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 June 30, 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 August 1, 2017 was 344,773,283 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	23

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk	38

	Item 4 – Controls and Procedures	38

	Report of Independent Registered Public Accounting Firm	39

Part II.	Other Information and Signatures

	Item 1 – Legal Proceedings	40

	Item 1A – Risk Factors	40

	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	40

	Item 6 – Exhibits	41

	Signatures	42

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	6/30/2017			6/30/2016 (As Restated)			6/30/2017			6/30/2016 (As Restated)
Company sales	$	909		$	1,006		$	1,811		$	1,959
Franchise and license fees and income	539			503			1,054			993
Total revenues	1,448			1,509			2,865			2,952
Costs and Expenses, Net
Company restaurant expenses
Food and paper	280			307			556			594
Payroll and employee benefits	239			263			483			520
Occupancy and other operating expenses	229			269			467			530
Company restaurant expenses	748			839			1,506			1,644
General and administrative expenses	247			254			484			497
Franchise and license expenses	54			54			100			105
Closures and impairment (income) expenses	1			7			2			9
Refranchising (gain) loss	(19		)	(54		)	(130		)	(54		)
Other (income) expense	(2		)	(6		)	—			(13		)
Total costs and expenses, net	1,029			1,094			1,962			2,188
Operating Profit	419			415			903			764
Other pension (income) expense	4			—			32			(1		)
Interest expense, net	104			51			213			93
Income from continuing operations before income taxes	311			364			658			672
Income tax provision	105			98			172			180
Income from continuing operations	206			266			486			492
Income from discontinued operations, net of tax	—			70			—			208
Net Income	$	206		$	336		$	486		$	700

Basic Earnings per Common Share from continuing operations	$	0.59		$	0.65		$	1.37		$	1.20
Basic Earnings per Common Share from discontinued operations	N/A			$	0.17		N/A			$	0.51
Basic Earnings Per Common Share	$	0.59		$	0.82		$	1.37		$	1.71

Diluted Earnings per Common Share from continuing operations	$	0.58		$	0.64		$	1.34		$	1.18
Diluted Earnings per Common Share from discontinued operations	N/A			$	0.17		N/A			$	0.50
Diluted Earnings Per Common Share	$	0.58		$	0.81		$	1.34		$	1.68

Dividends Declared Per Common Share	$	0.30		$	0.46		$	0.60		$	0.92

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
	6/30/2017			6/30/2016 (As Restated)			6/30/2017			6/30/2016 (As Restated)

Net Income - YUM! Brands, Inc.	$	206		$	336		$	486		$	700
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	7			(18		)	57			(24		)
Reclassification of adjustments and (gains) losses into Net Income	(5		)	—			(5		)	—
	2			(18		)	52			(24		)
Tax (expense) benefit	(3		)	—			(4		)	4
	(1		)	(18		)	48			(20		)
Changes in pension and post-retirement benefits
Unrealized gains (losses) arising during the period	(18		)	2			(13		)	1
Reclassification of (gains) losses into Net Income	6			2			36			5
	(12		)	4			23			6
Tax (expense) benefit	4			(1		)	(8		)	(2		)
	(8		)	3			15			4
Changes in derivative instruments
Unrealized gains (losses) arising during the period	(37		)	9			(40		)	(6		)
Reclassification of (gains) losses into Net Income	30			(15		)	37			6
	(7		)	(6		)	(3		)	—
Tax (expense) benefit	3			(1		)	2			—
	(4		)	(7		)	(1		)	—

Other comprehensive income (loss), net of tax	(13		)	(22		)	62			(16		)
Comprehensive Income	$	193		$	314		$	548		$	684

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
	6/30/2017			6/30/2016 (As Restated)
Cash Flows – Operating Activities from Continuing Operations
Net Income	$	486		$	700
Income from discontinued operations, net of tax	—			(208		)
Depreciation and amortization	135			147
Closures and impairment (income) expenses	2			9
Refranchising (gain) loss	(130		)	(54		)
Contributions to defined benefit pension plans	(12		)	(6		)
Deferred income taxes	10			(19		)
Share-based compensation expense	25			22
Changes in accounts and notes receivable	30			34
Changes in inventories	4			4
Changes in prepaid expenses and other current assets	(1		)	15
Changes in accounts payable and other current liabilities	(137		)	(66		)
Changes in income taxes payable	(83		)	12
Other, net	110			(3		)
Net Cash Provided by Operating Activities from Continuing Operations	439			587

Cash Flows – Investing Activities from Continuing Operations
Capital spending	(150		)	(186		)
Proceeds from refranchising of restaurants	321			84
Other, net	2			12
Net Cash Provided by (Used in) Investing Activities from Continuing Operations	173			(90		)

Cash Flows – Financing Activities from Continuing Operations
Proceeds from long-term debt	1,088			6,900
Repayments of long-term debt	(360		)	(304		)
Revolving credit facilities, three months or less, net	—			(685		)
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	—			—
Repurchase shares of Common Stock	(856		)	(2,067		)
Dividends paid on Common Stock	(211		)	(379		)
Debt issuance costs	(32		)	(86		)
Net transfers from discontinued operations	—			70
Other, net	(39		)	(29		)
Net Cash Provided by (Used in) Financing Activities from Continuing Operations	(410		)	2,820
Effect of Exchange Rates on Cash and Cash Equivalents	23			(1		)
Net Increase in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Continuing Operations	225			3,316
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	$	1,056		$	3,667

Cash Provided by Operating Activities from Discontinued Operations	$	—		$	376
Cash Used in Investing Activities from Discontinued Operations	—			(214		)
Cash Used in Financing Activities from Discontinued Operations	—			(71		)

See accompanying Notes to Condensed Consolidated Financial Statements.



CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)
	6/30/2017			12/31/2016 (As Restated)
ASSETS
Current Assets
Cash and cash equivalents	$	970		$	725
Accounts and notes receivable, net	356			370
Inventories	31			37
Prepaid expenses and other current assets	267			236
Advertising cooperative assets, restricted	161			137
Total Current Assets	1,785			1,505

Property, plant and equipment, net	2,021			2,113
Goodwill	540			536
Intangible assets, net	147			151
Other assets	340			376
Deferred income taxes	763			772
Total Assets	$	5,596		$	5,453

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	929		$	1,067
Income taxes payable	13			32
Short-term borrowings	375			66
Advertising cooperative liabilities	161			137
Total Current Liabilities	1,478			1,302

Long-term debt	9,474			9,059
Other liabilities and deferred credits	746			704
Total Liabilities	11,698			11,065

Shareholders’ Deficit
Common Stock, no par value, 750 shares authorized; 345 and 355 shares issued in 2017 and 2016, respectively	—			—
Accumulated deficit	(5,710		)	(5,158		)
Accumulated other comprehensive loss	(392		)	(454		)
Total Shareholders’ Deficit	(6,102		)	(5,612		)
Total Liabilities and Shareholders’ Deficit	$	5,596		$	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 nearly 44,000 units, of which 59% are located outside the U.S., in 137 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 Financial Statements are made using the first person notations of “we,” “us” or “our.”

As of June 30, 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 periods presented prior to the Separation. 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 the one month or one period reporting lags of our international subsidiaries. As a result of removing these reporting lags, each international subsidiary operates 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 June 30, 2017, our cash flows for the years to date ended June 30, 2017 and 2016, and the results of our operations and comprehensive income for the quarters and years to date ended June 30, 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 excess tax benefits within our income tax provision for share-based payments made of $15 million and $64 million during the quarter and year to date ended June 30, 2017, respectively. 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, $27 million of excess tax benefits previously presented as a financing activity have been reclassified to operating activities for the year to date ended June 30, 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 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 June 30, 2017. These reclassifications had no effect on previously reported Net Income.

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



	Quarter ended				Year to date
	2017		2016		2017		2016
Income from continuing operations	$	206	$	266	$	486	$	492
Income from discontinued operations	—		70		—		208
Net Income	$	206	$	336	$	486	$	700

Weighted-average common shares outstanding (for basic calculation)	350		408		354		411
Effect of dilutive share-based employee compensation	8		7		7		7
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)	358		415		361		418

Basic EPS from continuing operations	$	0.59	$	0.65	$	1.37	$	1.20
Basic EPS from discontinued operations	N/A		0.17		N/A		0.51
Basic EPS	$	0.59	$	0.82	$	1.37	$	1.71

Diluted EPS from continuing operations	$	0.58	$	0.64	$	1.34	$	1.18
Diluted EPS from discontinued operations	N/A		0.17		N/A		0.50
Diluted EPS	$	0.58	$	0.81	$	1.34	$	1.68
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation^(a)	2.7		6.0		2.3		6.9


(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’ Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the years to date ended June 30, 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	—		13,369		$	—		$	933		$	—
March 2016	—		2,823		—			228			—
May 2016	—		12,352		—			1,020			—
November 2016	12,462		—		826			—			1,089
Total	12,462	^(a)	28,544	^(b)	$	826	^(a)	$	2,181	^(b)	$	1,089


(a)	Includes the effect of $15 million in share repurchases (0.2 million shares) with trade dates on, or prior to, June 30, 2017, but cash settlement dates subsequent to June 30, 2017, and excludes the effect of $45 million in share repurchases (0.7 million shares) with trade dates on, or prior to, December 31, 2016, but cash settlement dates subsequent to December 31, 2016.


(b)	Includes the effect of $115 million in share repurchases (1.4 million shares) with trade dates on, or prior to, June 30, 2016, but cash settlement dates subsequent to June 30, 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	53			(8		)	(37		)	8

(Gains) losses reclassified from accumulated OCI, net of tax	(5		)	23			36			54

OCI, net of tax	48			15			(1		)	62

Balance at June 30, 2017, net of tax	$	(284	)	$	(112	)	$	4		$	(392	)

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 and year to date ended June 30, 2016, the combined KFC and Pizza Hut Divisions' Franchise and license fees and income, as a result of the Separation, increased by $60 million and $125 million, respectively. 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 and $8 million for the quarter and year to date ended June 30, 2016, respectively. 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, which was 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			Year to date
	2016^(a)			2016^(b)
Company sales	$	1,558		$	2,836
Franchise and license fees and income	30			55
Company restaurant expenses	(1,363		)	(2,408		)
G&A expenses	(112		)	(186		)
Franchise and license expenses	(13		)	(25		)
Closure and impairment expenses	(31		)	(31		)
Refranchising gain	2			5
Other income	10			26
Interest income, net	2			3
Income from discontinued operations before income taxes^(c)	83			275
Income tax provision	(17		)	(67		)
Income from discontinued operations - including noncontrolling interests	66			208
(Income) loss from discontinued operations - noncontrolling interests	4			—
Income from discontinued operations - YUM! Brands, Inc.	$	70		$	208


(a)	Includes historical Yum China financial results from March 1, 2016 to May 31, 2016.


(b)	Includes historical Yum China financial results from January 1, 2016 to May 31, 2016, plus an additional month of expense associated with the license fee paid to YUM to conform to the new YUM reporting calendar.


(c)	Includes costs incurred to execute the Separation of $10 million and $18 million for the quarter and year to date ended June 30, 2016. Such costs primarily related to transaction advisors, legal and other consulting fees.

Cash inflows from Yum China to the Company during the quarter and year to date ended June 30, 2017, related to the Master License Agreement were $49 million and $104 million, respectively, 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, our chief operating decision maker ("CODM") does not consider the impact of Refranchising (gain) loss when assessing segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes.

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



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

KFC U.S. Acceleration Agreement

During 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we anticipate investing approximately $120 million from 2015 through 2018 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges of $5 million and $8 million for the quarters ended June 30, 2017 and 2016, respectively, for these investments. We recorded pre-tax charges of $8 million and $17 million for the years to date ended June 30, 2017 and 2016, respectively. These amounts were recorded primarily as Franchise and license expenses. We recorded total pre-tax charges of $98 million during the two year period ended December 31, 2016, and we currently expect a total pre-tax charge of approximately $20 million in 2017 for these investments. Due to their size and unique and long-term brand building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these charges are not being allocated to the KFC Division segment operating results.

In addition to the investments above we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During both of the quarters ended June 30, 2017 and 2016, we incurred $5 million in incremental system advertising expense. During both the years to date ended June 30, 2017 and 2016, we incurred $9 million in incremental system advertising expense. We funded approximately $30 million of such advertising during the two year period ended December 31, 2016. We currently expect to fund approximately $20 million of such advertising in 2017 and $10 million in 2018. All of these advertising amounts were recorded primarily in Franchise and license expenses and are included in the KFC Division segment operating results.

YUM's Strategic Transformation Initiatives

In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated separation of our China business on October 31, 2016. Major features of the Company’s growth and transformation strategy involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. During both the quarters ended June 30, 2017 and 2016, we recognized pre-tax charges of $4 million related to these initiatives. During the years to date ended June 30, 2017 and 2016, we recognized pre-tax charges of $11 million and $4 million, respectively. These costs primarily related to severance and relocation costs that were recorded within G&A expense. Due to the scope of the initiatives as well as their significance, our CODM does not consider the impact of these initiatives when assessing segment performance. As such, costs associated with the initiatives are not being allocated to any segment for performance reporting purposes.

Pizza Hut U.S. Transformation Agreement

On May 1, 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising and digital and technology contributions by franchisees. In connection with this agreement, we anticipate investing approximately $90 million to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. We currently expect the majority of this investment will be split between 2017 and 2018. During the quarter ended June 30, 2017, we recorded pre-tax charges of $12 million primarily related to digital and e-commerce initiatives that were recorded as Franchise and license expenses. Due to their unique and long-term brand-building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these amounts are not being allocated to the Pizza Hut Division segment operating results.

In addition to the investments above, we have agreed to fund incremental system advertising dollars of approximately $25 million in the second half of 2017 and $12.5 million in 2018. No expense related to these incremental advertising amounts has yet to be recorded as of June 30, 2017. Such expense will be included in Pizza Hut's segment operating results as they are incurred.

Modifications of Share-based Compensation Awards

In connection with the Separation, we modified certain share-based compensation awards held as part of our Executive Income Deferral ("EID") Plan in phantom shares of YUM Common Stock to provide one phantom Yum China share-based award for each outstanding phantom YUM share-based award. These Yum China awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards each quarter within G&A in our Condensed Consolidated Income Statement. During the quarter and year to date ended June 30, 2017, we recorded pre-tax charges related to these awards of $16 million and $18 million, respectively, due to appreciation in the market price of Yum China's stock. Given these charges were a direct result of the Separation, our CODM does not consider their impact when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results.

Impact of Change in Reporting Calendar

As discussed in Note 1, we have changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year commencing with the year ending December 31, 2017. We also removed the monthly or period reporting lags certain of our international subsidiaries historically used to report results. The impacts on our Financial Statements of retrospectively applying these changes are included below:



	Quarter ended June 30, 2016
	As Previously Reported		Adjustments			After Change in Reporting Calendar
Total Revenues	$	1,477	$	32		$	1,509
Operating profit	408		7			415
Net Income from continuing operations	265		1			266
Income from discontinued operations, net of tax	74		(4		)	70
Net Income	$	339	$	(3	)	$	336

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



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

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


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

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

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

Non-cash Pension Adjustment

During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of $22 million to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM does not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost is not being allocated to any of our segment operating results.

Note 6 - Other (Income) Expense

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



	6/30/2017			12/31/2016
Accounts and notes receivable, gross	$	375		$	384
Allowance for doubtful accounts	(19		)	(14		)
Accounts and notes receivable, net	$	356		$	370

Property, Plant and Equipment, net



	6/30/2017			12/31/2016
Property, plant and equipment, gross	$	4,011		$	4,108
Accumulated depreciation and amortization	(1,990		)	(1,995		)
Property, plant and equipment, net	$	2,021		$	2,113

Assets held for sale at June 30, 2017 and December 31, 2016, total $21 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



	6/30/2017		12/31/2016
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets	$	970	$	725
Restricted cash included in Prepaid expenses and other current assets^(a)	53		55
Restricted cash included in Other assets^(b)	33		51
Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows	$	1,056	$	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						Year to date
	2017			2016			2017			2016
Income tax provision	$	105		$	98		$	172		$	180
Effective tax rate	33.8		%	27.0		%	26.2		%	26.8		%

Our effective tax rate is lower than the U.S. federal statutory rate of 35% primarily 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 second quarter effective tax rate was higher than the prior year primarily due to the unfavorable impacts associated with our 2017 planned refranchising gains, substantially all of which will be taxed at the U.S. rate, and the pre-tax charges recorded in the current quarter associated with refranchising certain international markets for which we are not able to record a tax benefit. The second quarter tax rate was also higher than the prior year due to lapping the benefit associated with a prior year income tax return amendment, partially offset by the inclusion in the current year of $15 million of excess benefits on share based compensation related to the adoption of a new accounting standard in the quarter ended March 31, 2017. See Note 1.

Our year to date effective tax rate was lower than prior year primarily due to the inclusion of $64 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 benefits were largely associated with the deferred compensation payouts to recently retired employees. This benefit was partially offset by the unfavorable impacts associated with our 2017 planned refranchising gains, substantially all of which will be taxed at the U.S. rate, the pre-tax charges recorded in the quarter ended June 30, 2017 associated with refranchising certain international markets for which we are not able to record a tax benefit and the 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					Year to date
Revenues	2017		2016			2017		2016
KFC Division	$	770	$	779		$	1,502	$	1,515
Pizza Hut Division	222		267			456		548
Taco Bell Division	456		464			907		890
Unallocated	—		(1		)	—		(1		)
	$	1,448	$	1,509		$	2,865	$	2,952



	Quarter ended				Year to date
Operating Profit	2017		2016		2017	2016
KFC Division	$	243	$	203