Yum! Brands (YUM) 10-K risk factor changes: FY2017 vs FY2016

Food-borne illnesses, such as E. coli, [removed: hepatitis A, trichinosis] [added: trichinosis, listeria] and salmonella, occur or may occur within our system from time to time.

If a customer of [added: one of] our Concepts becomes ill as a result of food safety issues, restaurants in our system may be temporarily closed, which [removed: would decrease] [added: could disrupt] our [removed: revenues.][added: operations and have a material adverse effect on our business, financial condition and results of operations.]

The occurrence of such an outbreak of an [removed: epidemic] [added: epidemic,] illness or other adverse public health developments could materially disrupt our business and operations.

Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having the avian flu or swine flu, [added: or other illnesses such as hepatitis A or norovirus,] since this could require us or our business partners to quarantine some or all of such employees or disinfect our restaurant facilities.

[removed: This] [added: Because poultry is a menu offering for our Concepts, this] would likely result in lower revenues and [removed: profits.][added: profits for us and our Concepts’ franchisees.]

We could also be adversely affected if [removed: jurisdictions in which our Concepts’ restaurants operate] [added: government authorities] impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants.

In [removed: October] 2016, [removed: in connection with the spin-off of our China business,] we announced our plan to become at least 98% franchised by the end of 2018.

Our refranchising efforts [added: have increased, and] will [removed: increase] [added: continue to increase,] our dependence on the financial success and cooperation of our Concepts’ franchisees.

Nearly all of this unit growth is expected to result from new unit openings by our [added: Concepts’] franchisees.

If our [added: Concepts’] franchisees do not meet our expectations for new unit development, we may fall short of our system sales growth targets.

We have limited control over how our Concepts’ franchisees’ businesses are run, and [removed: the] [added: their] inability [removed: of franchisees] to operate successfully could adversely affect our operating results through decreased royalty payments.

If a significant franchisee [added: of one of our Concepts becomes,] or a significant number of our Concepts’ franchisees [removed: become] [added: in the aggregate become,] financially distressed, our operating results could be impacted through reduced or delayed royalty [removed: payments.][added: payments and reduced new unit development.]

In addition, we are contingently liable on certain of our Concepts’ franchisees’ lease agreements, including lease agreements that we have guaranteed or assigned to franchisees in connection with [added: the] refranchising of certain [removed: Company restaurants, and our operating results could be impacted by any increased rent obligations for such leased properties.][added: Company-owned restaurants.]

Our success also depends on the willingness and ability of our Concepts’ franchisees to implement major [removed: initiatives,] [added: initiatives such as restaurant remodels or equipment or technology upgrades,] which may [removed: include] [added: require] financial investment.

[removed: On October 11, 2016, we announced] [added: We are in the process of implementing] our strategic transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell [removed: brands following the spin-off of our China business.][added: brands.]

[removed: There is no assurance that we will successfully implement, or fully] realize the anticipated positive impact of, our transformation [removed: initiatives] [added: initiatives,] or execute successfully on our transformation strategy, in the expected timeframes or at all.

In connection with the [removed: spin-off of our China business in October 2016,] [added: Separation,] we entered into a Master License Agreement with Yum China pursuant to which Yum China is the exclusive licensee of the KFC, Pizza Hut and Taco Bell Concepts and their related [added: marks and other intellectual property rights for restaurant services in China.]

[removed: These] [added: Yum China's business is exposed to] risks [added: in China, which] include, among others, changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), consumer preferences, [added: and] the regulatory environment, as well as increased media scrutiny of our [removed: business] [added: Concepts] and industry, fluctuations in foreign exchange rates and increased competition.

[removed: In addition,] [added: Further,] any significant or prolonged deterioration in U.S.-China relations could adversely affect our [added: Concepts in] China [removed: operations] if Chinese consumers reduce the frequency of their visits to Yum China’s restaurants.

Chinese law regulates [removed: the scope of our] [added: Yum China's] business conducted within China.

Our [added: royalty income from the Yum China] business is therefore subject to numerous uncertainties based on the policies of the Chinese government, as they may change from time to time.

Such interruption could [removed: result in] [added: cause] a delay [removed: in] [added: in,] or loss [removed: of] [added: of,] royalty income to us, which would negatively impact our financial results.

These risks, which can vary substantially by country, include political instability, [removed: corruption] [added: corruption, anti-American sentiment] and social and ethnic unrest, as well as changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), the regulatory environment, income and non-income based tax rates and laws, [added: sanctions,] foreign exchange control regimes, consumer preferences and the laws and policies that govern foreign investment in countries where our restaurants are operated.

In addition, our franchisees do business in jurisdictions that may be subject to trade or economic sanction [removed: regimes.][added: regimes and such sanctions could be expanded.]

[added: Our failure to adhere to or] successfully implement appropriate processes [added: to adhere to the requirements of GDPR and other laws and regulations] in this area could result in [added: financial penalties,] legal liability [removed: or impairment to] [added: and could damage] our and our [added: Concepts’] brands’ reputations.

Failure by our Concepts to use social media effectively or appropriately, particularly as compared to our [removed: Concept’s] [added: Concepts’] respective competitors, could lead to a decline in brand value, customer visits and revenue.

Shortages or interruptions in the supply of food items and other supplies to our [added: Concepts’] restaurants could adversely affect the availability, quality and cost of items we use and the operations of our restaurants.

Such shortages or disruptions could be caused by inclement weather, natural disasters, [removed: increased] [added: inaccurate forecasting of customer] demand, problems in production or distribution, restrictions on imports or exports, the inability of vendors to obtain credit, political instability in the countries in which suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements, the cancellation of supply or distribution agreements or an inability to renew such arrangements or to find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our Concepts’ franchisees.

Our growth strategy depends on our and our [added: Concepts’] franchisees’ ability to increase our net restaurant count in markets around the world, especially in emerging markets.

Other risks that could impact our ability to increase the number of our restaurants include prevailing economic conditions and [added: trade or economic sanctions and] our, or our Concepts’ franchisees’, ability to obtain suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, obtain required permits and approvals in a timely manner, hire and train qualified restaurant crews and meet construction schedules.

In addition, the [added: development of] new restaurants could impact the sales of our Concepts’ existing restaurants nearby.

Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants by us and our Concepts’ franchisees and could adversely impact [added: operation of] our Concepts’ existing restaurants.

In [removed: addition, strikes, work slowdowns or other job actions may become more common in] the [removed: U.S. In the] event of a strike, work slowdown or other labor unrest, the ability to adequately staff our [removed: Concept’s] [added: Concepts’] restaurants could be impaired, which could result in reduced revenue and customer claims, and may distract our management from focusing on our business and strategic priorities.

[removed: *A broader] [added: *The] standard for determining joint employer status [removed: may] [added: could] adversely affect our business operations and increase our liabilities resulting from actions by our Concepts’ franchisees.*

[removed: In 2015, the] [added: The] National Labor Relations [removed: Board] [added: Board’s] (the “NLRB”) [removed: adopted a new and broader] standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under the National Labor Relations [removed: Act.][added: Act is uncertain and subject to change.]

The NLRB’s [removed: proposed and evolving] joint employer liability standard could cause us or our Concepts to be liable or held responsible for unfair labor practices, violations of wage and hour laws, and other violations and could also require our Concepts to conduct collective bargaining [removed: negotiations,] [added: negotiations] regarding employees of our Concepts’ franchisees.

*An increase in food prices may have an adverse impact on our and our [added: Concepts’] franchisees’ profit margins.*

Our and our Concepts’ franchisees’ businesses depend on reliable sources of large quantities of raw materials such as [removed: protein] [added: proteins] (including poultry, pork, beef and seafood), cheese, oil, flour and vegetables (including potatoes and lettuce).

We cannot assure you that we or our Concepts’ franchisees will continue to be able to purchase raw materials at reasonable prices, or that [added: the cost of] raw materials [removed: prices] will remain stable in the future.

If we and our Concepts’ franchisees are unable to manage the cost [added: of raw materials or to increase the prices of products proportionately, our and our franchisees’ profit margins may be adversely impacted.]

Our operating results could be impacted by any increased rent obligations for such leased properties to the extent our Concepts’ franchisees default on such lease agreements.

There is no assurance that we will successfully implement, or fully

Following the Separation, Yum China became, and continues to be, our largest franchisee.

As a result, our overall financial results are significantly affected by Yum China’s results.

In addition, our vendors and/or franchisees receive and maintain certain personal, financial and other information about our employees

and customers.

For example, the European Union adopted a new regulation that becomes effective in May 2018, The General Data Protection Regulation ("GDPR"), which requires companies to meet new requirements regarding the handling of personal data.

*There are risks associated with our increasing dependence on digital commerce platforms to maintain and grow sales.

In addition, aspects of our information technology systems may experience disruptions, which could harm our ability to compete and conduct our business.*

Customers are increasingly using e-commerce websites and apps, both domestically and internationally, like pizzahut.com, Pizza Hut, KFC and Taco Bell apps, as well as apps owned by third-party delivery aggregators such as Grubhub and third-party mobile payment processors, to order and pay for our Concepts’ products.

As a result, our Concepts and our Concepts’ franchisees are increasingly reliant on digital ordering and payment as a sales channel.

These digital ordering and payment platforms could be damaged or interrupted by power loss, technological failures, user errors, cyber-attacks, other forms of sabotage or acts of God.

In particular, Pizza Hut relies on digital orders for a significant portion of its sales and could experience interruptions of its digital ordering platforms, which could limit or delay customers’ ability to order through such platforms.

Any such limitation or delay would negatively impact Pizza Hut’s sales and customer experience and perception.

In addition, if Pizza Hut’s digital ordering platforms do not meet customers’ expectations in terms of security, speed, attractiveness, or ease of use, customers may be less inclined to return to such digital ordering platforms, which could negatively impact our sales, results of operations and financial condition.

In addition, Yum China, our largest franchisee, relies heavily on third-party mobile payment apps such as Alipay and WeChat as a means through which to generate sales and process payments.

Should customers become unable to access mobile payment apps in China, or should the relationship between Yum China and one or more third-party mobile payment processors become interrupted, our results of operations could be negatively impacted.

In addition, strikes, work slowdowns or other job actions may become more common.

qualities.

See the discussion of legal proceedings in Note 20 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

We are also subject to ongoing and/or regular reviews, examinations and audits by the U.S. Internal Revenue Service (“IRS”) and other taxing authorities with respect to such income and non-income based taxes inside and outside of the U.S. In connection with the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, companies are now required to disclose more information to tax authorities on their global operations, which may lead to greater audit scrutiny of profits earned in various countries.

Our accruals for tax liabilities are based on past experience, interpretations of applicable law, and judgments about potential actions by tax authorities, but because such accruals require significant judgment the ultimate resolution of any tax matters may result in payments greater than the amounts accrued.

On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which significantly modifies the U.S. corporate income tax system.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of its effects and recorded provisional amounts for the year ended December 31, 2017, consistent with applicable SEC guidance.

(See details of the charge we recorded upon enactment of the Tax Act in Note 18 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.) These provisional amounts include a one-time mandatory deemed repatriation tax on accumulated foreign earnings, the remeasurement of certain net deferred tax assets and liabilities and the establishment of a valuation allowance on our foreign tax credits.

We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our ongoing effective tax rate.

The final impacts of the Tax Act may differ from current estimates and provisional amounts recorded, possibly materially, due to, among other things, changes in interpretations of the Tax Act, changes in accounting standards for income taxes or related accounting interpretations in response to the Tax Act, or updates or changes to estimates the Company has utilized to calculate the provisional impacts.

IRS.

There is no assurance that we will be

marks and other intellectual property rights for restaurant services in China.

Following the spin-off, Yum China is now our largest franchisee, and our overall financial results are significantly affected by Yum China’s results, and our business is exposed to risks in China.

Our failure to adhere to or

of raw materials or to increase the prices of products proportionately, it may have an adverse impact on our and our franchisees’ profit margins.

A significant percentage of our income is earned outside the U.S. and currently taxed at lower rates than the U.S. statutory rates.

However, if the cash generated by our U.S. business is not sufficient to meet our need for cash in the U.S., we may need to repatriate a greater portion of our international earnings to the U.S. in the future.

We are required to record U.S. income tax expense in our financial statements at the point in time when our management determines that we no longer have the ability and intent to indefinitely postpone tax consequences related to those international earnings.

This could cause our worldwide effective tax rate to increase materially.

Changes in legislation, regulation or interpretation of existing laws and regulations in the U.S. and other

significant resources.

indebtedness or to fund other liquidity needs, our financial condition and results of operations may be adversely affected.

Brands, Inc. (“YUM” or the “Company”) operates or franchises a worldwide system of over [removed: 43,500] [added: 45,000] restaurants in more than 135 countries and [removed: territories operating] [added: territories,] under the [added: concepts of] KFC, Pizza Hut [removed: or] [added: and] Taco Bell [removed: (collectively] [added: (collectively,] the [removed: "Concepts") brands.][added: "Concepts").]

These three Concepts are [removed: the] global leaders [removed: in] [added: of] the chicken, pizza and Mexican-style food categories, respectively.

Of the over [removed: 43,500] [added: 45,000] restaurants, [removed: 7%] [added: 3%] are operated by the Company and its subsidiaries and [removed: 93%] [added: 97%] are operated by franchisees.

As of December 31, [removed: 2016,] [added: 2017,] YUM consists of three operating segments:

| • | The KFC Division which includes [removed: the] [added: our] worldwide operations of the KFC concept |

| • | The Pizza Hut Division which includes [removed: the] [added: our] worldwide operations of the Pizza Hut concept |

| • | The Taco Bell Division which includes [removed: the] [added: our] worldwide operations of the Taco Bell concept |

As a result of the Separation, the results of [removed: operations, assets and liabilities,] [added: operations] and cash flows of the separated business are presented as discontinued operations in our Consolidated Statements of [removed: Income, Consolidated Balance Sheets] [added: Income] and Consolidated Statements of Cash Flows for [removed: all] periods [removed: presented.][added: prior to the Separation.]

See additional information related to the impact of the Separation in [removed: Item 8,] Note [removed: 4 to the Consolidated Financial Statements.][added: 4.]

| • | More Focused. Four growth drivers [removed: 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 [removed: will focus] [added: is focused] on becoming best-in-class in: |

| • | Building Distinctive, Relevant [added: and Easy] Brands |

| • | More Franchised. YUM intends [removed: to increase] franchise restaurant ownership to [added: be] at least 98% by the end of 2018. |

| • | More Efficient. The Company [removed: intends to revamp] [added: is revamping] its financial profile, improving the efficiency of its organization and cost structure globally, by: |

[removed: Over the next 3 years,] [added: From 2017 through 2019,] we intend to return an additional $6.5 - $7.0 billion to shareholders through share repurchases and cash dividends.

[removed: | • | 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 [removed: foreign currency translation] [added: FX] impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. [removed: |]

| • | System [added: sales, System] sales [removed: growth includes] [added: excluding] the [added: impacts of foreign currency translation ("FX"), and System sales excluding FX and the impact of the 53rd week in 2016. System sales include the] results of all restaurants regardless of ownership, including [removed: company-owned] [added: 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 Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues. We believe [removed: system] [added: 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 [added: for] one year or more. |

All comparisons within this summary are versus the same period a year [removed: ago, exclude the impact of Special Items] [added: ago] and include the impact of [added: lapping] a 53rd week in 2016, unless otherwise noted.

[removed: 2016 diluted] [added: | Diluted] EPS from Continuing [removed: Operations] [added: Operations,] excluding Special Items [removed: increased 5% to $2.45 per share.][added: | | 20 | | | 7 | |]

| | [removed: | 2016] % Change | | | | | | | | | [removed: | | | | |]

| | [removed: |] System Sales, [removed: ex] [added: Ex] FX | | [removed: | Same Store] [added: Same-Store] Sales | | [removed: |] Net New Units | | [removed: |] GAAP Operating Profit | | [removed: |] Core Operating Profit | [removed: |]

| KFC Division | [removed: | 7 | % | | 3 | % |] [added: +6] | [removed: 3] | [removed: %] [added: +3] | | [removed: 5] [added: +4] | [removed: %] | [added: +13] | [removed: 11] | [removed: %] [added: +12] |

| Pizza Hut Division | [removed: | 2 | % | | (1 | )% | | 2 | % | | 7 | % |] [added: +2] | [removed: 9] | [removed: %] [added: (5)] |

| Taco Bell Division | [removed: | 6 | % | | 2 | % |] [added: +5] | [removed: 3] | [removed: %] [added: +4] | | [removed: 11] [added: +4] | [removed: %] | [added: +4] | [removed: 10] | [removed: %] [added: +4] |

| Worldwide | [removed: | 5 | % | | 1 | % |] [added: +4] | [removed: 3] | [removed: %] [added: +2] | | [removed: 16] [added: +3] | [removed: %] | [added: +64] | [removed: 13] | [removed: %] [added: +7] |

| | [removed: |] Results Excluding 53rd Week [removed: (2016 %] [added: in 2016 (%] Change) | | | [removed: | |]

| | [removed: |] System Sales, [removed: ex] [added: Ex] FX | | [removed: |] Core Operating Profit | [removed: |]

| KFC Division | [removed: | 6 | % |] [added: +6] | [removed: 10] | [removed: %] [added: +14] |

| Pizza Hut Division | | [removed: 1] | [removed: %] | | [removed: 7] | [removed: %] | [added: | | | | | |]

| Taco Bell Division | [removed: | 4 | % |] [added: +7] | [removed: 8] | [removed: %] [added: +6] |

| Worldwide | [removed: | 4 | % |] [added: +5] | [removed: 11] | [removed: %] [added: +9] |

| | [removed: 2016] | [removed: | | | 2015 | | | | 2014 | | | | 2016 |] [added: 2016(a)] | | | | 2015 | | | [removed: |]

| Company sales | $ | [removed: 4,200] [added: 26] | | | $ | [removed: 4,356] [added: 5] | | | $ | [removed: 4,503 | | | (4 | ) | |] [added: 24] | | [removed: (3] | [removed: )] [added: $] | [added: 55] | |

| Franchise and license fees and income | [removed: 2,166 | | | | 2,084 | |] [added: 8] | | [removed: 2,084] | | [added: 6] | | [removed: 4] | | [added: 7] | | | [removed: —] | [added: 21] | | |

| Total revenues | $ | [removed: 6,366] [added: 34] | | | $ | [removed: 6,440] [added: 11] | | | $ | [removed: 6,587 | | | (1 | ) | |] [added: 31] | | [removed: (2] | [removed: )] [added: $] | [added: 76] | |

| Restaurant profit | $ | [removed: 702] [added: 618] | | | $ | [removed: 709] [added: 700] | | | $ | [removed: 633] [added: 709] | | | [removed: (1] [added: (12] | ) | | | | [removed: 12] [added: (1] | [added: )] | | |

| Restaurant [removed: Margin] [added: margin] % | [removed: 16.7] [added: 17.3] | | % | | [removed: 16.3] [added: 16.7] | | % | | [removed: 14.1] [added: 16.3] | | % | | [removed: 0.4] [added: 0.6] | | | ppts. | | [removed: 2.2] [added: 0.4] | | | ppts. |

| Operating Profit | [removed: $] | [removed: 1,625] | | | [removed: $] | [removed: 1,402] | | | [removed: $] | [removed: 1,517] | | | [removed: 16] | | | [removed: | | (8 | ) | | |]

| Interest expense, net | [removed: 307] [added: 440] | | | | [removed: 141] [added: 305] | | | | [removed: 143] [added: 141] | | | | [removed: NM] [added: (44] | [added: )] | | | | [removed: 1] [added: NM] | | | |

| Income from continuing operations | [removed: 994] [added: 1,340] | | | | [removed: 936] [added: 1,018] | | | | [removed: 1,006] [added: 926] | | | | [removed: 6] [added: 32] | | | | | [removed: (7] [added: 10] | [removed: )] | | |

| • | Lowering General and administrative expenses ("G&A") to 1.7% of system sales in 2019; and |

Beginning in 2017, we 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 removed the reporting lags from the fiscal calendars of our international subsidiaries.

Our MD&A has been recast to reflect the change in our reporting calendar.

| • | Net new units represents new unit openings, offset by store closures. |

In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP"), the Company provides the following non-GAAP measurements.

| • | Core Operating Profit and Core Operating Profit excluding the impact of the 53rd week in 2016. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally. |

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 these non-GAAP measurements 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.

Special Items are not included in any of our Division segment results as our chief operating decision maker does not consider the impact of these items when assessing segment performance.

Certain non-GAAP measurements are presented excluding the impact of FX.

These amounts are derived by translating current year results at prior year average exchange rates.

We provide Core Operating Profit excluding 53rd week and System sales excluding 53rd week to further enhance the comparability with the lapping of the 53rd week that was part of our fiscal calendar in 2016.

For 2017, GAAP diluted EPS from continuing operations increased 48% to $3.77 per share, and diluted EPS from continuing operations excluding Special Items, increased 20% to $2.96 per share.

2017 financial highlights:

| | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | |

| Pizza Hut Division | +1 | | Even | | +2 | | (7) | | (6) |

| | | | |

| --- | --- | --- | --- |

| | | | |

Additionally:

| • | During the year, we opened 1,407 net new units for 3% net new unit growth. |

| • | During the year, we refranchised 1,470 restaurants, including 828 KFC, 389 Pizza Hut and 253 Taco Bell units, for pre-tax proceeds of $1.8 billion. We recorded net refranchising gains of $1.1 billion in Special Items. |

| • | During the year, we repurchased 26.6 million shares totaling $1.9 billion at an average share price of $72. |

| Total revenues | $ | 5,878 | | | $ | 6,356 | | | $ | 6,418 | | | (8 | ) | | | | (1 | ) | | |

| G&A expenses | $ | 999 | | | $ | 1,129 | | | $ | 1,058 | | | 12 | | | | | (7 | ) | | |

| Closures and impairment expenses | 3 | | | | 15 | | | | 16 | | | | 82 | | | | | 8 | | | |

| Refranchising (gain) loss | (1,083 | | ) | | (163 | | ) | | 23 | | | | NM | | | | | NM | | | |

| Other (income) expense | 7 | | | | 3 | | | | 20 | | | | (103 | ) | | | | 83 | | | |

| Other pension (income) expense | 47 | | | | 32 | | | | 40 | | | | (45 | ) | | | | 18 | | | |

| Net Income | $ | 1,340 | | | $ | 1,643 | | | $ | 1,283 | | | (18 | ) | | | | 28 | | | |

| Diluted EPS(a) | $ | 3.77 | | | $ | 4.10 | | | $ | 2.90 | | | (8 | ) | | | | 42 | | | |

| Effective tax rate - continuing operations | 41.1% | | | | 24.3% | | | | 26.1% | | | | (16.8 | ) | | ppts. | | 1.8 | | | ppts. |

| Franchise | 43,603 | | | 40,834 | | | 39,320 | | | 7 | | | 4 | |

| Company-owned | 1,481 | | | 2,841 | | | 3,163 | | | (48 | ) | | (10 | ) |

| | 45,084 | | | 43,675 | | | 42,483 | | | 3 | | | 3 | |

| | | % B/(W) | | | | |

| | | 2017 | | | 2016 | |

Effective January 2016, the India Division was segmented by brand, integrated into the global KFC, Pizza Hut and Taco Bell Divisions, and is no longer a separate operating segment.

While our consolidated results were not impacted, we have restated our historical segment information for consistent presentation.

On the Distribution Date, we distributed to each of our shareholders of record as of the close of business on October 19, 2016 (the “Record Date”), one share of Yum China common stock for each share of our Common Stock held as of the Record Date.

The distribution was structured to be a tax free distribution to our U.S. shareholders for federal income tax purposes in the United States.

Yum China’s common stock now trades on the New York Stock Exchange under the symbol “YUMC.” After the distribution, we do not beneficially own any shares of Yum China common stock.

| • | Reducing General and administrative ("G&A") expenses by a cumulative ~$300 million over the next three years; and |

Since the fourth quarter of 2015, we have returned approximately $7.2 billion of capital to shareholders through share repurchases and cash dividends, funding the repurchases through a recapitalization and issuance of $5.2 billion of incremental borrowings in 2016.

| • | 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, Core Operating Profit and Core Operating Profit excluding 53rd week. 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. We provide Core Operating Profit excluding 53rd week to further enhance the comparability of fiscal 2016, which had a 53rd week, with prior year results. 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, Core Operating Profit and Core Operating Profit excluding 53rd week, 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. |

2016 diluted EPS from Continuing Operations increased 18% to $2.48 per share.

Foreign currency translation from our international operations negatively impacted GAAP Operating Profit by $55 million.

2016 financial highlights are below:

| | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Income tax provision | 324 | | | | 325 | | | | 368 | | | | — | | | | | 11 | | | |

| Net Income | $ | 1,619 | | | $ | 1,293 | | | $ | 1,051 | | | 25 | | | | | 23 | | | |

| Diluted EPS(a) | $ | 4.04 | | | $ | 2.92 | | | $ | 2.32 | | | 39 | | | | | 26 | | | |

| Effective tax rate - continuing operations | 24.6% | | | | 25.8% | | | | 26.7% | | | | 1.2 | | | ppts. | | 0.9 | | | ppts. |

| Franchise | 40,758 | | | 39,263 | | | 37,984 | | | 4 | | | 3 | |

| Company-owned | 2,859 | | | 3,159 | | | 3,247 | | | (9 | ) | | (3 | ) |

| | 43,617 | | | 42,422 | | | 41,231 | | | 3 | | | 3 | |

| | | | | |

| --- | --- | --- | --- | --- |

| | | % B/(W) | | |

| | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Refranchising initiatives(a) | | $ | 141 | | | $ | (20 | ) | | $ | 13 | |

| Settlement charges associated with pension deferred vested project (See Note 5) | | (25 | | ) | | — | | | | — | | |

| GAAP Operating Profit | | $ | 1,625 | | | $ | 1,402 | | | $ | 1,517 | |

| GAAP Operating Profit | | $ | 874 | | | $ | 832 | | | 876 | | |

| Core Operating Profit | | 922 | | | | 916 | | | | 876 | | |

| GAAP Operating Profit | | $ | 370 | | | $ | 347 | | | $ | 347 | |

| Core Operating Profit | | 377 | | | | 355 | | | | 347 | | |

| GAAP Operating Profit | | $ | 593 | | | $ | 536 | | | $ | 478 | |

| Core Operating Profit | | 593 | | | | 536 | | | | 478 | | |

| (a) | We have historically recorded refranchising gains and losses in the U.S. as Special Items due to the scope of our U.S. refranchising program and the volatility in associated gains and losses. Beginning in 2016, we are also including all international refranchising gains and losses in Special Items. The inclusion in Special Items of these additional international refranchising gains and losses is the result of the anticipated size and volatility of refranchising initiatives outside the U.S. that will take place in connection with our previously announced plans to have at least 98% franchise ownership by the end of 2018. International refranchising gains and losses in 2015 and 2014 previously not included in Special Items were not significant and have not been reclassified into Special Items. See Note 5 for discussion of Refranchising Gain and Losses. |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | % B/(W) | | | | | | | | | | | | % B/(W) | | | | | | |

| Company sales | | $ | 2,166 | | | $ | 2,203 | | | $ | 2,440 | | | (2 | ) | | | 5 | | | | 3 | | | | (10 | ) | | | 4 | | |

| Total revenues | | $ | 3,232 | | | $ | 3,235 | | | $ | 3,507 | | | — | | | | 6 | | | | 5 | | | | (8 | ) | | | 4 | | |

We have a market risk exposure to changes in interest rates, principally in the U.S. Our outstanding Long-term debt of [removed: $9.1] [added: $9.8] billion includes [removed: 73%] [added: 75%] fixed-rate debt and [removed: 27%] [added: 25%] variable-rate debt.

As a result, approximately 90% of our [removed: $9.1] [added: $9.8] billion of outstanding debt at December 31, [removed: 2016] [added: 2017] is effectively fixed-rate debt.

As of December 31, [removed: 2016] [added: 2017] and December [removed: 26, 2015] [added: 31, 2016] a hypothetical 100 basis-point increase in short-term interest rates would result, over the following twelve-month period after consideration of the aforementioned interest rate swaps, in an increase of approximately [removed: $10] [added: $9] million and [removed: $14] [added: $10] million, respectively, in Interest expense, net within our Consolidated Statements of Income.

These estimated amounts are based upon the current level of variable-rate debt that has not been swapped to fixed and assume no changes in the volume or composition of that debt and [removed: include no] [added: exclude any] impact from interest income related to cash and cash equivalents.

The fair value of our cumulative fixed-rate debt of [removed: $6.6] [added: $7.3] billion as of December 31, [removed: 2016,] [added: 2017,] would decrease approximately [removed: $375] [added: $400] million as a result of the same hypothetical 100 basis-point increase.

At December 31, [removed: 2016,] [added: 2017,] a hypothetical 100 basis-point decrease in short-term interest rates would decrease the fair value of our interest rate swaps approximately [removed: $55] [added: $50] million.

The Company’s foreign currency net asset exposure (defined as foreign currency assets less foreign currency liabilities) totaled approximately [removed: $2.1] [added: $2.0] billion as of December 31, [removed: 2016.][added: 2017.]

For the fiscal year ended December 31, [removed: 2016] [added: 2017] Operating Profit would have decreased approximately [removed: $105] [added: $180] million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar.

As of December 31, [removed: 2016,] [added: 2017,] YUM consists of three operating segments:

Yum China’s common stock [removed: now] trades on the New York Stock Exchange [removed: ("NYSE")] under the symbol “YUMC.” After the distribution, we do not beneficially own any shares of Yum China common stock.

As a result of the Separation, the results of [removed: operations, assets and liabilities,] [added: operations] and cash flows of the separated business are presented as discontinued operations in our Consolidated Statements of [removed: Income, Consolidated Balance Sheets] [added: Income] and Consolidated Statements of Cash Flows for [removed: all] periods [removed: presented.][added: presented prior to the Separation.]

Operating segment information for the years ended December 31, [removed: 2016, December 26, 2015] [added: 2017, 2016] and [removed: December 27, 2014] [added: 2015] for the Company is included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and in the related Consolidated Financial Statements in Part II, Item 8.

YUM has over [removed: 43,500] [added: 45,000] restaurants in more than 135 countries and territories.

[removed: Through the] [added: The Company's] three concepts of KFC, Pizza Hut and Taco Bell (the “Concepts”), [removed: the Company develops, operates] [added: develop, operate] or [removed: franchises] [added: franchise] a worldwide system of restaurants which prepare, package and sell a menu of competitively priced food items.

Units are operated by [removed: a Concept] [added: the Concepts] or by independent franchisees or licensees under the terms of franchise or license agreements, which [added: typically] require [added: an initial non-refundable fee upon an individual store opening and the] payment of sales-based fees for use of our Concepts' brands.

Franchisees contribute to the Company’s revenues [added: by paying non-refundable upfront fees at inception of the franchise agreement and] on an ongoing basis through the payment of royalties based on a percentage of sales (usually 4% - 6%).

Master franchisees [removed: often] [added: generally] pay [added: upfront fees and ongoing] royalties at a reduced rate to the Company.

| • | KFC operates in [removed: 128] [added: 131] countries and territories throughout the world. As of year end [removed: 2016,] [added: 2017,] KFC had [removed: 20,604 units. 93] [added: 21,487 units, 97] percent of [removed: the KFC units] [added: which] are franchised. |

| • | Pizza Hut operates in [removed: 103] [added: 106] countries and territories throughout the world. As of year end [removed: 2016,] [added: 2017,] Pizza Hut had [removed: 16,409 units. 97] [added: 16,748 units, 99] percent of [removed: the Pizza Hut units] [added: which] are franchised. |

| • | Pizza Hut features a variety of pizzas which are marketed under varying names. Each of these pizzas is offered with a variety of different toppings suited to local preferences and tastes. Many Pizza Huts also offer pasta and chicken wings, including approximately 5,900 stores offering wings under the [removed: brand] WingStreet [added: brand] in the U.S. Outside the U.S., Pizza Hut casual dining restaurants offer a variety of core menu products other than pizza, which are typically suited to local preferences and tastes. Pizza Hut units feature a distinctive red roof logo on their signage. |

| • | Taco Bell operates in [removed: 22] [added: 27] countries and territories throughout the world. As of year end [removed: 2016,] [added: 2017,] there were [removed: 6,604] [added: 6,849] Taco Bell units, primarily in the [removed: U.S. 87] [added: U.S., 90] percent of [removed: the Taco Bell units] [added: which] are franchised. |

Traditional units [added: can] feature dine-in, [removed: carryout and, in some instances,] [added: carryout,] drive-thru [removed: or] [added: and] delivery services.

Generally, each [removed: Concept-owned] restaurant is led by a restaurant general manager (“RGM”), together with one or more assistant managers, depending on the operating complexity and sales volume of the restaurant.

This arrangement combines the purchasing power of the Company-owned and franchisee [removed: restaurants] [added: restaurants,] which the Company believes leverages the system’s scale to drive cost savings and effectiveness in the purchasing function.

Outside the U.S., we and our [added: Concepts'] franchisees primarily use decentralized sourcing and distribution systems involving many different global, regional and local suppliers and distributors.

We and our franchisees have approximately [removed: 5,800] [added: 6,400] food and paper suppliers, including U.S.-based suppliers that export to many countries.

The use of [added: certain of] these marks by franchisees has been authorized in our franchise agreements.

The retail food industry, in which our Concepts compete, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including the QSR segment), and is intensely competitive with respect to price and quality of food products, new product development, [added: digital engagement,] advertising levels and promotional initiatives, customer service reputation, restaurant location and attractiveness and maintenance of properties.

The Company expensed [removed: $24] [added: $22] million, $24 million and $25 million in [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014,] [added: 2015,] respectively, for R&D activities.

During [removed: 2016,] [added: 2017,] there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

*U.S. Operations.* The Company and its U.S. [removed: operations] [added: operations, as well as our franchisees,] are subject to various federal, state and local laws affecting its business, including laws and regulations concerning information security, labor and employment, health, marketing, food labeling, sanitation and safety.

Each of [removed: the] [added: our and our] Concepts’ [added: franchisees'] restaurants in the U.S. must comply with licensing and regulation by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located.

[removed: In addition, each Concept must comply with various] state and federal laws that regulate the franchisor/franchisee relationship.

[removed: The Company’s] [added: Our and our Concepts' franchisees'] restaurants outside the U.S. are subject to national and local laws and regulations which are similar to those affecting U.S. restaurants.

As of year end [removed: 2016,] [added: 2017,] the Company and its subsidiaries employed approximately [removed: 90,000] [added: 60,000] persons.

The Company makes [removed: available] [added: available,] through the Investor Relations section of its internet website at [removed: http://yum.com] [added: http://www.yum.com,] its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission ("SEC") at http://www.sec.gov.

Pizza Hut typically offers delivery service, while, on a more limited but expanding basis, KFC and Taco Bell allow for consumers to have the Concepts' food delivered either through store-level or third-party delivery services.

In February 2018, we entered into an agreement with GrubHub, Inc., ("Grubhub") the leading online and mobile take out food-ordering company in the U.S. Under the agreement, Grubhub will provide support in the U.S. for the KFC and Taco Bell branded online delivery channels, along with access to Grubhub's online ordering platform, logistics and last-mile support for delivery orders, and point-of-sale integration to streamline operations.

In certain refranchising transactions the Company may retain ownership of land and building and lease them to the franchisee.

In addition, each Concept must comply with various

Effective January 2016, the India Division was segmented by brand, integrated into the global KFC, Pizza Hut and Taco Bell Divisions, and is no longer a separate operating segment.

While our consolidated results were not impacted, we have restated our historical segment information for consistent presentation.

Pizza Hut typically offers delivery service, as does KFC on a more limited basis primarily in China.

Various senior operators visit restaurants from time to time to promote adherence to system standards and mentor restaurant team members.

Matters faced by the Company include, but are not limited to, claims from franchisees, suppliers, employees, customers and others related to operational, contractual or employment issues as well as claims that the Company has infringed on [removed: third party] [added: third-party] intellectual property rights.

Descriptions of [added: significant] current specific claims and [removed: contingencies] [added: contingencies, if any,] appear in Note 20, Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, which is incorporated by reference into this item.

| | | EXCHANGE ACT OF 1934 for the fiscal year ended December 31, [removed: 2016] [added: 2017] |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated [removed: filer or] [added: filer,] a smaller reporting [added: company or an emerging growth] company.

See definitions of “large accelerated filer”, “accelerated [removed: filer” and] [added: filer”,] “smaller reporting company” [added: and"emerging growth company"] in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer: \[ü\] Accelerated filer: \[ \] Non-accelerated filer: \[ \] Smaller reporting company: \[ \] [added: Emerging growth company: \[ \]]

The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June [removed: 11, 2016] [added: 30, 2017] computed by reference to the closing price of the registrant’s Common Stock on the New York Stock Exchange Composite Tape on such date was approximately [removed: $31.1] [added: $25.4] billion.

The number of shares outstanding of the registrant’s Common Stock as of February 14, [removed: 2017] [added: 2018] was [removed: 353,844,095] [added: 332,513,103] shares.

Portions of the definitive proxy statement furnished to shareholders of the registrant in connection with the annual meeting of shareholders to be held on May [removed: 19, 2017] [added: 17, 2018] are incorporated by reference into Part III.

Forward-looking statements are based on our current expectations, estimates, assumptions and/or [removed: projections as well as] [added: projections,] our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances.

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.

\[ \]

The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its [removed: 2016] [added: 2017] fiscal year and that remain unresolved.

As of year end [removed: 2016,] [added: 2017,] the Company’s Concepts owned [removed: approximately 860] [added: land, building or both for 580] units and leased land, building or both for [removed: approximately 2,000 units worldwide.][added: 901 properties worldwide in connection with the operation of Company-owned restaurants.]

| • | The KFC Division owned [removed: approximately 260] [added: land, building or both for 184] units and leased land, building or both [removed: in approximately 1,165] [added: for 484] units. |

| • | The Pizza Hut Division owned [removed: approximately 70] [added: land, building or both for 9] units and leased land, building or both [removed: in approximately 480] [added: for 151] units. |

| • | The Taco Bell Division owned [removed: approximately 530] [added: land, building or both for 387] units and leased land, building or both [removed: in approximately 355] [added: for 266] units. |

The Company currently [removed: has] [added: owns or leases] land, [removed: buildings] [added: building] or both related to approximately [removed: 700] [added: 900] units, not included in the property counts above, that it leases or subleases to franchisees, principally in the U.S., United Kingdom, [removed: Germany] [added: Germany, Australia] and France.

The executive officers of the Company as of February 21, [removed: 2017,] [added: 2018,] and their ages and current positions as of that date are as follows:

Greg Creed, [removed: 59,] [added: 60,] is Chief Executive Officer of YUM.

Roger Eaton, [removed: 56,] [added: 57,] is Chief Executive Officer of KFC Division, a position he has held since August 2015.

David Gibbs, [removed: 53,] [added: 54,] is President and Chief Financial Officer of YUM.

Marc Kesselman, [removed: 45,] [added: 46,] is General Counsel, Corporate Secretary and Chief Government Affairs Officer of YUM.

David Russell, [removed: 47,] [added: 48,] is Senior Vice President, Finance and Corporate Controller of YUM.

He has [removed: been Vice President and] [added: served as YUM's] Corporate Controller since February [removed: 2011.][added: 2011 and as Senior Vice President, Finance since February 2017.]

Tracy Skeans, [removed: 44,] [added: 45,] is Chief Transformation and People Officer of YUM.

Prior to serving as Corporate Controller, Mr. Russell served in various positions at the Vice President-level in the Yum Finance Department, including Controller-Designate from November 2010 to February 2011 and Vice President, Assistant Controller from January 2008 to December 2010.

Brian Niccol, 42, is Chief Executive Officer of Taco Bell Division, a position he has held since January 2015.

From January 2014 to December 2014, Mr. Niccol served as President of Taco Bell Division.

From May 2013 to December 2013 Mr. Niccol served as President of Taco Bell U.S. Mr. Niccol served as Chief Marketing and Innovation Officer of Taco Bell U.S. from October 2011 to April 2013.

Prior to this position, he served as General Manager of Pizza Hut U.S. from February 2011 to September 2011.

From September 2007 to January 2011 he was Chief Marketing Officer of Pizza Hut U.S.

He has served in this position since December 2012.

Effective December 2012, his duties and title were expanded to include Vice President, Finance.

From November 2010 to February 2011, Mr. Russell served as Vice President, Controller-Designate.

From January 2008 to November 2010, he served as Vice President and Assistant Controller.

The Company’s Common Stock trades under the symbol YUM and is listed on the [removed: NYSE.][added: New York Stock Exchange ("NYSE").]

| 2016 [added: (As Restated)(a)] | | | | | | | | | | | | |

| First | | $ | [removed: 78.79] [added: 82.25] | | | $ | 65.24 | | | $ | 0.46 | |

| Third | | 91.26 | | | | [removed: 79.33] [added: 83.04] | | | | [removed: —] [added: 0.51] | | |

| Fourth (to October 31) | | [removed: 91.25] [added: 90.92] | | | | 85.36 | | | | [removed: 0.51] [added: —] | | |

[removed: The] [added: Over the long term, the] Company [removed: currently] targets an annual dividend payout ratio of [removed: approximately] 45% to 50% of net [removed: income.][added: income, before Special Items.]

As of February 14, [removed: 2017,] [added: 2018,] there were [removed: 52,541] [added: 49,843] registered holders of record of the Company’s Common Stock.

The following table provides information as of December 31, [removed: 2016,] [added: 2017,] with respect to shares of Common Stock repurchased by the Company during the quarter then ended.

On [removed: March 4, 2016,] [added: November 16, 2017,] our Board of Directors authorized share repurchases through December [removed: 2016] [added: 2018] of up to [removed: $500 million] [added: $1.5 billion] (excluding applicable transaction fees) of our outstanding Common Stock.

As of December 31, [removed: 2016,] [added: 2017,] we have remaining capacity to repurchase up to [removed: $1.9] [added: $1.5] billion of Common Stock under [removed: the November 2016] [added: this] authorization.

This graph compares the cumulative total return of our Common Stock to the cumulative total return of the S&P 500 [removed: Stock] Index and the S&P 500 Consumer Discretionary [removed: Sector,] [added: Sector Index,] a peer group that includes YUM, for the period from December [removed: 30, 2011] [added: 31, 2012] to December [removed: 30, 2016,] [added: 29, 2017,] the last trading day of our [removed: 2016] [added: 2017] fiscal year.

The graph assumes that the value of the investment in our Common Stock and each index was $100 at December [removed: 30, 2011,] [added: 31, 2012] and that all [added: cash] dividends were reinvested.

[removed: ][added: ]

| | | [removed: 12/30/2011] [added: 12/31/2012] | | | | [removed: 12/28/2012] [added: 12/31/2013] | | | | [removed: 12/27/2013] [added: 12/31/2014] | | | | [removed: 12/26/2014] [added: 12/31/2015] | | | | [removed: 12/24/2015] [added: 12/30/2016] | | | | [removed: 12/30/2016] [added: 12/29/2017] | | |

| 2017 | | | | | | | | | | | | |

| First | | $ | 68.65 | | | $ | 63.18 | | | $ | 0.30 | |

| Second | | 74.82 | | | | 63.55 | | | | 0.30 | | |

| Third | | 77.80 | | | | 72.65 | | | | — | | |

| Fourth | | 83.47 | | | | 73.75 | | | | 0.30 | | |

| Second | | 85.90 | | | | 79.33 | | | | 0.46 | | |

In 2017, the Company paid four cash dividends of $0.30 per share.

This included a dividend distributed February 3, 2017, that had been declared on December 21, 2016, which was the first dividend declared subsequent to the Separation of the Company's China business.

| (a) | Stock price information presented for 2016 is now reflective of our current reporting calendar. See Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K for discussion of the change in our reporting calendar. |

| 10/1/17 - 10/31/17 | | 2,686 | | $ | 75.47 | | | 2,686 | | $ | 385 | |

| 11/1/17- 11/30/17 | | 3,162 | | $ | 79.68 | | | 3,162 | | $ | 1,633 | |

| 12/1/17 - 12/31/17 | | 1,603 | | $ | 82.95 | | | 1,603 | | $ | 1,500 | |

| Total | | 7,451 | | $ | 78.87 | | | 7,451 | | $ | 1,500 | |

| YUM | | $ | 100 | | | $ | 116 | | | $ | 114 | | | $ | 117 | | | $ | 145 | | | $ | 190 | |

| S&P 500 | | $ | 100 | | | $ | 132 | | | $ | 150 | | | $ | 153 | | | $ | 171 | | | $ | 208 | |

| S&P Consumer Discretionary | | $ | 100 | | | $ | 143 | | | $ | 157 | | | $ | 173 | | | $ | 183 | | | $ | 225 | |

Source: Bloomberg

| --- | --- |

| | |

| Second | | 84.19 | | | | 78.98 | | | | 0.46 | | |

| 2015 | | | | | | | | | | | | |

| First | | $ | 81.80 | | | $ | 70.01 | | | $ | — | |

| Second | | 94.88 | | | | 78.29 | | | | 0.82 | | |

| Third | | 92.75 | | | | 76.10 | | | | — | | |

| Fourth | | 83.42 | | | | 67.12 | | | | 0.92 | | |

On December 21, 2016, the Company declared its first dividend since the separation of its China business of $0.30 per share of Common Stock.

The quarterly dividend was distributed February 3, 2017, to shareholders of record at the close of business on January 13, 2017.

Share prices for shares repurchased prior to November 1, 2016, do not reflect any adjustment for the impact of the Separation.

| Period 10 | | 7,458 | | $ | 89.15 | | | 7,458 | | $ | 940 | |

| 9/4/16 - 10/1/16 | | | | | | | | | | | | |

| Period 11 | | 5,047 | | $ | 89.15 | | | 5,047 | | $ | 490 | |

| 10/2/16 - 10/29/16 | | | | | | | | | | | | |

| Period 12 | | 3,511 | | $ | 61.38 | | | 3,511 | | $ | 2,275 | |

| 10/30/16 - 11/26/16 | | | | | | | | | | | | |

| Period 13 | | 5,638 | | $ | 63.84 | | | 5,638 | | $ | 1,915 | |

| 11/27/16 - 12/31/16 | | | | | | | | | | | | |

| Total | | 21,654 | | $ | 78.06 | | | 21,654 | | $ | 1,915 | |

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

This authorization superseded all previous unutilized authorizations.

On November 17, 2016, our Board of Directors authorized additional share repurchases through December 2017 of up to $2.0 billion (excluding applicable transaction fees) of our outstanding Common Stock.

For the purpose of this graph, the distribution of 100% of the outstanding common stock of Yum China Holdings, Inc. (“Yum China”) to our stockholders, pursuant to which Yum China became an independent company, is treated as a non-taxable cash dividend of $24.51 per share, an amount equal to the opening price of Yum China common stock when it began trading on November 1, 2016, that was deemed reinvested in YUM Common Stock at the closing price on November 1, 2016.

| YUM | | $ | 100 | | | $ | 112 | | | $ | 130 | | | $ | 131 | | | $ | 136 | | | $ | 167 | |

| S&P 500 | | $ | 100 | | | $ | 114 | | | $ | 152 | | | $ | 176 | | | $ | 178 | | | $ | 198 | |

| S&P Consumer Discretionary | | $ | 100 | | | $ | 121 | | | $ | 175 | | | $ | 194 | | | $ | 214 | | | $ | 227 | |

| | [removed: 2016(a)(f)] [added: 2017] | | | | [removed: 2015(a)] [added: 2016(a)(d)] | | | | [removed: 2014(a)] [added: 2015(a)] | | | | [removed: 2013(a)] [added: 2014(a)] | | | | [removed: 2012(a)(f)] [added: 2013(a)] | | |

| Company sales | $ | [removed: 4,200] [added: 3,572] | | | $ | [removed: 4,356] [added: 4,189] | | | $ | [removed: 4,503] [added: 4,336] | | | $ | [removed: 4,384] [added: 4,503] | | | $ | [removed: 5,036] [added: 4,384] | |

| Franchise and license fees and income | [removed: 2,166] [added: 2,306] | | | | [removed: 2,084] [added: 2,167] | | | | [removed: 2,084] [added: 2,082] | | | | [removed: 2,033] [added: 2,084] | | | | [removed: 1,940] [added: 2,033] | | |

| Refranchising [removed: gain (loss)(b)] [added: (gain) loss(b)] | [removed: 141] [added: (1,083] | | [added: )] | | [removed: (23] [added: (163] | | ) | | [removed: 16] [added: 23] | | | | [removed: 95] [added: (16] | | [added: )] | | [removed: 61] [added: (95] | | [added: )] |

| Operating [removed: Profit(c)] [added: Profit(b)] | [removed: 1,625] [added: 2,761] | | | | [removed: 1,402] [added: 1,682] | | | | [removed: 1,517] [added: 1,434] | | | | [removed: 1,530] [added: 1,517] | | | | [removed: 1,408] [added: 1,530] | | |

| Interest expense, [removed: net(c)] [added: net(b)] | [removed: 307] [added: 440] | | | | [removed: 141] [added: 305] | | | | [removed: 143] [added: 141] | | | | [removed: 251] [added: 143] | | | | [removed: 157] [added: 251] | | |

| Income from continuing [removed: operations] [added: operations(b)] | [removed: 994] [added: 1,340] | | | | [removed: 936] [added: 1,018] | | | | [removed: 1,006] [added: 926] | | | | [removed: 922] [added: 1,006] | | | | [removed: 884] [added: 922] | | |

| Income from discontinued operations, net of tax | [removed: 625] [added: N/A] | | | | [removed: 357] [added: 625] | | | | [removed: 45] [added: 357] | | | | [removed: 169] [added: 45] | | | | [removed: 713] [added: 169] | | |

| Net [removed: Income] [added: Income(b)] | [removed: 1,619] [added: 1,340] | | | | [removed: 1,293] [added: 1,643] | | | | [removed: 1,051] [added: 1,283] | | | | [removed: 1,091] [added: 1,051] | | | | [removed: 1,597] [added: 1,091] | | |

| Basic earnings per common share from continuing [removed: operations] [added: operations(b)] | [removed: 2.52] [added: 3.86] | | | | [removed: 2.15] [added: 2.58] | | | | [removed: 2.27] [added: 2.13] | | | | [removed: 2.04] [added: 2.27] | | | | [removed: 1.91] [added: 2.04] | | |

| Basic earnings per common share from discontinued operations | [removed: 1.59] [added: N/A] | | | | [removed: 0.82] [added: 1.59] | | | | [removed: 0.10] [added: 0.82] | | | | [removed: 0.37] [added: 0.10] | | | | [removed: 1.55] [added: 0.37] | | |

| Basic earnings per common [removed: share] [added: share(b)] | [removed: 4.11] [added: 3.86] | | | | [removed: 2.97] [added: 4.17] | | | | [removed: 2.37] [added: 2.95] | | | | [removed: 2.41] [added: 2.37] | | | | [removed: 3.46] [added: 2.41] | | |

| Diluted earnings per common share from continuing [removed: operations] [added: operations(b)] | [removed: 2.48] [added: 3.77] | | | | [removed: 2.11] [added: 2.54] | | | | [removed: 2.22] [added: 2.09] | | | | [removed: 2.00] [added: 2.22] | | | | [removed: 1.87] [added: 2.00] | | |

| Diluted earnings per common share from discontinued operations | [removed: 1.56] [added: N/A] | | | | [removed: 0.81] [added: 1.56] | | | | [removed: 0.10] [added: 0.81] | | | | [removed: 0.36] [added: 0.10] | | | | [removed: 1.51] [added: 0.36] | | |

| Diluted earnings per common [removed: share] [added: share(b)] | [removed: 4.04] [added: 3.77] | | | | [removed: 2.92] [added: 4.10] | | | | [removed: 2.32] [added: 2.90] | | | | [removed: 2.36] [added: 2.32] | | | | [removed: 3.38] [added: 2.36] | | |

| Diluted earnings per common share from continuing operations excluding Special Items(c) | [removed: 2.45] [added: 2.96] | | | | [removed: 2.33] [added: 2.46] | | | | [removed: 2.20] [added: 2.31] | | | | [removed: 2.04] [added: 2.20] | | | | [removed: 1.90] [added: 2.04] | | |

| Provided by operating activities | $ | [removed: 1,204] [added: 1,030] | | | $ | [removed: 1,213] [added: 1,248] | | | $ | [removed: 1,217] [added: 1,260] | | | $ | [removed: 1,289] [added: 1,217] | | | $ | [removed: 1,373] [added: 1,289] | |

| Capital spending | [removed: 422] [added: 318] | | | | [removed: 461] [added: 427] | | | | [removed: 508] [added: 442] | | | | [removed: 481] [added: 508] | | | | [removed: 444] [added: 481] | | |

| Proceeds from refranchising of restaurants | [removed: 346] [added: 1,773] | | | | [removed: 219] [added: 370] | | | | [removed: 83] [added: 213] | | | | [removed: 250] [added: 83] | | | | [removed: 337] [added: 250] | | |

| Repurchase shares of Common Stock | [removed: 5,402] [added: 1,960] | | | | [removed: 1,200] [added: 5,403] | | | | [removed: 820] [added: 1,200] | | | | [removed: 770] [added: 820] | | | | [removed: 965] [added: 770] | | |

| Dividends paid on Common Stock | [removed: 744] [added: 416] | | | | [removed: 730] [added: 744] | | | | [removed: 669] [added: 730] | | | | [removed: 615] [added: 669] | | | | [removed: 544] [added: 615] | | |

| KFC Division system sales [removed: growth(d)] | [added: 24,515] | | | | [added: 23,242] | | | | [added: 22,628] | | | | [added: 23,458] | | | | [added: 23,147] | | |

| Reported [added: growth] | [removed: 2] [added: 5] | | % | | [added: 3 | | % | |] (3 | | )% | | 1 | | % | | (2 | | )% | [removed: | 6 | | % |]

| [removed: Local currency(e)] [added: Growth in local currency] | [removed: 7] [added: 6] | | % | | [removed: 5] [added: 7] | | % | | [removed: 4] [added: 5] | | % | | [removed: —] [added: 4] | | % | | [removed: 8] [added: —] | | % |

| Pizza Hut Division system sales [removed: growth(d)] | [added: 12,034] | | | | [added: 12,019] | | | | [added: 11,999] | | | | [added: 12,106] | | | | [added: 11,948] | | |

| Reported [added: growth] | — | | % | | [removed: (1] [added: —] | | [removed: )%] [added: %] | | [removed: 1] [added: (1] | | [removed: %] [added: )%] | | [removed: 3] [added: 1] | | % | | [removed: 5] [added: 3] | | % |

| [removed: Local currency(e)] [added: Growth in local currency] | [removed: 2] [added: 1] | | % | | [removed: 3] [added: 2] | | % | | [removed: 2] [added: 3] | | % | | [removed: 4] [added: 2] | | % | | [removed: 7] [added: 4] | | % |

| Taco Bell Division system sales [removed: growth(d)] | [added: 10,145] | | | | [added: 9,660] | | | | [added: 9,102] | | | | [added: 8,459] | | | | [added: 8,107] | | |

| Reported [added: growth] | [removed: 6] [added: 5] | | % | | [removed: 8] [added: 6] | | % | | [removed: 4] [added: 8] | | % | | 4 | | % | | [removed: 7] [added: 4] | | % |

| [removed: Local currency(e)] [added: Growth in local currency] | [removed: 6] [added: 5] | | % | | [removed: 8] [added: 6] | | % | | [removed: 4] [added: 8] | | % | | 4 | | % | | [removed: 9] [added: 4] | | % |

| Shares outstanding at year end | [removed: 355] [added: 332] | | | | [removed: 420] [added: 355] | | | | [removed: 434] [added: 420] | | | | [removed: 443] [added: 434] | | | | [removed: 451] [added: 443] | | |

| Cash dividends declared per Common Share | $ | [removed: 1.73] [added: 0.90] | | | $ | [removed: 1.74] [added: 1.73] | | | $ | [removed: 1.56] [added: 1.74] | | | $ | [removed: 1.41] [added: 1.56] | | | $ | [removed: 1.24] [added: 1.41] | |

| Market price per share at year [removed: end(g)] [added: end(e)] | $ | [removed: 63.33] [added: 81.61] | | | $ | [removed: 74.00] [added: 63.33] | | | $ | [removed: 73.14] [added: 73.05] | | | $ | [removed: 73.87] [added: 73.14] | | | $ | [removed: 64.72] [added: 73.87] | |

| [removed: (g)] [added: (e)] | Historical stock prices prior to November 1, 2016, do not reflect any adjustment for the impact of the Separation. |

| Total | 5,878 | | | | 6,356 | | | | 6,418 | | | | 6,587 | | | | 6,417 | | |

| Other pension (income) expense(b) | 47 | | | | 32 | | | | 40 | | | | N/A | | | | N/A | | |

| Income from continuing operations before income taxes(b) | 2,274 | | | | 1,345 | | | | 1,253 | | | | 1,374 | | | | 1,279 | | |

| Total assets | $ | 5,311 | | | $ | 5,453 | | | $ | 4,939 | | | $ | 5,073 | | | $ | 4,975 | |

| Long-term debt | 9,429 | | | | 9,059 | | | | 2,988 | | | | 3,003 | | | | 2,888 | | |

| Total debt | 9,804 | | | | 9,125 | | | | 3,908 | | | | 3,268 | | | | 2,958 | | |

| Franchise | 43,603 | | | | 40,834 | | | | 39,320 | | | | 37,959 | | | | 36,746 | | |

| Company | 1,481 | | | | 2,841 | | | | 3,163 | | | | 3,279 | | | | 3,071 | | |

| System | 45,084 | | | | 43,675 | | | | 42,483 | | | | 41,238 | | | | 39,817 | | |

| System Sales(c) | | | | | | | | | | | | | | | | | | | |

| (a) | Selected financial data for years 2016 and 2015 has been recast to present the change in our reporting calendar and retroactively adopting a new accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively,"Benefit Costs"). See Notes 2 and 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K for discussion related to adopting a new accounting standard on Benefit Costs and the change in our reporting calendar, respectively. 2014 reflects our Balance Sheet and store count data that were recast for purposes of presenting 2015 Consolidated Statement of Cash Flows and unit growth. No other data presented in 2014 or 2013 has been recast. |

| (b) | Includes amounts deemed as Special Items for some or all years presented. See discussion of our 2017, 2016 and 2015 Special Items in our Management's Discussion and Analysis ("MD&A"). Special Items in 2014 positively impacted Operating Profit by $16 million, primarily due to Refranchising gains. Special Items in 2013 positively impacted Operating Profit by $73 million, primarily due to Refranchising gains, partially offset by $10 million in pension settlement charges and $5 million of expense related to U.S. productivity initiatives and realignment of resources. Additionally, in 2013, we incurred $118 million of premiums paid and other costs related to the extinguishment of debt that were considered Special Items and were recorded in Interest expense, net. Special Items resulted in cumulative net tax benefits of $23 million 2013. |

| (c) | These non-GAAP measures are discussed in further detail in our MD&A. |

| (d) | Fiscal years for our U.S. and certain international subsidiaries that operate on a weekly periodic calendar include 52 weeks in 2017, 2015, 2014 and 2013 and 53 weeks in 2016. Refer to Note 2 for additional details related to our fiscal calendar. |

| Total | 6,366 | | | | 6,440 | | | | 6,587 | | | | 6,417 | | | | 6,976 | | |

| Closures and impairment income (expenses) | (14 | | ) | | (15 | | ) | | (18 | | ) | | (6 | | ) | | (28 | | ) |

| Income before income taxes | 1,318 | | | | 1,261 | | | | 1,374 | | | | 1,279 | | | | 1,251 | | |

| Total assets | $ | 5,478 | | | $ | 4,916 | | | $ | 5,132 | | | $ | 4,975 | | | $ | 5,262 | |

| Long-term debt | 9,061 | | | | 3,007 | | | | 3,042 | | | | 2,888 | | | | 2,905 | | |

| Total debt | 9,127 | | | | 3,928 | | | | 3,308 | | | | 2,958 | | | | 2,914 | | |

| Company | 2,859 | | | | 3,159 | | | | 3,247 | | | | 3,071 | | | | 2,997 | | |

| Franchise | 40,758 | | | | 39,263 | | | | 37,984 | | | | 36,746 | | | | 35,461 | | |

| System | 43,617 | | | | 42,422 | | | | 41,231 | | | | 39,817 | | | | 38,458 | | |

| | |

| --- | --- |

| (a) | Financial data for prior years has been recast to present the results of the Separation as discontinued operations and reflects amounts related to continuing operations unless otherwise noted. Store count data for prior years has been recast to exclude the Little Sheep and East Dawning stores operated by our former China Division and reflect all other former China Division Company operated stores as franchise units within the KFC and Pizza Hut Divisions. KFC Division, Pizza Hut Division and Taco Bell Division system sales growth has been recast to reflect the integration of the former India and China Divisions. See Note 4 regarding details of the Separation. |

| (b) | See Note 5 for discussion of Refranchising gain (loss) for fiscal years 2016, 2015 and 2014. Fiscal year 2013 primarily reflects net gains from refranchising Taco Bell restaurants in the U.S. Fiscal year 2012 included $122 million in net gains from refranchising restaurants in the U.S., primarily Taco Bells, and $70 million in losses related to the refranchising of our then remaining Company-owned Pizza Hut UK dine-in restaurants. |

| (c) | In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”),the Company provides non-GAAP measurements which present operating results from continuing operations on a basis excluding Special Items. The Company uses earnings from continuing operations excluding Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally and Special Items are not included in any of our segment results. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of earnings from continuing operations excluding Special Items provides additional information to investors to facilitate the comparison of past and present results, excluding items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature. |

2016, 2015 and 2014 Special Items are described in further detail within our Management's Discussion and Analysis of Financial Condition and Results of Operations.

Special Items in 2013 positively impacted Operating Profit by $73 million, primarily due to refranchising gains on the sale of restaurants in the U.S. (primarily Taco Bells), partially offset by $10 million in pension settlement charges and $5 million of expense related to U.S. productivity initiatives and realignment of resources.

Additionally, in 2013, we incurred $118 million of premiums paid and other costs related to the extinguishment of debt that were considered Special Items and were recorded in Interest expense, net.

Special Items in 2012 negatively impacted Operating Profit by $16 million, primarily due to $84 million in pension settlement charges and $70 million of losses associated with the refranchising of the Pizza Hut UK dine-in business, partially offset by $122 million in U.S. refranchising net gains.

Special Items resulted in cumulative net tax benefits of $23 million and $1 million in 2013 and 2012, respectively.

| (d) | 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 fees for the Company at a rate of 3% to 6% of sales. Franchise restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise 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. |

| (e) | Local currency represents the percentage change excluding the impact of foreign currency translation. 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. |

| (f) | Fiscal years 2015, 2014, 2013 and 2012 include 52 weeks and fiscal year 2016 includes 53 weeks. The estimated impacts of the 53rd week on Company sales, Franchise and license fees and income and Operating Profit in 2016 were increases of $55 million, $21 million and $27 million, respectively. The 53rd week positively impacted Division system sales growth by 1%, 1% and 2% for KFC, Pizza Hut and Taco Bell, respectively. Refer to Note 2 for additional details related to our fiscal calendar. |

| Report of Independent Registered Public Accounting Firm | [removed: [48](#sAA746572B314F8A54358D444B310162E)] [added: [50](#s6CBB2E37C5A65BE6AC09D60E13B4A4C7)] | |

| [removed: Consolidated Statements of Income for the fiscal] [added: Fiscal] years ended December 31, [removed: 2016, December 26, 2015] [added: 2017, 2016] and [removed: December 27, 2014] [added: 2015] | [removed: [49](#sE595CC1A680B880AEC64D44495F91F99)] | | [added: | | | | | | | | | |]

| [removed: Consolidated Statements of Comprehensive Income for the fiscal] [added: Fiscal] years ended December 31, [removed: 2016, December 26, 2015] [added: 2017, 2016] and [removed: December 27, 2014] [added: 2015] | [removed: [50](#s448BAE007C2C98FB0278D444925CEC8F)] | | [added: | | | | | | | | | |]

| [removed: Consolidated Statements of Cash Flows for the fiscal] [added: Fiscal] years ended December 31, [removed: 2016, December 26, 2015] [added: 2017, 2016] and [removed: December 27, 2014] [added: 2015] | [removed: [51](#s6D43618C0A7E9897AC74D444920E6DFC)] | | [added: | | | | | | | | | |]

| [removed: Consolidated Statements of Shareholders’ Equity (Deficit) for the fiscal] [added: Fiscal] years ended December 31, [removed: 2016, December 26, 2015] [added: 2017, 2016] and [removed: December 27, 2014] [added: 2015] | [removed: [53](#s7916662B37E958D10D5FD44496AB7E3A)] | | [added: | | | | | | | | | | | | | | | | | | | | | | | | |]

| Notes to Consolidated Financial Statements | [removed: [54](#s829DD7DAD8238BB8C9C2D444B4771229)] [added: [57](#s691B50BD986151919769D61DA764CDAE)] | |

Brands, Inc. and Subsidiaries (YUM) as of December 31, [removed: 2016 and December 26, 2015,] [added: 2017] and [added: 2016,] the related consolidated statements of income, comprehensive income, cash flows and shareholders’ equity (deficit) for each of the fiscal years in the [removed: three-year] [added: three‑year] period ended December 31, [removed: 2016.][added: 2017, and the related notes collectively, the “consolidated financial statements.” We also have audited YUM’s internal control over financial reporting as of December 31, 2017, based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.]

[removed: We also have audited YUM’s] [added: Also in our opinion, YUM maintained, in all material respects, effective] internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

YUM’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on [removed: these] [added: YUM’s] consolidated financial statements and an opinion on YUM’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the [added: consolidated] financial statements are free of material [removed: misstatement] [added: misstatement, whether due to error or fraud,] and whether effective internal control over financial reporting was maintained in all material respects.

Our audits [removed: of the consolidated financial statements] [added: also] included [removed: examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing] [added: evaluating] the accounting principles used and significant estimates made by management, [removed: and] [added: as well as] evaluating the overall [added: presentation of the consolidated] financial [removed: statement presentation.][added: statements.]

[removed: A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial] statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of YUM as of December 31, [removed: 2016] [added: 2017] and [removed: December 26, 2015,] [added: 2016,] and the results of its operations and its cash flows for each of the [removed: fiscal] years in the three-year period ended December 31, [removed: 2016,] [added: 2017,] in conformity with U.S. generally accepted accounting principles.

[removed: February 21,] [added: | | |] 2017 [added: | | | | | | | | | | | | | | |]

| | | [removed: 2016] [added: 2016(a)] | | | | 2015 | | | [removed: | 2014 | | |]

| [added: Unallocated] Franchise and license fees and [removed: income] [added: income(b)(f)] | | [removed: 2,166] [added: (5] | | [added: )] | | [removed: 2,084] [added: (2] | | [added: )] | | [removed: 2,084] [added: —] | | |

| Total revenues | | [added: $ |] 6,366 | | | [added: $] | [removed: 6,440] [added: (10] | [added: )] | | [added: $] | [removed: 6,587] [added: 6,356] | | |

| Payroll and employee benefits | | [removed: 1,109] [added: 939] | | | | [removed: 1,131] [added: 1,106] | | | | [removed: 1,172] [added: 1,125] | | |

| Occupancy and other operating expenses | | [removed: 1,120] [added: 912] | | | | [removed: 1,168] [added: 1,116] | | | | [removed: 1,227] [added: 1,162] | | |

| General and administrative expenses | | [removed: 1,161] [added: 999] | | | | [removed: 1,099] [added: 1,129] | | | | [removed: 1,028] [added: 1,058] | | |

| Franchise and license expenses | | [removed: 202 | | | | 237] [added: (45] | | [added: )] | | [removed: 159] [added: (48] | | [added: )] |

| Closures and impairment (income) expenses | | [removed: 14] [added: 3] | | | | 15 | | | | [removed: 18] [added: 16] | | |

| Refranchising (gain) loss | | [removed: (141] [added: (1,083] | | ) | | [removed: 23] [added: (163] | | [added: )] | | [removed: (16] [added: 23] | | [removed: )] |

| Other (income) expense | | 7 | | | | [removed: 17] [added: 3] | | | | [removed: 11] [added: 20] | | |

| Total costs and expenses, net | | [removed: 4,741] [added: 3,117] | | | | [removed: 5,038] [added: 4,674] | | | | [removed: 5,070] [added: 4,984] | | |

| [removed: Operating Profit] [added: Operating Profit] | | 1,625 | | | | [removed: 1,402] [added: 25] | | | [added: (a)] | [removed: 1,517] [added: 1,650] | | | [added: (b) |]

| Interest expense, net | | [removed: 307] [added: 440] | | | | [removed: 141] [added: 305] | | | | [removed: 143] [added: 141] | | |

| Income from continuing operations before income taxes | | [removed: 1,318] [added: 2,274] | | | | [removed: 1,261] [added: 1,345] | | | | [removed: 1,374] [added: 1,253] | | |

| Income from continuing operations | | 994 | | | | [removed: 936] [added: 24] | | | | [removed: 1,006] [added: 1,018] | | | [added: |]

| Income from discontinued operations, net of tax | | [removed: 625] [added: N/A] | | | | [removed: 357] [added: 625] | | | | [removed: 45] [added: 357] | | |

| [removed: Net Income] [added: Net Income] | | $ | 1,619 | | | $ | [removed: 1,293] [added: 24] | | | [removed: $] [added: 1,643] | [removed: 1,051] | | [added: |]

| Basic Earnings per Common Share from continuing operations | | $ | [removed: 2.52] [added: 3.86] | | | $ | [removed: 2.15] [added: 2.58] | | | $ | [removed: 2.27] [added: 2.13] | |

| Basic Earnings per Common Share from discontinued operations | | [removed: $] [added: N/A] | [removed: 1.59] | | | $ | [removed: 0.82] [added: 1.59] | | | $ | [removed: 0.10] [added: 0.82] | |

| Basic Earnings Per Common Share | | $ | [removed: 4.11] [added: 3.86] | | | $ | [removed: 2.97] [added: 4.17] | | | $ | [removed: 2.37] [added: 2.95] | |

| Diluted Earnings per Common Share from continuing operations | | $ | [removed: 2.48] [added: 3.77] | | | $ | [removed: 2.11] [added: 2.54] | | | $ | [removed: 2.22] [added: 2.09] | |

| Diluted Earnings per Common Share from discontinued operations | | [removed: $] [added: N/A] | [removed: 1.56] | | | $ | [removed: 0.81] [added: 1.56] | | | $ | [removed: 0.10] [added: 0.81] | |

| Diluted Earnings Per Common Share | | $ | [removed: 4.04] [added: 3.77] | | | $ | [removed: 2.92] [added: 4.10] | | | $ | [removed: 2.32] [added: 2.90] | |

| Dividends Declared Per Common Share | | $ | [removed: 1.73] [added: 0.90] | | | $ | [removed: 1.74] [added: 1.73] | | | $ | [removed: 1.56] [added: 1.74] | |

| Adjustments and gains (losses) arising during the year | | [removed: (166] [added: 115] | | [removed: )] | | [removed: (253] [added: (174] | | ) | | [removed: (147] [added: (231] | | ) |

| Consolidated Statements of Income | [52](#s5FFDEA8736BA56AC9A983D7EA16964CB) | |

| Consolidated Statements of Comprehensive Income | [53](#sCF7BC8F020AC566D9C1D5683C3F8E3E5) | |

| Consolidated Statements of Cash Flows | [54](#s3DB9DC4F55405D9FA76AEC713DC867A0) | |

| Consolidated Balance Sheets | [55](#s81FE1FCEE6655B1DA41801FF6BBEA517) | |

| Consolidated Statements of Shareholders’ Equity (Deficit) | [56](#s04CF22D571BF5678B16BEBCE76039694) | |

*Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting*

*Change in Accounting Principle*

As discussed in notes 2 and 5 to the consolidated financial statements, the comparative consolidated balance sheet as of December 31, 2016, and the comparative consolidated statements of income, comprehensive income, cash flows and shareholders’ equity (deficit) for the fiscal years ended December 31, 2016 and 2015 have been restated for the effects of the change in accounting principle whereby YUM changed its fiscal year from a 52-53 week fiscal year to a fiscal year ending on December 31 of each year and eliminated any of the one-month or one-period reporting lags of its international subsidiaries.

*Basis for Opinions*

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to YUM in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

*Definition and Limitations of Internal Control Over Financial Reporting*

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

We have served as YUM’s auditor since 1997.

| | | 2017 | | | | 2016 (As Restated) | | | | 2015 (As Restated) | | |

| Company sales | | $ | 3,572 | | | $ | 4,189 | | | $ | 4,336 | |

| Total revenues | | 5,878 | | | | 6,356 | | | | 6,418 | | |

| Food and paper | | 1,103 | | | | 1,267 | | | | 1,340 | | |

| Company restaurant expenses | | 2,954 | | | | 3,489 | | | | 3,627 | | |

| Operating Profit | | 2,761 | | | | 1,682 | | | | 1,434 | | |

| Other pension (income) expense | | 47 | | | | 32 | | | | 40 | | |

| Income tax provision | | 934 | | | | 327 | | | | 327 | | |

| Income from continuing operations | | 1,340 | | | | 1,018 | | | | 926 | | |

| Net Income | | $ | 1,340 | | | $ | 1,643 | | | $ | 1,283 | |

| | | 2017 | | | | 2016 (As Restated) | | | | 2015 (As Restated) | | |

| Net Income | | $ | 1,340 | | | $ | 1,643 | | | $ | 1,283 | |

| | | 170 | | | | (185 | | ) | | (116 | | ) |

| | | 162 | | | | (164 | | ) | | (116 | | ) |

| | | 21 | | | | (14 | | ) | | 97 | | |

| | | 6 | | | | 35 | | | | (5 | | ) |

| | | 4 | | | | 19 | | | | (5 | | ) |

| Comprehensive Income | | $ | 1,527 | | | $ | 1,484 | | | $ | 1,259 | |

| | | 2017 | | | | 2016 (As Restated) | | | | 2015 (As Restated) | | |

| Net Income | | $ | 1,340 | | | $ | 1,643 | | | $ | 1,283 | |

| Depreciation and amortization | | 253 | | | | 310 | | | | 319 | | |

| Closures and impairment (income) expenses | | 3 | | | | 15 | | | | 16 | | |

| Refranchising (gain) loss | | (1,083 | | ) | | (163 | | ) | | 23 | | |

| Capital spending | | (318 | | ) | | (427 | | ) | | (442 | | ) |

| | | 2017 | | | | 2016 (As Restated) | | |

| Consolidated Balance Sheets as of December 31, 2016 and December 26, 2015 | [52](#s1AACA5E0281F7D74DDBDD444933F0528) | |

Also in our opinion, YUM maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Fiscal years ended December 31, 2016, December 26, 2015 and December 27, 2014 | | | | | | | | | | | | |

| Company sales | | $ | 4,200 | | | $ | 4,356 | | | $ | 4,503 | |

| Food and paper | | 1,269 | | | | 1,348 | | | | 1,471 | | |

| Company restaurant expenses | | 3,498 | | | | 3,647 | | | | 3,870 | | |

| Income tax provision | | 324 | | | | 325 | | | | 368 | | |

| Net Income - YUM! Brands, Inc. | | $ | 1,619 | | | $ | 1,293 | | | $ | 1,051 | |

| | | (177 | | ) | | (138 | | ) | | (145 | | ) |

| | | (157 | | ) | | (138 | | ) | | (141 | | ) |

| | | (14 | | ) | | 97 | | | | (113 | | ) |

| | | 40 | | | | (9 | | ) | | — | | |

| | | 24 | | | | (8 | | ) | | — | | |

| Comprehensive Income | | $ | 1,472 | | | $ | 1,244 | | | $ | 797 | |

| Depreciation and amortization | | 309 | | | | 322 | | | | 328 | | |

| Capital spending | | (422 | | ) | | (461 | | ) | | (508 | | ) |

| Excess tax benefit from share-based compensation | | 83 | | | | 47 | | | | 40 | | |

| Current assets of discontinued operations | | — | | | | 774 | | |

| Goodwill | | 541 | | | | 571 | | |

| Noncurrent assets of discontinued operations | | — | | | | 2,371 | | |

| Total Assets | | $ | 5,478 | | | $ | 8,061 | |

| Current liabilities of discontinued operations | | — | | | | 934 | | |

| Noncurrent liabilities of discontinued operations | | — | | | | 247 | | |

| Total Liabilities | | 11,134 | | | | 7,086 | | |

| Redeemable noncontrolling interest - discontinued operations | | — | | | | 6 | | |

| Retained earnings (Accumulated Deficit) | | (5,223 | | ) | | 1,150 | | |

| Total Shareholders’ Equity (Deficit) – YUM! Brands, Inc. | | (5,656 | | ) | | 911 | | |

| Total Shareholders’ Equity (Deficit) | | (5,656 | | ) | | 969 | | |

| Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity (Deficit) | | $ | 5,478 | | | $ | 8,061 | |

| Fiscal years ended December 31, 2016, December 26, 2015 and December 27, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Balance at December 28, 2013 | | 443 | | | $ | — | | | $ | 2,102 | | | $ | 64 | | | $ | 63 | | | $ | 2,229 | | | $ | 39 | |

| Compensation-related events (includes tax impact of $5 million) | | | | | 62 | | | | | | | | | | | | | | | | 62 | | | | | | |

| Balance at December 27, 2014 | | 434 | | | $ | — | | | $ | 1,737 | | | $ | (190 | ) | | $ | 57 | | | $ | 1,604 | | | $ | 9 | |

| Compensation-related events (includes tax impact of $7 million) | | | | | 64 | | | | | | | | | | | | | | | | 64 | | | | | | |

| Net Income (loss) | | | | | | | | | 1,619 | | | | | | | | 18 | | | | 1,637 | | | | (7 | | ) |

| Employee stock option and SARs exercises (includes tax impact of $75 million) | | 3 | | | 1 | | | | | | | | | | | | | | | | 1 | | | | | | |

| Compensation-related events (includes tax impact of $11 million) | | | | | 48 | | | | | | | | | | | | | | | | 48 | | | | | | |

| Balance at December 31, 2016 | | 355 | | | $ | — | | | $ | (5,223 | ) | | $ | (433 | ) | | $ | — | | | $ | (5,656 | ) | | $ | — | |

Based on our evaluation under the framework in *Internal Control – Integrated Framework (2013)*, our management concluded that our internal control over financial reporting was effective as of December 31, [removed: 2016.][added: 2017.]

There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended December 31, [removed: 2016.][added: 2017.]

Information regarding Section 16(a) compliance, the Audit Committee and the Audit Committee financial expert, the Company’s code of ethics and background of the directors appearing under the captions “Stock Ownership Information,” “Governance of the Company,” “Executive Compensation” and “Item 1: Election of Directors and Director biographies” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, [removed: 2016.][added: 2017.]

Information regarding executive and director compensation and the Compensation Committee appearing under the captions “Governance of the Company” and “Executive Compensation” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, [removed: 2016.][added: 2017.]

Information regarding equity compensation plans and security ownership of certain beneficial owners and management appearing under the captions “Executive Compensation” and “Stock Ownership Information” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, [removed: 2016.][added: 2017.]

Information regarding certain relationships and related transactions and information regarding director independence appearing under the caption “Governance of the Company” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, [removed: 2016.][added: 2017.]

Information regarding principal accountant fees and services and audit committee pre-approval policies and procedures appearing under the caption “Item 2: Ratification of Independent Auditors” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, [removed: 2016.][added: 2017.]

| Date: | February 21, [removed: 2017] [added: 2018] |

| /s/ Greg Creed | | Chief Executive Officer | | February 21, [removed: 2017] [added: 2018] |

| /s/ David [added: W.] Gibbs | | President and Chief Financial Officer | | February 21, [removed: 2017] [added: 2018] |

| David [added: W.] Gibbs | | (principal financial officer) | | |

| /s/ David E. Russell | | Senior Vice President, Finance and Corporate Controller | | February 21, [removed: 2017] [added: 2018] |

| /s/ Paget L. Alves | | Director | | February 21, [removed: 2017] [added: 2018] |

| /s/ Michael J. Cavanagh | | Director | | February 21, [removed: 2017] [added: 2018] |

| /s/ Brian [added: C.] Cornell | | Director | | February 21, [removed: 2017] [added: 2018] |

| Brian [added: C.] Cornell | | | | |

| /s/ Mirian [added: M.] Graddick-Weir | | Director | | February 21, [removed: 2017] [added: 2018] |

| Mirian [added: M.] Graddick-Weir | | | | |

| /s/ Thomas C. Nelson | | Director | | February 21, [removed: 2017] [added: 2018] |

| /s/ P. Justin Skala | | Director | | February 21, [removed: 2017] [added: 2018] |

| /s/ Elane [added: B.] Stock | | Director | | February 21, [removed: 2017] [added: 2018] |

| Elane [added: B.] Stock | | | | |

| /s/ Robert D. Walter | | Director | | February 21, [removed: 2017] [added: 2018] |

| 2.1 [removed: *] | | | [removed: Separation] [added: [Separation] and Distribution Agreement, dated as of October 31, 2016, by and among YUM, Yum Restaurants Consulting (Shanghai) Company Limited and Yum China Holdings, Inc., which is incorporated herein by reference from Exhibit 2.1 to YUM's Report on Form 8-K filed on November 3, [removed: 2016.] [added: 2016.](http://www.sec.gov/Archives/edgar/data/1041061/000104106116000097/a16-20742_3ex2d1.htm)] | |

| 3.1 | | | [removed: Restated] [added: [Restated] Articles of Incorporation of YUM, effective May 26, 2011, which is incorporated herein by reference from Exhibit 3.1 to YUM's Report on Form 8-K filed on May 31, [removed: 2011.] [added: 2011.](http://www.sec.gov/Archives/edgar/data/1041061/000104106111000025/exhib3_1.htm)] | |

| 3.2 | | | [removed: Amended] [added: [Amended] and restated Bylaws of YUM, effective July 15, 2016, which are incorporated herein by reference from Exhibit 3.1 to YUM's Report on Form 8-K filed on July 19, [removed: 2016.] [added: 2016.](http://www.sec.gov/Archives/edgar/data/1041061/000104106116000086/ex31.htm)] | |

| 4.1 | | | [removed: Indenture,] [added: [Indenture,] dated as of May 1, 1998, between YUM and The Bank of New York Mellon Trust Company, N.A., successor in interest to The First National Bank of Chicago, which is incorporated herein by reference from Exhibit 4.1 to YUM's Report on Form 8-K filed on May 13, [removed: 1998.] [added: 1998.](http://www.sec.gov/Archives/edgar/data/1041061/0001047469-98-019880.txt)] | |

| | | | (i) | [removed: 6.25%] [added: [6.25%] Senior Notes due March 15, 2018 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 [added: (included in Exhibit 4.1)] to YUM's Report on Form 8-K filed on October 22, [removed: 2007.] [added: 2007.](http://www.sec.gov/Archives/edgar/data/1041061/000110465907075918/a07-25341_4ex4d1.htm)] |