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”) franchises or operates a worldwide system of over 48,000 restaurants in more than 140 countries and territories, primarily 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 48,000 restaurants, 98% are operated by franchisees.

As of December 31, 2018, 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”). 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 YUM common stock (“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. 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 mainland 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 Relevant, Easy and Distinctive Brands

•	Developing Unmatched Franchise Operating Capability

•	Driving Bold Restaurant Development

•	Growing Unrivaled Culture and Talent

•	More Franchised. YUM successfully increased franchise restaurant ownership to 98% as of December 31, 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 generated pre-tax proceeds of $2.8 billion through our refranchising initiatives to achieve targeted franchise ownership of 98%, which were completed in December 2018. 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.

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.

Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special 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.

For 2016 we provided 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.

For 2018, GAAP diluted EPS from continuing operations increased 24% to $4.69 per share, and diluted EPS from continuing operations excluding Special Items, increased 7% to $3.17 per share.

2018 financial highlights:

	% Change
	System Sales, Ex FX		Same-Store Sales		Net New Units		GAAP Operating Profit		Core Operating Profit
KFC Division	+6		+2		+5		(2)		(2)
Pizza Hut Division	+1		Even		+10		+2		+2
Taco Bell Division	+6		+4		+3		+2		+2
Worldwide	+5		+2		+7		(17)		Even

Additionally:

•	During the year, we opened 1,757 net new units and added 1,282 Telepizza units for 7% net new unit growth.

•	During the year, we refranchised 660 restaurants, including 364 KFC, 97 Pizza Hut and 199 Taco Bell units, for pre-tax proceeds of $825 million. We recorded net refranchising gains of $540 million in Special Items.

•	During the year, we repurchased 28.2 million shares totaling $2.4 billion at an average share price of $85.

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)
	2018				2017				2016				2018					2017
Company sales	$	2,000			$	3,572			$	4,189			(44	)				(15	)
Franchise and property revenues	2,482				2,306				2,167				8					6
Franchise contributions for advertising and other services	1,206				—				—				N/A					N/A
Total revenues	$	5,688			$	5,878			$	6,356			(3	)				(8	)
Restaurant profit	$	366			$	618			$	700			(41	)				(12	)
Restaurant margin %	18.3		%		17.3		%		16.7		%		1.0			ppts.		0.6			ppts.
G&A expenses	$	895			$	999			$	1,129			10					12
Franchise and property expenses	188				237				201				21					(18	)
Franchise advertising and other services expense	1,208				—				—				N/A					N/A
Refranchising (gain) loss	(540		)		(1,083		)		(163		)		(50	)				NM
Other (income) expense	7				10				18				NM					NM
Operating Profit	$	2,296			$	2,761			$	1,682			(17	)				64
Investment (income) expense, net	(9		)		(5		)		(2		)		88					NM
Other pension (income) expense	14				47				32				70					(45	)
Interest expense, net	452				445				307				(1	)				(45	)
Income tax provision	297				934				327				68					NM
Income from continuing operations	1,542				1,340				1,018				15					32
Income from discontinued operations, net of tax	N/A				N/A				625				NM					NM
Net Income	$	1,542			$	1,340			$	1,643			15					(18	)
Diluted EPS from continuing operations(a)	$	4.69			$	3.77			$	2.54			24					48
Diluted EPS from discontinued operations(a)	N/A				N/A				$	1.56			NM					NM
Diluted EPS(a)	$	4.69			$	3.77			$	4.10			24					(8	)
Effective tax rate - continuing operations	16.2%				41.1%				24.3%				24.9			ppts.		(16.8	)		ppts.

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

Performance Metrics

										% Increase (Decrease)
Unit Count	2018			2017			2016			2018			2017
Franchise(a)	47,268			43,603			40,834			8			7
Company-owned	856			1,481			2,841			(42	)		(48	)
	48,124			45,084			43,675			7			3

(a)	Includes 1,282 Telepizza units as of December 31, 2018. See description of the Telepizza strategic alliance within this MD&A.

		2018		2017		2016
Same-Store Sales Growth		2		2		1

Non-GAAP Items
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
		2018			2017			2016
System Sales Growth, reported		5			4			3
System Sales Growth, excluding FX		5			4			5
System Sales Growth, excluding FX and 53rd week		N/A			5			4
Core Operating Profit Growth		Even			7			11
Core Operating Profit Growth, excluding 53rd week		N/A			9			9
Diluted EPS from Continuing Operations Growth, excluding Special Items		7			20			7
Effective Tax Rate excluding Special Items		20.4	%		18.8	%		26.3	%

		Year
Detail of Special Items		2018				2017				2016
Refranchising gain (loss) (See Note 5)		$	540			$	1,083			$	163
YUM's Strategic Transformation Initiatives (See Note 5)		(8		)		(23		)		(67		)
Costs associated with Pizza Hut U.S. Transformation Agreement (See Note 5)		(6		)		(31		)		—
Costs associated with KFC U.S. Acceleration Agreement (See Note 5)		(2		)		(17		)		(26		)
Non-cash credits (charges) associated with share-based compensation (See Note 5)		3				(18		)		(30		)
Other Special Items Income (Expense)		3				7				(5		)
Special Items Income - Operating Profit		530				1,001				35
Special Items - Other Pension Income (Expense) (See Note 5)		—				(23		)		(26		)
Special Items Income from Continuing Operations before Income Taxes		530				978				9
Tax Benefit (Expense) on Special Items(a)		(96		)		(256		)		24
Tax Benefit (Expense) - U.S. Tax Act(b)		66				(434		)		—
Special Items Income, net of tax		$	500			$	288			$	33
Average diluted shares outstanding		329				355				400
Special Items diluted EPS		$	1.52			$	0.81			$	0.08
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53****rd Week
Consolidated
GAAP Operating Profit		$	2,296			$	2,761			$	1,682
Special Items Income - Operating Profit		530				1,001				35
Foreign Currency Impact on Divisional Operating Profit(c)		1				—				N/A
Core Operating Profit		1,765				1,760				1,647
Impact of 53rd Week		N/A				N/A				28
Core Operating Profit, excluding 53rd Week		$	1,765			$	1,760			$	1,619
KFC Division
GAAP Operating Profit		$	959			$	981			$	871
Foreign Currency Impact on Divisional Operating Profit(c)		—				4				N/A
Core Operating Profit		959				977				871
Impact of 53rd Week		N/A				N/A				11
Core Operating Profit, excluding 53rd Week		$	959			$	977			$	860

Pizza Hut Division
GAAP Operating Profit		$	348			$	341			$	367
Foreign Currency Impact on Divisional Operating Profit(c)		1				(4		)		N/A
Core Operating Profit		347				345				367
Impact of 53rd Week		N/A				N/A				5
Core Operating Profit, excluding 53rd Week		$	347			$	345			$	362
Taco Bell Division
GAAP Operating Profit		$	633			$	619			$	595
Foreign Currency Impact on Divisional Operating Profit(c)		—				—				N/A
Core Operating Profit		633				619				595
Impact of 53rd Week		N/A				N/A				12
Core Operating Profit, excluding 53rd Week		$	633			$	619			$	583
Reconciliation of Diluted EPS from Continuing Operations to Diluted EPS from Continuing Operations, excluding Special Items
Diluted EPS from Continuing Operations		$	4.69			$	3.77			$	2.54
Special Items Diluted EPS		1.52				0.81				0.08
Diluted EPS from Continuing Operations excluding Special Items		$	3.17			$	2.96			$	2.46
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items
GAAP Effective Tax Rate		16.2		%		41.1		%		24.3		%
Impact on Tax Rate as a result of Special Items(a)		(4.2		)%		22.3		%		(2.0		)%
Effective Tax Rate excluding Special Items(b)		20.4		%		18.8		%		26.3		%
Reconciliation of GAAP Company sales to System sales
Consolidated
GAAP Company sales(d)		$	2,000			$	3,572			$	4,189
Franchise sales		47,237				43,122				40,732
System sales		49,237				46,694				44,921
Foreign Currency Impact on System sales(e)		186				(90		)		N/A
System sales, excluding FX		49,051				46,784				44,921
Impact of 53rd week		N/A				N/A				434
System sales, excluding FX and 53rd Week		$	49,051			$	46,784			$	44,487
KFC Division
GAAP Company sales(d)		$	894			$	1,928			$	2,156
Franchise sales		25,345				22,587				21,086
System sales		26,239				24,515				23,242
Foreign Currency Impact on System sales(e)		142				(28		)		N/A
System sales, excluding FX		26,097				24,543				23,242
Impact of 53rd week		N/A				N/A				165
System sales, excluding FX and 53rd Week		$	26,097			$	24,543			$	23,077

Pizza Hut Division
GAAP Company sales(d)		$	69			$	285			$	493
Franchise sales		12,143				11,749				11,526
System sales		12,212				12,034				12,019
Foreign Currency Impact on System sales(e)		47				(66		)		N/A
System sales, excluding FX		12,165				12,100				12,019
Impact of 53rd week		N/A				N/A				113
System sales, excluding FX and 53rd Week		$	12,165			$	12,100			$	11,906
Taco Bell Division
GAAP Company sales(d)		$	1,037			$	1,359			$	1,540
Franchise sales		9,749				8,786				8,120
System sales		10,786				10,145				9,660
Foreign Currency Impact on System sales(e)		(3		)		4				N/A
System sales, excluding FX		10,789				10,141				9,660
Impact of 53rd week		N/A				N/A				156
System sales, excluding FX and 53rd Week		$	10,789			$	10,141			$	9,504

(a)

Tax Benefit (Expense) on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items. In 2018, we also recorded a $19 million increase to our Income tax provision for the correction of an error associated with the tax recorded on a prior year divestiture, the effects of which were previously recorded as a Special Item. 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.

(b)

During the year ended December 31, 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") that was reported as a Special Item. We also recorded a Special Items tax benefit of $31 million in the year ended December 31, 2018 related to current year U.S. foreign tax credits that became realizable directly as a result of the impact of deemed repatriation tax expense associated with the Tax Act. We recognized $434 million in our 2017 Income tax provision that was reported as a Special Item as a result of the December 22, 2017 enactment of the Tax Act.

(c)	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.

(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.

Items Impacting Reported Results and/or 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. 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 and property revenues from restaurants that have been refranchised. We have made G&A reductions, including reductions directly attributable to refranchising, such that beginning in 2019, on an annual basis, the impact of lost Operating Profit from our refranchising initiatives will be largely offset by G&A reductions we have made. Operating Profit was negatively impacted throughout 2018 as certain G&A reductions lagged the loss of Operating Profit due to refranchising. The impact of refranchising, net of G&A reductions, negatively impacted Core Operating Profit growth for 2018 by 4 percentage points.

KFC United Kingdom ("UK") Supply Availability Issues

On February 14, 2018, we and our franchisees transitioned to a new distributor for the products supplied to 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, 2018). In connection with this transition, certain of the restaurants experienced supply availability issues which resulted in store closures or stores operating under a limited menu. Beginning mid-May 2018, all restaurants opened for business, offering their full menus, with advertising beginning at the end of May. On a full-year basis, Core Operating Profit growth was negatively impacted by approximately 2 percentage points for KFC Division and approximately 1 percentage point for YUM as a result of these first-half supply availability issues. The negative impact to full-year same-store sales growth for 2018 was approximately 50 basis points for our KFC Division and approximately 25 basis points for YUM.

Investment in Grubhub

For the year ended December 31, 2018 we recognized pre-tax income of $14 million related to our investment in Grubhub. See Note 5 for further discussion of our investment in Grubhub.

Telepizza Strategic Alliance

On December 30, 2018, the Company consummated a strategic alliance with Telepizza Group S.A. (“Telepizza”), the largest non U.S.-based pizza delivery company in the world, to be the master franchisee of Pizza Hut in Latin America and portions of Europe. The key terms of the alliance are set forth below:

•	In Spain and Portugal Telepizza will continue operating the Telepizza brand and will oversee franchisees operating Pizza Hut branded restaurants

•	In Latin America (excluding Brazil), the Caribbean and Switzerland, Telepizza will progressively convert its existing restaurants to the Pizza Hut brand and oversee franchisees operating Pizza Hut branded restaurants

•	Telepizza will manage supply chain logistics for the entire master franchise territory and will become an authorized supplier of Pizza Hut branded restaurants

•	Across the regions covered by the master franchise agreement, Telepizza will target opening at least 1,300 new units over the next ten years and 2,550 units in total over 20 years

As a result of the alliance we added 1,282 Telepizza units to our Pizza Hut Division unit count at December 31, 2018. In total approximately 2,300 Pizza Hut and Telepizza units are subject to the master franchise agreement as of December 31, 2018. Of these 2,300 units, we anticipate between 100 and 150 may close due to overlap in a particular trade area.

Based upon our ongoing and active maintenance of the Pizza Hut intellectual property as well as Telepizza’s active involvement in supply chain management and their role as a master franchisee, both parties are exposed to significant risks and rewards depending on the commercial success of the alliance. As a result, the alliance has been identified as a collaborative arrangement and upon consummation of the alliance no amounts were recorded in our Consolidated Financial Statements (other than insignificant success fees that were paid to third-party advisors). Subsequent to consummation of the deal, for all Pizza Hut restaurants that are part of the alliance, we will receive a continuing fee of 3.5% of restaurant sales. Likewise, for most Telepizza restaurants that are part of the alliance we will receive an alliance fee of 3.5% of restaurant sales. These fees will be recorded as Franchise and property revenues within our Consolidated Statement of Income when the related sales occur, consistent with our recognition of continuing fees for all other restaurants subject to our franchise agreements. These fees will be reduced by a sales-based credit that decreases over time and, potentially, certain incentive payments if development or conversion targets are met. Previously, the existing Pizza Hut restaurants that are now subject to the master franchise agreement with Telepizza generally paid a continuing fee of 6% of restaurant sales consistent with our standard International franchise agreement terms.

Adoption of Topic 606, "Revenue from Contracts with Customers"

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 (“Topic 606”). As a result, the Company has changed its accounting policy for revenue recognition as detailed in Note 2. We adopted Topic 606 on January 1, 2018, using the modified retrospective method. Therefore, the comparative information for fiscal 2017 and 2016 has not been adjusted and continues to be reported under our accounting polices related to revenue recognition prior to the adoption of Topic 606 ("Legacy GAAP"). GAAP Operating Profit for the year ended December 31, 2018 was $14 million lower and Core Operating Profit was $41 million lower (2 percentage points) than what would have been recognized under Legacy GAAP.

		2018
Increase (Decrease) vs. Legacy GAAP		KFC Division				Pizza Hut Division				Taco Bell Division				Unallocated(a)				Total
Amortization of upfront fees		$	40			$	16			$	10			$	—			$	66
Amortization of franchise incentive payments		(14		)		(5		)		(1		)		—				(20		)
Upfront fee cash received		(64		)		(15		)		(13		)		—				(92		)
Incentive payments made		1				2				1				18				22
Franchise and property revenues		(37		)		(2		)		(3		)		18				(24		)
Franchise and property expenses		1				—				—				5				6
Refranchising gain		—				—				—				4				4
Operating Profit		$	(36	)		$	(2	)		$	(3	)		$	27			$	(14	)

a)

Reflects incentive payments made to or on behalf of franchisees during 2018 that under Legacy GAAP would have been recognized as expense in full in 2018. Due to the size and nature of such payments, we historically would have included such amounts as Special Items and thus in the table above have not allocated their impact to our Divisional results. Such amounts are now being capitalized with related amortization recognized as a reduction of Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payments relate. Also reflects the recognition as Refranchising gain of deferred franchise fees upon the modification of existing franchise agreements when entering into master franchise agreements.

Topic 606 also impacted transactions that were not historically included in our revenues and expenses such as franchisee contributions to, and subsequent expenditures from, advertising cooperatives that we are required to consolidate, as well as receipts and expenditures for other services we provide to our franchisees. Based on Legacy GAAP, these transactions were reported on a net basis in our Consolidated Statements of Income. This change did not have a significant impact on Operating Profit, as the contributions that are now recorded in Franchise contributions for advertising and other services are largely offset by the expenditures recorded in Franchise advertising and other services expense. Refer to Notes 2 and 5 for further details of the significant changes and quantitative impact of Topic 606.

Income Tax Matters

The Tax Cuts and Jobs Act of 2017 ("Tax Act") was enacted on December 22, 2017 (See Note 17 for discussion of the charge recorded as a result of the enactment). The Tax Act significantly modified 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 foreign earnings are now subject to U.S. tax.

After considering the impacts of the Tax Act, we anticipate a 2019 and ongoing effective tax rate of 20% to 22%, compared to our pre-2018 annual guidance of 26% to 27%, as we expect to benefit from the lower U.S. tax rate and the territorial tax system due to a majority of our earnings being generated outside the U.S. We anticipate this benefit will be partially offset by taxes incurred under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Act. We originally anticipated that our 2018 effective tax would be slightly below the ongoing anticipated range of 20% to 22%, primarily due to a delay in the applicability of the GILTI provisions of the Tax Act. Our actual 2018 Effective Tax Rate, excluding Special Items of 20.4% was higher than we originally expected. This was due to the negative impact of a reserve of approximately $20 million we recorded related to a dispute concerning the income tax rate to be applied to our 2018 income in a foreign market.

Extra Week in 2016 (As Restated for Change in Reporting Calendar)

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 property revenues	8				6				7				21
Total revenues	$	34			$	11			$	31			$	76
Operating Profit
Franchise and property expenses	$	8			$	6			$	7			$	21
Restaurant profit	6				1				7				14
G&A expenses	(3		)		(2		)		(2		)		(7		)
Operating Profit	$	11			$	5			$	12			$	28

KFC Division

The KFC Division has 22,621 units, 82% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of the end of 2018.

														% B/(W)								% B/(W)
														2018								2017
		2018				2017				2016				Reported				Ex FX				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	26,239			$	24,515			$	23,242			7				6				5				6				6
Same-Store Sales Growth (Decline)														2				N/A				3				N/A				N/A
Company sales		$	894			$	1,928			$	2,156			(54	)			(53	)			(11	)			(12	)			(11	)
Franchise and property revenues		1,294				1,182				1,069				10				9				11				10				11
Franchise contributions for advertising and other services		456				—				—				N/A				N/A				N/A				N/A				N/A
Total revenues		$	2,644			$	3,110			$	3,225			(15	)			(15	)			(4	)			(4	)			(3	)
Restaurant profit		$	119			$	289			$	317			(59	)			(58	)			(9	)			(10	)			(8	)
Restaurant margin %		13.3		%		15.0		%		14.7		%		(1.7	)	ppts.		(1.5	)	ppts.		0.3		ppts.		0.3		ppts.		0.4		ppts.
G&A expenses		$	350			$	370			$	396			5				5				7				7				7
Franchise and property expenses		107				117				108				8				9				(8	)			(7	)			(8	)
Franchise advertising and other services expense		452				—				—				N/A				N/A				N/A				N/A				N/A
Operating Profit		$	959			$	981			$	871			(2	)			(2	)			13				12				14

											% Increase (Decrease)
Unit Count		2018			2017			2016			2018				2017
Franchise		22,297			20,819			19,236			7				8
Company-owned		324			668			1,407			(51		)		(53	)
Total		22,621			21,487			20,643			5				4

		2017			New Builds			Closures			Refranchised			2018
Franchise		20,819			1,576			(462	)		364			22,297
Company-owned		668			28			(8	)		(364	)		324
Total		21,487			1,604			(470	)		—			22,621

		2016			New Builds			Closures			Refranchised			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

Company Sales and Restaurant Profit

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

	2018 vs. 2017
Income / (Expense)	2017				Store Portfolio Actions				Other				FX				2018
Company sales	$	1,928			$	(1,036	)		$	17			$	(15	)		$	894
Cost of sales	(664		)		351				(17		)		6				(324		)
Cost of labor	(451		)		244				(5		)		2				(210		)
Occupancy and other	(524		)		283				(4		)		4				(241		)
Company restaurant expenses	$	(1,639	)		$	878			$	(26	)		$	12			$	(775	)
Restaurant profit	$	289			$	(158	)		$	(9	)		$	(3	)		$	119

	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

In 2018, 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 growth of 2%, including the impact of the supply interruptions in our KFC UK business.

In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions were 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.

Franchise and property revenues

In 2018, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation and the adoption of Topic 606, was driven by refranchising, international net new unit growth, and franchise same-store sales growth of 2%, including the impact of the supply interruptions in our KFC UK business, partially offset by lapping higher than normal renewal and transfer fees that were recognized upfront in the prior year.

In 2017, the increase in Franchise and property revenues, 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.

G&A

In 2018, the decrease in G&A expenses, excluding the impacts of foreign currency translation, was driven by the positive impact of YUM's Transformation initiatives, including reductions in G&A directly attributable to refranchising.

In 2017, the decrease in G&A, excluding the impacts 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 higher incentive compensation.

Operating Profit

In 2018, the increase in Operating Profit, excluding the impacts of foreign currency translation and the adoption of Topic 606, was driven by net new unit growth, same-store sales growth, lower G&A and lower advertising costs associated with the KFC U.S. Acceleration Agreement recorded in Franchise and property expenses, partially offset by refranchising, the supply interruptions in our KFC UK business and lapping higher than normal renewal and transfer fees that were recognized upfront in the prior year.

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.

Pizza Hut Division

The Pizza Hut Division has 18,431 units, 59% 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). Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2018.

														% B/(W)								% B/(W)
														2018								2017
		2018				2017				2016				Reported				Ex FX				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	12,212			$	12,034			$	12,019			1				1				—				1				2
Same-Store Sales Growth (Decline)														Even				N/A				Even				N/A				N/A
Company sales		$	69			$	285			$	493			(76	)			(76	)			(42	)			(42	)			(41	)
Franchise and property revenues		598				608				615				(2	)			(2	)			(1	)			(1	)			—
Franchise contributions for advertising and other services		321				—				—				N/A				N/A				N/A				N/A				N/A
Total revenues		$	988			$	893			$	1,108			11				10				(19	)			(19	)			(18	)
Restaurant profit		$	—			$	14			$	41			NM				NM				(63	)			(63	)			(62	)
Restaurant margin %		(0.1		)%		5.3		%		8.3		%		(5.4	)	ppts.		(5.3	)	ppts.		(3.0	)	ppts.		(3.0	)	ppts.		(2.9	)	ppts.
G&A expenses		$	197			$	211			$	242			7				7				13				13				12
Franchise and property expenses		45				68				48				35				36				(42	)			(41	)			(41	)
Franchise advertising and other services expense		328				—				—				N/A				N/A				N/A				N/A				N/A
Operating Profit		$	348			$	341			$	367			2				2				(7	)			(6	)			(5	)

											% Increase (Decrease)
Unit Count		2018			2017			2016			2018				2017
Franchise		18,369			16,588			15,871			11				5
Company-owned		62			160			549			(61		)		(71	)
Total		18,431			16,748			16,420			10				2

		2017			New Builds			Closures			Refranchised			Other(a)			2018
Franchise		16,588			1,106			(705	)		97			1,283			18,369
Company-owned		160			2			(3	)		(97	)		—			62
Total		16,748			1,108			(708	)		—			1,283			18,431

		2016			New Builds			Closures			Refranchised			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

(a) Includes 1,282 Telepizza restaurants.

Company Sales and Restaurant Profit

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

	2018 vs. 2017
Income / (Expense)	2017				Store Portfolio Actions				Other				FX				2018
Company sales	$	285			$	(218	)		$	1			$	1			$	69
Cost of sales	(83		)		64				—				—				(19		)
Cost of labor	(94		)		70				(2		)		—				(26		)
Occupancy and other	(94		)		69				2				(1		)		(24		)
Company restaurant expenses	$	(271	)		$	203			$	—			$	(1	)		$	(69	)
Restaurant profit	$	14			$	(15	)		$	1			$	—			$	—

	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

In 2018, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising. Company same-store sales growth was 1%.

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.

Franchise and property revenues

In 2018, the increase in Franchise and property revenues, excluding the impacts of foreign currency translation and the adoption of Topic 606, was driven by net new unit growth and refranchising. Franchise same-store sales were even.

In 2017, Franchise and property revenues, 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.

G&A

In 2018, the decrease in G&A, excluding the impacts of foreign currency translation, was driven by Yum’s Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, and lapping higher litigation costs.

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.

Operating Profit

In 2018, the increase in Operating Profit, excluding the impact of foreign currency translation and the adoption of Topic 606, was driven by lower G&A, lower advertising costs associated with the Pizza Hut Transformation Agreement recorded in Franchise and property expenses, net new unit growth and refranchising.

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 recorded in Franchise and property expenses, partially offset by lower G&A.

Taco Bell Division

The Taco Bell Division has 7,072 units, 93% of which are in the U.S. The Company-owned 7% of the Taco Bell units in the U.S. as of the end of 2018.

														% B/(W)								% B/(W)
														2018								2017
		2018				2017				2016				Reported				Ex FX				Reported				Ex FX				Ex FX and 53rd Week in 2016
System Sales		$	10,786			$	10,145			$	9,660			6				6				5				5				7
Same-Store Sales Growth														4				N/A				4				N/A				N/A
Company sales		$	1,037			$	1,359			$	1,540			(24	)			(24	)			(12	)			(12	)			(10	)
Franchise and property revenues		590				521				485				13				13				7				7				9
Franchise contributions for advertising and other services		429				—				—				N/A				N/A				N/A				N/A				N/A
Total revenues		$	2,056			$	1,880			$	2,025			9				9				(7	)			(7	)			(6	)
Restaurant profit		$	244			$	305			$	342			(20	)			(20	)			(11	)			(11	)			(9	)
Restaurant margin %		23.5		%		22.4		%		22.2		%		1.1		ppts.		1.1		ppts.		0.2		ppts.		0.2		ppts.		0.3		ppts.
G&A expenses		$	177			$	188			$	211			6				6				11				11				10
Franchise and property expenses		28				22				21				(31	)			(31	)			(6	)			(5	)			(6	)
Franchise advertising and other services expense		428				—				—				N/A				N/A				N/A				N/A				N/A
Operating Profit		$	633			$	619			$	595			2				2				4				4				6

											% Increase (Decrease)
Unit Count		2018			2017			2016			2018				2017
Franchise		6,602			6,196			5,727			7				8
Company-owned		470			653			885			(28		)		(26	)
Total		7,072			6,849			6,612			3				4

		2017			New Builds			Closures			Refranchised			Other			2018
Franchise		6,196			293			(86	)		199			—			6,602
Company-owned		653			16			—			(199	)		—			470
Total		6,849			309			(86	)		—			—			7,072

		2016			New Builds			Closures			Refranchised			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

Company Sales and Restaurant Profit

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

	2018 vs. 2017
Income / (Expense)	2017				Store Portfolio Actions				Other				2018
Company sales	$	1,359			$	(363	)		$	41			$	1,037
Cost of sales	(356		)		96				(1		)		(261		)
Cost of labor	(394		)		103				(8		)		(299		)
Occupancy and other	(304		)		74				(3		)		(233		)
Company restaurant expense	$	(1,054	)		$	273			$	(12	)		$	(793	)
Restaurant profit	$	305			$	(90	)		$	29			$	244

	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

In 2018, 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 4%, partially offset by higher labor costs.

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.

Franchise and property revenues

In 2018, the increase in Franchise and property revenues, excluding the adoption of Topic 606, was driven by refranchising, franchise same-store sales growth of 4% and net new unit growth.

In 2017, the increase in Franchise and property revenues, 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.

G&A

In 2018, the decrease in G&A was driven by the positive impact of YUM's Strategic Transformation initiatives, including reductions in G&A directly attributable to refranchising, and the favorable impact of forfeitures related to share based compensation awards, partially offset by lapping lower litigation costs.

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.

Operating Profit

In 2018, the increase in Operating Profit, excluding the impacts of the adoption of Topic 606, was driven by same-store sales growth and net new unit growth, partially offset by refranchising and higher restaurant operating costs.

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.

Corporate & Unallocated

														% B/(W)
(Expense)/Income		2018				2017				2016				2018				2017
Corporate and unallocated G&A		$	(171	)		$	(230	)		$	(280	)		26				18
Unallocated restaurant costs		3				10				—				(69	)			NM
Unallocated Franchise and property revenues		—				(5		)		(2		)		NM				NM
Unallocated Franchise and property expenses		(8		)		(30		)		(24		)		73				(26	)
Refranchising gain (loss) (See Note 5)		540				1,083				163				(50	)			NM
Unallocated Other income (expense)		(8		)		(8		)		(8		)		NM				NM
Investment income (expense), net (See Note 5)		9				5				2				88				NM
Other pension income (expense) (See Note 14)		(14		)		(47		)		(32		)		70				(45	)
Interest expense, net		(452		)		(445		)		(307		)		(1	)			(44	)
Income tax provision (See Note 17)		(297		)		(934		)		(327		)		68				NM
Effective tax rate (See Note 17)		16.2		%		41.1		%		24.3		%		24.9		ppts.		(16.8	)	ppts.

Corporate and unallocated G&A

In 2018, the decrease in Corporate G&A expenses was driven by non-cash credits in the current year associated with the modification of Executive Income Deferral (“EID”) share-based compensation awards when compared with charges in the prior year (See Note 5), current year G&A reductions due to the impact of YUM’s Strategic Transformation Initiatives, lapping higher costs associated with YUM's Strategic Transformation Initiatives (See Note 5), and lapping charges related to the Pizza Hut U.S. Transformation Agreement (See Note 5).

In 2017, the decrease in Corporate and unallocated G&A was driven by lower year-over-year costs 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 non-cash charges associated with the modification of EID share-based compensation awards when compared to the prior year (See Note 5), partially offset by charges related to the Pizza Hut U.S. Transformation Agreement (See Note 5).

Unallocated restaurant costs

In 2018 and 2017, Unallocated restaurant costs represents the cessation of depreciation on held-for-sale assets that were not allocated to the Division segments.

Unallocated Franchise and property revenues

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

Unallocated Franchise and property expenses

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

Unallocated Other income (expense)

In 2018 and 2017, Unallocated Other income (expense) primarily includes foreign exchange gains (losses). See Note 7.

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 7.

Other Pension (Income) Expense

In 2017, Other Pension (Income) Expense includes an adjustment related to our deferred vested pension obligation and settlement charges in our U.S. plans. See Note 5.

Interest expense, net

The increases in Interest expense, net for 2018 and 2017 were driven by increased outstanding borrowings. See Note 10.

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)
Total revenues		$	5,776
Total income from discontinued operations before income taxes(b)		571
Income tax (benefit) provision(c)		(65		)
Income from discontinued operations, net of tax		625

(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 for 2016. Such costs primarily related 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.

Consolidated Cash Flows

Net cash provided by operating activities from continuing operations was $1,176 million in 2018 compared to $1,030 million in 2017. The increase was primarily driven by lower retirement and deferred compensation payouts to retirees and a decrease in income tax payments.

In 2017, net cash provided by operating activities from continuing operations was $1,030 million compared to $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

Net cash provided by investing activities from continuing operations was $313 million in 2018 compared to $1,472 million in 2017. The decrease was primarily driven by lower refranchising proceeds and our $200 million investment in Grubhub common stock in 2018.

In 2017, net cash provided by investing activities from continuing operations was $1,472 million compared to 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

Net cash used in financing activities from continuing operations was $2,620 million in 2018 compared to $1,795 million in 2017. The increase was primarily driven by lower net borrowings and higher share repurchases.

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

Consolidated Financial Condition

Our Consolidated Balance Sheet was impacted by the adoption of Topic 606 (See Note 2). Other assets also increased due to the inclusion of our investment in Grubhub common stock (See Note 5).

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").

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 announced our intention to own less than 1,000 stores by the end of 2018. As of December 31, 2018 we owned 856 stores. Additionally, we announced our intention to, 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 2018 and 2017, we returned a cumulative $5.2 billion to shareholders through share repurchases and cash dividends towards our commitment to return between $6.5 and $7.0 billion from 2017 to 2019. We are funding these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our five times EBITDA leverage. We generated total gross refranchising proceeds of $2.8 billion in connection with our initiative to increase franchise ownership to 98%, which we achieved in December 2018.

Our primary sources of liquidity are cash on hand, cash generated by operations and our revolving facilities. As of December 31, 2018, we had Cash and cash equivalents of $292 million. Cash and cash equivalents decreased from $1,522 million at December 31, 2017 due to share repurchases, dividend payments, the repayment of $325 million in YUM Senior Unsecured Notes that matured in March 2018 and our investment in Grubhub. 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. Decreases in operating cash flows from the operation of fewer Company-owned stores due to refranchising have been offset, and are expected to continue to 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 a revolving credit facility with total capacity of $1 billion that was undrawn as of year end 2018.

Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM. Our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur

and Company sales are paid in cash or by credit card (which is quickly converted into cash). Substantial amounts of cash received have historically been either returned to shareholders or invested in new restaurant assets which are non-current in nature. 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, 2018, approximately 91%, including the impact of interest rate swaps, of our $10.1 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 consistent with highly-levered peer restaurant franchise companies.

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 (the “2016 Class A-2 Notes”). On November 14, 2018, Taco Bell Funding, LLC, completed a refinancing agreement and issued two fixed rate senior secured notes in the aggregate amount of $1.45 billion (the "2018 Class A-2 Notes", and, together with the 2016 Class A-2 Notes, the "Securitization Notes"). Proceeds from the 2018 issuance were used to repay $788 million of existing Securitization Notes issued in 2016 and to repay the then outstanding balance on the Revolving Facility (see below). 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 $7 million in letters of credit outstanding as of December 31, 2018, 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.

On April 3, 2018, the Borrowers completed the repricing of the then existing $1.97 billion under the Term Loan B Facility pursuant to an amendment to the Credit Agreement. The amendment reduces the interest rate applicable to the Term Loan B Facility by 25 basis points to adjusted LIBOR plus 1.75% or Base Rate plus 0.75%, at the Borrowers’ election, and extends the maturity date for the Term Loan B Facility by 2 years to April 3, 2025. All other material provisions under the Credit Agreement remained unchanged as a result of this amendment.

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 $1.9 billion at December 31, 2018. 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, 2018.

		2019				2020				2021				2022				2023				2024				2025				2026				2027				2028				2037				2043				Total
Securitization Notes		$	29			$	29			$	29			$	29			$	1,281			$	16			$	16			$	921			$	6			$	572											$	2,928
Credit Agreement		45				51				76				395				20				20				1,836																								2,443
Subsidiary Senior Unsecured Notes																						1,050								1,050				750																2,850
YUM Senior Unsecured Notes		250				350				350								325																								325				275				1,875
Total		$	324			$	430			$	455			$	424			$	1,626			$	1,086			$	1,852			$	1,971			$	756			$	572			$	325			$	275			$	10,096

See Note 10 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, 2018 included:

		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Long-term debt obligations(a)		$	13,477			$	773			$	1,756			$	2,861			$	8,087
Capital leases(b)		103				10				19				16				58
Operating leases(b)		786				103				167				132				384
Purchase obligations(c)		301				139				149				11				2
Benefit plans and other(d)		220				73				37				34				76
Total contractual obligations		$	14,887			$	1,098			$	2,128			$	3,054			$	8,607

(a)	Amounts include maturities of debt outstanding as of December 31, 2018 and expected interest payments on those outstanding amounts on a nominal basis. The estimated interest payments related to the variable rate portion of our debt is based on current LIBOR interest rates. See Note 10.

(b)	These obligations, which are shown on a nominal basis and represent the non cancellable term of the lease, relate primarily to approximately 500 Company-owned restaurants. See Note 11.

(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 cancellable without penalty. Purchase obligations relate primarily to marketing, information technology and supply agreements.

(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 $43 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 17) and anticipated investments 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, 2018 the Plan was in a net underfunded position of $42 million. The UK pension plans were in a net overfunded position of $86 million at our 2018 measurement date.

We do not anticipate making any significant contributions to the Plan in 2019. 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 2019 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 $6 million in 2018 and no future funding amounts are included in the contractual obligations table. See Note 14.

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 $117 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 19 for discussion of our off-balance sheet arrangements.

New Accounting Pronouncements Not Yet Adopted

The Financial Accounting Standards Board ("FASB") has issued standards on the recognition and measurement of leases that are 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. We will adopt these standards using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the first quarter of 2019 and will not recast the comparative periods presented in the Financial Statements upon adoption. See "Recent Accounting Pronouncements" in Note 2 for additional information regarding our adoption of the new lease accounting standards.

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 fiscal 2019. We are currently evaluating the impact the adoption of this standard will have on 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 2018 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 2018, refranchising activity completed by the Company resulted in the write-off of $12 million in Goodwill within Refranchising (gain) loss, representing 2% of beginning-of-year Company goodwill. Of the $12 million, the most significant write-offs were recognized within our KFC UK, Taco Bell U.S. and KFC Russia reporting units. Within KFC UK, 91 restaurants were refranchised (representing 65% of beginning-of-year company units) and $5 million in goodwill was written off (representing

13% of beginning-of-year goodwill). Within Taco Bell U.S., 199 restaurants were refranchised (representing 31% of beginning-of-year company units) and $4 million in goodwill was written off (representing 4% of beginning-of-year goodwill). Within KFC Russia, 194 restaurants were refranchised (representing 91% of beginning-of-year company units) and $2 million in goodwill was written off (representing 11% of beginning-of-year goodwill).

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

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 $873 million and a fair value of plan assets of $755 million at December 31, 2018.

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 4.6% at December 31, 2018. 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 $50 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 $60 million at our measurement date.

The net periodic benefit cost we will record in 2019 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 plus expected pension settlement charges for our U.S. plans to decrease approximately $13 million in 2019. A 50 basis-point decrease or increase in our discount rate assumption at our 2018 measurement date would not significantly impact our 2019 U.S. net periodic benefit cost. 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 2019 pension expense, at December 31, 2018 was 5.75%, 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 2019 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 5.75% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million.

A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $101 million included in AOCI for these U.S. plans at December 31, 2018. We will recognize approximately $1 million of such loss in net periodic benefit cost in 2019 versus $16 million recognized in 2018. See Note 14.

Income Taxes

At December 31, 2018, we had valuation allowances of approximately $454 million to reduce our $748 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to 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, 2018, we had $113 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.

The 2017 Tax Cuts and Jobs Act included 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, including U.S. state income and foreign withholding taxes, as we believe they are indefinitely reinvested. See Note 17 for a further discussion of our Income taxes.