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Items Affecting Comparability of Net Income, Financial Position and Cash Flows
 9 Months Ended
Sep. 30, 2019
Items Affecting Comparability of Net Income and Cash Flows [Abstract]  
Comparability of Prior Year Financial Data Items Affecting Comparability of Net Income, Financial Position and Cash Flows

Refranchising (Gain) Loss

The Refranchising (gain) loss by our Divisional reportable segments 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 Divisional segment performance. As such, we do not allocate such gains and losses to our Divisional segments for performance reporting purposes.

During the quarter and year to date ended September 30, 2019, we sold certain restaurant assets associated with existing franchise restaurants to the franchisee. Additionally, during the quarter and year to date ended September 30, 2019, we refranchised 2 restaurants and 8 restaurants, respectively. Pre-tax proceeds related to these sales totaled $30 million and $55 million for the quarter and year to date ended September 30, 2019, respectively. During the quarter and year to date ended September 30, 2018, we refranchised 134 restaurants and 329 restaurants, respectively, and received $193 million and $445 million, respectively, in pre-tax proceeds.

A summary of Refranchising (gain) loss is as follows:

 
 
Quarter ended
 
Year to date
 
 
2019
 
2018
 
2019
 
2018
KFC Division
 
$
(7
)
 
$
(29
)
 
$
(13
)
 
$
(128
)
Pizza Hut Division
 
—

 
3

 
—

 
14

Taco Bell Division
 
(1
)
 
(74
)
 
(5
)
 
(171
)
Worldwide
 
$
(8
)
 
$
(100
)
 
$
(18
)
 
$
(285
)


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 that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million from 2017 to 2020 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. As of September 30, 2019, we have invested $86 million since the inception of the agreement.

We have invested $5 million and $18 million in the quarter and year to date ended September 30, 2019, respectively, and $5 million and $16 million in the quarter and year to date ended September 30, 2018, respectively, related to the Transformation Agreement. These amounts primarily consisted of capital investments and franchisee incentive payments that were capitalized. Also included are operating investments of $2 million and $1 million in the quarters ended September 30, 2019 and 2018, respectively, and $5 million and $3 million in the years to date ended September 30, 2019 and 2018, respectively.

Due to their unique and long-term brand-building nature as well as their non-recurring impact on Pizza Hut’s Division results, the financial impact of operating investments that are part of the Transformation Agreement are not being considered by our CODM when assessing segment performance. As such, these operating investments are not being allocated to the Pizza Hut Division operating segment results for performance reporting purposes.

Depreciation on capital investments made as part of the Transformation Agreement is being allocated to Pizza Hut segment results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. For the same reasons, the amortization related to capitalized franchisee incentive payments is being allocated to Pizza Hut Division operating segment results.

In addition to the investments above, we funded $37.5 million of incremental system advertising from the second half of 2017 through 2018, including $4 million and $9 million we incurred during the quarter and year to date ended September 30, 2018, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the Pizza Hut Division segment operating results.

KFC U.S. Acceleration Agreement

During 2015, we reached an agreement with our KFC U.S. franchisees that gave us control of brand marketing execution 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 $130 million from 2015 through 2019 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We invested $1 million and $2 million in the quarters ended September 30, 2019 and 2018, respectively, and $3 million and $5 million in the years to date ended September 30, 2019 and 2018, respectively. We have invested approximately $125 million since the inception of the agreement.

In addition to the investments above, we funded $60 million of incremental system advertising from 2015 through 2018, including $2 million and $7 million incurred during the quarter and year to date ended September 30, 2018, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the KFC Division segment operating results.

Turkey Acquisition Contingent Consideration

During the second quarter of 2019 we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses.  Consistent with prior adjustments to the recorded contingent consideration, our CODM does not consider this charge when assessing segment performance due to the nature of these costs.  As such, these costs are not being allocated to any of our segment operating results for performance reporting purposes.

Investment in Grubhub, Inc. ("Grubhub")

On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub, the leading online and mobile takeout food-ordering company in the U.S., which is intended to provide dedicated support for the KFC and Taco Bell branded online delivery channels in the U.S. through Grubhub’s online ordering platform, logistics and last-mile support for delivery orders, as well as point-of-sale integration to streamline operations. Concurrently with the master services agreement, one of our subsidiaries entered into an investment agreement with Grubhub to invest $200 million in exchange for approximately 2.8 million shares of Grubhub common stock, subject to customary closing conditions. In April 2018, all necessary regulatory approvals were obtained and the purchase of Grubhub shares was consummated. Shares acquired as part of this purchase are restricted from being transferred until the earlier of the two-year anniversary of closing the investment agreement or 30 days following the termination of our master services agreement with Grubhub. In the quarter and year to date ended September 30, 2019 we recognized pre-tax expense of $60 million and $56 million, respectively, related to the mark-to-market of these shares, which includes current year depreciation in the market price of Grubhub common stock. In the quarter and year to date ended September 30, 2018, we recognized pre-tax income of $94 million and $185 million, respectively, which included the appreciation in the market price of Grubhub common stock since entering into the agreement. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Condensed Consolidated Statements of Income.

Impact of Adopting New Lease Standards

As discussed in Note 2, we adopted Topic 842 beginning with the quarter ended March 31, 2019, using a modified retrospective method. Topic 842 was applied to all leases existing at, or entered into after, the beginning of 2019. As a result of adopting Topic 842, the following adjustments were made to the Condensed Consolidated Balance Sheet as of the beginning of the quarter ended March 31, 2019:
CONDENSED CONSOLIDATED BALANCE SHEET
 
As Reported 12/31/2018
 
Adjustments
 
Balances with Adoption of Topic 842 1/1/2019
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
292

 
$
—

 
$
292

Accounts and notes receivable, net
561

 
—

 
561

Prepaid expenses and other current assets
354

 
(10
)
 
344

Total Current Assets
1,207

 
(10
)
 
1,197

 
 
 
 
 
 
Property, plant and equipment, net
1,237

 
—

 
1,237

Goodwill
525

 
—

 
525

Intangible assets, net
242

 
—

 
242

Other assets
724

 
689

 
1,413

Deferred income taxes
195

 
—

 
195

Total Assets
$
4,130

 
$
679

 
$
4,809

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts payable and other current liabilities
$
911

 
$
76

 
$
987

Income taxes payable
69

 
—

 
69

Short-term borrowings
321

 
—

 
321

Total Current Liabilities
1,301

 
76

 
1,377

 
 
 
 
 
 
Long-term debt
9,751

 
—

 
9,751

Other liabilities and deferred credits
1,004

 
605

 
1,609

Total Liabilities
12,056

 
681

 
12,737

 
 
 
 
 
 
Shareholders’ Deficit
 
 
 
 
 
Accumulated deficit
(7,592
)
 
(2
)
 
(7,594
)
Accumulated other comprehensive loss
(334
)
 
—

 
(334
)
Total Shareholders’ Deficit
(7,926
)
 
(2
)
 
(7,928
)
Total Liabilities and Shareholders’ Deficit
$
4,130

 
$
679

 
$
4,809



We recorded lease liabilities within Accounts payable and other current liabilities and Other liabilities and deferred credits of $83 million and $661 million, respectively, related to the present value of the remaining operating lease payments. These adjustments were partially offset by reductions to Accounts payable and other current liabilities and Other liabilities and deferred credits of $7 million and $56 million, respectively, primarily related to the write offs of liabilities previously recorded to reflect the impact of recognizing rent expense on a straight-line basis when lease payments were escalating under Legacy GAAP. Additionally, lease liabilities recognized upon adoption were offset by the write-off of prepaid rent of $11 million that was recorded under Legacy GAAP resulting in a decrease within Prepaid expenses and other current assets and Other assets of $10 million and $1 million, respectively.

We recorded a corresponding right-of-use asset within Other Assets of $690 million. This right-of-use asset reflected a $2 million impairment charge that would have been recorded before adoption of Topic 842 had the right-of-use asset been recognized under Legacy GAAP. A related increase was recorded in Accumulated deficit.