consistent with the $2 million of loss recognized in 2025.
Income Taxes
At December 31, 2025, we had valuation allowances of $284 million to reduce our $1,713 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 and tax credit carryforwards in profitable U.S. federal, state and foreign jurisdictions and net operating loss carryforwards 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, carryforward periods, restrictions on usage and prudent and feasible tax planning strategies. 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, 2025, we had $115 million of unrecognized tax benefits, $103 million of which would impact the effective income 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.
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. Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings outside the U.S. Thus, we have provided taxes, including any U.S. federal and state income, foreign income, or foreign withholding taxes on the majority of our unremitted earnings. In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions. We believe any such taxes would be immaterial.
