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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934 for the quarterly period ended
September 30, 2019
 
 
 
 
OR
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to _________________
 
 Commission file number 1-13163
________________________
YUM! BRANDS, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
 
13-3951308
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
 
 
 
 
1441 Gardiner Lane,
Louisville,
Kentucky
 
40213
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code:
(502)
 874-8300
 
Securities registered pursuant to Section 12(b) of the Act
 
 
 
 
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
 
Common Stock, no par value
YUM
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
 
Accelerated Filer
o
 
 
 
 
 
Non-accelerated Filer
o
 
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No x
 
The number of shares outstanding of the registrant’s Common Stock as of October 29, 2019 was 302,462,172 shares.
 




YUM! BRANDS, INC.

INDEX
 
 
 
Page
 
 
No.
Part I.
Financial Information
 
 
 
 
 
Item 1 - Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Income
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
Condensed Consolidated Statements of Shareholders' Deficit
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2 - Management’s Discussion and Analysis of Financial Condition
              and Results of Operations
 
 
 
 
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4 – Controls and Procedures
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
Part II.
Other Information and Signatures
 
 
 
 
 
Item 1 – Legal Proceedings
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 6 – Exhibits
 
 
 
 
Signatures


2



PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements
 

3



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
 
 
 
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
 
(in millions, except per share data)
 
 
 
 
 
 
 
 
Quarter ended
 
Year to date
Revenues
9/30/2019
 
9/30/2018
 
9/30/2019
 
9/30/2018
Company sales
$
364


$
499


$
1,056


$
1,523

Franchise and property revenues
645


605


1,890


1,773

Franchise contributions for advertising and other services
330

 
287

 
957

 
834

Total revenues
1,339

 
1,391


3,903


4,130

Costs and Expenses, Net
 
 
 
 
 
 
 
Company restaurant expenses
292

 
399


850


1,258

General and administrative expenses
208


204


617


631

Franchise and property expenses
43


40


124


127

Franchise advertising and other services expense
325

 
288

 
941

 
834

Refranchising (gain) loss
(8
)

(100
)

(18
)

(285
)
Other (income) expense
(1
)

7


5


10

Total costs and expenses, net
859


838


2,519


2,575

Operating Profit
480


553


1,384


1,555

Investment (income) expense, net
59

 
(96
)
 
50

 
(185
)
Other pension (income) expense
1

 
4

 
4

 
10

Interest expense, net
120


111


354


330

Income before income taxes
300

 
534


976


1,400

Income tax provision
45


80


170


192

Net Income
$
255

 
$
454


$
806


$
1,208

 
 
 
 
 
 
 
 
Basic Earnings Per Common Share
$
0.83


$
1.43


$
2.63


$
3.72

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share
$
0.81


$
1.40


$
2.57


$
3.64

 
 
 
 
 
 
 
 
Dividends Declared Per Common Share
$
0.42

 
$
0.36

 
$
1.26

 
$
1.08

 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 


4



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
Quarter ended
 
Year to date
 
9/30/2019
 
9/30/2018
 
9/30/2019
 
9/30/2018
 
 
 
 
 
 
 
 
Net Income
$
255

 
$
454

 
$
806

 
$
1,208

Other comprehensive income (loss), net of tax
 
 
 
 

 

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature
 
 
 
 
 
 
 
Adjustments and gains (losses) arising during the period
(42
)
 
(47
)
 
(37
)
 
(77
)
Reclassification of adjustments and (gains) losses into Net Income

 
(4
)
 

 
(4
)
 
(42
)
 
(51
)
 
(37
)
 
(81
)
Tax (expense) benefit
5

 
5

 
5

 
5

 
(37
)
 
(46
)
 
(32
)
 
(76
)
Changes in pension and post-retirement benefits
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period

 
1

 

 
1

Reclassification of (gains) losses into Net Income
3

 
5

 
8

 
16

 
3

 
6

 
8

 
17

Tax (expense) benefit
(1
)
 
(1
)
 
(2
)
 
(4
)
 
2

 
5

 
6

 
13

Changes in derivative instruments
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(5
)
 
16

 
(65
)
 
43

Reclassification of (gains) losses into Net Income
(12
)
 
(8
)
 
(26
)
 
(23
)
 
(17
)
 
8

 
(91
)
 
20

Tax (expense) benefit
4

 
(2
)
 
23

 
(5
)
 
(13
)
 
6

 
(68
)
 
15

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(48
)
 
(35
)
 
(94
)
 
(48
)
Comprehensive Income
$
207

 
$
419

 
$
712

 
$
1,160

 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
Year to date
 
9/30/2019
 
9/30/2018
Cash Flows – Operating Activities
 
 
 
Net Income
$
806

 
$
1,208

Depreciation and amortization
84

 
103

Refranchising (gain) loss
(18
)

(285
)
Investment (income) expense, net
50

 
(185
)
Contributions to defined benefit pension plans
(13
)
 
(9
)
Deferred income taxes
(10
)
 
32

Share-based compensation expense
45

 
36

Changes in accounts and notes receivable
(4
)
 
(35
)
Changes in prepaid expenses and other current assets
(9
)
 
10

Changes in accounts payable and other current liabilities
(96
)
 
(81
)
Changes in income taxes payable
(64
)
 
(47
)
Other, net
112

 
49

Net Cash Provided by Operating Activities
883

 
796

 
 
 
 
Cash Flows – Investing Activities
 
 
 
Capital spending
(109
)
 
(147
)
Investment in Grubhub Inc. common stock

 
(200
)
Proceeds from refranchising of restaurants
55

 
445

Other, net

 
(9
)
Net Cash Provided by (Used in) Investing Activities
(54
)
 
89

 
 
 
 
Cash Flows – Financing Activities
 
 
 
Proceeds from long-term debt
800

 
106

Repayments of long-term debt
(311
)
 
(462
)
Revolving credit facilities, three months or less, net

 
273

Short-term borrowings by original maturity
 
 
 
More than three months - proceeds
80

 
59

More than three months - payments
(70
)
 
(59
)
Three months or less, net

 

Repurchase shares of Common Stock
(472
)
 
(1,684
)
Dividends paid on Common Stock
(385
)
 
(349
)
Debt issuance costs
(9
)
 

Other, net
(73
)
 
(45
)
Net Cash Used in Financing Activities
(440
)
 
(2,161
)
Effect of Exchange Rates on Cash and Cash Equivalents
(27
)
 
(55
)
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
362

 
(1,331
)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period
474

 
1,668

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period
$
836

 
$
337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 


6



CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
(Unaudited) 9/30/2019
 
12/31/2018
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
691


$
292

Accounts and notes receivable, net
527

 
561

Prepaid expenses and other current assets
330

 
354

Total Current Assets
1,548

 
1,207

 
 
 
 
Property, plant and equipment, net
1,151


1,237

Goodwill
521

 
525

Intangible assets, net
243

 
242

Other assets
1,316

 
724

Deferred income taxes
224

 
195

Total Assets
$
5,003

 
$
4,130

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current Liabilities
 
 
 
Accounts payable and other current liabilities
$
870

 
$
911

Income taxes payable
33

 
69

Short-term borrowings
84

 
321

Total Current Liabilities
987

 
1,301

 
 
 
 
Long-term debt
10,491

 
9,751

Other liabilities and deferred credits
1,622

 
1,004

Total Liabilities
13,100

 
12,056

 
 
 
 
Shareholders’ Deficit
 
 
 
Common Stock, no par value, 750 shares authorized; 303 shares issued in 2019 and 306 issued in 2018

 

Accumulated deficit
(7,669
)
 
(7,592
)
Accumulated other comprehensive loss
(428
)

(334
)
Total Shareholders’ Deficit
(8,097
)
 
(7,926
)
Total Liabilities and Shareholders’ Deficit
$
5,003

 
$
4,130

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 

7



CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
Quarters and years to date ended September 30, 2019 and 2018
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Yum! Brands, Inc.
 
 
 
 
Issued Common Stock
 
Accumulated Deficit
 
Accumulated
Other Comprehensive Loss
 
Total Shareholders' Deficit
 
 
Shares
 
Amount
 
 
 
Balance at June 30, 2019
 
304

 
$

 
$
(7,614
)
 
$
(380
)
 
$
(7,994
)
Net Income
 
 
 
 
 
255

 
 
 
255

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)
 
 
 
 
 
 
 
(37
)
 
(37
)
Pension and post-retirement benefit plans (net of tax impact of $1 million)
 
 
 
 
 
 
 
2

 
2

Net loss on derivative instruments (net of tax impact of $4 million)
 
 
 
 
 
 
 
(13
)
 
(13
)
Comprehensive Income
 
 
 
 
 
 
 
 
 
207

Dividends declared
 
 
 
 
 
(130
)
 
 
 
(130
)
Repurchase of shares of Common Stock
 
(2
)
 

 
(174
)
 
 
 
(174
)
Employee share-based award exercises
 
1

 
(15
)
 
(5
)
 
 
 
(20
)
Share-based compensation events
 
 
 
15

 
(1
)
 
 
 
14

Balance at September 30, 2019
 
303

 
$

 
$
(7,669
)
 
$
(428
)
 
$
(8,097
)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
306

 
$

 
$
(7,592
)
 
$
(334
)
 
$
(7,926
)
Net Income
 
 
 
 
 
806

 
 
 
806

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)
 
 
 
 
 
 
 
(32
)
 
(32
)
Pension and post-retirement benefit plans (net of tax impact of $2 million)
 
 
 
 
 
 
 
6

 
6

Net loss on derivative instruments (net of tax impact of $23 million)
 
 
 
 
 
 
 
(68
)
 
(68
)
Comprehensive Income
 
 
 
 
 
 
 
 
 
712

Dividends declared
 
 
 
 
 
(387
)
 
 
 
(387
)
Repurchase of shares of Common Stock
 
(5
)
 
(1
)
 
(475
)
 
 
 
(476
)
Employee share-based award exercises
 
2

 
(53
)
 
(18
)
 
 
 
(71
)
Share-based compensation events
 
 
 
54

 
(1
)
 
 
 
53

Adoption of accounting standard
 
 
 
 
 
(2
)
 


 
(2
)
Balance at September 30, 2019
 
303

 
$

 
$
(7,669
)
 
$
(428
)
 
$
(8,097
)
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
 
319

 
$

 
$
(6,965
)
 
$
(282
)
 
$
(7,247
)
Net Income
 
 
 
 
 
454

 
 
 
454

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)
 
 
 
 
 
 
 
(46
)
 
(46
)
Pension and post-retirement benefit plans (net of tax impact of $1 million)
 
 
 
 
 
 
 
5

 
5

Net gain on derivative instruments (net of tax impact of $2 million)
 
 
 
 
 
 
 
6

 
6

Comprehensive Income
 
 
 
 
 
 
 
 
 
419

Dividends declared
 
 
 
 
 
(114
)
 
 
 
(114
)
Repurchase of shares of Common Stock
 
(6
)
 
(11
)
 
(516
)
 
 
 
(527
)
Employee share-based award exercises
 

 
(3
)
 
 
 
 
 
(3
)
Share-based compensation events
 
 
 
14

 
 
 
 
 
14

Balance at September 30, 2018
 
313

 
$

 
$
(7,141
)
 
$
(317
)
 
$
(7,458
)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
332

 
$

 
$
(6,063
)
 
$
(271
)
 
$
(6,334
)
Net Income
 
 
 
 
 
1,208

 
 
 
1,208

Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $5 million)
 
 
 
 
 
 
 
(76
)
 
(76
)
Pension and post-retirement benefit plans (net of tax impact of $4 million)
 
 
 
 
 
 
 
13

 
13

Net gain on derivative instruments (net of tax impact of $5 million)
 
 
 
 
 
 
 
15

 
15

Comprehensive Income
 
 
 
 
 
 
 
 
 
1,160

Dividends declared
 
 
 
 
 
(351
)
 
 
 
(351
)
Repurchase of shares of Common Stock
 
(20
)
 
(18
)
 
(1,680
)
 
 
 
(1,698
)
Employee share-based award exercises
 
1

 
(32
)
 
(4
)
 
 
 
(36
)
Share-based compensation events
 
 
 
50

 
 
 
 
 
50

Adoption of accounting standards
 
 
 
 
 
(251
)
 
2

 
(249
)
Balance at September 30, 2018
 
313

 
$

 
$
(7,141
)
 
$
(317
)
 
$
(7,458
)
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.


8



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in millions, except per share data)

Note 1 - Financial Statement Presentation

We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements.  Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“2018 Form 10-K”).  

YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchises or operates a system of over 49,000 quick service restaurants in more than 145 countries and territories.  At September 30, 2019, 98% of these restaurants were owned and operated by franchisees.  The Company’s KFC, Pizza Hut and Taco Bell brands (collectively the “Concepts”) are global leaders of the chicken, pizza and Mexican-style food categories.

As of September 30, 2019, YUM consisted of three 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

YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. 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. For our subsidiaries that operate on this weekly periodic calendar, 2019 will include a 53rd week. Our remaining international subsidiaries operate on a monthly calendar similar to that on which YUM operates.

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 2018 Form 10-K, the results of the interim periods presented. Our results of operations, comprehensive income, cash flows and changes in shareholders' deficit for these interim periods are not necessarily indicative of the results to be expected for the full year.

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

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 30, 2019. These reclassifications had no effect on previously reported Net Income.


9



Note 2 - Lease Accounting

Starting in February 2016 and continuing into 2019, the Financial Accounting Standards Board ("FASB") issued standards on the recognition and measurement of leases ("Topic 842"). We adopted these standards beginning with the quarter ended March 31, 2019, using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of 2019 and have not recast the comparative periods presented in the Condensed Consolidated Financial Statements. The standards provide a number of optional practical expedients and policy elections in transition. We elected the ‘package of practical expedients’ under which we did not reassess under the standards our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements. Refer to Note 5 for information regarding the adjustments recorded to our Condensed Consolidated Balance Sheet as of the beginning of the quarter ended March 31, 2019 to reflect the adoption of Topic 842. Below is information about the nature of our leases, accounting policies and assumptions subsequent to adopting Topic 842 and other required disclosures.

In certain instances, we lease or sublease certain restaurants to franchisees. Our lessor and sublease portfolio primarily consists of stores that have been leased to franchisees subsequent to refranchising transactions. Our most significant leases with lease and non-lease components are leases with our franchisees that include both the right to use a restaurant as well as a license of the intellectual property associated with our Concepts’ brands. For these leases, which are primarily classified as operating leases, we account for the lease and non-lease components separately. Revenues from rental agreements with franchisees are presented within Franchise and property revenues in our Condensed Consolidated Statements of Income and related expenses (e.g. depreciation and rent expense) are presented within Franchise and property expenses. The impact of adopting Topic 842 on the accounting for our lessor and sublease portfolio was not significant.

We lease land, buildings or both for certain of our restaurants and restaurant support centers worldwide. Rental expense for leased restaurants is presented in our Condensed Consolidated Statements of Income as Company restaurant expenses and rental expense for restaurant support centers is presented as General and administrative expenses. The length of our lease terms, which vary by country and often include renewal options, are an important factor in determining the appropriate accounting for leases including the initial classification of the lease as finance (referred to as “capital” leases prior to the adoption of Topic 842) or operating as well as the timing of recognition of rent expense over the duration of the lease. We include renewal option periods in determining the term of our leases when failure to renew the lease would impose a penalty on the Company in such an amount that a renewal appears to be reasonably certain at the commencement of the lease. The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements that might be impaired if we choose not to continue the use of the leased property. Our leasing activity for other assets, including equipment, is not significant.

Prior to the adoption of Topic 842 (“Legacy GAAP”) liabilities for future rental payments under operating leases were not recognized on the balance sheet of the Company except when recognizing a liability was necessary to reflect the impact of recognizing rent expense on a straight-line basis. Upon the adoption of Topic 842, right-of-use assets and liabilities are recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. Such assets and liabilities have historically always been recorded for finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Subsequent amortization of the right-of-use asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. For finance leases, the right-of-use asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. As most of our leases do not provide an implicit discount rate, we use our incremental secured borrowing rate based on the information available at commencement date, including the lease term and currency, in determining the present value of lease payments for both operating and finance leases. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Right-of-use assets are assessed for impairment in accordance with our long-lived asset impairment policy, which is performed annually or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We reassess lease classification and remeasure right-of-use assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with Topic 842. The difference between operating lease rental expense recognized in our Condensed Consolidated Statements of Income and cash payments for operating leases is recognized within Other, net within Net Cash Provided by Operating Activities in our Condensed Consolidated Statements of Cash Flows.


10



The components of lease expense were as follows:
 
Quarter Ended
9/30/2019
 
Year to date 9/30/2019
Operating lease cost
 
$
18

 
$
55

Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 

 
2

Interest on lease liabilities
 
1

 
2

Total finance lease cost
 
1

 
4

Sublease income
 
(16
)
 
(50
)


Supplemental cash flow information related to leases was as follows:
 
Year to date
9/30/2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
73

Operating cash flows from finance leases
 
2

Financing cash flows from finance leases
 
3

Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
 
67

Finance leases
 
8



Supplemental balance sheet information related to leases was as follows:

 
 
9/30/2019
 
Condensed Consolidated Balance Sheet
Assets
 
 
 
 
Operating lease right-of-use assets
 
$
657

 
Other assets
Finance lease right-of-use assets
 
36

 
Property, plant and equipment, net
Total right-of-use assets(a)
 
$
693

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
$
69

 
Accounts payable and other current liabilities
Finance
 
7

 
Short-term borrowings
Non-current
 
 
 
 
Operating
 
653

 
Other liabilities and deferred credits
Finance
 
62

 
Long-term debt
Total lease liabilities(a)
 
$
791

 
 
 
 
 
 
 
Weighted-average Remaining Lease Term (in years)
 
 
 
 
Operating leases
 
12.8

 
 
Finance leases
 
12.6

 
 
 
 
 
 
 
Weighted-average Discount Rate
 
 
 
 
Operating leases
 
5.5
%
 
 
Finance leases
 
6.1
%
 
 

(a)
U.S. operating lease right-of-use assets and liabilities totaled $298 million and $352 million, respectively, as of September 30, 2019 and primarily related to Taco Bell U.S.


11



Future minimum lease payments as of September 30, 2019, including rental payments for lease renewal options we are reasonably certain to exercise were as follows:
 
 
Commitments
 
 
Finance
 
Operating
Less than 1 year
 
$
10

 
$
110

1-2 years
 
9

 
101

2-3 years
 
9

 
92

3-4 years
 
8

 
83

4-5 years
 
7

 
79

Thereafter
 
54

 
548

Total lease payments
 
97

 
1,013

Less imputed interest
 
(28
)
 
(291
)
Total lease liabilities
 
$
69

 
$
722



Future minimum lease payments under the non-cancellable term of leases as of December 31, 2018 as required to be disclosed under Legacy GAAP were as follows:
 
 
Commitments
 
 
Capital
 
Operating
2019
 
$
10

 
$
103

2020
 
10

 
89

2021
 
9

 
78

2022
 
8

 
71

2023
 
8

 
61

Thereafter
 
58

 
384

Total lease payments
 
$
103

 
$
786




Note 3 - Earnings Per Common Share (“EPS”)
 
 
Quarter ended
 
Year to date
 
 
2019
 
2018
 
2019
 
2018
Net Income
 
$
255

 
$
454

 
$
806

 
$
1,208

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (for basic calculation)
 
306


318

 
307

 
325

Effect of dilutive share-based employee compensation
 
7

 
7

 
7

 
7

Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
 
313


325

 
314


332