Items Affecting Comparability of Net Income and Cash Flows

6 Months Ended

Jun. 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 June 30, 2017, we refranchised 244 restaurants. We received $136 million in proceeds and recorded $19 million of net pre-tax refranchising gains related to these transactions. During the year to date ended June 30, 2017, we refranchised 365 restaurants. We received $321 million in proceeds and recorded $130 million of net pre-tax refranchising gains related to these transactions.



	Quarter ended						Year to date
	2017			2016			2017			2016
KFC Division	$	41		$	—		42			1
Pizza Hut Division	11			(54		)	13			(54		)
Taco Bell Division	(71		)	—			(185		)	(1		)
Worldwide	$	(19	)	$	(54	)	$	(130	)	$	(54	)

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 anticipate 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 $5 million and $8 million for the quarters ended June 30, 2017 and 2016, respectively, for these investments. We recorded pre-tax charges of $8 million and $17 million for the years to date ended June 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 $20 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 June 30, 2017 and 2016, we incurred $5 million in incremental system advertising expense. During both the years to date ended June 30, 2017 and 2016, we incurred $9 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 both the quarters ended June 30, 2017 and 2016, we recognized pre-tax charges of $4 million related to these initiatives. During the years to date ended June 30, 2017 and 2016, we recognized pre-tax charges of $11 million and $4 million, respectively. These costs primarily related to severance and relocation costs that were recorded within G&A expense. 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

On May 1, 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 ended June 30, 2017, we recorded pre-tax charges of $12 million primarily related to digital and e-commerce initiatives that were recorded as Franchise and license expenses. 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 amounts 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. No expense related to these incremental advertising amounts has yet to be recorded as of June 30, 2017. Such expense will be included in Pizza Hut's segment operating results as they are incurred.

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 in our Condensed Consolidated Income Statement. During the quarter and year to date ended June 30, 2017, we recorded pre-tax charges related to these awards of $16 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 June 30, 2016
	As Previously Reported		Adjustments			After Change in Reporting Calendar
Total Revenues	$	1,477	$	32		$	1,509
Operating profit	408		7			415
Net Income from continuing operations	265		1			266
Income from discontinued operations, net of tax	74		(4		)	70
Net Income	$	339	$	(3	)	$	336

Diluted EPS from continuing operations	$	0.64	$	—		$	0.64
Diluted EPS from discontinued operations	0.17		—			0.17
Diluted EPS	$	0.81	$	—		$	0.81



	Year to date ended June 30, 2016
	As Previously Reported		Adjustments			After Change in Reporting Calendar
Total Revenues	$	2,841	$	111		$	2,952
Operating profit	764		1			765		^(a)
Net Income from continuing operations	505		(13		)	492
Income from discontinued operations, net of tax	225		(17		)	208
Net Income	$	730	$	(30	)	$	700

Diluted EPS from continuing operations	$	1.20	$	(0.02	)	$	1.18
Diluted EPS from discontinued operations	0.54		(0.04		)	0.50
Diluted EPS	$	1.74	$	(0.06	)	$	1.68


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

The impact on Total Assets within the Condensed Consolidated Balance Sheet as of December 31, 2016, versus amounts previously reported, was a decrease of $25 million.

The impact on our June 30, 2016 Condensed Consolidated Statement of Cash Flows was a decrease in cash provided by operating activities of $26 million, an increase in cash used in investing activities of $16 million and an increase in cash provided by financing activities of $3,299 million versus amounts previously reported. The increase in cash used in financing activities is due to timing of proceeds from Long-term debt issuances.

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.