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Items Affecting Comparability of Net Income, Financial Position and Cash Flows | 9 Months Ended
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Sep. 30, 2018
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 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 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. During the quarter and year to date ended September 30, 2017, we refranchised 209 restaurants and 574 restaurants, respectively, and received $395 million and $716 million, respectively, in pre-tax proceeds. A summary of Refranchising (gain) loss is as follows:
|  | Quarter ended |  | Year to date
|  | 2018 |  | 2017 |  | 2018 |  | 2017
KFC Division |  | $ | (29 | ) |  | $ | (50 | ) |  | $ | (128 | ) |  | $ | (8 | )
Pizza Hut Division |  | 3 |  |  | 27 |  |  | 14 |  |  | 40 |
Taco Bell Division |  | (74 | ) |  | (178 | ) |  | (171 | ) |  | (363 | )
Worldwide |  | $ | (100 | ) |  | $ | (201 | ) |  | $ | (285 | ) |  | $ | (331 | )
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 $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. Under Legacy GAAP these amounts were expensed as incurred including $4 million and $12 million during the quarter and year to date ended September 30, 2017, respectively. We recorded total pre-tax charges for such amounts of $115 million, primarily as Franchise and property expenses, during the three year period ended December 31, 2017. Due to their size and unique and long-term brand building nature, as well as their non-recurring impact on KFC Division's results when expensed upfront, our CODM did not consider the impact of these investments when assessing segment performance from 2015 through 2017. As such, prior to 2018 the investments were not allocated to the KFC Division segment operating results for performance reporting purposes. Upon adoption of Topic 606 in 2018, approximately $100 million of these incentives paid to franchisees from 2015 through 2017 were capitalized, which was net of amortization of $19 million. These capitalized amounts are now being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates. Amortization related to both franchise incentive payments that were capitalized upon the adoption of Topic 606 and franchise incentive payments that will be capitalized going forward will be allocated to KFC segment operating results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. During the quarter and year to date ended September 30, 2018, we recorded a reduction to KFC Division Franchise and property revenues related to the amortization of these franchise incentive payments of $2 million and $7 million, respectively. In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During the quarters ended September 30, 2018 and 2017, we incurred $2 million and $5 million, respectively, in incremental system advertising expense. During the years to date ended September 30, 2018 and 2017, we incurred $7 million and $14 million, respectively, in incremental system advertising expense. We funded approximately $50 million of such advertising during the three year period ended December 31, 2017, which included $20 million during 2017. We currently expect to fund approximately $10 million in 2018. These advertising amounts were recorded primarily in Franchise and property expenses and have been and continue to be 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 strategic transformation plans 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, 2018 and 2017, we recognized pre-tax charges of $1 million and $4 million, respectively, primarily within G&A, related to these initiatives. During the years to date ended September 30, 2018 and 2017, we recognized pre-tax charges of $2 million and $15 million, respectively, primarily within G&A, related to these initiatives. These costs primarily related to severance and relocation costs. Due to the scope of the initiatives as well as the significance of YUM's Strategic Transformation Initiatives program, 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 that includes 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 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, which will be a mix of both capital and operating investments, to be split between 2017 and 2018. We invested $39 million related to the Transformation Agreement in 2017, which included $8 million of investments that we capitalized and $31 million that was expensed primarily as Franchise and property expenses or G&A. The $31 million expense amount included $5 million of franchisee incentive payments that under Legacy GAAP were expensed as incurred, but that upon adoption of Topic 606 in 2018 were capitalized. In 2018, both amounts capitalized upon adoption of Topic 606 and franchisee incentive payments capitalized thereafter are being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payments relate. We have invested $5 million and $16 million in the quarter and year to date, respectively, related to the Transformation Agreement, primarily consisting of capital investments and franchisee incentive payments that were capitalized. 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 in 2017 or 2018. As such, these operating investments were not 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 franchisee incentive payments that were capitalized upon the adoption of Topic 606 and amortization related to franchisee incentive payments that are being capitalized going forward are being allocated to Pizza Hut Division operating segment results starting in 2018. In addition to the investments above, we agreed to fund $37.5 million of incremental system advertising dollars from the second half of 2017 through 2018. During the quarter and year to date ended September 30, 2018, we incurred $4 million and $9 million, respectively, in related incremental system advertising expense. We funded approximately $25 million of such advertising during 2017, which was expensed in the third and fourth quarters of 2017. We currently expect to fund approximately $12.5 million in 2018. These advertising amounts have been and will continue to be recorded primarily in Franchise and property expenses and are included in Pizza Hut's segment operating results. Modifications of Share-based Compensation Awards In connection with the separation of our business in China, 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. Through October 31, 2018, these Yum China awards could be settled in cash, as opposed to stock, which required recognition of the fair value of these awards within G&A in our Condensed Consolidated Income Statement. During the quarter and year to date ended September 30, 2018 we recorded pre-tax credits related to these awards of $2 million and $3 million, respectively, due to depreciation in the market price of Yum China's common stock. 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 common stock. Given these adjustments were a direct result of the separation, our CODM did not consider their impact when assessing segment performance. As such, these amounts were not allocated to any of our segment operating results. Subsequent to the quarter end, on October 31, 2018, deferrals in phantom shares of Yum China common stock are no longer an investment option within our EID Plan and any balances relating to these shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund will remain classified as a liability and any appreciation or depreciation in these investments from the transfer date forward will be recognized as compensation expense and included in our segment operating results consistent with existing investments in these funds. Any balances directed into phantom shares of YUM Common Stock will be reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock. Impact of Adopting New Revenue Recognition Standards As discussed in Note 1, we adopted Topic 606 beginning with the quarter ended March 31, 2018, using the modified retrospective method. Topic 606 was applied to all contracts with customers as of January 1, 2018 and the cumulative effective of this transition was recorded as an adjustment to Accumulated deficit as of this date. As a result, the following adjustments were made to the Condensed Consolidated Balance Sheet as of January 1, 2018:
CONDENSED CONSOLIDATED BALANCE SHEET
| As Reported 12/31/2017 |  | Adjustments |  |  | Balances with Adoption of Topic 606 1/1/2018
ASSETS |  |  |  |  |  |
Current Assets |  |  |  |  |  |
Cash and cash equivalents | $ | 1,522 |  |  | $ | 11 |  |  |  | $ | 1,533 |
Accounts and notes receivable, net | 400 |  |  | 112 |  |  |  | 512 |
Prepaid expenses and other current assets | 384 |  |  | 76 |  | (a) |  | 460 |
Advertising cooperative assets, restricted | 201 |  |  | (201 | ) |  |  | — |
Total Current Assets | 2,507 |  |  | (2 | ) |  |  | 2,505 |
Property, plant and equipment, net | 1,697 |  |  | 11 |  |  |  | 1,708 |
Goodwill | 512 |  |  | — |  |  |  | 512 |
Intangible assets, net | 110 |  |  | — |  |  |  | 110 |
Other assets | 346 |  |  | 118 |  |  |  | 464 |
Deferred income taxes | 139 |  |  | 26 |  |  |  | 165 |
Total Assets | $ | 5,311 |  |  | $ | 153 |  |  |  | $ | 5,464 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |  |
Current Liabilities |  |  |  |  |  |
Accounts payable and other current liabilities | $ | 813 |  |  | $ | 220 |  |  |  | $ | 1,033 |
Income taxes payable | 123 |  |  | — |  |  |  | 123 |
Short-term borrowings | 375 |  |  | — |  |  |  | 375 |
Advertising cooperative liabilities | 201 |  |  | (201 | ) |  |  | — |
Total Current Liabilities | 1,512 |  |  | 19 |  |  |  | 1,531 |
Long-term debt | 9,429 |  |  | — |  |  |  | 9,429 |
Other liabilities and deferred credits | 704 |  |  | 353 |  |  |  | 1,057 |
Total Liabilities | 11,645 |  |  | 372 |  |  |  | 12,017 |
Shareholders’ Deficit |  |  |  |  |  |
Accumulated deficit | (6,063 | ) |  | (240 | ) |  |  | (6,303 | )
Accumulated other comprehensive loss | (271 | ) |  | 21 |  |  |  | (250 | )
Total Shareholders’ Deficit | (6,334 | ) |  | (219 | ) |  |  | (6,553 | )
Total Liabilities and Shareholders’ Deficit | $ | 5,311 |  |  | $ | 153 |  |  |  | $ | 5,464 |
(a) | Includes $58 million of restricted cash related to advertising cooperatives. These balances can only be used to settle obligations of the respective cooperatives.
We recorded an increase in Accounts payable and other current liabilities and Other liabilities and deferred credits of $57 million and $335 million, respectively, as part of our cumulative adjustment related to unamortized upfront franchise fees, with a corresponding $392 million increase in Accumulated deficit. We recorded increases in Prepaid expenses and other current assets and Other assets of $18 million and $118 million, respectively, as part of our cumulative adjustment related to unamortized franchise incentives, with a corresponding $136 million decrease in Accumulated deficit. Deferred income taxes increased $26 million as a result of recording the tax effects of the two adjustments noted above, with a corresponding decrease to Accumulated deficit. Accumulated other comprehensive loss decreased $21 million as a result of recognizing the impact of foreign currency translation related to the three adjustments noted above, with a corresponding increase in Accumulated deficit. The remaining adjustments to our December 31, 2017 Condensed Consolidated Balance Sheet are primarily a result of reclassifying the assets and liabilities of our consolidated advertising cooperates from Advertising cooperative assets, restricted and Advertising cooperative liabilities to the respective balance sheet caption to which the assets and liabilities relate. The following tables reflect the impact of the adoption of Topic 606 on our Condensed Consolidated Statement of Income for the quarter and year to date ended September 30, 2018 and our Condensed Consolidated Balance Sheet as of September 30, 2018.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| Quarter ended 9/30/2018
Revenues | As Reported |  | Impact |  |  | Balances under Legacy GAAP
Company sales | $ | 499 |  |  | $ | — |  |  |  | $ | 499 |
Franchise and property revenues | 605 |  |  | 11 |  |  |  | 616 |
Franchise contributions for advertising and other services | 287 |  |  | (287 | ) |  |  | — |
Total revenues | 1,391 |  |  | (276 | ) |  |  | 1,115 |
Costs and Expenses, Net |  |  |  |  |  |
Company restaurant expenses | 399 |  |  | — |  |  |  | 399 |
General and administrative expenses | 204 |  |  | — |  |  |  | 204 |
Franchise and property expenses | 40 |  |  | 10 |  |  |  | 50 |
Franchise advertising and other services expense | 288 |  |  | (288 | ) |  |  | — |
Refranchising (gain) loss | (100 | ) |  | — |  |  |  | (100 | )
Other (income) expense | 7 |  |  | — |  |  |  | 7 |
Total costs and expenses, net | 838 |  |  | (278 | ) |  |  | 560 |
Operating Profit | 553 |  |  | 2 |  | (a) |  | 555 |
Investment (income) expense, net | (96 | ) |  | — |  |  |  | (96 | )
Other pension (income) expense | 4 |  |  | — |  |  |  | 4 |
Interest expense, net | 111 |  |  | — |  |  |  | 111 |
Income before income taxes | 534 |  |  | 2 |  |  |  | 536 |
Income tax provision (benefit) | 80 |  |  | (2 | ) |  |  | 78 |
Net Income | $ | 454 |  |  | $ | 4 |  |  |  | $ | 458 |
Basic Earnings Per Common Share | $ | 1.43 |  |  | $ | 0.01 |  |  |  | $ | 1.44 |
Diluted Earnings Per Common Share | $ | 1.40 |  |  | $ | 0.01 |  |  |  | $ | 1.41 |
| Year to date ended 9/30/2018
Revenues | As Reported |  | Impact |  |  | Balances under Legacy GAAP
Company sales | $ | 1,523 |  |  | $ | — |  |  |  | $ | 1,523 |
Franchise and property revenues | 1,773 |  |  | 23 |  |  |  | 1,796 |
Franchise contributions for advertising and other services | 834 |  |  | (834 | ) |  |  | — |
Total revenues | 4,130 |  |  | (811 | ) |  |  | 3,319 |
Costs and Expenses, Net |  |  |  |  |  |
Company restaurant expenses | 1,258 |  |  | — |  |  |  | 1,258 |
General and administrative expenses | 631 |  |  | — |  |  |  | 631 |
Franchise and property expenses | 127 |  |  | 21 |  |  |  | 148 |
Franchise advertising and other services expense | 834 |  |  | (834 | ) |  |  | — |
Refranchising (gain) loss | (285 | ) |  | 4 |  |  |  | (281 | )
Other (income) expense | 10 |  |  | — |  |  |  | 10 |
Total costs and expenses, net | 2,575 |  |  | (809 | ) |  |  | 1,766 |
Operating Profit | 1,555 |  |  | (2 | ) | (a) |  | 1,553 |
Investment (income) expense, net | (185 | ) |  | — |  |  |  | (185 | )
Other pension (income) expense | 10 |  |  | — |  |  |  | 10 |
Interest expense, net | 330 |  |  | — |  |  |  | 330 |
Income before income taxes | 1,400 |  |  | (2 | ) |  |  | 1,398 |
Income tax provision (benefit) | 192 |  |  | (3 | ) |  |  | 189 |
Net Income | $ | 1,208 |  |  | $ | 1 |  |  |  | $ | 1,209 |
Basic Earnings Per Common Share | $ | 3.72 |  |  | $ | 0.01 |  |  |  | $ | 3.73 |
Diluted Earnings Per Common Share | $ | 3.64 |  |  | $ | — |  |  |  | $ | 3.64 |
(a) | Includes $2 million and $11 million of franchise incentive payments related to the KFC U.S. Acceleration Agreement or the Pizza Hut U.S. Transformation Agreement that would have been expensed immediately and that we would not have allocated to the KFC Division or the Pizza Hut Division under Legacy GAAP for the quarter and year to date ended September 30, 2018, respectively. Upon the adoption of Topic 606, these payments have been capitalized as assets.
Upon the adoption of Topic 606, the timing and amount of revenue recognized for upfront franchise fees and franchise incentives changed from upfront recognition under Legacy GAAP to recognition over the term of the franchise agreement to which the fees and incentives relate. Also, under Legacy GAAP, amounts reported as Franchise contributions for advertising and other services and Franchise advertising and other services expense were presented on a net basis. Upon the adoption of Topic 606, these amounts require gross presentation in our Condensed Consolidated Statements of Income. Lastly, Legacy GAAP required that certain value-added taxes withheld and remitted on our behalf by our franchisees be reported as revenue and corresponding expense in our Condensed Consolidated Statements of Income. Upon adoption of Topic 606, these taxes are reported on a net basis as a reduction in Franchise and property revenues.
CONDENSED CONSOLIDATED BALANCE SHEET
| As Reported 9/30/2018 |  | Impact |  | Balances under Legacy GAAP 9/30/2018
ASSETS |  |  |  |  |
Current Assets |  |  |  |  |
Cash and cash equivalents | $ | 198 |  |  | $ | (22 | ) |  | $ | 176 |
Accounts and notes receivable, net | 528 |  |  | (101 | ) |  | 427 |
Prepaid expenses and other current assets | 443 |  |  | (71 | ) |  | 372 |
Advertising cooperative assets, restricted | — |  |  | 197 |  |  | 197 |
Total Current Assets | 1,169 |  |  | 3 |  |  | 1,172 |
Property, plant and equipment, net | 1,378 |  |  | (19 | ) |  | 1,359 |
Goodwill | 489 |  |  | — |  |  | 489 |
Intangible assets, net | 84 |  |  | — |  |  | 84 |
Other assets | 886 |  |  | (117 | ) |  | 769 |
Deferred income taxes | 149 |  |  | (25 | ) |  | 124 |
Total Assets | $ | 4,155 |  |  | $ | (158 | ) |  | $ | 3,997 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current Liabilities |  |  |  |  |
Accounts payable and other current liabilities | $ | 885 |  |  | $ | (239 | ) |  | $ | 646 |
Income taxes payable | 14 |  |  | — |  |  | 14 |
Short-term borrowings | 295 |  |  | — |  |  | 295 |
Advertising cooperative liabilities | — |  |  | 197 |  |  | 197 |
Total Current Liabilities | 1,194 |  |  | (42 | ) |  | 1,152 |
Long-term debt | 9,405 |  |  | — |  |  | 9,405 |
Other liabilities and deferred credits | 1,014 |  |  | (337 | ) |  | 677 |
Total Liabilities | 11,613 |  |  | (379 | ) |  | 11,234 |
Shareholders’ Deficit |  |  |  |  |
Accumulated deficit | (7,141 | ) |  | 241 |  |  | (6,900 | )
Accumulated other comprehensive loss | (317 | ) |  | (20 | ) |  | (337 | )
Total Shareholders’ Deficit | (7,458 | ) |  | 221 |  |  | (7,237 | )
Total Liabilities and Shareholders’ Deficit | $ | 4,155 |  |  | $ | (158 | ) |  | $ | 3,997 |
The significant impacts resulting from the adoption of Topic 606 on our Condensed Consolidated Balance Sheet as of September 30, 2018, are consistent with those recorded as of January 1, 2018 as described previously. Under Legacy GAAP, Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents pertaining to advertising cooperatives that we were required to consolidate were classified within Advertising cooperative assets, restricted. Upon adoption of Topic 606, these amounts are reflected on our Condensed Consolidated Balance Sheet and changes in these balances are reported within our Condensed Consolidated Statement of Cash Flows. Investment in 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. 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, 2018 we recognized pre-tax income of $94 million and $185 million, respectively, which includes the appreciation in the market price of Grubhub common stock less valuation adjustments related to the transfer restrictions. 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. 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 did not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost was not allocated to any of our segment operating results for performance reporting purposes.

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