Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction and Overview

The following Management’s Discussion and Analysis (“MD&A”), should be read in conjunction with the Consolidated Financial Statements (“Financial Statements”) in Item 8 and the Forward-Looking Statements and the Risk Factors set forth in Item 1A. All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Unless otherwise stated, financial results herein reflect continuing operations of the Company. Percentages may not recompute due to rounding.

YUM! Brands, Inc. (“YUM” or the “Company”) operates or franchises a worldwide system of over 45,000 restaurants in more than 135 countries and territories, under the concepts of KFC, Pizza Hut and Taco Bell (collectively, the "Concepts"). These three Concepts are global leaders of the chicken, pizza and Mexican-style food categories, respectively. Of the over 45,000 restaurants, 3% are operated by the Company and its subsidiaries and 97% are operated by franchisees.

As of December 31, 2017, YUM consists of three operating segments:

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

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

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

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

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

•	More Focused. Four growth drivers 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 is focused on becoming best-in-class in:

•	Building Distinctive, Relevant and Easy Brands

•	Developing Unmatched Franchise Operating Capability

•	Driving Bold Restaurant Development

•	Growing Unrivaled Culture and Talent

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

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

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

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

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

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

Beginning in 2017, we 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. See Notes 2 and 5 for additional details related to our fiscal calendar.

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

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

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

•

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

•	Operating margin is Operating Profit divided by Total revenues.

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

•

System sales, System sales excluding the 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 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 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.

•	Diluted Earnings Per Share from Continuing Operations excluding Special Items (as defined below);

•	Effective Tax Rate excluding Special Items;

•	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 believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

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.

Results of Operations

Summary

All comparisons within this summary are versus the same period a year ago and include the impact of lapping a 53rd week in 2016, unless otherwise noted.

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:

	% Change
	System Sales, Ex FX		Same-Store Sales		Net New Units		GAAP Operating Profit		Core Operating Profit
KFC Division	+6		+3		+4		+13		+12
Pizza Hut Division	+1		Even		+2		(7)		(6)
Taco Bell Division	+5		+4		+4		+4		+4
Worldwide	+4		+2		+3		+64		+7

	Results Excluding 53rd Week in 2016 (% Change)
	System Sales, Ex FX		Core Operating Profit
KFC Division	+6		+14
Pizza Hut Division	+2		(5)
Taco Bell Division	+7		+6
Worldwide	+5		+9

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.

Worldwide

GAAP Results

	Amount												% B/(W)
	2017				2016				2015				2017					2016
Company sales	$	3,572			$	4,189			$	4,336			(15	)				(3	)
Franchise and license fees and income	2,306				2,167				2,082				6					4
Total revenues	$	5,878			$	6,356			$	6,418			(8	)				(1	)
Restaurant profit	$	618			$	700			$	709			(12	)				(1	)
Restaurant margin %	17.3		%		16.7		%		16.3		%		0.6			ppts.		0.4			ppts.
G&A expenses	$	999			$	1,129			$	1,058			12					(7	)
Franchise and license expenses	237				201				240				(18	)				16
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
Operating Profit	$	2,761			$	1,682			$	1,434			64					17
Other pension (income) expense	47				32				40				(45	)				18
Interest expense, net	440				305				141				(44	)				NM
Income tax provision	934				327				327				NM					—
Income from continuing operations	1,340				1,018				926				32					10
Income from discontinued operations, net of tax	N/A				625				357				NM					75
Net Income	$	1,340			$	1,643			$	1,283			(18	)				28
Diluted EPS from continuing operations(a)	$	3.77			$	2.54			$	2.09			48					22
Diluted EPS from discontinued operations(a)	N/A				$	1.56			$	0.81			NM					93
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.

(a)	See Note 3 for the number of shares used in these calculations.

Performance Metrics

										% Increase (Decrease)
Unit Count	2017			2016			2015			2017			2016
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
System Sales Growth, reported		4			3
System Sales Growth, excluding FX		4			5
System Sales Growth, excluding FX and 53rd week		5			4
Same-Store Sales Growth		2			1
Non-GAAP Items
Core Operating Profit Growth		7			11
Core Operating Profit Growth, excluding 53rd week		9			9
Diluted EPS from Continuing Operations, excluding Special Items		20			7

Extra Week in 2016 (As Restated)

Fiscal 2016 included a 53rd week for all of our U.S. businesses and certain of our non-U.S. businesses that report 13 four-week periods versus 12 months. See Notes 2 and 5 for additional details related to our fiscal calendar. The following table summarizes the estimated impact of the 53rd week on Revenues and Operating Profit for the year ended December 31, 2016:

	KFC Division				Pizza Hut Division				Taco Bell Division				Total
Revenues
Company sales	$	26			$	5			$	24			$	55
Franchise and license fees and income	8				6				7				21
Total revenues	$	34			$	11			$	31			$	76
Operating Profit
Franchise and license fees and income	$	8			$	6			$	7			$	21
Restaurant profit	6				1				7				14
G&A expenses	(3		)		(2		)		(2		)		(7		)
Operating Profit	$	11			$	5			$	12			$	28

Non-GAAP Items

Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.

		Year
Detail of Special Items		2017				2016				2015
Refranchising gain (loss) (See Note 5)		$	1,083			$	163			$	(19	)
YUM's Strategic Transformation Initiatives (See Note 5)		(23		)		(67		)		—
Costs associated with Pizza Hut U.S. Transformation Agreement (See Note 5)		(31		)		—				—
Costs associated with KFC U.S. Acceleration Agreement (See Note 5)		(17		)		(26		)		(72		)
Non-cash charges associated with share-based compensation (See Note 5)		(18		)		(30		)		—
Other Special Items Income (Expense)		7				(5		)		—
Special Items Income (Expense) - Operating Profit		1,001				35				(91		)
Special Items - Other Pension Income (Expense) (See Note 5)		(23		)		(26		)		—
Special Items Income (Expense) from Continuing Operations before Income Taxes		978				9				(91		)
Tax Benefit (Expense) on Special Items(a)		(256		)		24				(4		)
Tax (Expense) - U.S. Tax Act(a)		(434		)		—				—
Special Items Income (Expense), net of tax		$	288			$	33			$	(95	)
Average diluted shares outstanding		355				400				443
Special Items diluted EPS		$	0.81			$	0.08			$	(0.22	)
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53****rd Week
Consolidated
GAAP Operating Profit		$	2,761			$	1,682			$	1,434
Special Items Income (Expense) - Operating Profit		1,001				35				(91		)
Foreign Currency Impact on Divisional Operating Profit(b)		—				(47		)		N/A
Core Operating Profit		$	1,760			$	1,694			$	1,525
Impact of 53rd Week		N/A				28				N/A
Core Operating Profit, excluding 53rd Week		$	1,760			$	1,666			$	1,525
KFC Division
GAAP Operating Profit		$	981			$	871			$	835
Foreign Currency Impact on Divisional Operating Profit(b)		4				(41		)		N/A
Core Operating Profit		977				912				835
Impact of 53rd Week		N/A				11				N/A
Core Operating Profit, excluding 53rd Week		$	977			$	901			$	835
Pizza Hut Division
GAAP Operating Profit		$	341			$	367			$	351
Foreign Currency Impact on Divisional Operating Profit(b)		(4		)		(7		)		N/A
Core Operating Profit		345				374				351
Impact of 53rd Week		N/A				5				N/A
Core Operating Profit, excluding 53rd Week		$	345			$	369			$	351

Taco Bell Division
GAAP Operating Profit		$	619			$	595			$	546
Foreign Currency Impact on Divisional Operating Profit(b)		—				1				N/A
Core Operating Profit		619				594				546
Impact of 53rd Week		N/A				12				N/A
Core Operating Profit, excluding 53rd Week		$	619			$	582			$	546
Reconciliation of Diluted EPS from Continuing Operations to Diluted EPS from Continuing Operations, excluding Special Items
Diluted EPS from Continuing Operations		$	3.77			$	2.54			$	2.09
Special Items Diluted EPS		0.81				0.08				(0.22		)
Diluted EPS from Continuing Operations excluding Special Items		$	2.96			$	2.46			$	2.31
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items
GAAP Effective Tax Rate		41.1		%		24.3		%		26.1		%
Impact on Tax Rate as a result of Special Items(a)		22.3		%		(2.0		)%		2.1		%
Effective Tax Rate excluding Special Items(c)		18.8		%		26.3		%		24.0		%
Reconciliation of GAAP Company sales to System sales
Consolidated
GAAP Company sales(d)		$	3,572			$	4,189			$	4,336
Franchise sales		43,122				40,732				39,393
System sales		46,694				44,921				43,729
Foreign Currency Impact on System sales(e)		(90		)		(1,123		)		N/A
System sales, excluding FX		46,784				46,044				43,729
Impact of 53rd week		N/A				434				N/A
System sales, excluding FX and 53rd Week		$	46,784			$	45,610			$	43,729
KFC Division
GAAP Company sales(d)		$	1,928			$	2,156			$	2,191
Franchise sales		22,587				21,086				20,437
System sales		24,515				23,242				22,628
Foreign Currency Impact on System sales(e)		(28		)		(858		)		N/A
System sales, excluding FX		24,543				24,100				22,628
Impact of 53rd week		N/A				165				N/A
System sales, excluding FX and 53rd Week		$	24,543			$	23,935			$	22,628
Pizza Hut Division
GAAP Company sales(d)		$	285			$	493			$	601
Franchise sales		11,749				11,526				11,398
System sales		12,034				12,019				11,999
Foreign Currency Impact on System sales(e)		(66		)		(258		)		N/A
System sales, excluding FX		12,100				12,277				11,999
Impact of 53rd week		N/A				113				N/A
System sales, excluding FX and 53rd Week		$	12,100			$	12,164			$	11,999

Taco Bell Division
GAAP Company sales(d)		$	1,359			$	1,540			$	1,544
Franchise sales		8,786				8,120				7,558
System sales		10,145				9,660				9,102
Foreign Currency Impact on System sales(e)		4				$	(7	)		N/A
System sales, excluding FX		10,141				9,667				9,102
Impact of 53rd week		N/A				156				N/A
System sales, excluding FX and 53rd Week		$	10,141			$	9,511			$	9,102

(a)

The tax benefit (expense) was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items. In 2016, our tax rate on Special Items was favorably impacted by the recognition of capital loss carryforwards in anticipation of U.S. refranchising gains. In 2015, our tax rate on Special Items was unfavorably impacted by the non-deductibility of certain losses associated with international refranchising. See Note 18.

(b)	The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit Growth percentages, the Core Operating Profit for the current year should be compared to the prior year Operating Profit, prior to adjustment for the prior year FX impact.

(c)

Our 2017 Effective Tax Rate excluding Special Items was lower than prior years due primarily to the inclusion of tax expense on the repatriation of certain foreign earnings in 2017 being included in the one-time Special Items charge referenced in (a) above. The majority of our foreign entities have a tax year-end of November 30. Amounts repatriated from these foreign entities after November 30, 2017, which were significant due to the timing of international refranchising proceeds, were required to be taxed as part of the mandatory deemed repatriation tax in connection with the Tax Act. See Note 18.

(d)	Company Sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income.

(e)	The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales prior to adjustment for the prior year FX impact.

KFC Division

The KFC Division has 21,487 units, 81% of which are located outside the U.S. The KFC Division has experienced significant unit growth in emerging markets, which comprised approximately 60% of both the Division’s units and profits, respectively, as of the end of 2017. Additionally, 97% of the KFC Division units were operated by franchisees as of the end of 2017.

														% B/(W)												% B/(W)
														2017												2016
		2017				2016				2015				Reported				Ex FX				Ex FX and 53rd Week in 2016				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	24,515			$	23,242			$	22,628			5				6				6				3				7				6
Same-Store Sales Growth (Decline)														3				N/A				N/A				2				N/A				N/A
Company sales		$	1,928			$	2,156			$	2,191			(11	)			(12	)			(11	)			(2	)			4				3
Franchise and license fees and income		1,182				1,069				1,031				11				10				11				4				7				7
Total revenues		$	3,110			$	3,225			$	3,222			(4	)			(4	)			(3	)			—				5				4
Restaurant profit		$	289			$	317			$	307			(9	)			(10	)			(8	)			3				9				7
Restaurant margin %		15.0		%		14.7		%		14.0		%		0.3		ppts.		0.3		ppts.		0.4		ppts.		0.7		ppts.		0.7		ppts.		0.6		ppts.
G&A expenses		$	370			$	396			$	395			7				7				7				—				(3	)			(3	)
Operating Profit		$	981			$	871			$	835			13				12				14				4				9				8

											% Increase (Decrease)
Unit Count		2017			2016			2015			2017				2016
Franchise		20,819			19,236			18,473			8				4
Company-owned		668			1,407			1,513			(53		)		(7	)
		21,487			20,643			19,986			4				3

		2016			New Builds			Closures			Refranchised			Acquired			Other			2017
Franchise		19,236			1,169			(414	)		828			—			—			20,819
Company-owned		1,407			102			(13	)		(828	)		—			—			668
Total		20,643			1,271			(427	)		—			—			—			21,487

		2015			New Builds			Closures			Refranchised			Acquired			Other			2016
Franchise		18,473			994			(412	)		180			—			1			19,236
Company-owned		1,513			114			(39	)		(180	)		—			(1	)		1,407
Total		19,986			1,108			(451	)		—			—			—			20,643

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:

	2017 vs. 2016
Income / (Expense)	2016				Store Portfolio Actions				Other				FX				53rd Week				2017
Company sales	$	2,156			$	(286	)		$	61			$	23			$	(26	)		$	1,928
Cost of sales	(733		)		93				(22		)		(11		)		9				(664		)
Cost of labor	(507		)		69				(16		)		(3		)		6				(451		)
Occupancy and other	(599		)		82				(7		)		(5		)		5				(524		)
Company restaurant expenses	$	(1,839	)		$	244			$	(45	)		$	(19	)		$	20			$	(1,639	)
Restaurant profit	$	317			$	(42	)		$	16			$	4			$	(6	)		$	289

	2016 vs. 2015
Income / (Expense)	2015				Store Portfolio Actions				Other				FX				53rd Week				2016
Company sales	$	2,191			$	24			$	39			$	(124	)		$	26			$	2,156
Cost of sales	(751		)		(10		)		(7		)		44				(9		)		(733		)
Cost of labor	(511		)		(3		)		(14		)		27				(6		)		(507		)
Occupancy and other	(622		)		3				(10		)		35				(5		)		(599		)
Company restaurant expenses	$	(1,884	)		$	(10	)		$	(31	)		$	106			$	(20	)		$	(1,839	)
Restaurant profit	$	307			$	14			$	8			$	(18	)		$	6			$	317

In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising, partially offset by international net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 4%, partially offset by higher commodity and labor costs.

In 2016, the increase in Company sales associated with store portfolio actions was driven by international net new unit growth, partially offset by refranchising. The increase in Restaurant profit associated with store portfolio actions was driven by international net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 2%, partially offset by higher labor and commodity costs.

Franchise and License Fees and Income

In 2017, the increase in Franchise and license fees and income, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, was driven by international net new unit growth, franchise same-store sales growth of 3%, refranchising and higher renewal and transfer fees.

In 2016, the increase in Franchise and license fees and income, excluding the impacts of foreign currency translation and the 53rd week, was driven by international net new unit growth, franchise same-store sales growth of 2% and refranchising.

G&A

In 2017, the decrease in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, were driven by the positive impact of YUM's Strategic Transformation Initiatives , including reductions in G&A directly attributable to refranchising, partially offset by higher incentive compensation.

In 2016, the increase in G&A, excluding the impacts of foreign currency translation and 53rd week, were driven by the impact of higher compensation costs due to increased headcount and wage inflation in international markets and higher incentive compensation.

Operating Profit

In 2017, the increase in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, was driven by same-store sales growth, international net new unit growth, lower G&A and higher renewal and transfer fees, partially offset by higher restaurant operating costs and refranchising.

In 2016, the increase in Operating Profit, excluding the impacts of foreign currency translation and 53rd week, was driven by international net new unit growth and same-store sales growth, partially offset by higher restaurant operating costs and advertising contributions associated with the KFC U.S. Acceleration Agreement.

Pizza Hut Division

The Pizza Hut Division has 16,748 units, 55% of which are located outside the U.S. The Pizza Hut Division operates as one brand that uses multiple distribution channels including delivery, dine-in and express (e.g. airports). Emerging markets comprised approximately 35% of units and 40% of profits for the Division as of the end of 2017. Additionally, 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2017.

														% B/(W)												% B/(W)
														2017												2016
		2017				2016				2015				Reported				Ex FX				Ex FX and 53rd Week in 2016				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	12,034			$	12,019			$	11,999			—				1				2				—				2				1
Same-Store Sales Growth (Decline)														Even				N/A				N/A				(2	)			N/A				N/A
Company sales		$	285			$	493			$	601			(42	)			(42	)			(41	)			(18	)			(16	)			(17	)
Franchise and license fees and income		608				615				604				(1	)			(1	)			—				2				4				3
Total revenues		$	893			$	1,108			$	1,205			(19	)			(19	)			(18	)			(8	)			(6	)			(7	)
Restaurant profit		$	14			$	41			$	58			(63	)			(63	)			(62	)			(31	)			(31	)			(31	)
Restaurant margin %		5.3		%		8.3		%		9.8		%		(3.0	)	ppts.		(3.0	)	ppts.		(2.9	)	ppts.		(1.5)		ppts.		(1.7)		ppts.		(1.7	)	ppts.
G&A expenses		$	211			$	242			$	262			13				13				12				7				6				6
Operating Profit		$	341			$	367			$	351			(7	)			(6	)			(5	)			4				6				5

											% Increase (Decrease)
Unit Count		2017			2016			2015			2017				2016
Franchise		16,588			15,871			15,334			5				4
Company-owned		160			549			750			(71		)		(27	)
		16,748			16,420			16,084			2				2

		2016			New Builds			Closures			Refranchised			Acquired			Other			2017
Franchise		15,871			1,035			(708	)		389			—			1			16,588
Company-owned		549			12			(12	)		(389	)		—			—			160
Total		16,420			1,047			(720	)		—			—			1			16,748

		2015			New Builds			Closures			Refranchised			Acquired			Other			2016
Franchise		15,334			885			(554	)		206			—			—			15,871
Company-owned		750			40			(35	)		(206	)		—			—			549
Total		16,084			925			(589	)		—			—			—			16,420

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:

	2017 vs. 2016
Income / (Expense)	2016				Store Portfolio Actions				Other				FX				53rd Week				2017
Company sales	$	493			$	(193	)		$	(9	)		$	(1	)		$	(5	)		$	285
Cost of sales	(137		)		56				(4		)		—				2				(83		)
Cost of labor	(156		)		61				(1		)		1				1				(94		)
Occupancy and other	(159		)		61				3				—				1				(94		)
Company restaurant expenses	$	(452	)		$	178			$	(2	)		$	1			$	4			$	(271	)
Restaurant profit	$	41			$	(15	)		$	(11	)		$	—			$	(1	)		$	14

	2016 vs. 2015
Income / (Expense)	2015				Store Portfolio Actions				Other				FX				53rd Week				2016
Company sales	$	601			$	(120	)		$	16			$	(9	)		$	5			$	493
Cost of sales	(167		)		34				(5		)		3				(2		)		(137		)
Cost of labor	(187		)		40				(11		)		3				(1		)		(156		)
Occupancy and other	(189		)		33				(5		)		3				(1		)		(159		)
Company restaurant expenses	$	(543	)		$	107			$	(21	)		$	9			$	(4	)		$	(452	)
Restaurant profit	$	58			$	(13	)		$	(5	)		$	—			$	1			$	41

In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales declines of 3% and higher commodity and labor costs, partially offset by lower property and casualty losses.

In 2016, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were higher labor costs and increased advertising spend in the U.S., partially offset by company same-store sales growth of 2%.

Franchise and License Fees and Income

In 2017, Franchise and license fees income, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was even with prior year as the favorable impacts of refranchising and net new unit growth were offset by lower fees from expiring development agreements. Franchise same-store sales were even.

In 2016, the increase in Franchise and license fees income, excluding the impacts of foreign currency translation and 53rd week, was driven by net new unit growth, refranchising and higher fees from expiring development agreements, partially offset by franchise same-store sales declines of 2%.

G&A

In 2017, the decrease in G&A, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was driven by the positive impact of YUM's Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, partially offset by increased litigation costs.

In 2016, the decrease in G&A, excluding the impacts of foreign currency translation and 53rd week, was driven by lower litigation settlement costs and legal fees and the positive impact of YUM's Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, partially offset by higher incentive compensation costs.

Operating Profit

In 2017, the decrease in Operating Profit, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was driven by increased advertising costs associated with the Pizza Hut U.S. Transformation Agreement, partially offset by lower G&A.

In 2016, the increase in Operating Profit, excluding the impacts of foreign currency translation and 53rd week, was driven by lower G&A and net new unit growth, partially offset by franchise same-store sales declines.

Taco Bell Division

The Taco Bell Division has 6,849 units, 94% of which are in the U.S. As of the end of 2017, the Company owns 10% of the Taco Bell units in the U.S., where the brand has historically achieved high restaurant margins and returns.

														% B/(W)												% B/(W)
														2017												2016
		2017				2016				2015				Reported				Ex FX				Ex FX and 53rd Week in 2016				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	10,145			$	9,660			$	9,102			5				5				7				6				6				5
Same-Store Sales Growth														4				N/A				N/A				2				N/A				N/A
Company sales		$	1,359			$	1,540			$	1,544			(12	)			(12	)			(10	)			—				—				(2	)
Franchise and license fees and income		521				485				447				7				7				9				9				9				7
Total revenues		$	1,880			$	2,025			$	1,991			(7	)			(7	)			(6	)			2				2				—
Restaurant profit		$	305			$	342			$	344			(11	)			(11	)			(9	)			—				—				(3	)
Restaurant margin %		22.4		%		22.2		%		22.2		%		0.2		ppts.		0.2		ppts.		0.3		ppts.		—		ppts.		—		ppts.		(0.2	)	ppts.
G&A expenses		$	188			$	211			$	221			11				11				10				4				4				5
Operating Profit		$	619			$	595			$	546			4				4				6				9				9				6

											% Increase (Decrease)
Unit Count		2017			2016			2015			2017				2016
Franchise		6,196			5,727			5,513			8				4
Company-owned		653			885			900			(26		)		(2	)
		6,849			6,612			6,413			4				3

		2016			New Builds			Closures			Refranchised			Acquired			Other			2017
Franchise		5,727			293			(78	)		253			—			1			6,196
Company-owned		885			21			—			(253	)		—			—			653
Total		6,612			314			(78	)		—			—			1			6,849

		2015			New Builds			Closures			Refranchised			Acquired			Other			2016
Franchise		5,513			263			(95	)		46			(1	)		1			5,727
Company-owned		900			34			(4	)		(46	)		1			—			885
Total		6,413			297			(99	)		—			—			1			6,612

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:

	2017 vs. 2016
Income / (Expense)	2016				Store Portfolio Actions				Other				53rd Week				2017
Company sales	$	1,540			$	(195	)		$	38			$	(24	)		$	1,359
Cost of sales	(397		)		50				(15		)		6				(356		)
Cost of labor	(443		)		55				(13		)		7				(394		)
Occupancy and other	(358		)		44				6				4				(304		)
Company restaurant expense	$	(1,198	)		$	149			$	(22	)		$	17			$	(1,054	)
Restaurant profit	$	342			$	(46	)		$	16			$	(7	)		$	305

	2016 vs. 2015
Income / (Expense)	2015				Store Portfolio Actions				Other				53rd Week				2016
Company sales	$	1,544			$	(37	)		$	9			$	24			$	1,540
Cost of sales	(422		)		11				20				(6		)		(397		)
Cost of labor	(427		)		10				(19		)		(7		)		(443		)
Occupancy and other	(351		)		7				(10		)		(4		)		(358		)
Company restaurant expense	$	(1,200	)		$	28			$	(9	)		$	(17	)		$	(1,198	)
Restaurant profit	$	344			$	(9	)		$	—			$	7			$	342

In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising, partially offset by net unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 3%, partially offset by higher labor costs, commodity cost inflation, and increased cost of sales associated with value offerings.

In 2016, the decrease in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising, partially offset by net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 1% and favorable commodity costs, partially offset by higher labor costs and store-level investments.

Franchise and License Fees and Income

In 2017, the increase in Franchise and license fees and income, excluding the impact of lapping the 53rd week in 2016, was driven by refranchising, franchise same-store sales growth of 4%, and net new unit growth.

In 2016, the increase in Franchise and license fees and income, excluding the impact of the 53rd week, was driven by net new unit growth, franchise same-store sales growth of 2% and refranchising.

G&A

In 2017, the decrease in G&A, excluding the impact of lapping the 53rd week in 2016, was driven by the positive impact of YUM's Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, and lower litigation costs.

In 2016, the decrease in G&A, excluding the impact of the 53rd week, was driven by lapping the Live Más Scholarship contribution and lower litigation costs.

Operating Profit

In 2017, the increase in Operating Profit, excluding the impact of lapping the 53rd week in 2016, was driven by same-store sales growth, lower G&A and net new unit growth, partially offset by refranchising and higher restaurant operating costs.

In 2016, the increase in Operating Profit, excluding the impact of the 53rd week, was driven by same-store sales growth, net new unit growth and lower G&A, partially offset by higher restaurant operating costs and refranchising.

Corporate & Unallocated

														% B/(W)
Income/(Expense)		2017				2016				2015				2017				2016
Corporate and unallocated G&A		$	(230	)		$	(280	)		$	(180	)		18				(56	)
Unallocated restaurant costs		10				—				—				NM				NM
Unallocated Franchise and license fees and income		(5		)		(2		)		—				NM				NM
Unallocated Franchise and license expenses		(30		)		(24		)		(71		)		(26	)			67
Refranchising gain (loss) (See Note 5)		1,083				163				(23		)		NM				NM
Unallocated Other income (expense)		(8		)		(8		)		(24		)		3				65
Other pension income (expense) (See Note 15)		(47		)		(32		)		(40		)		(45	)			18
Interest expense, net		(440		)		(305		)		(141		)		(44	)			(117	)
Income tax provision (See Note 18)		(934		)		(327		)		(327		)		NM				—
Effective tax rate (See Note 18)		41.1		%		24.3		%		26.1		%		(16.8	)	ppts.		1.8		ppts.

Corporate and unallocated G&A

In 2017, the decrease in Corporate and unallocated G&A was driven by lower year-over-year spending associated with YUM’s Strategic Transformation Initiatives (See Note 5), current year G&A reductions due to the impact of YUM’s Strategic Transformation Initiatives and lower year-over-year non-cash charges associated with the modification of Executive Income Deferral (“EID”) share-based compensation awards (See Note 5), partially offset by charges related to the Pizza Hut U.S. Transformation Agreement (See Note 5).

In 2016, the increase in Corporate and unallocated G&A was driven by costs associated with YUM's Strategic Transformation Initiatives (See Note 5), non-cash charges associated with the modification of certain EID share-based compensation awards (See Note 5 ) and higher incentive compensation costs, partially offset by lower professional and legal fees.

Unallocated restaurant costs

In 2017, Unallocated restaurant costs represents depreciation reductions that were not allocated to the Division segments. See Note 5.

Unallocated Franchise and license fees and income

In 2017, Unallocated Franchise and license fees and income primarily reflects charges related to the Pizza Hut U.S. Transformation Agreement . See Note 5.

In 2016, Unallocated Franchise and license fees and income reflects charges related to the KFC U.S. Acceleration Agreement. See Note 5.

Unallocated Franchise and license expenses

Unallocated Franchise and license expenses reflect charges related to the KFC U.S. Acceleration Agreement and/or Pizza Hut U.S. Transformation Agreement. See Note 5.

Unallocated Other income (expense)

In 2017, Unallocated Other income (expense) primarily includes foreign exchange gains (losses). See Note 8.

In 2016, Unallocated Other income (expense) primarily includes write-downs related to our decision to dispose of our corporate aircraft and foreign exchange gains (losses). See Note 8.

In 2015, Unallocated Other income (expense) primarily includes foreign exchange gains (losses).

Interest expense, net

The increases in Interest expense, net for 2017 and 2016 were driven by increased outstanding borrowings. See Note 11.

Income from Discontinued Operations, Net of Tax

The following table is a summary of the operating results of the China business which have been reflected in discontinued operations. See Note 4 for additional information.

		2016(a)				2015
Total revenues		$	5,776			$	6,909
Total income from discontinued operations before income taxes(b)		571				526
Income tax (benefit) provision(c)		(65		)		164
Income from discontinued operations, net of tax		625				357

(a)	Includes Yum China financial results from January 1, 2016 to October 31, 2016.

(b)	Includes costs incurred to execute the Separation of $68 million and $9 million for 2016 and 2015, respectively. Such costs primarily relate to transaction advisors, legal and other consulting fees.

(c)	During 2016, we recorded a tax benefit of $233 million related to previously recorded losses associated with our Little Sheep business. The tax benefit associated with these losses was able to be recognized as a result of legal entity restructuring completed in anticipation of the China spin-off.

Significant Known Events, Trends or Uncertainties Expected to Impact Future Results

Strategic Transformation Initiatives Impact

We have refranchised a significant number of Company-owned restaurants since the announcement of YUM’s Strategic Transformation Initiatives in October 2016, and anticipate that additional, significant refranchising will occur in 2018. The impact on Operating profit due to refranchising includes the loss of restaurant profit, which reflects the decrease in Company sales, and the increase in franchise fees from restaurants that have been refranchised. We expect to reduce G&A, including reductions directly attributable to refranchising, such that upon completion of YUM’s Strategic Transformation Initiatives in 2019, on an annual basis, the impact of lost Operating profit from refranchising will be largely offset by G&A reductions we are making. However, we expect that Operating profit will be negatively impacted throughout 2018 as certain G&A reductions lag the loss of Operating profit due to refranchising. We expect the impact of refranchising, net of G&A reductions, to negatively impact Core Operating Profit growth for 2018 by 6 to 7 percentage points.

GAAP Required Change in Accounting for Revenue

See “Recent Accounting Pronouncements” in Note 2 for discussion of the expected impact of changes in GAAP related to revenue recognition.

Tax Cuts and Jobs Act of 2017 (“Tax Act”)

The Tax Act was enacted on December 22, 2017 (see Note 18 for discussion of the charge recorded upon enactment). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from 35% to 21% beginning in 2018, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), imposing a mandatory one-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax.

After considering the impacts of the Tax Act, we anticipate an ongoing effective tax rate of approximately 20-22% compared to our previous guidance of 26-27%. While we expect to benefit from the lower U.S. tax rate, we anticipate this benefit will be partially offset by the limitation on the deductibility of interest. The transition to a territorial tax system is expected to benefit our effective tax rate as a majority of our earnings are generated outside the U.S. However, this benefit is expected to be partially offset by taxes incurred under the Global Intangible Low-Taxed Income provisions of the Tax Act. We currently expect that our 2018 effective tax rate will be slightly below the ongoing anticipated range noted above due to a delay in the applicability of the Global Intangible Low-Taxed Income provision and increased 2018 EBITDA in the U.S. due to our planned U.S. refranchising gains, which will lead to higher interest deductibility.

KFC United Kingdom ("UK") Supply Availability Issues

On February 14, 2018 we and our franchisees transitioned to a new distributor for the food sold in our approximately 900 KFCs in the United Kingdom and Ireland (those restaurants accounted for approximately 3% of YUM’s global system sales in the year ended December 31, 2017). In connection with this transition, certain of these restaurants have experienced supply availability issues which have resulted in store closures or stores operating under a limited menu. These supply availability issues continue through the date of this filing, and it is difficult to predict with certainty when such issues may be resolved and all KFCs in the UK and Ireland will be fully operational. While the impact of lost profits as a result of these closures and limited menus has not been material through the date of this filing, prolonged supply availability issues could have a material impact on our revenues. Additionally, should the supply availability issues persist, our franchisees, suppliers and the distributor, whose affiliates also service KFCs located in other countries within Europe, may experience financial distress or require credit support, which could further impact our results of operations.

Consolidated Cash Flows

Net cash provided by operating activities from continuing operations was $1,030 million in 2017 vs. $1,248 million in 2016. The decrease was primarily driven by an increase in interest payments and retirement and deferred compensation payouts to retirees, partially offset by an increase in Operating profit before Special Items.

In 2016, net cash provided by operating activities from continuing operations was $1,248 million compared to $1,260 million in 2015. The decrease was primarily driven by an increase in interest payments, partially offset by a decrease in income tax payments.

Net cash provided by investing activities from continuing operations was $1,472 million in 2017 versus net cash used in investing activities of $4 million in 2016. The increase was primarily driven by higher proceeds from refranchising of restaurants and lower capital spending.

In 2016, net cash used in investing activities from continuing operations was $4 million compared to $199 million in 2015. The decrease was primarily driven by higher refranchising proceeds.

Net cash used in financing activities from continuing operations was $1,795 million in 2017 compared to $744 million in 2016. The increase was primarily driven by lower net borrowings, partially offset by lower share repurchases.

In 2016, net cash used in financing activities from continuing operations was $744 million compared to $1,089 million in 2015. The decrease was primarily driven by higher proceeds from net borrowings, partially offset by higher share repurchases.

Consolidated Financial Condition

Cash and cash equivalents increased due to significant refranchising proceeds received late in the year ended December 31, 2017, as well as cash on hand to fund the March 2018 maturity of $325 million in YUM Senior Unsecured Notes.

The refranchising of Company-operated stores drove decreases in restaurant-level assets and liabilities on our Consolidated Balance Sheet, including within Property, plant and equipment ("PP&E").

Deferred income taxes decreased in connection with the tax charge we recorded upon enactment of the Tax Act (see Note 18).

Long-term debt increased during 2017 due to the issuance of $750 million of Subsidiary Senior Unsecured Notes, partially offset by the reclassification of $325 million of YUM Senior Unsecured Notes to Short-term borrowings due to their March 2018 maturity date.

Liquidity and Capital Resources

In October 2016, we announced YUM’s Strategic Transformation Initiatives to drive global expansion of the KFC, Pizza Hut and Taco Bell brands following the Separation on October 31, 2016. As part of this transformation we intend to own less than 1,000 stores by the end of 2018 and, by 2019, reduce annual recurring capital expenditures to approximately $100 million, improve our efficiency by lowering G&A to 1.7% of system sales and increase free cash flow conversion to 100%.

In 2017, we returned $2.4 billion to shareholders through share repurchases and cash dividends and we remain committed to returning between $6.5 and $7.0 billion from 2017 to 2019. We intend to fund these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our five times EBITDA leverage. We anticipate generating total proceeds in excess of $2 billion, net of tax, in connection with our refranchising initiatives.

We have historically generated substantial cash flows from the operations of our Company-owned stores and from our extensive franchise operations, which require a limited YUM investment. Our annual operating cash flows from continuing operations have historically been in excess of $1 billion. Going forward, we anticipate that any decrease in operating cash flows from the operation of fewer Company-owned stores due to refranchising will be offset with savings generated from decreased capital investment and G&A required to support company operations. To the extent operating cash flows plus other sources of cash such as refranchising proceeds do not cover our anticipated cash needs, we maintain $1 billion of undrawn capacity under our existing revolving credit facility.

Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM. Company sales are paid in cash or by credit card (which is quickly converted into cash) and our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur. Substantial amounts of cash

received have historically been either invested in new restaurant assets which are non-current in nature or returned to shareholders. As part of our working capital strategy, we negotiate favorable credit terms with vendors and, as a result, our on-hand inventory turns faster than the related short-term liabilities. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations.

Debt Instruments

As of December 31, 2017, approximately 90%, including the impact of interest rate swaps, of our $9.8 billion of total debt outstanding is fixed with an effective overall interest rate of approximately 4.7%. We are managing a capital structure which is levered in-line with our target of approximately five times EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years. We have credit ratings of BB (Standard & Poor's)/Ba3 (Moody's) with a balance sheet more consistent with highly-levered peer restaurant franchise companies. See Note 11 for details of our financing activities supporting the return of capital initiative.

Securitization Notes. In May 2016, Taco Bell Funding, LLC, a newly formed special purpose subsidiary of the Company, issued an aggregate of $2.3 billion of fixed rate senior secured notes (“Class A-2 Notes”). In connection with the issuance of the Class A-2 Notes, Taco Bell Funding, LLC also issued variable rate notes (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Securitization Notes”) pursuant to a new revolving financing facility, which allowed for the borrowing of up to $100 million including the issuance of letters of credit up to $50 million. On October 16, 2017, Taco Bell Funding, LLC terminated the Variable Funding Notes. The Securitization Notes contain cross-default provisions whereby the failure to pay principal on any outstanding Securitization Notes will constitute an event of default under any other Securitization Notes.

Credit Agreement. On June 16, 2016, three wholly-owned subsidiaries of the Company, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, as co-borrowers (the "Borrowers") entered into a new credit agreement (the “Credit Agreement”) providing for the following (each of which may be increased subject to certain conditions): (i) a $500 million Term Loan A facility (the “Term Loan A Facility”), (ii) a $2 billion Term Loan B facility (the “Term Loan B Facility”) and (iii) a $1 billion revolving facility (the “Revolving Facility”) which has no outstanding borrowings and has $4 million in letters of credit outstanding as of December 31, 2017, each of which may be increased subject to certain conditions. Our Term Loan A Facility and Term Loan B Facility contain cross-default provisions whereby the failure to pay principal of or otherwise perform any agreement or condition under indebtedness of certain subsidiaries with a principal amount in excess of $100 million will constitute an event of default under the Credit Agreement.

Subsidiary Senior Unsecured Notes. On June 16, 2016, the Borrowers issued an aggregate of $1.05 billion Senior Unsecured Notes due 2024 and an aggregate of $1.05 billion Senior Unsecured Notes due 2026. On June 15, 2017, the Borrowers issued an aggregate of $750 million Senior Unsecured Notes due June 1, 2027 (together with the June 16, 2016 issuances, the “Subsidiary Senior Unsecured Notes”). Our Subsidiary Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of the indebtedness of certain subsidiaries with a principal amount in excess of $100 million or the failure to pay principal of such indebtedness will constitute an event of default under the Subsidiary Senior Unsecured Notes.

The majority of our remaining long-term debt primarily comprises senior, unsecured obligations ("YUM Senior Unsecured Notes") which ranks equally in right of payment with all of our existing and future unsecured unsubordinated indebtedness. Amounts outstanding under YUM Senior Unsecured Notes were $2.2 billion at December 31, 2017. Our YUM Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of any of our indebtedness in a principal amount in excess of $50 million will constitute a default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice.

The following table summarizes the future maturities of our outstanding long-term debt, excluding capital leases, as of December 31, 2017.

		2018				2019				2020				2021				2022				2023				2024				2025				2026				2027				2037				2043				Total
Securitization Notes		$	23			$	23			$	789			$	15			$	15			$	479			$	10			$	10			$	907															$	2,271
Credit Agreement		32				45				51				76				395				1,876																												2,475
Subsidiary Senior Unsecured Notes																										1,050								1,050				750												2,850
YUM Senior Unsecured Notes		325				250				350				350								325																				325				275				2,200
Total		$	380			$	318			$	1,190			$	441			$	410			$	2,680			$	1,060			$	10			$	1,957			$	750			$	325			$	275			$	9,796

See Note 11 for details on the the Securitization Notes, Subsidiary Senior Unsecured Notes, the Credit Agreement and YUM Senior Unsecured Notes.

Contractual Obligations

Our significant contractual obligations and payments as of December 31, 2017 included:

		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Long-term debt obligations(a)		$	12,970			$	801			$	2,301			$	1,538			$	8,330
Capital leases(b)		136				13				25				22				76
Operating leases(b)		899				124				198				142				435
Purchase obligations(c)		377				216				123				38				—
Benefit plans and other(d)		284				100				66				26				92
Total contractual obligations		$	14,666			$	1,254			$	2,713			$	1,766			$	8,933

(a)	Amounts include maturities of debt outstanding as of December 31, 2017 and expected interest payments on those outstanding amounts on a nominal basis. See Note 11.

(b)	These obligations, which are shown on a nominal basis, relate primarily to approximately 900 Company-owned restaurants. See Note 12.

(c)

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancelable without penalty. Purchase obligations relate primarily to supply agreements, marketing, information technology, purchases of PP&E as well as consulting, maintenance and other agreements. Amounts include estimated payments for our incremental advertising contributions related to the KFC U.S. Acceleration Agreement and the Pizza Hut U.S. Transformation Agreement. See Note 5.

(d)

Includes actuarially-determined timing of payments from our most significant unfunded pension plan as well as scheduled payments from our deferred compensation plan and other unfunded benefit plans where payment dates are determinable. This table excludes $39 million of future benefit payments for deferred compensation and other unfunded benefit plans to be paid upon separation of employee's service or retirement from the company, as we cannot reasonably estimate the dates of these future cash payments. Other amounts include a cash tax obligation related to the mandatory deemed repatriation tax provisions of the Tax Act (see Note 18) and anticipated investments, other than incremental advertising, related to the KFC U.S. Acceleration Agreement and the Pizza Hut U.S. Transformation Agreement (see Note 5).

We sponsor noncontributory defined benefit pension plans covering certain salaried and hourly employees, the most significant of which are in the U.S. and UK. The most significant of the U.S. plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from our other significant U.S. plan are paid by the Company as incurred (see footnote (d) above). Our funding policy for the Plan is to contribute annually amounts that will at least equal the minimum amounts required to comply with the Pension Protection Act of 2006. However, additional voluntary contributions are made from time-to-time to improve the Plan’s funded status. At December 31, 2017 the Plan was in a net underfunded position of $59 million. The UK pension plans were in a net overfunded position of $71 million at our 2017 measurement date.

We do not anticipate making any significant contributions to the Plan in 2018. Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumptions. Future changes in investment performance and corporate bond rates could impact our funded status and the timing and amounts of required contributions in 2018 and beyond.

Our post-retirement health care plan in the U.S. is not required to be funded in advance, but is pay as you go. We made post-retirement benefit payments of $5 million in 2017 and no future funding amounts are included in the contractual obligations table. See Note 15.

We have excluded from the contractual obligations table payments we may make for exposures for which we are self-insured, including workers’ compensation, employment practices liability, general liability, automobile liability, product liability and

property losses (collectively “property and casualty losses”) and employee healthcare and long-term disability claims. The majority of our recorded liability for self-insured property and casualty losses and employee healthcare and long-term disability claims represents estimated reserves for incurred claims that have yet to be filed or settled.

We have not included in the contractual obligations table approximately $100 million of liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities.

Off-Balance Sheet Arrangements

See the Lease Guarantees and Franchise Loan Pool and Equipment Guarantees sections of Note 20 for discussion of our off-balance sheet arrangements.

New Accounting Pronouncements Not Yet Adopted

The Financial Accounting Standards Board (“FASB”) has issued standards to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries. These standards are effective for the Company in our first quarter of 2018, and we will adopt the standards using the modified retrospective transition method. See “Recent Accounting Pronouncements” in Note 2 for additional information regarding our adoption of the new revenue recognition standards.

In February 2016, the FASB issued a standard on the recognition and measurement of leases, which is intended to increase transparency and comparability among organizations by requiring that substantially all lease assets and liabilities be recognized on the balance sheet and by requiring the disclosure of key information about leasing arrangements. This standard is effective for the Company in our first quarter of 2019 with early adoption permitted. The standard must be adopted using a modified retrospective transition method. We currently plan to adopt this standard in the first quarter of 2019 and we are evaluating the impact the adoption of this standard will have on our Financial Statements. Based on our current volume of store leases and subleases to franchisees (see Note 12) we expect this adoption will result in a material increase in the assets and liabilities on our Consolidated Balance Sheets; however, we believe the impact will be less material over time as we execute our strategy to be at least 98% franchised by 2019 and thus are a party to fewer leases. Further, we do not anticipate adoption will have a significant impact on our Consolidated Statements of Income or Cash Flows.

In June 2016, the FASB issued a standard that requires measurement and recognition of expected versus incurred credit losses for financial assets held. The standard is effective for the Company in our first quarter of fiscal 2020 with early adoption permitted beginning in the first quarter of 2019. We are currently evaluating the impact the adoption of this standard will have on our Financial Statements.

In October 2016, the FASB issued a standard that requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance will require a modified retrospective application with a cumulative adjustment to opening retained earnings at the beginning of our first quarter of 2018. We anticipate a reduction in Other assets of approximately $40 million upon adoption to write-off the unamortized tax consequences of certain historical intra-entity transfers of assets with an offsetting increase to our Accumulated deficit.

In August 2017, the FASB issued a standard that refines and expands existing hedge accounting guidance. The standard is effective for the Company in our first quarter of 2019 with early adoption permitted. We do not anticipate the impact of adopting this standard will be material to our Financial Statements.

Critical Accounting Policies and Estimates

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results of operations and financial condition and cash flows in future years. A description of what we consider to be our most significant critical accounting policies follows.

Impairment or Disposal of Long-Lived Assets

We review long-lived assets of restaurants (primarily PP&E and allocated intangible assets subject to amortization) semi-annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We evaluate recoverability based on the restaurant’s forecasted undiscounted cash flows, which incorporate our best estimate of sales growth and margin improvement based upon our plans for the unit and actual results at comparable restaurants. For restaurant assets that are deemed to not be recoverable, we write-down the impaired restaurant to its estimated fair value. Key assumptions in the determination of fair value are the future after-tax cash flows of the restaurant, which are reduced by future royalties a franchisee would pay, and a discount rate. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the determination of a purchase price for the restaurant. Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions.

We perform an impairment evaluation at a restaurant group level if it is more likely than not that we will refranchise restaurants as a group. Expected net sales proceeds are generally based on actual bids from the buyer, if available, or anticipated bids given the discounted projected after-tax cash flows for the group of restaurants. Historically, these anticipated bids have been reasonably accurate estimations of the proceeds ultimately received. The after-tax cash flows used in determining the anticipated bids incorporate reasonable assumptions we believe a franchisee would make such as sales growth and margin improvement as well as expectations as to the useful lives of the restaurant assets. These after-tax cash flows also include a deduction for the anticipated, future royalties we would receive under a franchise agreement with terms substantially at market entered into simultaneously with the refranchising transaction.

The discount rate used in the fair value calculations is our estimate of the required rate of return that a franchisee would expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

Impairment of Goodwill

We evaluate goodwill for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our business units (which are aligned based on geography) in our KFC, Pizza Hut and Taco Bell Divisions. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from franchise royalties and Company-owned restaurant operations, if any.

Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting unit. Future cash flows are based on growth expectations relative to recent historical performance and incorporate sales growth (from net new restaurants or same-sales growth) and margin improvement (for those reporting units which include Company-owned restaurant operations) assumptions that we believe a third-party buyer would assume when determining a purchase price for the reporting unit. Any margin improvement assumptions that factor into the discounted cash flows are highly correlated with sales growth as cash flow growth can be achieved through various interrelated strategies such as product pricing and restaurant productivity initiatives. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

The fair values of all our reporting units with goodwill balances were substantially in excess of their respective carrying values as of the 2017 goodwill testing date.

When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit that will be retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which include a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transaction. Appropriate adjustments are made to the fair value determinations if such franchise agreement is determined to not be at prevailing market rates. When determining whether such franchise agreement is at prevailing market rates our primary consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world. The Company believes consistency in royalty

rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.

The discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee is reduced by future royalties the franchisee will pay the Company. The Company thus considers the fair value of future royalties to be received under the franchise agreement as fair value retained in its determination of the goodwill to be written off when refranchising. Others may consider the fair value of these future royalties as fair value disposed of and thus would conclude that a larger percentage of a reporting unit’s fair value is disposed of in a refranchising transaction.

During 2017, refranchising activity completed by the Company resulted in the write-off of $36 million in Goodwill within Refranchising (gain) loss, representing 7% of beginning-of-year Company goodwill. Of the $36 million, the most significant write-offs were recognized by KFC Turkey and Taco Bell U.S. Within KFC Turkey, all remaining company restaurants were refranchised and $13 million in goodwill was written off (representing 33% of beginning-of-year goodwill). Within Taco Bell U.S., 251 restaurants were refranchised (representing 29% of beginning-of-year company units) and $8 million in goodwill was written off (representing 7% of beginning-of-year goodwill).

See Note 2 for a further discussion of our policies regarding goodwill.

Self-Insured Property and Casualty Losses

We record our best estimate of the remaining cost to settle incurred self-insured property and casualty losses. The estimate is based on the results of an independent actuarial study and considers historical claim frequency and severity as well as changes in factors such as our business environment, benefit levels, medical costs and the regulatory environment that could impact overall self-insurance costs. Additionally, our reserve includes a risk margin to cover unforeseen events that may occur over the several years required to settle claims, increasing our confidence level that the recorded reserve is adequate.

See Note 20 for a further discussion of our insurance programs.

Pension Plans

Certain of our employees are covered under defined benefit pension plans. Our two most significant plans are in the U.S. and combined had a projected benefit obligation (“PBO”) of $1,007 million and a fair value of plan assets of $864 million at December 31, 2017.

The PBO reflects the actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBOs are highly sensitive to changes in discount rates. For our U.S. plans, we measured our PBOs using a discount rate of 3.90% at December 31, 2017. This discount rate was determined with the assistance of our independent actuary. The primary basis for this discount rate determination is a model that consists of a hypothetical portfolio of ten or more corporate debt instruments rated Aa or higher by Moody’s or Standard & Poor's ("S&P") with cash flows that mirror our expected benefit payment cash flows under the plans. We exclude from the model those corporate debt instruments flagged by Moody’s or S&P for a potential downgrade (if the potential downgrade would result in a rating below Aa by both Moody's and S&P) and bonds with yields that were two standard deviations or more above the mean. In considering possible bond portfolios, the model allows the bond cash flows for a particular year to exceed the expected benefit payment cash flows for that year. Such excesses are assumed to be reinvested at appropriate one-year forward rates and used to meet the benefit payment cash flows in a future year. The weighted-average yield of this hypothetical portfolio was used to arrive at an appropriate discount rate. We also ensure that changes in the discount rate as compared to the prior year are consistent with the overall change in prevailing market rates and make adjustments as necessary. A 50 basis-point increase in this discount rate would have decreased these U.S. plans’ PBOs by approximately $65 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased our U.S. plans’ PBOs by approximately $75 million at our measurement date.

The net periodic benefit cost we will record in 2018 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date. We expect net periodic benefit cost for our U.S. plans to increase approximately $6 million in 2018. A 50 basis-point decrease in our discount rate assumption at our 2017 measurement date would further increase our 2018 U.S. net periodic benefit cost by approximately $9 million. A 50 basis-point increase in our discount rate assumption at our 2017 measurement date would decrease our 2018 U.S. net periodic benefit cost by approximately $8 million. The impacts of changes in net periodic benefit costs are reflected primarily in Other pension (income) expense.

Our estimated long-term rate of return on U.S. plan assets is based upon the weighted-average of historical and expected future returns for each asset category. Our expected long-term rate of return on U.S. plan assets, for purposes of determining 2018 pension expense, at December 31, 2017 was 5.65%, net of administrative and investment fees paid from plan assets. We believe this rate is appropriate given the composition of our plan assets and historical market returns thereon. A 100 basis point change in our expected long-term rate of return on plan assets assumption would impact our 2018 U.S. net periodic benefit cost by approximately $8 million. Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 5.65% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million. The impacts of changes in net periodic benefit costs are recorded to Other pension (income) expense.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $134 million included in AOCI for these U.S. plans at December 31, 2017. We will recognize approximately $16 million of such loss in net periodic benefit cost in 2018 versus $5 million recognized in 2017. See Note 15.

In the first quarter of 2017, we adopted FASB issued guidance related to the presentation of non-service components of net periodic pension cost. As a result, expense associated with changes in actuarial assumptions, settlement charges and other non-service related charges are primarily recorded to Other pension (income) expense.

Income Taxes

At December 31, 2017, we had valuation allowances of approximately $421 million to reduce our $847 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to foreign tax credits and temporary differences in profitable U.S. federal, state and foreign jurisdictions and net operating losses in certain foreign jurisdictions, the majority of which do not expire. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions as well as carryforward periods and restrictions on usage. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans. Thus, recorded valuation allowances may be subject to material future changes.

As a matter of course, we are regularly audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income tax provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2017, we had $100 million of unrecognized tax benefits, $10 million of which are temporary in nature and, if recognized, would not impact the effective tax rate. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.

On December 22, 2017, the SEC staff issued SEC Staff Accounting Bulletin (“SAB”) 118 to address the accounting implications of the 2017 Tax Cuts and Jobs Act (“Tax Act”). SAB 118 permits a company to recognize provisional amounts for the one-time tax effects of the Tax Act upon enactment when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The measurement period to finalize our calculations cannot extend beyond one year of the enactment date. Key provisions that have a significant impact on our Financial Statements and where we have recognized estimated amounts include the recognition of liabilities for taxes on mandatory one-time deemed repatriation of accumulated earnings of foreign subsidiaries, the remeasurement of certain net deferred tax assets and liabilities, and establishment of a valuation allowance on our foreign tax credit carryforwards.

The Tax Act includes a mandatory deemed repatriation tax on accumulated earnings of foreign subsidiaries, and as a result, previously unremitted earnings for which no U.S. deferred tax liability had been provided have now been subject to U.S. tax. Our cash currently held overseas is primarily limited to that necessary to fund working capital requirements. Thus, we have not provided taxes on our foreign unremitted earnings, other than U.S. federal taxes provided in connection with the mandatory deemed repatriation tax, as we believe they are indefinitely reinvested. See Note 18 for a further discussion of our Income taxes.