Edgar Filing: YUM BRANDS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

___________

FORM 10-Q

(Mark One)



[Ÿ]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934 for the quarterly period ended September 3, 2016

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

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 [ü] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [ü] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer: [ü] Accelerated filer: [ ] Non-accelerated filer: [ ] Smaller reporting company: [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü]

The number of shares outstanding of the Registrant’s Common Stock as of October 7, 2016 was 367,005,511 million shares.

YUM! BRANDS, INC.

INDEX



		Page
		No.
Part I.	Financial Information

	Item 1 - Financial Statements

	Condensed Consolidated Statements of Income - Quarters and Years to date ended September 3, 2016 and September 5, 2015	3

	Condensed Consolidated Statements of Comprehensive Income - Quarters and Years to date ended September 3, 2016 and September 5, 2015	4

	Condensed Consolidated Statements of Cash Flows – Years to date ended September 3, 2016 and September 5, 2015	5

	Condensed Consolidated Balance Sheets – September 3, 2016 and December 26, 2015	6

	Notes to Condensed Consolidated Financial Statements	7

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk	40

	Item 4 – Controls and Procedures	40

	Report of Independent Registered Public Accounting Firm	42

Part II.	Other Information and Signatures

	Item 1 – Legal Proceedings	43

	Item 1A – Risk Factors	43

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 6 – Exhibits	44

	Signatures	45

PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
	Quarter ended						Year to date
Revenues	9/3/2016			9/5/2015			9/3/2016			9/5/2015
Company sales	$	2,841		$	2,968		$	7,560		$	7,806
Franchise and license fees and income	475			459			1,383			1,348
Total revenues	3,316			3,427			8,943			9,154
Costs and Expenses, Net
Company restaurant expenses
Food and paper	817			933			2,230			2,462
Payroll and employee benefits	638			625			1,727			1,720
Occupancy and other operating expenses	816			871			2,192			2,292
Company restaurant expenses	2,271			2,429			6,149			6,474
General and administrative expenses	377			328			1,028			976
Franchise and license expenses	47			65			145			146
Closures and impairment (income) expenses	7			3			47			30
Refranchising (gain) loss	(25		)	2			(85		)	60
Other (income) expense	(15		)	(3		)	(50		)	(12		)
Total costs and expenses, net	2,662			2,824			7,234			7,674
Operating Profit	654			603			1,709			1,480
Interest expense, net	87			32			164			99
Income Before Income Taxes	567			571			1,545			1,381
Income tax (benefit) provision	(65		)	145			183			358
Net income – including noncontrolling interests	632			426			1,362			1,023
Net income – noncontrolling interests	10			5			10			5
Net Income – YUM! Brands, Inc.	$	622		$	421		$	1,352		$	1,018

Basic Earnings Per Common Share	$	1.59		$	0.97		$	3.33		$	2.33

Diluted Earnings Per Common Share	$	1.56		$	0.95		$	3.28		$	2.29

Dividends Declared Per Common Share	$	—		$	—		$	0.92		$	0.82

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Quarter ended						Year to date
	9/3/2016			9/5/2015			9/3/2016			9/5/2015

Net Income - including noncontrolling interests	$	632		$	426		$	1,362		$	1,023
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	(61		)	(122		)	(97		)	(174		)
Reclassification of adjustments and (gains) losses into Net Income	—			12			—			80
	(61		)	(110		)	(97		)	(94		)
Tax (expense) benefit	—			1			4			1
	(61		)	(109		)	(93		)	(93		)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	—			(3		)	—			(1		)
Reclassification of (gains) losses into Net Income	2			11			8			34
	2			8			8			33
Tax (expense) benefit	(1		)	(3		)	(3		)	(12		)
	1			5			5			21
Changes in derivative instruments
Unrealized gains (losses) arising during the period	11			8			(20		)	20
Reclassification of (gains) losses into Net Income	(12		)	(10		)	21			(22		)
	(1		)	(2		)	1			(2		)
Tax (expense) benefit	1			—			1			—
	—			(2		)	2			(2		)
Other comprehensive income (loss), net of tax	(60		)	(106		)	(86		)	(74		)
Comprehensive Income - including noncontrolling interests	572			320			1,276			949
Comprehensive Income - noncontrolling interests	8			4			9			3
Comprehensive Income - YUM! Brands, Inc.	$	564		$	316		$	1,267		$	946

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Year to date
	9/3/2016			9/5/2015
Cash Flows – Operating Activities
Net Income – including noncontrolling interests	$	1,362		$	1,023
Depreciation and amortization	489			505
Closures and impairment (income) expenses	47			30
Refranchising (gain) loss	(85		)	60
Contributions to defined benefit pension plans	(4		)	(83		)
Deferred income taxes	(215		)	(42		)
Equity income from investments in unconsolidated affiliates	(44		)	(31		)
Distributions of income received from unconsolidated affiliates	18			9
Excess tax benefits from share-based compensation	(66		)	(46		)
Share-based compensation expense	41			40
Changes in accounts and notes receivable	(31		)	(15		)
Changes in inventories	(32		)	62
Changes in prepaid expenses and other current assets	5			(27		)
Changes in accounts payable and other current liabilities	146			201
Changes in income taxes payable	41			111
Changes in restricted cash	(82		)	(4		)
Other, net	(48		)	24
Net Cash Provided by Operating Activities	1,542			1,817

Cash Flows – Investing Activities
Capital spending	(546		)	(642		)
Proceeds from refranchising of restaurants	165			72
Other, net	35			48
Net Cash Used in Investing Activities	(346		)	(522		)

Cash Flows – Financing Activities
Proceeds from long-term debt	6,900			—
Repayments of long-term debt	(308		)	(10		)
Short-term borrowings by original maturity
More than three months - proceeds	1,400			—
More than three months - payments	(2,000		)	—
Three months or less, net	—			—
Revolving credit facilities, three months or less, net	(701		)	(116		)
Repurchase shares of Common Stock	(3,652		)	(370		)
Excess tax benefits from share-based compensation	66			46
Dividends paid on Common Stock	(559		)	(532		)
Debt issuance costs	(86		)	—
Other, net	(77		)	(37		)
Net Cash Provided by (Used in) Financing Activities	983			(1,019		)
Effect of Exchange Rates on Cash and Cash Equivalents	(31		)	7
Net Increase in Cash and Cash Equivalents	2,148			283
Cash and Cash Equivalents - Beginning of Period	737			578
Cash and Cash Equivalents - End of Period	$	2,885		$	861

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	(Unaudited)
	9/3/2016			12/26/2015
ASSETS
Current Assets
Cash and cash equivalents	$	2,885		$	737
Accounts and notes receivable, net	440			377
Inventories	255			229
Prepaid expenses and other current assets	287			241
Advertising cooperative assets, restricted	136			103
Total Current Assets	4,003			1,687

Property, plant and equipment, net	4,010			4,189
Goodwill	635			656
Intangible assets, net	258			271
Investments in unconsolidated affiliates	64			61
Other assets	562			521
Deferred income taxes	900			676
Total Assets	$	10,432		$	8,061

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable and other current liabilities	$	2,058		$	1,985
Income taxes payable	57			77
Short-term borrowings	48			922
Advertising cooperative liabilities	136			103
Total Current Liabilities	2,299			3,087

Long-term debt	9,119			3,041
Other liabilities and deferred credits	844			958
Total Liabilities	12,262			7,086

Redeemable noncontrolling interest	—			6

Shareholders’ Equity (Deficit)
Common Stock, no par value, 750 shares authorized; 376 and 420 shares issued in 2016 and 2015, respectively	—			—
Retained earnings (Accumulated deficit)	(1,572		)	1,150
Accumulated other comprehensive income (loss)	(324		)	(239		)
Total Shareholders’ Equity (Deficit) – YUM! Brands, Inc.	(1,896		)	911
Noncontrolling interests	66			58
Total Shareholders’ Equity (Deficit)	(1,830		)	969
Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity (Deficit)	$	10,432		$	8,061

See accompanying Notes to Condensed Consolidated Financial Statements.

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 26, 2015 (“2015 Form 10-K”).

YUM! Brands, Inc. and Subsidiaries (collectively referred to herein as “YUM” or the “Company”) comprise primarily the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”). References to YUM throughout these Notes to our Financial Statements are made using the first person notations of “we,” “us” or “our.”

YUM currently consists of four reporting segments:


•	YUM China (“China” or “China Division”) which includes all operations in mainland China


•	The KFC Division which includes all operations of the KFC concept outside of China Division


•	The Pizza Hut Division which includes all operations of the Pizza Hut concept outside of China Division


•	The Taco Bell Division which includes all operations of the Taco Bell concept

Effective January 2016 our India business was segmented by brand, integrated into the global KFC, Pizza Hut and Taco Bell Divisions, and is no longer a separate operating segment. While our consolidated results were not impacted, we have restated our historical segment information for consistent presentation. Integrating India into our Brand Divisions increased Total revenues for the KFC, Pizza Hut and Taco Bell Divisions by $27 million, $2 million and less than $1 million, respectively, and decreased Operating Profit by $6 million, $2 million and less than $1 million, respectively, for the quarter ended September 5, 2015. Integrating India into our Brand Divisions increased Total revenues for the KFC, Pizza Hut and Taco Bell Divisions by $79 million, $5 million and $2 million respectively, and decreased Operating Profit by $12 million, $2 million and $1 million, respectively, for the year to date ended September 5, 2015.

In October 2015 we announced our intent to separate YUM’s China business from YUM into an independent, publicly-traded company. This transaction, which is expected to be a tax-free spin-off of our China business, will create two powerful, independent, focused growth companies with distinct strategies, financial profiles and investment characteristics.

On September 23, 2016 the YUM Board of Directors (“Board”) approved a distribution of one share of YUM China common stock for each share of YUM common stock held at the close of business on October 19, 2016, the record date for the distribution.

YUM expects to complete the distribution after the close of business on October 31, 2016.

Completion of the spin-off will be subject to certain conditions, including, among others, receipt of various regulatory approvals, receipt of external opinions with respect to certain tax matters, the effectiveness of filings related to public listing and applicable securities laws, and other terms and conditions as may be determined by the Board of Directors.

After the spin-off of our China business, we anticipate reclassifying our China Division historical results, other results attributable to China though not allocated to the China Division (e.g. refranchising gains), and related income tax expense for periods presented prior to the spin-off, including those periods in 2016, to Discontinued Operations within our Consolidated Income Statement. The China business results presented in Discontinued Operations will include an incremental license fee expense similar to what will be paid by YUM China to YUM going forward. Likewise, YUM's historical results for our KFC and Pizza Hut Divisions will include incremental license fee income from our China business such that recast total Net income, including Discontinued Operations, will be the same as previously reported results.

YUM’s fiscal year ends on the last Saturday in December. The first three quarters of each fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks. Our subsidiaries operate on similar fiscal calendars except that China and certain other international subsidiaries operate on a monthly calendar with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter. The current fiscal year of 2016 will have a 53 week for YUM and our subsidiaries that do not operate on a monthly calendar, which will be included in our fourth quarter results. Our international subsidiaries that operate on a monthly calendar, including China, are not impacted by the addition of a 53week. Our international subsidiaries within^rdweek. Our international subsidiaries within week. Our international subsidiaries within ^rd week for YUM and our subsidiaries that do not operate on a monthly calendar, which will be included in our fourth quarter results. Our international subsidiaries that operate on a monthly calendar, including China, are not impacted by the addition of a 53week. Our international subsidiaries within^rdweek. Our international subsidiaries within week. Our international subsidiaries within week for YUM and our subsidiaries that do not operate on a monthly calendar, which will be included in our fourth quarter results. Our international subsidiaries that operate on a monthly calendar, including China, are not impacted by the addition of a 53week. Our international subsidiaries within ^rdweek. Our international subsidiaries within week. Our international subsidiaries within o

our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. our KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting. ur KFC, Pizza Hut and Taco Bell divisions generally close approximately one month earlier to facilitate consolidated reporting.

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 2015 Form 10-K, our financial position as of September 3, 2016, and the results of our operations and comprehensive income for the quarters and years to date ended September 3, 2016 and September 5, 2015 and cash flows for the years to date ended September 3, 2016 and September 5, 2015. Our results of operations, comprehensive income and cash flows 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 certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

In April 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 amended the then-current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 was effective for the Company beginning with the quarter ended March 19, 2016. The adoption of this standard required restatement of our consolidated balance sheet as of December 26, 2015. As a result, Other assets and Long-term debt each decreased by $13 million and Prepaid expenses and other current assets and Short-term borrowings each decreased by $1 million versus amounts previously reported.

We have reclassified certain items in the Financial Statements for the prior periods to be comparable with the classification for the quarter and year to date ended September 3, 2016. These reclassifications had no effect on previously reported Net Income - YUM! Brands, Inc.

Note 2 - Earnings Per Common Share (“EPS”)



	Quarter ended				Year to date
	2016		2015		2016		2015
Net Income – YUM! Brands, Inc.	$	622	$	421	$	1,352	$	1,018

Weighted-average common shares outstanding (for basic calculation)	392		436		406		437
Effect of dilutive share-based employee compensation	6		8		6		8
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	398		444		412		445
Basic EPS	$	1.59	$	0.97	$	3.33	$	2.33
Diluted EPS	$	1.56	$	0.95	$	3.28	$	2.29
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation^(a)	2.3		4.2		6.2		4.3


(a)	These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.

Note 3 - Shareholders’ Equity

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date as indicated below. All amounts exclude applicable transaction fees.



	Shares Repurchased (thousands)			Dollar Value of Shares Repurchased					Remaining Dollar Value of Shares that may be Repurchased
Authorization Date	2016		2015	2016			2015		2016
November 2013	—		1,779	$	—		$	133	$	—
November 2014	—		2,737	—			237		—
December 2015	13,369		—	933			—		—
March 2016	2,823		—	228			—		—
May 2016	30,117		—	2,596			—		1,604
Total	46,309	^(a)	4,516	$	3,757	^(a)	$	370	$	1,604


(a)	Includes the effect of $105 million in share repurchases (1.2 million shares) with trade dates prior to September 3, 2016 but cash settlement dates subsequent to September 3, 2016.

On May 20, 2016 our Board of Directors authorized share repurchases through December 2016 of up to $4.2 billion (excluding applicable transaction fees) of our outstanding Common Stock. This authorization superseded all previous unutilized authorizations.

Changes in accumulated other comprehensive income (loss) ("OCI") are presented below.



	Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature			Pension and Post-Retirement Benefits			Derivative Instruments			Total
Balance at December 26, 2015, net of tax	$	(109	)	$	(113	)	$	(17	)	$	(239	)

Gains (losses) arising during the year classified into accumulated OCI, net of tax	(92		)	—			(20		)	(112		)

(Gains) losses reclassified from accumulated OCI, net of tax	—			5			22			27

OCI, net of tax	(92		)	5			2			(85		)

Balance at September 3, 2016, net of tax	$	(201	)	$	(108	)	$	(15	)	$	(324	)

Note 4 - Items Affecting Comparability of Net Income and Cash Flows

Refranchising (Gain) Loss

The Refranchising (gain) loss by reportable segment is presented below. We do not allocate such gains and losses to our segments for performance reporting purposes.

During the quarter ended September 3, 2016 we refranchised 123 restaurants, primarily Taco Bell and Pizza Hut restaurants in the U.S. We received $67 million in proceeds and recorded $25 million of net pre-tax refranchising gains related to these transactions. During the year to date ended September 3, 2016 we refranchised 250 restaurants, primarily Pizza Hut and Taco Bell restaurants in the U.S. We received $165 million in proceeds and recorded $85 million of net pre-tax refranchising gains related to these transactions.



	Quarter ended						Year to date
	2016			2015			2016			2015
China	$	(4	)	$	(3	)	$	(8	)	$	(7	)
KFC Division^(a)	1			4			2			36
Pizza Hut Division^(a)	(8		)	15			(64		)	52
Taco Bell Division	(14		)	(14		)	(15		)	(21		)
Worldwide	$	(25	)	$	2		$	(85	)	$	60

(a)

In 2010 we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing it to the franchisee. During the quarter ended June 13, 2015, we initiated plans to sell this real estate and determined it was held for sale in accordance with GAAP. On September 28, 2015, subsequent to our quarter ended September 5, 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represented a substantial liquidation of our Mexican operations under GAAP. Accordingly, we were required to include accumulated translation losses associated with our Mexican business within our carrying value when performing impairment evaluations subsequent to determining that the real estate was held for sale. We recorded charges of $12 million and $80 million in the quarter and year to date ended September 5, 2015, respectively, representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the then-expected sales price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising (Gain) Loss. Refranchising Losses of $4 million and $40 million were associated with the KFC Division for the quarter and year to date ended September 5, 2015, respectively. Refranchising Losses of $8 million and $40 million were associated with the Pizza Hut Division for the quarter and year to date ended September 5, 2015, respectively. The proceeds ultimately received for the real estate approximated our carrying value including the remaining unrecognized accumulated translation losses as of September 5, 2015.

Additionally, during the quarter and year to date ended September 5, 2015 we recognized charges of $8 million and $13 million, respectively, within Refranchising (Gain) Loss associated with the planned refranchising of our company-owned Pizza Hut restaurants in Korea.

KFC U.S. Acceleration Agreement

During the first quarter of 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 $125 million from 2015 through 2017 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 less than $1 million and $21 million for the quarters ended September 3, 2016 and September 5, 2015, respectively, for these investments. We recorded pre-tax charges of $17 million and $31 million for the years to date ended September 3, 2016 and September 5, 2015, respectively, for these investments. These amounts were recorded primarily as Franchise and license expenses. We recorded total pre-tax charges of $72 million during the year ended December 26, 2015 and we currently expect a total pre-tax charge of approximately $30 million in 2016 for these investments. 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 the quarters ended September 3, 2016, and September 5, 2015, we incurred $5 million and $3 million in incremental system advertising expense, respectively. During the years to date ended September 3, 2016 and September 5, 2015, we incurred $14 million and $6 million in incremental system advertising expense, respectively. We funded approximately $10 million of such advertising during the year ended December 26, 2015. These amounts were recorded primarily in Franchise and license expenses and are included in the KFC Division segment operating results. We currently expect to fund approximately $20 million of such advertising in both 2016 and 2017 and $10 million in 2018.

Costs Associated with the Planned Spin-off of the China Business and YUM Recapitalization

In connection with our planned separation of the YUM China business into an independent, publicly-traded company and the related recapitalization of YUM, we incurred $10 million and $29 million of pre-tax costs in the quarter and year to date ended September 3, 2016, respectively, which were recorded in General and administrative ("G&A") expenses. Cumulative project costs since the announcement of the planned separation total $38 million and we currently expect to incur additional cash costs of approximately $25 million in the fourth quarter of 2016 to complete the spin-off transaction. Additionally, we expect to incur a non-cash charge related to certain share-based awards that will be modified in connection with the spin-off. The amount of the non-cash charge will be based on the net increase in fair value of the modified awards that are vested as of the separation date. These costs are not being allocated to any of our segment operating results.

See Notes 10 and 11 for details on YUM's recapitalization.

YUM's Strategic Transformation Initiatives

On October 11, 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 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. This transformation will result in YUM being at least 98% refranchised by the end of 2018. During the quarter ended September 3, 2016, YUM offered a Voluntary Retirement Program to certain U.S. employees as a step towards becoming a leaner, more efficient organization. This program will provide separation pay and benefits to employees who elected to voluntarily separate from YUM. We have incurred pre-tax costs of $26 million and $32 million for the quarter and year to date, respectively, related to our Strategic Transformation Initiatives primarily related to this U.S. Voluntary Retirement Program. YUM's Strategic Transformation Initiatives represent the continuation of YUM's transformation of its operating model and capital structure following the China spin-off and recapitalization of YUM. Due to the scope of the initiatives as well as their significance, costs associated with the initiatives are not being allocated to any segment for performance reporting.

Income Tax Benefit related to Little Sheep Investment

See Note 7.

Note 5 - Other (Income) Expense



	Quarter ended						Year to date
	2016			2015			2016			2015
Equity (income) loss from investments in unconsolidated affiliates	$	(18	)	$	(15	)	$	(44	)	$	(31	)
Foreign exchange net (gain) loss and other	3			12			(6		)	19
Other (income) expense	$	(15	)	$	(3	)	$	(50	)	$	(12	)

Note 6 - Supplemental Balance Sheet Information

Accounts and Notes Receivable, net

The Company’s receivables are primarily generated as a result of ongoing business relationships with our franchisees and licensees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees and licensees are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable on our Condensed Consolidated Balance Sheets.



	9/3/2016			12/26/2015
Accounts and notes receivable, gross	$	460		$	393
Allowance for doubtful accounts	(20		)	(16		)
Accounts and notes receivable, net	$	440		$	377

Property, Plant and Equipment, net



	9/3/2016			12/26/2015
Property, plant and equipment, gross	$	7,708		$	7,832
Accumulated depreciation and amortization	(3,698		)	(3,643		)
Property, plant and equipment, net	$	4,010		$	4,189

Assets held for sale at September 3, 2016 and December 26, 2015 total $14 million and $28 million, respectively, and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

Noncontrolling Interests

Noncontrolling interests represent the ownership interests of minority shareholders of the entities that operate KFC restaurants in Beijing and Shanghai, China. At December 26, 2015, the Redeemable noncontrolling interest comprised the 7% ownership interest in Little Sheep held by the Little Sheep founding shareholders, and was classified outside of permanent equity on our Condensed Consolidated Balance Sheets due to redemption rights held by the Little Sheep founding shareholders. During the quarter ended June 11, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to YUM pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interest, was recorded as an $8 million loss attributable to noncontrolling interests during the quarter ended June 11, 2016. Consistent with our 2012 gain on the acquisition of Little Sheep and subsequent impairments of Little Sheep goodwill and intangibles in 2013 and 2014, this loss attributable to noncontrolling interests is not being allocated to any segment operating results. A reconciliation of the beginning and ending carrying amount of the equity attributable to noncontrolling interests is as follows:



	Noncontrolling Interests			Redeemable Noncontrolling Interest
Balance at December 26, 2015	$	58		$	6
Net Income (loss) – noncontrolling interests	17			1
Noncontrolling interest loss upon redemption	—			(8		)
Dividends declared	(7		)	—
Currency translation adjustments and other	(2		)	1
Balance at September 3, 2016	$	66		$	—

Note 7 - Income Taxes



	Quarter ended						Year to date
	2016			2015			2016			2015
Income tax (benefit) provision	$	(65	)	$	145		$	183		$	358
Effective tax rate	(11.6		)%	25.3		%	11.8		%	25.9		%

Our effective tax rate is generally lower than the U.S. federal statutory rate of 35% due to the majority of our income being earned outside the U.S. where tax rates are generally lower than the U.S. rate.

During the quarter ended September 3, 2016, we recorded a tax benefit of $233 million related to previously recorded losses associated with our Little Sheep business. The tax benefit associated with these losses was able to be recognized as a result of

legal entity restructuring completed in anticipation of the China spin-off. The cash tax savings associated with this benefit will be realized as we recognize future U.S. refranchising gains.

Our third quarter and year to date effective tax rates were lower than the prior year primarily due to the recognition of the aforementioned Little Sheep tax benefits, lapping a valuation allowance charge resulting from a change in judgment regarding the future use of certain deferred tax assets in a foreign market, partially offset by the increased cost of repatriating current year foreign earnings.

Note 8 - Reportable Operating Segments

We identify our operating segments based on management responsibility. As described in Note 1, effective January 1, 2016 our India business was segmented by brand and integrated into the global KFC, Pizza Hut and Taco Bell Divisions. Segment information for previous periods has been restated to reflect this reporting change. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:



	Quarter ended					Year to date
Revenues	2016			2015		2016			2015
China	$	1,883		$	1,969	$	4,774		$	4,861
KFC Division	723			721		2,060			2,109
Pizza Hut Division	230			264		741			802
Taco Bell Division	481			473		1,370			1,382
Unallocated	(1		)	—		(2		)	—
	$	3,316		$	3,427	$	8,943		$	9,154



	Quarter ended						Year to date
Operating Profit	2016			2015			2016			2015
China^(a)	$	348		$	327		$	751		$	661
KFC Division	160			144			469			459
Pizza Hut Division	61			65			212			206
Taco Bell Division	143			132			401			386
Unallocated and Corporate General and administrative expenses^(b)	(80		)	(53		)	(213		)	(153		)
Unallocated Other income (expense)	(3		)	(10		)	4			(19		)
Unallocated Refranchising gain (loss)^(c)	25			(2		)	85			(60		)
Operating Profit	$	654		$	603		$	1,709		$	1,480
Interest expense, net	(87		)	(32		)	(164		)	(99		)
Income Before Income Taxes	$	567		$	571		$	1,545		$	1,381


(a)	Includes equity income from investments in unconsolidated affiliates of $18 million and $15 million for the quarters ended September 3, 2016 and September 5, 2015, respectively. Includes equity income from investments in unconsolidated affiliates of $44 million and $31 million for the years to date ended September 3, 2016 and September 5, 2015, respectively.

(b)

Primarily Corporate G&A expenses for the quarters ended September 3, 2016 and September 5, 2015. Amounts also include costs associated with the KFC U.S. Acceleration Agreement of $21 million for the quarter ended September 5, 2015 and $17 million and $31 million for the years to date ended September 3, 2016 and September 5, 2015, respectively. Also included are $10 million and $29 million for the quarter and year to date ended September 3, 2016, respectively, related to the planned spin-off of the China business and YUM recapitalization, and $26 million for the quarter and $32 million for the year to date ended September 3, 2016, respectively, associated with YUM's Strategic Transformation Initiatives. See Note 4.


(c)	See the Refranchising (Gain) Loss section of Note 4.

Note 9 - Pension Benefits

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees. The most significant of these plans, the YUM Retirement Plan (the "Plan"), is funded. We fund our other U.S. plans as benefits are paid. The Plan and our most significant non-qualified plan in the U.S. are closed to new salaried participants.

Subsequent to the quarter ended September 3, 2016 we contributed $20 million to the Plan, and do not expect to make any further significant contributions in 2016.

The components of net periodic benefit cost associated with our significant U.S. pension plans are as follows:



	Quarter ended						Year to date
	2016			2015			2016			2015
Service cost	$	4		$	5		$	12		$	13
Interest cost	12			13			37			38
Expected return on plan assets	(15		)	(15		)	(45		)	(43		)
Amortization of net loss	1			10			4			31
Amortization of prior service cost	2			1			4			1
Net periodic benefit cost	$	4		$	14		$	12		$	40

Additional loss (gain) recognized due to settlements^(a)	$	1		$	—		$	1		$	1


(a)	Losses are a result of settlement transactions from a non-funded plan which exceeded the sum of annual service and interest costs for that plan. These losses were recorded in G&A expenses.

Note 10 - Short-term Borrowings and Long-term Debt



Short-term Borrowings	9/3/2016			12/26/2015
Current maturities of long-term debt	$	55		$	313
Unsecured Short-term Loan Credit Facility (the "Bridge Facility")	—			600
Other	—			9
	55			922
Less current portion of debt issuance costs and discounts	(7		)	—
Short-term borrowings	$	48		$	922

Long-term Debt
Securitization Notes	$	2,300		$	—
Subsidiary Senior Unsecured Notes	2,100			—
Term Loan A Facility	500			—
Term Loan B Facility	2,000			—
YUM Senior Unsecured Notes	2,200			2,500
Senior Unsecured Revolving Credit Facility	—			701
Capital lease obligations	154			169
Other	9			—
	9,263			3,370
Less debt issuance costs and discounts	(89		)	(16		)
Less current maturities of long-term debt	(55		)	(313		)
Long-term debt