Items Affecting Comparability of Net Income and Cash Flows

9 Months Ended

Sep. 30, 2017

Items Affecting Comparability of Net Income and Cash Flows [Abstract]

Comparability of Prior Year Financial Data

Items Affecting Comparability of Net Income and Cash Flows

Refranchising (Gain) Loss

The Refranchising (gain) loss by reportable segment is presented below. Given the size and volatility of refranchising initiatives, our chief operating decision maker ("CODM") does not consider the impact of Refranchising (gain) loss when assessing segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes.

During the quarter ended September 30, 2017, we refranchised 209 restaurants. We received $395 million in gross proceeds and recorded $201 million of net, pre-tax refranchising gains related to these transactions. During the year to date ended September 30, 2017, we refranchised 574 restaurants. We received $716 million in gross proceeds and recorded $331 million of net, pre-tax refranchising gains related to these transactions.

A summary of refranchising (gains) losses is as follows:

	Quarter ended						Year to date
	2017			2016			2017			2016
KFC Division(a)	$	(50	)	$	2		(8		)	3
Pizza Hut Division(b)	27			(9		)	40			(63		)
Taco Bell Division(c)	(178		)	(14		)	(363		)	(15		)
Worldwide	$	(201	)	$	(21	)	$	(331	)	$	(75	)

(a) During the quarter ended September 30, 2017, KFC refranchising gains related primarily to the sale of restaurants in the Netherlands and Australia. These gains were partially offset by a loss recorded related to our planned refranchising of KFC Turkey, which was classified as held-for-sale during the quarter ended September 30, 2017. While the sales price we expect to receive for KFC Turkey exceeds the carrying value of the restaurants being sold, this pending transaction would represent a substantially complete liquidation of our KFC Turkey foreign entity. Accordingly, we are required to include accumulated translation losses associated with our KFC Turkey business within our held-for-sale impairment evaluations. As such, we recorded a $51 million non-cash charge within Refranchising (gain) loss that represents the excess of the book value of our KFC Turkey business, which included the accumulated translation losses and a proportionate amount of the KFC Turkey goodwill balance, over the expected sales price.

(b) During the quarter ended September 30, 2017, we recorded a $25 million Refranchising loss related to executing a master franchising agreement that consolidated our existing Pizza Hut Korea franchise base under a single master franchisee. This loss included writing off $12 million of accumulated translation losses as this transaction resulted in a substantially complete liquidation of our Pizza Hut Korea foreign entity.

(c) Net refranchising gains for Taco Bell Division for both the quarter and year to date ended September 30, 2017, relate to refranchising Taco Bell restaurants in the U.S.

In connection with our refranchising initiatives, approximately 520 KFC restaurants in Thailand, Turkey, the U.S. and France have met the criteria and were classified as held-for-sale at the end of the third quarter. As a result of classifying these assets as held-for-sale and recording any related write-downs to fair value, depreciation expense was reduced versus what would have otherwise been recorded by $5 million during the quarter ended September 30, 2017. These depreciation reductions were not allocated to the division segments resulting in depreciation expense continuing to be recorded within our Divisional results at the rate at which it was prior to the held-for-sale classification. Our CODM does not consider the impact of these depreciation reductions when assessing segment performance.

KFC U.S. Acceleration Agreement

During 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we are investing approximately $120 million from 2015 through 2018 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges of $4 million and less than $1 million for the quarters ended September 30, 2017 and 2016, respectively, for these investments. We recorded pre-tax charges of

$12 million and $17 million for the years to date ended September 30, 2017 and 2016, respectively. These amounts were recorded primarily as Franchise and license expenses. We recorded total pre-tax charges of $98 million during the two year period ended December 31, 2016, and we currently expect a total pre-tax charge of approximately $15 million in 2017 for these investments. Due to their size and unique and long-term brand building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these charges are not being allocated to the KFC Division segment operating results.

In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During both of the quarters ended September 30, 2017 and 2016, we incurred $5 million in incremental system advertising expense. During both the years to date ended September 30, 2017 and 2016, we incurred $14 million in incremental system advertising expense. We funded approximately $30 million of such advertising during the two year period ended December 31, 2016. We currently expect to fund approximately $20 million of such advertising in 2017 and $10 million in 2018. All of these advertising amounts were recorded primarily in Franchise and license expenses and are included in the KFC Division segment operating results.

YUM's Strategic Transformation Initiatives

In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated separation of our China business on October 31, 2016. Major features of the Company’s growth and transformation strategy involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. During the quarters ended September 30, 2017 and 2016, we recognized pre-tax charges of $4 million and $30 million, respectively, related to these initiatives. During the years to date ended September 30, 2017 and 2016, we recognized pre-tax charges of $15 million and $34 million, respectively. These costs primarily related to severance and relocation costs that were recorded within G&A expenses. Due to the scope of the initiatives as well as their significance, our CODM does not consider the impact of these initiatives when assessing segment performance. As such, costs associated with the initiatives are not being allocated to any segment for performance reporting purposes.

Pizza Hut U.S. Transformation Agreement

In May 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising and digital and technology contributions by franchisees. In connection with this agreement, we anticipate investing approximately $90 million to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. We currently expect the majority of this investment will be split between 2017 and 2018. During the quarter and year to date ended September 30, 2017, we recorded pre-tax charges of $8 million and $20 million, respectively, within Franchise and license expenses or G&A expenses and capitalized $4 million of costs primarily related to digital and e-commerce initiatives. Due to their unique and long-term brand-building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these investments are not being allocated to the Pizza Hut Division segment operating results.

In addition to the investments above, we have agreed to fund incremental system advertising dollars of approximately $25 million in the second half of 2017 and $12.5 million in 2018. During the quarter ended September 30, 2017, we incurred $10 million in related incremental system advertising expense. These advertising amounts were recorded primarily in Franchise and license expenses and are included in Pizza Hut's segment operating results.

Modifications of Share-based Compensation Awards

In connection with the Separation, we modified certain share-based compensation awards held as part of our Executive Income Deferral ("EID") Plan in phantom shares of YUM Common Stock to provide one phantom Yum China share-based award for each outstanding phantom YUM share-based award. These Yum China awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards each quarter within G&A expenses in our Condensed Consolidated Income Statement. During the quarter and year to date ended September 30, 2017, we recorded pre-tax charges related to these awards of less than $1 million and $18 million, respectively, due to appreciation in the market price of Yum China's stock. Given these charges were a direct result of the Separation, our CODM does not consider their impact when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results.

Impact of Change in Reporting Calendar

As discussed in Note 1, we have changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year commencing with the year ending December 31, 2017. We also removed the monthly or period reporting lags certain of our international subsidiaries historically used to report results. The impacts on our Financial Statements of retrospectively applying these changes are included below:

	Quarter ended September 30, 2016
	As Previously Reported		Adjustments		After Change in Reporting Calendar
Total Revenues	$	1,501	$	17	$	1,518
Operating profit	372		25		397		(a)
Net Income from continuing operations	204		14		218
Income from discontinued operations, net of tax	418		4		422
Net Income	$	622	$	18	$	640
Diluted EPS from continuing operations	$	0.51	$	0.04	$	0.55
Diluted EPS from discontinued operations	1.05		0.02		1.07
Diluted EPS	$	1.56	$	0.06	$	1.62

	Year to date ended September 30, 2016
	As Previously Reported		Adjustments			After Change in Reporting Calendar
Total Revenues	$	4,342	$	128		$	4,470
Operating profit	1,136		24			1,160		(a)
Net Income from continuing operations	709		1			710
Income from discontinued operations, net of tax	643		(13		)	630
Net Income	$	1,352	$	(12	)	$	1,340
Diluted EPS from continuing operations	$	1.72	$	0.01		$	1.73
Diluted EPS from discontinued operations	1.56		(0.02		)	1.54
Diluted EPS	$	3.28	$	(0.01	)	$	3.27

(a) Amount does not reconcile to our Condensed Consolidated Statements of Income for the quarter and year to date ended September 30, 2016 due to the impact of retrospectively adopting a new accounting standard on Benefit Costs of $1 million and $2 million, respectively. See Note 1.

Except for a decrease in cash provided by financing activities of $674 million primarily attributable to the repurchase of Common Stock, the impacts to the Condensed Consolidated Statement of Cash Flows and Condensed Consolidated Balance Sheet as a result of the change in reporting calendar were not significant.

Non-cash Pension Adjustment

During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of $22 million to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM does not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost is not being allocated to any of our segment operating results.