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 March 31, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer:	[ü]		Accelerated filer:	[ ]

Non-accelerated filer:	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company:	[ ]

Emerging growth company:	[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 May 2, 2017 was 348,230,475 shares.

YUM! BRANDS, INC.

INDEX



		Page
		No.
Part I.	Financial Information

	Item 1 - Financial Statements

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Balance Sheets	7

	Notes to Condensed Consolidated Financial Statements	8

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

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk	36

	Item 4 – Controls and Procedures	36

	Report of Independent Registered Public Accounting Firm	38

Part II.	Other Information and Signatures

	Item 1 – Legal Proceedings	39

	Item 1A – Risk Factors	39

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	39

	Item 6 – Exhibits	40

	Signatures	41

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
Revenues	3/31/2017			3/31/2016 (As Restated)
Company sales	$	902		$	953
Franchise and license fees and income	515			490
Total revenues	1,417			1,443
Costs and Expenses, Net
Company restaurant expenses
Food and paper	276			287
Payroll and employee benefits	244			257
Occupancy and other operating expenses	238			261
Company restaurant expenses	758			805
General and administrative expenses	237			243
Franchise and license expenses	46			51
Closures and impairment (income) expenses	1			2
Refranchising (gain) loss	(111		)	—
Other (income) expense	2			(7		)
Total costs and expenses, net	933			1,094
Operating Profit	484			349
Other pension (income) expense	28			(1		)
Interest expense, net	109			42
Income from continuing operations before income taxes	347			308
Income tax provision	67			82
Income from continuing operations	280			226
Income from discontinued operations, net of tax	—			138
Net Income	$	280		$	364

Basic Earnings per Common Share from continuing operations	$	0.78		$	0.55
Basic Earnings per Common Share from discontinued operations	N/A			$	0.33
Basic Earnings Per Common Share	$	0.78		$	0.88

Diluted Earnings per Common Share from continuing operations	$	0.77		$	0.54
Diluted Earnings per Common Share from discontinued operations	N/A			$	0.33
Diluted Earnings Per Common Share	$	0.77		$	0.87

Dividends Declared Per Common Share	$	0.30		$	0.46

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Quarter ended
	3/31/2017			3/31/2016 (As Restated)

Net Income - YUM! Brands, Inc.	$	280		$	364
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	50			(6		)
	50			(6		)
Tax (expense) benefit	(1		)	4
	49			(2		)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	5			(1		)
Reclassification of (gains) losses into Net Income	30			3
	35			2
Tax (expense) benefit	(12		)	(1		)
	23			1
Changes in derivative instruments
Unrealized gains (losses) arising during the period	(3		)	(15		)
Reclassification of (gains) losses into Net Income	7			21
	4			6
Tax (expense) benefit	(1		)	1
	3			7

Other comprehensive income (loss), net of tax	75			6
Comprehensive Income	$	355		$	370

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	Quarter ended
	3/31/2017			3/31/2016 (As Restated)
Cash Flows – Operating Activities from Continuing Operations
Net Income	$	280		$	364
Income from discontinued operations, net of tax	—			(138		)
Depreciation and amortization	70			73
Closures and impairment (income) expenses	1			2
Refranchising (gain) loss	(111		)	—
Contributions to defined benefit pension plans	(7		)	(2		)
Deferred income taxes	20			(5		)
Share-based compensation expense	15			13
Changes in accounts and notes receivable	18			45
Changes in inventories	4			2
Changes in prepaid expenses and other current assets	(5		)	6
Changes in accounts payable and other current liabilities	(48		)	(93		)
Changes in income taxes payable	12			60
Other, net	39			(18		)
Net Cash Provided by Operating Activities from Continuing Operations	288			309

Cash Flows – Investing Activities from Continuing Operations
Capital spending	(76		)	(80		)
Proceeds from refranchising of restaurants	185			8
Other, net	(5		)	5
Net Cash Provided by (Used in) Investing Activities from Continuing Operations	104			(67		)

Cash Flows – Financing Activities from Continuing Operations
Proceeds from long-term debt	192			—
Repayments of long-term debt	(200		)	(2		)
Revolving credit facilities, three months or less, net	—			(605		)
Short-term borrowings by original maturity
More than three months - proceeds	—			1,400
More than three months - payments	—			—
Three months or less, net	—			—
Repurchase shares of Common Stock	(461		)	(925		)
Dividends paid on Common Stock	(106		)	(192		)
Debt issuance costs	(18		)	—
Net transfers to discontinued operations	—			(43		)
Other, net	(36		)	(11		)
Net Cash Used in Financing Activities from Continuing Operations	(629		)	(378		)
Effect of Exchange Rates on Cash and Cash Equivalents	17			3
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Continuing Operations	(220		)	(133		)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period	831			351
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period	$	611		$	218

Cash Provided by Operating Activities from Discontinued Operations	$	—		$	338
Cash Used in Investing Activities from Discontinued Operations	—			(128		)
Cash Provided by Financing Activities from Discontinued Operations	—			43

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	3/31/2017			12/31/2016 (As Restated)
ASSETS
Current Assets
Cash and cash equivalents	$	525		$	725
Accounts and notes receivable, net	355			370
Inventories	34			37
Prepaid expenses and other current assets	215			236
Advertising cooperative assets, restricted	148			137
Total Current Assets	1,277			1,505

Property, plant and equipment, net	2,084			2,113
Goodwill	539			536
Intangible assets, net	150			151
Other assets	357			376
Deferred income taxes	744			772
Total Assets	$	5,151		$	5,453

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable and other current liabilities	$	972		$	1,067
Income taxes payable	45			32
Short-term borrowings	393			66
Advertising cooperative liabilities	148			137
Total Current Liabilities	1,558			1,302

Long-term debt	8,715			9,059
Other liabilities and deferred credits	690			704
Total Liabilities	10,963			11,065

Shareholders’ Equity (Deficit)
Common Stock, no par value, 750 shares authorized; 350 and 355 shares issued in 2017 and 2016, respectively	—			—
Accumulated deficit	(5,433		)	(5,158		)
Accumulated other comprehensive loss	(379		)	(454		)
Total Shareholders’ Equity (Deficit)	(5,812		)	(5,612		)
Total Liabilities and Shareholders’ Equity (Deficit)	$	5,151		$	5,453

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 31, 2016 (“2016 Form 10-K”).

YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as “YUM” or the “Company”) comprise the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”). YUM has over 43,500 units of which 59% are located outside the U.S. in 136 countries and territories. YUM was created as an independent, publicly-owned company on October 6, 1997 via a tax-free distribution by our former parent, PepsiCo, Inc., of our Common Stock to its shareholders. References to YUM throughout these Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” or “our.”

As of March 31, 2017, YUM consisted of three operating segments:


•	The KFC Division which includes our worldwide operations of the KFC concept


•	The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept


•	The Taco Bell Division which includes our worldwide operations of the Taco Bell concept

On October 31, 2016 (the “Distribution Date”), we completed the spin-off of our China business (the "Separation") into an independent, publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). Concurrent with the Separation, a subsidiary of the Company entered into a Master License Agreement with a subsidiary of Yum China for the exclusive right to use and sublicense the use of intellectual property owned by YUM and its affiliates for the development and operation of KFC, Pizza Hut and Taco Bell restaurants in China. Prior to the Separation, our operations in mainland China were reported in our former China Division segment results. As a result of the Separation, the results of operations and cash flows of the separated business are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows for all periods presented. See additional information related to the impact of the Separation in Note 4.

Our fiscal year has historically ended on the last Saturday in December and, as a result, a 53rd week was added every five or six years. The first three quarters of each fiscal year consisted of 12 weeks and the fourth quarter consisted of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks. Our U.S. subsidiaries and certain international subsidiaries operated on similar fiscal calendars. Our remaining international subsidiaries operated on a monthly calendar, and thus never had a 53rd week, with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter. Certain international subsidiaries within our KFC, Pizza Hut and Taco Bell divisions have historically closed approximately one month or one period earlier to facilitate consolidated reporting.

On January 27, 2017, YUM’s Board of Directors approved a change in the Company's fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending December 31 of each year, commencing with the year ending December 31, 2017. In connection with this change, the Company moved from a 52-week periodic fiscal calendar with three 12-week interim quarters and a 16-week fourth quarter to a monthly reporting calendar with each quarter comprised of three months. Our U.S. subsidiaries continue to report on a period calendar as described above.

Concurrent with the change in the Company's fiscal year, we also eliminated any of the one month or one period reporting lags of our international subsidiaries. As a result of removing these reporting lags, each international subsidiary will now operate either on a monthly calendar consistent with the Company’s new calendar or on a periodic calendar consistent with our U.S. subsidiaries. We believe this change in our international subsidiary reporting calendars and the resulting elimination of reporting lags is preferable because a more current reporting calendar allows the Financial Statements to more consistently and more timely reflect the impact of current events, economic conditions and global trends.

The change to the Company’s fiscal year and removal of the international reporting lags is effective in 2017. We have applied this change in accounting principle retrospectively to all prior financial periods presented and the impact of this change is

summarized in Note 5. The impact of the change in accounting principle on the current period financial statements is similar to the impact on the prior period results discussed in Note 5.

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 2016 Form 10-K, our financial position as of March 31, 2017, and the results of our operations, comprehensive income and cash flows for the quarters ended March 31, 2017 and 2016. 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 March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance related to stock-based compensation which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including their income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this standard beginning with the quarter ended March 31, 2017.

The impact of adoption included the recognition of $49 million in excess tax benefits within our income tax provision for share-based payments made during the quarter ended March 31, 2017. Additionally, the standard requires these excess tax benefits be reported as operating activities in the Condensed Consolidated Statements of Cash Flows as opposed to within financing activities as they have been historically reported. We elected retrospective presentation of excess tax benefits as operating cash flows for prior years. As a result, $11 million of excess tax benefits previously presented as a financing activity have been reclassified to operating activities for the quarter ended March 31, 2016 in our Condensed Consolidated Statements of Cash Flows. No other provisions of this standard had a material impact on the Company's financial statements or disclosures.

In March 2017, the FASB issued guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, "Benefit Costs"). The standard does not change the requirement that an employer report the service cost component of these Benefit Costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. However, the standard requires that the non-service components of these Benefit Costs be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. We early adopted the standard beginning with the quarter ended March 31, 2017 on a retrospective basis. As a result, we have reclassified amounts related to non-service components of Benefit Costs from their prior Financial Statement captions (Payroll and employee benefits and General and administrative "G&A" expenses) into a new Financial Statement caption titled Other pension (income) expense in our Condensed Consolidated Statements of Income. The adoption of this standard does not impact Net Income.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2017. These reclassifications had no effect on previously reported Net Income.

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



	Quarter ended
	2017		2016
Income from continuing operations	$	280	$	226
Income from discontinued operations	—		138
Net Income	$	280	$	364

Weighted-average common shares outstanding (for basic calculation)	357		415
Effect of dilutive share-based employee compensation	7		6
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	364		421

Basic EPS from continuing operations	$	0.78	$	0.55
Basic EPS from discontinued operations	—		0.33
Basic EPS	$	0.78	$	0.88

Diluted EPS from continuing operations	$	0.77	$	0.54
Diluted EPS from discontinued operations	—		0.33
Diluted EPS	$	0.77	$	0.87
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation^(a)	1.7		8.1


(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 (Deficit)

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 31, 2017 and 2016 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	2017		2016	2017			2016		2017
December 2015	—		13,275	$	—		$	925	$	—
November 2016	6,849		—	442			—		1,473
Total	6,849	^(a)	13,275	$	442	^(a)	$	925	$	1,473


(a)	Includes the effect of $26 million in share repurchases (0.4 million shares) with trade dates prior to March 31, 2017 but cash settlement dates subsequent to March 31, 2017 and excludes the effect of $45 million in share repurchases (0.7 million shares) with trade dates prior to December 31, 2016, but cash settlement dates subsequent to December 31, 2016.

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 31, 2016, net of tax	$	(332	)	$	(127	)	$	5		$	(454	)

Gains (losses) arising during the period classified into accumulated OCI, net of tax	49			3			(3		)	49

(Gains) losses reclassified from accumulated OCI, net of tax	—			20			6			26

OCI, net of tax	49			23			3			75

Balance at March 31, 2017, net of tax	$	(283	)	$	(104	)	$	8		$	(379	)

Note 4 - Discontinued Operations

As discussed in Note 1, on October 31, 2016, the Company completed the separation of our China business.

As a result of the Separation, all royalty revenues earned by us under the Master License Agreement with Yum China that were previously eliminated in consolidation are now reflected as Franchise and license fees and income in our Condensed Consolidated Statements of Income. For the quarter ended March 31, 2016 the combined KFC and Pizza Hut Divisions' Franchise and license fees and income, as a result of the Separation, increased by $65 million. The value added tax associated with this royalty revenue increased Franchise and license expenses for the combined KFC and Pizza Hut Divisions by $4 million for the quarter ended March 31, 2016. The net increases in the KFC and Pizza Hut Divisions' Operating Profit were offset with a corresponding reduction in Income from discontinued operations such that there was no impact from the Separation on total Net income.

The financial results of Yum China presented in discontinued operations reflect the results of the former China Division, an operating segment of the Company until the Separation, adjusted for the transactions discussed above and the inclusion of certain G&A expenses, non-cash impairment charges, refranchising gains, interest and taxes that were previously not allocated to but were related to the former China Division's historical results of operations. The following table presents the financial results of the Company’s discontinued operations:



	Quarter ended
	2016^(a)
Company sales	$	1,278
Franchise and license fees and income	25
Company restaurant expenses	(1,045		)
G&A expenses	(74		)
Franchise and license expenses	(12		)
Refranchising gain	3
Other income	16
Interest income, net	1
Income from discontinued operations before income taxes^(b)	192
Income tax provision	(50		)
Income from discontinued operations - including noncontrolling interests	142
(Income) from discontinued operations - noncontrolling interests	(4		)
Income from discontinued operations - YUM! Brands, Inc.	$	138


(a)	Includes historical Yum China financial results from January 1, 2016 to February 29, 2016 plus an additional month of expense associated with the license fee paid to YUM to conform to the new YUM reporting calendar.


(b)	Includes costs incurred to execute the Separation of $8 million for the quarter ended March 31, 2016. Such costs primarily related to transaction advisors, legal and other consulting fees.

Cash inflows from Yum China to the Company during the quarter ended March 31, 2017 related to the Master License Agreement were $55 million, net of taxes paid, and primarily related to royalty revenues.

Note 5 - 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, we do not allocate such gains and losses to our segments for performance reporting purposes.

During the quarter ended March 31, 2017 we refranchised 121 restaurants. We received $185 million in proceeds and recorded $111 million of net pre-tax refranchising gains related to refranchising activity during the quarter ended March 31, 2017.



	Quarter ended
	2017			2016
KFC Division	$	1		$	1
Pizza Hut Division	2			—
Taco Bell Division	(114		)	(1		)
Worldwide	$	(111	)	$	—

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 $3 million and $9 million for the quarters ended March 31, 2017, and 2016, respectively, for these investments. 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. These charges are not being allocated to the KFC Division segment operating results due to their size and unique and long-term brand building nature.

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 March 31, 2017 and 2016, we incurred $4 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. We incurred pre-tax costs of $7 million within G&A expenses related to these initiatives during the quarter ended March 31, 2017, primarily for severance and relocation costs. 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 purposes.

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 March 31, 2016
	As Previously Reported		Adjustments			After Change in Reporting Calendar
Total Revenues	$	1,364	$	79		$	1,443
Operating profit	356		(6		)	350		^(a)
Net Income from continuing operations	240		(14		)	226
Income from discontinued operations, net of tax	151		(13		)	138
Net Income	$	391	$	(27	)	$	364

Diluted EPS from continuing operations	$	0.57	$	(0.03	)	$	0.54
Diluted EPS from discontinued operations	0.36		(0.03		)	0.33
Diluted EPS	$	0.93	$	(0.06	)	$	0.87


(a)	Amount does not reconcile to our Condensed Consolidated Statements of Income due to the $1 million impact of retrospectively adopting a new accounting standard on Benefit Costs. 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 March 31, 2016 Condensed Consolidated Statement of Cash Flows was an increase in cash provided by operating activities of $10 million, an increase in cash used in investing activities of $6 million and an increase in cash used in financing activities of $94 million versus amounts previously reported. The increase in cash used in financing activities is due to timing of borrowings against our revolving credit facilities.

Non-cash Pension Adjustment

During the quarter ended March 31, 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.

Note 6 - Other (Income) Expense

Other (income) expense includes primarily foreign exchange net (gains) losses.

Note 7 - 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 as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees 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.



	3/31/2017			12/31/2016
Accounts and notes receivable, gross	$	374		$	384
Allowance for doubtful accounts	(19		)	(14		)
Accounts and notes receivable, net	$	355		$	370

Property, Plant and Equipment, net



	3/31/2017			12/31/2016
Property, plant and equipment, gross	$	4,092		$	4,108
Accumulated depreciation and amortization	(2,008		)	(1,995		)
Property, plant and equipment, net	$	2,084		$	2,113

Assets held for sale at March 31, 2017 and December 31, 2016 total $26 million and $57 million, respectively, and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

Reconciliation of Cash and cash equivalents for Condensed Consolidated Statements of Cash Flows



	3/31/2017		12/31/2016
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	525	$	725
Restricted cash included in Prepaid expenses and other current assets^(a)	54		55
Restricted cash included in Other assets^(b)	32		51
Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows	$	611	$	831


(a)	Restricted cash within Prepaid expenses and other current assets primarily relates to the Taco Bell Securitization interest reserves.


(b)	Primarily cash balances required to meet statutory minimum net worth requirements for legal entities which enter into U.S. franchise agreements and trust accounts related to our self-insurance program.

Note 8 - Income Taxes



	Quarter ended
	2017			2016
Income tax provision	$	67		$	82
Effective tax rate	19.4		%	26.6		%

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.

Our first quarter effective tax rate was favorably impacted by the inclusion of $49 million of excess tax benefits on share-based compensation related to the adoption of a new accounting standard in the quarter ended March 31, 2017. See Note 1. These excess tax benefits were largely associated with deferred compensation payouts to recently retired employees. This benefit was partially offset by the unfavorable impacts associated with the Company’s planned 2017 refranchising gains, substantially all of which will be taxed at the U.S. rate, and repatriation of foreign earnings.

Note 9 - Reportable Operating Segments

We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:



	Quarter ended
Revenues	2017		2016
KFC Division	$	732	$	736
Pizza Hut Division	234		281
Taco Bell Division	451		426
	$	1,417	$	1,443



	Quarter ended
Operating Profit	2017			2016
KFC Division	$	207		$	185
Pizza Hut Division	83			91
Taco Bell Division	141			118
Unallocated Franchise and license expenses^(a)	(3		)	(9		)
Unallocated and Corporate expenses^(b)	(53		)	(43		)
Unallocated Refranchising gain (loss) (See Note 5)	111			—
Unallocated Other income (expense)	(2		)	7
Operating Profit	$	484		$	349
Other pension income (expense) (See Note 10)	(28		)	1
Interest expense, net	(109		)	(42		)
Income from continuing operations before income taxes	$	347		$	308


(a)	Costs associated with the KFC U.S. Acceleration Agreement. See Note 5.


(b)	Primarily Corporate G&A expenses for the quarters ended March 31, 2017 and March 31, 2016. Amounts also include $7 million for the quarter ended March 31, 2017, associated with YUM's Strategic Transformation Initiatives. See Note 5.

Note 10 - 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.

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



	Quarter ended
	2017			2016
Service cost	$	3		$	4
Interest cost	10			13
Expected return on plan assets	(12		)	(15		)
Amortization of net loss	2			1
Amortization of prior service cost	1			1
Net periodic benefit cost	$	4		$	4

Additional loss recognized due to settlements^(a)	$	5		$	—
Pension data adjustment^(b)	$	22		$	—


(a)	Losses are a result of settlement transactions in each of our U.S. plans which exceeded the sum of annual service and interest costs for each plan. These losses were recorded in Other pension (income) expense.


(b)	Reflects a non-cash, out-of-year charge related to the adjustment of certain historical deferred vested liability balances in the Plan during the quarter ended March 31, 2017. This charge was recorded in Other pension (income) expense. See Note 5.

Note 11 - Short-term Borrowings and Long-term Debt



Short-term Borrowings	3/31/2017			12/31/2016
Current maturities of long-term debt	$	395		$	66
Other	9			8
	$	404		$	74
Less current portion of debt issuance costs and discounts	(11		)	(8		)
Short-term borrowings	$	393		$	66

Long-term Debt
Securitization Notes	$	2,288		$	2,294
Subsidiary Senior Unsecured Notes	2,100			2,100
Term Loan A Facility	500			500
Term Loan B Facility	1,990			1,990
YUM Senior Unsecured Notes	2,200			2,200
Capital lease obligations	122			120
	$	9,200		$	9,204
Less debt issuance costs and discounts	(90		)	(79		)
Less current maturities of long-term debt	(395		)	(66		)
Long-term debt	$	8,715		$	9,059

On March 21, 2017, KFC Holding Co., Pizza Hut Holdings, LLC, a limited liability company, and Taco Bell of America, LLC, a limited liability company, each of which is a wholly-owned subsidiary of the Company, as co-borrowers completed the repricing of the existing $1,990 million under the Term Loan B Facility pursuant to an amendment to the Credit Agreement (as defined in our 2016 Form 10-K). The amendment reduces the interest rate applicable to the Term Loan B Facility by 75 basis points to adjusted LIBOR plus 2.00%, with a rate stepdown to LIBOR plus 1.75% in the event the secured net leverage ratio (as defined in the Credit Agreement) is less than 1 to 1. Lenders choosing to continue in the Term Loan B Facility repriced $1,798 million in term loan principal and purchased $73 million of additional principal from lenders choosing not to participate in, or electing to decrease their holdings in the loan. Additionally, $119 million in principal was assigned to new lenders. The maturity date and all other material provisions under the Credit Agreement remain unchanged.

Based on the specific creditors that continued to participate in the Term Loan B Facility, including the levels of their participation, a portion of the repricing transaction represented a new debt issuance, a portion represented a debt modification, and the remainder represented a debt extinguishment. As a result, $18 million of fees were recorded as debt issuance costs either within Accounts payable and other current liabilities or Long-term debt on our Condensed Consolidated Balance Sheet, and $4 million were recognized as Interest expense, net during the quarter ended March 31, 2017. Additionally, $2 million of previously recorded unamortized debt issuance costs and discounts were written off to Interest expense, net during the quarter ended March 31, 2017.

Details of our short-term borrowings and long-term debt as of December 31, 2016 can be found within our 2016 Form 10-K. Cash paid for interest during the quarters ended March 31, 2017 and 2016 was $68 million and $25 million, respectively.

Note 12 - Derivative Instruments

We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Swaps

We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments. At March 31, 2017 and December 31, 2016, our interest rate swaps outstanding had notional amounts of $1.55 billion. These interest rate swaps will expire in July 2021 and are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of March 31, 2017.

The effective portion of gains or losses on the interest rate swaps is reported as a component of Accumulated OCI ("AOCI") and reclassified into Interest expense, net in our Condensed Consolidated Statement of Income in the same period or periods during which the related hedged interest payments affect earnings. Gains or losses on the swaps representing hedge ineffectiveness are recognized in current earnings. Through March 31, 2017, the swaps were highly effective cash flow hedges and no ineffectiveness has been recorded.

Foreign Currency Contracts

We enter into foreign currency forward and swap contracts with the objective of reducing our exposure to earnings volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying intercompany receivables or payables. Our foreign currency contracts are designated cash flow hedges as the future cash flows of the contracts are expected to offset changes in intercompany receivables and payables due to foreign currency exchange rate fluctuations.

The effective portion of gains or losses on the foreign currency contracts is reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Gains or losses on the foreign currency contracts representing hedge ineffectiveness are recognized in current earnings. Through March 31, 2017, all foreign currency contracts were highly effective cash flow hedges and no ineffectiveness has been recorded.

As of March 31, 2017, and December 31, 2016, foreign currency forward and swap contracts outstanding had total notional amounts of $452 million and $437 million, respectively. As of March 31, 2017 we have foreign currency forward and swap contracts with durations expiring as early as 2017 and as late as 2020.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At March 31, 2017, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.

Gains and losses on derivative instruments designated as cash flow hedges recognized in OCI and reclassifications from AOCI into Net Income:



	Quarter ended
	Gains/(Losses) Recognized in OCI						(Gains)/Losses Reclassified from AOCI into Net Income
	2017			2016			2017			2016

Interest rate swaps	$	(1	)	$	—		$	2		$	—

Foreign currency contracts	(2		)	(15		)	5			21

Income tax benefit/(expense)	—			1			(1		)	—

As of March 31, 2017, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $5 million, based on current LIBOR interest rates.

See Note 13 for the fair value of our derivative assets and liabilities.

Note 13 - Fair Value Disclosures

As of March 31, 2017 the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short -term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments.

The fair value of notes receivable net of allowances and lease guarantees less subsequent amortization approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations:



	3/31/2017				12/31/2016
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)

Securitization Notes^(a)	$	2,288	$	2,322	$	2,294	$	2,315
Subsidiary Senior Unsecured Notes^(b)	2,100		2,175		2,100		2,175
Term Loan A Facility^(b)	500		505		500		501
Term Loan B Facility^(b)	1,990		2,004		1,990		2,016
YUM Senior Unsecured Notes^(b)	2,200		2,245		2,200		2,216


(a)	We estimated the fair value of the Securitization Notes by obtaining broker quotes from two separate brokerage firms that are knowledgeable about the Company’s Securitization Notes and, at times, trade these notes. The markets in which the Securitization Notes trade are not considered active markets.


(b)	We estimated the fair value of the YUM and Subsidiary Senior Unsecured Notes, Term Loan A Facility, and Term Loan B Facility using market quotes and calculations based on market rates.

Recurring Fair Value Measurements

The Company has interest rate swaps and foreign currency contracts accounted for as cash flow hedges and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 12 for discussion regarding derivative instruments). The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall. No transfers among the levels within the fair value hierarchy occurred during the quarter ended March 31, 2017.



		Fair Value
	Level	3/31/2017		12/31/2016		Condensed Consolidated Balance Sheet
Interest Rate Swaps - Liability	2	$	—	$	3	Accounts payable and other current liabilities
Interest Rate Swaps - Asset	2	1		—		Prepaid expenses and other current assets
Interest Rate Swaps - Asset	2	43		47		Other assets
Foreign Currency Contracts - Asset	2	4		6		Prepaid expenses and other current assets
Foreign Currency Contracts - Asset	2	9		10		Other assets
Other Investments	1	25		24		Other assets

The fair value of the Company’s foreign currency contracts and interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based upon observable inputs. The other investments include investments in mutual funds, which are used to offset fluctuations in deferred compensation liabilities that employees have chosen to invest in phantom shares of a stock index fund or bond index fund. The other investments' fair value is determined based on the closing market prices of the respective mutual funds as of March 31, 2017 and December 31, 2016.

Note 14 - Contingencies

Lease Guarantees

As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company restaurants and guaranteeing certain other leases, we are frequently contingently liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of March 31, 2017 the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessees was approximately $550 million. The present value of these potential payments discounted at our pre-tax cost of debt at March 31, 2017 was approximately $465 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our probable exposure under such leases as of March 31, 2017 was not material.

Franchise Loan Pool and Equipment Guarantees

We have agreed to provide financial support, if required, to a variable interest entity that operates a franchisee lending program used primarily to assist franchisees in the development of new restaurants or the upgrade of existing restaurants and, to a lesser extent, in connection with the Company’s refranchising programs in the U.S. We have determined that we are not required to consolidate this entity as we share the power to direct this entity’s lending activity with other parties. We have provided guarantees of 20% of the outstanding loans of the franchisee loan program. As such, at March 31, 2017 our guarantee exposure under this program is approximately $4 million based on total loans outstanding of $20 million.

In addition to the guarantees described above, we have provided guarantees of up to approximately $50 million on behalf of franchisees for several financing programs related to specific initiatives. At March 31, 2017 our guarantee exposure under these financing programs is approximately $5 million based on total loans outstanding under these financing programs of $10 million.

Legal Proceedings

We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable.

The Company and Taco Bell were named as defendants in a number of putative class action suits filed in 2007, 2008, 2009 and 2010 alleging violations of California labor laws including unpaid overtime, failure to timely pay wages on termination, failure to pay accrued vacation wages, failure to pay minimum wage, denial of meal and rest breaks, improper wage statements, unpaid business expenses, wrongful termination, discrimination, conversion and unfair or unlawful business practices in violation of California Business & Professions Code §17200. Some plaintiffs also sought penalties for alleged violations of California’s Labor Code under California’s Private Attorneys General Act (“PAGA”) as well as statutory “waiting time” penalties and alleged violations of California’s Unfair Business Practices Act. Plaintiffs sought to represent a California state-wide class of hourly employees.

These matters were consolidated, and the consolidated case is styled In Re Taco Bell Wage and Hour Actions. The In Re Taco Bell Wage and Hour Actions plaintiffs filed a consolidated complaint in June 2009, and in March 2010 the court approved the parties’ stipulation to dismiss the Company from the action, leaving Taco Bell as the sole defendant. Plaintiffs filed their motion for class certification on the vacation and final pay claims in December 2010, and on September 26, 2011, the court issued its order denying the certification of the vacation and final pay claims. Plaintiffs then sought to certify four separate meal and rest break classes. On January 2, 2013, the court rejected three of the proposed classes but granted certification with respect to the late meal break class. The parties thereafter agreed on a list of putative class members, and the class notice and opt out forms were mailed on January 21, 2014.

Per order of the court, plaintiffs filed a second amended complaint to clarify the class claims. Plaintiffs also filed a motion for partial summary judgment. Taco Bell filed motions to strike and to dismiss, as well as a motion to alter or amend the second amended complaint. On August 29, 2014, the court denied plaintiffs’ motion for partial summary judgment. On that same date, the court granted Taco Bell’s motion to dismiss all but one of the PAGA claims. On October 29, 2014, plaintiffs filed a motion to amend the operative complaint and a motion to amend the class certification order. On December 16, 2014, the court partially granted both motions, rejecting plaintiffs’ proposed on-duty meal period class but certifying a limited rest break class and certifying an underpaid meal premium class, and allowing the plaintiffs to amend the complaint to reflect those certifications. On December 30, 2014, plaintiffs filed the third amended complaint. On February 26, 2015, the court denied a motion by Taco Bell to dismiss or strike the underpaid meal premium class.

Beginning on February 22, 2016, the late meal period class claim, the limited rest break class claim, the underpaid meal premium class claim, and the associated statutory “waiting time” penalty claim were tried to a jury. On March 9, 2016, the jury returned verdicts in favor of Taco Bell on the late meal period claim, the limited rest break claim, and the statutory “waiting time” penalty claim. The jury found for the plaintiffs on the underpaid meal premium class claim, awarding approximately $0.5 million. A bench trial was subsequently conducted with respect to the PAGA claims and plaintiffs’ Business & Professions Code §17200 claim. On April 8, 2016, the court returned a verdict in favor of Taco Bell on the PAGA claims and the §17200 claim. In a separate ruling issued the same day, the court also ruled that plaintiffs were entitled to prejudgment interest on the underpaid meal premium class claim, awarding approximately $0.3 million. Taco Bell denies liability as to the underpaid meal premium class claim and filed a post-trial motion to overturn the verdict. Plaintiffs also filed various post-trial motions.

On July 15, 2016, the court denied Taco Bell’s motion to overturn the verdict. The court denied Plaintiffs’ motions: (1) for a new trial, (2) for judgment as a matter of law to overturn the verdicts in favor of Taco Bell, (3) challenging the jury instructions and special verdict forms, and (4) to overturn the court’s rejection of the §17200 claims for meal and rest break violations. The court also denied Plaintiffs’ motions for additional costs and for enhanced awards to two of the named Plaintiffs. The court granted Plaintiffs’ motion for judgment on the §17200 claim regarding the underpaid meal premium claim, but rejected awarding any additional damages, finding that the jury verdict sufficiently compensated the class. The court granted Plaintiffs’ motion for attorneys’ fees, but awarded only approximately $1.1 million of the $7.3 million requested. The court also granted Plaintiffs’ bill of costs, but only awarded approximately $0.1 million of Plaintiffs’ $0.2 million. Thereafter, both Plaintiffs and Taco Bell timely filed notices of appeal and the matter is now before the Ninth Circuit.

Subsequently, the parties engaged in settlement negotiations and have agreed in principle to dismiss the appeals and settle the matter. The parties are drafting a final written settlement agreement and, in the event the appeals are dismissed, the parties will then move the District Court to amend the judgment to include a list of class members and a method for division of the verdict.

The proposed settlement amount has been accrued in our Condensed Consolidated Financial Statements, and the anticipated associated cash payments are not expected to be material.

We are engaged in various other legal proceedings and have certain unresolved claims pending, the ultimate liability for which, if any, cannot be determined at this time. However, based upon consultation with legal counsel, we are of the opinion that such proceedings and claims are not expected to have a material adverse effect, individually or in the aggregate, on our Condensed Consolidated Financial Statements.


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

Introduction and Overview

Yum! Brands, Inc. (“YUM” or the “Company”) operates or franchises a worldwide system of more than 43,500 restaurants in 136 countries and territories, primarily through the concepts of KFC, Pizza Hut and Taco Bell. These three concepts are the global leaders in the chicken, pizza and Mexican-style food categories, respectively. Of the more than 43,500 restaurants, 6% are operated by the Company and unconsolidated affiliates and 94% are operated by franchisees.

This Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Cautionary Note Regarding Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“2016 Form 10-K”). References to YUM throughout this discussion are made in first person notations of “we,” “us” or “our.”

YUM currently consists of three reporting segments:


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


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


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

On October 11, 2016, we announced our strategic transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands (“YUM’s Strategic Transformation Initiatives”) following the Separation. Major features of the Company’s transformation and growth strategy involve being more focused, franchised and efficient. YUM’s Strategic Transformation Initiatives below represent the continuation of YUM’s transformation of its operating model and capital structure.


•	More Focused. Four growth drivers will form the basis of YUM’s strategic plans and repeatable business model to accelerate same-store sales growth and net-new restaurant development at KFC, Pizza Hut and Taco Bell around the world over the long term. The Company will focus on becoming best-in-class in:


•	Building Distinctive, Relevant Brands


•	Developing Unmatched Franchise Operating Capability


•	Driving Bold Restaurant Development


•	Growing Unrivaled Culture and Talent


•	More Franchised. YUM intends to increase franchise restaurant ownership to at least 98% by the end of 2018.


•	More Efficient. The Company intends to revamp its financial profile, improving the efficiency of its organization and cost structure globally, by:


•	Reducing annual capital expenditures to approximately $100 million in 2019;


•	Reducing General and administrative ("G&A") expenses by a cumulative ~$300 million from 2015 through the end of 2019; and


•	Maintaining an optimized capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) leverage.

From 2017 through 2019, we intend to return $6.5 - $7.0 billion to shareholders through share repurchases and cash dividends. We intend to fund these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our five times EBITDA leverage. We anticipate generating proceeds in excess of $2 billion, net of tax, through our refranchising initiatives. Refer to the Liquidity and Capital Resources section of this MD&A for additional details.

Beginning in 2017 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. Concurrently, we have removed the reporting lags from the fiscal calendars of our international subsidiaries. See Notes 1 and 5.

We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. Throughout this MD&A, we commonly discuss the following performance metrics:


•	The Company provides certain percentage changes excluding the impact of foreign currency translation (“FX” or “Forex”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

•

System sales growth includes the results of all restaurants regardless of ownership, including company-owned and franchise restaurants that operate our Concepts. Sales of franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Franchise restaurant sales are not included in Company sales on the Condensed Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.


•	Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the YUM system one year or more.

•

Company restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales. Within the Company Sales and Restaurant Profit sections of this MD&A, Store Portfolio Actions represent the net impact of new unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in costs such as inflation/deflation.


•	Operating margin is Operating Profit divided by Total revenues.

•

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") , the Company has provided non-GAAP measurements which present Diluted Earnings Per Share from Continuing Operations excluding Special Items, our Effective Tax Rate excluding Special Items and Core Operating Profit. Core Operating Profit excludes Special Items and foreign currency translation and we use Core Operating Profit for the purposes of evaluating performance internally. Special Items are not included in any of our externally reported segment results, and we believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of Diluted Earnings Per Share from Continuing Operations excluding Special Items, our Effective Tax Rate excluding Special Items and Core Operating Profit, provide additional information to investors to facilitate the comparison of past and present operations, excluding items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Unless otherwise stated, financial results herein reflect continuing operations of the Company. Percentages may not recompute due to rounding.

Results of Operations

Summary

All comparisons within this summary are versus the same period a year ago.

For the quarter ended March 31, 2017 GAAP diluted EPS from continuing operations increased 43% to $0.77 per share, and diluted EPS from continuing operations, excluding Special Items, increased 17% to $0.65 per share.

Quarterly Financial highlights:



	% Change
	System Sales, ex FX	Same-Store Sales	Net New Units	GAAP Operating Profit	Core Operating Profit
KFC Division	+5	+2	+4	+12	+13
Pizza Hut Division	Even	(3)	+2	(9)	(7)
Taco Bell Division	+12	+8	+3	+19	+19
Worldwide	+5	+2	+3	+39	+9

Additionally:


•	Foreign currency translation negatively impacted our reported quarterly Operating Profit by $5 million, which included $3 million from our KFC Division and $2 million from our Pizza Hut Division.


•	Our GAAP effective tax rate for the quarter decreased to 19.4% from 26.6%. Our Effective Tax Rate, excluding Special Items, for the quarter decreased to 12.5% from 26.7%.

Worldwide

GAAP Results



	Quarter ended
	2017			2016			% B/(W)
Company sales	$	902		$	953		(5	)
Franchise and license fees and income	515			490			5
Total revenues	$	1,417		$	1,443		(2	)

Restaurant profit	$	144		$	148		(2	)
Restaurant margin %	16.0		%	15.5		%	0.5		ppts.

G&A expenses	$	237		$	243		2
Franchise and license expenses	46			51			10
Closures and impairment (income) expenses	1			2			59
Refranchising (gain) loss	(111		)	—			NM
Other (income) expense	2			(7		)	NM
Operating Profit	$	484		$	349		39

Other pension (income) expense	$	28		$	(1	)	NM
Interest expense, net	109			42			NM
Income tax provision	67			82			18
Income from continuing operations	$	280		$	226		24
Income from discontinued operations, net of tax	—			138			NM
Net Income	$	280		$	364		(23	)

Diluted EPS^(a) from continuing operations	$	0.77		$	0.54		43
Diluted EPS^(a) from discontinued operations	—			0.33			NM
Diluted EPS^(a)	$	0.77		$	0.87		(11	)
Effective tax rate - continuing operations	19.4		%	26.6		%	7.2		ppts.


(a)	See Note 2 for the number of shares used in this calculation.

Performance Metrics



Unit Count	3/31/2017	3/31/2016	% Increase (Decrease)