Yum! Brands, Inc. (YUM, NYSE)
Industry: Restaurants
Annual report, fiscal year 2018


## A WORLD OF
OPPORTUNITIES

Yum!

KFC

Pizza Hut

TACO BELL

YUM! BRANDS 2018 ANNUAL REPORT



## FINANCIAL HIGHLIGHTS

<table><tr><td>Year-end</td><td>2018</td><td>2017</td><td>% B/(W) change</td></tr><tr><td>Company sales</td><td>$ 2,000</td><td>$ 3,572</td><td>(44)</td></tr><tr><td>Franchise and property revenues</td><td>2,482</td><td>2,306</td><td>8</td></tr><tr><td>Franchise contributions for advertising and other services</td><td>1,206</td><td>-</td><td>NM</td></tr><tr><td>Total revenues</td><td>$ 5,688</td><td>$ 5,878</td><td>(3)</td></tr><tr><td>Operating Profit</td><td>$ 2,296</td><td>$ 2,761</td><td>(17)</td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 1,340</td><td>15</td></tr><tr><td>Reported Diluted Earnings Per Common Share from Continuing Operations</td><td>$ 4.69</td><td>$ 3.77</td><td>24</td></tr><tr><td>Special Items Diluted Earnings Per Common Share (a)</td><td>1.52</td><td>0.81</td><td>NM</td></tr><tr><td>Diluted Earnings Per Common Share from Continuing Operations before Special Items (a)</td><td>$ 3.17</td><td>$ 2.96</td><td>7</td></tr><tr><td>Net Cash Provided by Operating Activities from Continuing Operations</td><td>$ 1,176</td><td>$ 1,030</td><td>14</td></tr></table>

(a) See our 2018 Form 10-K for further discussion of Special Items.



# TRANSFORMATION JOURNEY NEARLY COMPLETE
AND A WORLD OF
OPPORTUNITIES FOR YUM!

## Dear Fellow Stakeholders:

## 2018

2018 was another year of celebrating and achieving milestones. Our diverse portfolio of iconic brands generated over $49 billion in system sales and ended the year with over 48,000 global restaurants. Combined across our brands and led by over 2,000 world-class franchisees, we opened a record of eight gross new restaurants per day. Additionally, we made significant progress on our transformation commitments, having achieved our goal of becoming at least 98 percent franchised. Focus on our growth drivers, increased collaboration and a new mindset are clearly fueling improved results.
Our four growth drivers are the foundation on which our sustainable, long-term results are being built. These growth capabilities, outlined below, are the key drivers of same-store sales and net-new unit growth and serve as our guiding principles in all business decisions.

1. Distinctive, Relevant & Easy Brands. We will innovate and elevate iconic restaurant brands people trust and champion.

2. Unmatched Franchise Operating Capability. We will recruit and equip the best restaurant operators in the world to deliver great customer experiences using our 3C approach. This includes partners who are Committed to providing consistently bold value and brand strategy. These partners are also Capable to deliver a great customer experience and operational standards. And finally, our partners have Capital – both to grow new units and modernize existing assets.

3. Bold Restaurant Development. We will drive market and franchise unit expansion with strong economics and attractive returns.

4. Unrivaled Culture & Talent. We will leverage culture and people capability to fuel brand performance and franchisee success.

I firmly believe our culture is a competitive advantage for Yum!. With culture as the driving force behind our results, I’m pleased to share the following highlights from 2018:

Worldwide system sales growth of 5 percent, led by 6 percent growth at KFC, 6 percent at Taco Bell and 1 percent at Pizza Hut

Same-store sales growth of 2 percent, led by 4 percent growth at Taco Bell and followed by 2 percent at KFC with Pizza Hut even for the year

Net-new unit growth of 7 percent, including 3,021 gross unit openings, which is 389 more openings than in 2017, and the addition of 1,282 Telepizza units

Ended the year with over 48,000 global restaurants in approximately 270 brand-country combinations

Achieved our goal of becoming at least 98 percent franchised, with 856 company units by the end of 2018



Greg Creed,
Chief Executive Officer
Yum! Brands Inc.



Core operating profit growth flat and in line with expectations

Returned $2.4 billion of capital to shareholders through share repurchases and dividends

Our iconic brands continue to focus on our four key growth drivers, which are the catalysts behind our successful results.

KFC is “Finger Lickin’ Good.” KFC continued to bolster its “Always Original” brand positioning and beloved core menu items with innovative new products such as the Dunked Burger and Chicken & Waffles. KFC remains dedicated to making the brand R.E.D., relevant, easy and distinctive, by investing in innovation, technology and enhanced asset formats.

Pizza Hut celebrated its 60th birthday in 2018 by reaching a milestone of over 18,000 restaurants worldwide, all while continuing its commitment to ensuring every customer has a Hot, Fast and Reliable experience around the globe. In the U.S., Pizza Hut became the official sponsor of the NFL and kicked off the $5 Lineup with intense focus on value. Internationally, the brand continued to lay the foundation for an off-premise centric business with the Telepizza alliance paving the way.

Taco Bell is truly a “Category of One” for everyone. 2018 was the brand’s seventh consecutive year of positive same-store sales growth, a testament to the strength of the leadership team and the partnership with franchisees. In addition to a relentless commitment to value and innovation for which Taco Bell is known, I am particularly excited that in 2019, Taco Bell delivery will be available in over 4,000 restaurants across the U.S. through our strategic partnership with Grubhub.

Overall, 2018 showcased the benefits of the Yum! system. We leveraged our scale and expanded our capabilities to improve unit level economics. First, we entered into the U.S. strategic partnership with Grubhub to provide a world-class delivery experience to both our customers and franchisees. Second, we closed on a strategic growth alliance with Telepizza. This landmark deal places Pizza Hut in the no.1 category position across Latin America and Iberia in terms of unit count and provides a pipeline for future accelerated growth. Third, we acquired QuikOrder, our third-party online ordering service provider for Pizza Hut in the U.S. Running our own e-commerce platform will enable us to more quickly provide breakthrough products and convenient services to our customers that will allow for better franchise economics over the long term.

In 2018, we also sharpened our Global Citizenship & Sustainability Strategy and launched our first investor-grade sustainability report called our Recipe for Good. This work unites our system and keeps our employees, franchisees and suppliers focused on socially and environmentally responsible growth.

In closing, I am very proud of what we have been able to accomplish in just two short years since we announced the transformation of Yum!. We made significant progress on all our 2016 transformation goals, including completing our refranchising program. We closed creative and transformative deals to drive profitable system sales growth for our franchisees for years to come. We achieved healthy same-store and system sales growth with improvement throughout the year. Heading into 2019, our commitment to being more focused, more franchised and more efficient continues to strengthen our enviable business model. We are confident Yum! is well positioned to leverage our massive scale and expand our capabilities in order to improve franchise unit economics and accelerate growth.



Greg Creed, CEO






YUM! Brands, Inc.
1441 Gardiner Lane
Louisville, Kentucky 40213

April 5, 2019

## Dear Fellow Shareholders:

On behalf of your Board of Directors, we are pleased to invite you to attend the 2019 Annual Meeting of Shareholders of YUM! Brands, Inc. The Annual Meeting will be held Thursday, May 16, 2019, at 9:00 a.m., local time, in the Yum! Conference Center at 1900 Colonel Sanders Lane in Louisville, Kentucky.

Once again, we encourage you to take advantage of the Securities and Exchange Commission rule allowing companies to furnish proxy materials to their shareholders over the Internet. We believe that this e-proxy process expedites shareholders' receipt of proxy materials, lowers the costs of delivery and helps reduce the Company's environmental impact.

Your vote is important. We encourage you to vote promptly whether or not you plan to attend the meeting. You may vote your shares via a toll-free telephone number or over the Internet. If you received a paper copy of the proxy card by mail, you may sign, date and mail the proxy card in the envelope provided. Instructions regarding the three methods of voting prior to the meeting are contained on the notice or proxy card.

If you plan to attend the meeting, please bring your notice, admission ticket from your proxy card or proof of your ownership of YUM common stock as of March 18, 2019 as well as a valid picture identification. Whether or not you attend the meeting, we encourage you to consider the matters presented in the proxy statement and vote as soon as possible.

Sincerely,



Greg Creed

Chief Executive Officer

Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to Be Held on May 16, 2019—this notice and the proxy statement are available at www.investors.yum.com/governance-documents. The Annual Report on Form 10-K is available at www.investors.yum.com/annual-reports.



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# Notice of Annual Meeting of Shareholders

## Thursday, May 16, 2019 9:00 a.m.

Yum! Conference Center, 1900 Colonel Sanders Lane, Louisville, Kentucky 40213

## ITEMS OF BUSINESS:

(1) To elect eleven (11) directors to serve until the 2020 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified.

(2) To ratify the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2019.

(3) To consider and hold an advisory vote on executive compensation.

(4)-(6) To consider and vote on three (3) shareholder proposals, if properly presented at the meeting.

(7) To transact such other business as may properly come before the meeting.

## WHO CAN VOTE?:

You can vote if you were a shareholder of record as of the close of business on March 18, 2019.

## ANNUAL REPORT:

A copy of our 2018 Annual Report on Form 10-K is included with this proxy statement.

## WEBSITE:

You may also read the Company’s Annual Report and this Notice and proxy statement on our website at www.investors.yum.com/annual-reports.

## DATE OF MAILING:

This Notice, the proxy statement and the form of proxy are first being mailed to shareholders on or about April 5, 2019.

By Order of the Board of Directors

8 24 C 4

Scott A. Catlett
General Counsel and Corporate Secretary

## YOUR VOTE IS IMPORTANT

Under securities exchange rules, brokers cannot vote on your behalf for the election of directors or on executive compensation related matters without your instructions. Whether or not you plan to attend the Annual Meeting, please provide your proxy by following the instructions on your Notice or proxy card. On or about April 5, 2019, we mailed to our shareholders a Notice containing instructions on how to access the proxy statement and our Annual Report and vote online.

If you received a Notice by mail, you will not receive a printed copy of the proxy materials in the mail unless you request a copy. Instead, you should follow the instructions included in the Notice on how to access and review the proxy statement and Annual Report. The Notice also instructs you on how you may submit your vote by proxy over the Internet.

If you received the proxy statement and Annual Report in the mail, please submit your proxy by marking, dating and signing the proxy card included and returning it promptly in the envelope enclosed. If you are able to attend the Annual Meeting and wish to vote your shares personally, you may do so at any time before the proxy is exercised.



## Table of Contents

PROXY STATEMENT 1
QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING 1
GOVERNANCE OF THE COMPANY 6
Director Biographies 10
Director Compensation 15
MATTERS REQUIRING SHAREHOLDER ACTION 26
ITEM 1 Election of Directors (Item 1 on the Proxy Card) 26
ITEM 2 Ratification of Independent Auditors (Item 2 on the Proxy Card) 27
ITEM 3 Advisory Vote on Executive Compensation (Item 3 on the Proxy Card) 28
ITEM 4 Shareholder Proposal Regarding the Issuance of a Report on Renewable Energy (Item 4 on the Proxy Card) 29
ITEM 5 Shareholder Proposal Regarding Issuance of Annual Reports on Efforts to Reduce Deforestation (Item 5 on the Proxy Card) 32
ITEM 6 Shareholder Proposal Regarding the Issuance of a Report on Sustainable Packaging (Item 6 on the Proxy Card) 34
STOCK OWNERSHIP INFORMATION 37
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 39
EXECUTIVE COMPENSATION 39
Compensation Discussion and Analysis 39
Summary Compensation Table 59
All Other Compensation Table 60
Grants of Plan-Based Awards 61
Outstanding Equity Awards at Year-End 63
Option Exercises and Stock Vested 65
Pension Benefits 66
Nonqualified Deferred Compensation 68
Potential Payments Upon Termination or Change in Control 71
CEO Pay Ratio 73
EQUITY COMPENSATION PLAN INFORMATION 75
AUDIT COMMITTEE REPORT 77
ADDITIONAL INFORMATION 80
APPENDIX A: Reconciliation of Adjusted Operating Profit Growth A-1



## PROXY STATEMENT

For Annual Meeting of Shareholders To Be Held On

May 16, 2019

The Board of Directors (the “Board of Directors” or the “Board”) of YUM! Brands, Inc., a North Carolina corporation (“YUM” or the “Company”), solicits the enclosed proxy for use at the Annual Meeting of Shareholders of the Company to be held at 9:00 a.m. (Eastern Time), on Thursday, May 16, 2019, in the Yum! Conference Center at 1900 Colonel Sanders Lane in Louisville, Kentucky. This proxy statement contains information about the matters to be voted on at the Annual Meeting and the voting process, as well as information about our directors and most highly paid executive officers.

## QUESTIONS AND ANSWERS ABOUT THE
MEETING AND VOTING

## What is the purpose of the Annual Meeting?

At our Annual Meeting, shareholders will vote on several important Company matters. In addition, our management will report on the Company’s performance over the last fiscal year and, following the meeting, respond to questions from shareholders.

## Why am I receiving these materials?

You received these materials because our Board of Directors is soliciting your proxy to vote your shares at the Annual Meeting. As a shareholder, you are invited to attend the Annual Meeting and are entitled to vote on the items of business described in this proxy statement.

## Why did I receive a one-page Notice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?

As permitted by Securities and Exchange Commission (“SEC”) rules, we are making this proxy statement and our Annual Report available to our shareholders electronically via the Internet. On or about April 5, 2019, we mailed to our shareholders a Notice containing instructions on how to access this proxy statement and our Annual Report and vote online. If you received a Notice by mail you will not receive a printed copy of the proxy materials in the mail unless you request a copy. The Notice instructs you on how to access and review all of the important information contained in the proxy statement and Annual Report. The Notice also instructs you on how you may submit your proxy over the Internet. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials contained on the Notice.

We encourage you to take advantage of the availability of the proxy materials on the Internet in order to help lower the costs of delivery and reduce the Company’s environmental impact.



## Who may attend the Annual Meeting?

The Annual Meeting is open to all shareholders of record as of close of business on March 18, 2019, or their duly appointed proxies. Seating is limited and admission is on a first-come, first-served basis.

## What do I need to bring to attend the Annual Meeting?

You will need a valid picture identification and either an admission ticket or proof of ownership of YUM’s common stock to enter the Annual Meeting. If you are a registered owner, your Notice will be your admission ticket.

If you received the proxy statement and Annual Report by mail, you will find an admission ticket attached to the proxy card sent to you. If you plan to attend the Annual Meeting, please so indicate when you vote and bring the ticket with you to the Annual Meeting. If your shares are held in the name of a bank or broker, you will need to bring your legal proxy from your bank or broker and your admission ticket. If you do not bring your admission ticket, you will need proof of ownership to be admitted to the Annual Meeting. A recent brokerage statement or letter from a bank or broker is an example of proof of ownership. If you arrive at the Annual Meeting without an admission ticket, we will admit you only if we are able to verify that you are a YUM shareholder. Your admittance to the Annual Meeting will depend upon availability of seating. All shareholders will be required to present valid picture identification prior to admittance. IF YOU DO NOT HAVE A VALID PICTURE IDENTIFICATION AND EITHER AN ADMISSION TICKET OR PROOF THAT YOU OWN YUM COMMON STOCK, YOU MAY NOT BE ADMITTED INTO THE ANNUAL MEETING.

Please note that computers, cameras, sound or video recording equipment, cellular and smart phones, tablets and other similar devices, large bags, briefcases and packages will not be allowed in the meeting room.

## May shareholders ask questions?

Yes. Representatives of the Company will answer shareholders’ questions of general interest following the Annual Meeting. In order to give a greater number of shareholders an opportunity to ask questions, individuals or groups will be allowed to ask only one question and no repetitive or follow-up questions will be permitted.

## Who may vote?

You may vote if you owned YUM common stock as of the close of business on the record date, March 18, 2019. Each share of YUM common stock is entitled to one vote. As of March 18, 2019, YUM had 305.9 million shares of common stock outstanding.

## What am I voting on?

You will be voting on the following six (6) items of business at the Annual Meeting:

- The election of eleven (11) directors to serve until the next Annual Meeting of Shareholders and until their respective successors are duly elected and qualified;

- The ratification of the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2019;
• An advisory vote on executive compensation; and

• Three (3) shareholder proposals.

We will also consider other business that properly comes before the meeting.



## How does the Board of Directors recommend that I vote?

Our Board of Directors recommends that you vote your shares:

• FOR each of the nominees named in this proxy statement for election to the Board;

• FOR the ratification of the selection of KPMG LLP as our independent auditors;
• FOR the proposal regarding an advisory vote on executive compensation; and

• AGAINST each of the three (3) shareholder proposals.

## How do I vote before the Annual Meeting?

There are three ways to vote before the meeting:

• By Internet — If you have Internet access, we encourage you to vote on www.proxyvote.com by following instructions on the Notice or proxy card;

• By telephone — by making a toll-free telephone call from the U.S. or Canada to 1(800) 690-6903 (if you have any questions about how to vote over the phone, call 1(888) 298-6986); or

• By mail — If you received your proxy materials by mail, you can vote by completing, signing and returning the enclosed proxy card in the postage-paid envelope provided.

If you are a participant in the direct stock purchase and dividend reinvestment plan (Computer Share CIP), as a registered shareholder, you will receive all proxy materials and may vote your shares according to the procedures outlined herein.

If you are a participant in the YUM! Brands 401(k) Plan (“401(k) Plan”), the trustee of the 401(k) Plan will only vote the shares for which it has received directions to vote from you.

Proxies submitted through the Internet or by telephone as described above must be received by 11:59 p.m.,

## Can I vote at the Annual Meeting?

Shares registered directly in your name as the shareholder of record may be voted in person at the Annual Meeting. Shares held through a broker or nominee may be voted in person only if you obtain a legal proxy from the broker or nominee that holds your shares giving you the right to vote the shares. Eastern Daylight Saving Time, on May 15, 2019. Proxies submitted by mail must be received prior to the meeting. Directions submitted by 401(k) Plan participants must be received by 12:00 p.m., Eastern Daylight Saving Time, on May 14, 2019.

Also, if you hold your shares in the name of a bank or broker, your ability to vote by telephone or the Internet depends on their voting processes. Please follow the directions on your notice carefully. A number of brokerage firms and banks participate in a program provided through Broadridge Financial Solutions, Inc. (“Broadridge”) that offers telephone and Internet voting options. If your shares are held in an account with a brokerage firm or bank participating in the Broadridge program, you may vote those shares telephonically by calling the telephone number shown on the voting instruction form received from your brokerage firm or bank, or through the Internet at Broadridge’s voting website (www.proxyvote.com). Votes submitted through the Internet or by telephone through the Broadridge program must be received by 11:59 p.m., Eastern Daylight Saving Time, on May 15, 2019.

Even if you plan to attend the Annual Meeting, we encourage you to vote your shares by proxy. You may still vote your shares in person at the meeting even if you have previously voted by proxy.



## Can I change my mind after I vote?

You may change your vote at any time before the polls close at the Annual Meeting. You may do this by:

• Signing another proxy card with a later date and returning it to us prior to the Annual Meeting;

• Voting again by telephone or through the Internet prior to 11:59 p.m., Eastern Daylight Saving Time, on May 15, 2019;
• Giving written notice to the Corporate Secretary of the Company prior to the Annual Meeting; or

• Voting again at the Annual Meeting.

Your attendance at the Annual Meeting will not have the effect of revoking a proxy unless you notify our Corporate Secretary in writing before the polls close that you wish to revoke a previous proxy.

## Who will count the votes?

Representatives of Computershare, Inc. will count the votes and will serve as the independent inspector of election.

## What if I return my proxy card but do not provide voting instructions?

If you vote by proxy card, your shares will be voted as you instruct by the individuals named on the proxy card. If you sign and return a proxy card but do not specify how your shares are to be voted, the persons named as proxies on the proxy card will vote your shares in accordance with the recommendations of the Board. These recommendations are:

• FOR the election of the eleven (11) nominees for director named in this proxy statement (Item 1);
• FOR the ratification of the selection of KPMG LLP as our independent auditors for the fiscal year 2019 (Item 2);

• FOR the proposal regarding an advisory vote on executive compensation (Item 3); and

• AGAINST each Shareholder Proposal (Items 4-6).

## What does it mean if I receive more than one proxy card?

It means that you have multiple accounts with brokers and/or our transfer agent. Please vote all of these shares. We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Computershare, Inc., which may be reached at 1 (888) 439-4986 and internationally at 1 (781) 575-2879.

## Will my shares be voted if I do not provide my proxy?

Your shares may be voted if they are held in the name of a brokerage firm, even if you do not provide the brokerage firm with voting instructions. Brokerage firms have the authority under the New York Stock Exchange rules to vote shares for which their customers do not provide voting instructions on certain “routine” matters.

The proposal to ratify the selection of KPMG LLP as our independent auditors for fiscal year 2019 is considered a routine matter for which brokerage firms may vote shares for which they have not received voting instructions. The other proposals to be voted on at our Annual Meeting are not considered “routine” under applicable rules. When a proposal is not a routine matter and the brokerage firm has not received voting instructions from the beneficial owner of the shares with respect to that proposal, the brokerage firm cannot vote the shares on that proposal. This is called a “broker non-vote.”



## How many votes must be present to hold the Annual Meeting?

Your shares are counted as present at the Annual Meeting if you attend the Annual Meeting in person or if you properly return a proxy by Internet, telephone or mail. In order for us to conduct our Annual Meeting, a majority of the outstanding shares of YUM common stock, as of March 18, 2019, must be present in person or represented by proxy at the Annual Meeting. This is referred to as a quorum. Abstentions and broker non-votes will be counted for purposes of establishing a quorum at the Annual Meeting.

## How many votes are needed to elect directors?

You may vote “FOR” each nominee or “AGAINST” each nominee, or “ABSTAIN” from voting on one or more nominees. Unless you mark “AGAINST” or “ABSTAIN” with respect to a particular nominee or nominees or for all nominees, your proxy will be voted “FOR” each of the director nominees named in this proxy statement. In an uncontested election, a nominee will be elected as a director if the number of “FOR” votes exceeds the number of “AGAINST” votes. Abstentions will be counted as present but not voted. Abstentions and broker non-votes will not affect the outcome of the vote on directors. Full details of the Company’s majority voting policy are set out in our Corporate Governance Principles at www.investors.yum.com and at page 19 under “What other significant Board practices does the Company have? — Majority Voting Policy.”

## How many votes are needed to approve the other proposals?

In order to be approved, the other proposals must receive the “FOR” vote of a majority of the shares, present in person or represented by proxy, and entitled to vote at the Annual Meeting. For each of these items, you may vote “FOR”, “AGAINST” or “ABSTAIN.” Abstentions will be counted as shares present and entitled to vote at the Annual Meeting. Accordingly, abstentions will have the same effect as a vote “AGAINST” the proposals. Broker non-votes will not be counted as shares present and entitled to vote with respect to the particular matter on which the broker has not voted. Thus, broker non-votes will not affect the outcome of any of these proposals.

## When will the Company announce the voting results?

The Company will announce the voting results of the Annual Meeting on a Current Report on Form 8-K filed within four business days of the Annual Meeting.

## What if other matters are presented for consideration at the Annual Meeting?

The Company knows of no other matters to be submitted to the shareholders at the Annual Meeting, other than the proposals referred to in this Proxy Statement. If any other matters properly come before the shareholders at the Annual Meeting, it is the intention of the persons named on the proxy to vote the shares represented thereby on such matters in accordance with their best judgment.



# GOVERNANCE OF THE COMPANY

The business and affairs of YUM are managed under the direction of the Board of Directors. The Board believes that good corporate governance is a critical factor in achieving business success and in fulfilling the Board’s responsibilities to shareholders. The Board believes that its practices align management and shareholder interests.

The corporate governance section of the Company website makes available the Company’s corporate governance materials, including the Corporate Governance Principles (the “Governance Principles”), the Company’s Articles of Incorporation and Bylaws, the charters for each Board committee, the Company’s Worldwide Code of Conduct, the Company’s Political Contributions and U.S. Government Advocacy Policy, and information about how to report concerns about the Company. To access these documents on the Company’s website, www.yum.com, click on “Investors” and then “Corporate Governance”.

## Governance Highlights

## Corporate Governance

• 11 Director Nominees

• 10 Independent Nominees

• Directors with experience, qualifications and skills across a wide range of public and private companies

• Board Access to Senior Management and Independent Advisors

• Independent Non-Executive Chairman

• Independent Board Committees

• Executive Sessions of Independent Directors at every regular Board and Committee meeting

• Risk Oversight by Board and its Committees

• Annual Board and Committee Self-Evaluations

• All Directors Attended at least 75% of Meetings Held

• YUM’s Worldwide Code of Conduct

• Political Contributions and U.S. Government Advocacy Policy

• Audit Committee Complaint Procedures Policy regarding Accounting Matters

• No Hedging or Pledging of Company Stock



## Shareholder Rights

• Annual Election of Directors

• Majority Voting of Directors

• Proxy Access

• Shareholder Communication Process for communicating with Board

• Active Shareholder Engagement Program

## Compensation

• Independent Management Planning and Development Committee

• Independent Compensation Consultant

• Executive Compensation is Highly Performance Based to Align with Shareholder Interests and Promote Company Business Strategy

• At Risk Pay Tied to Performance

• Strong Stock Ownership Guidelines

• No Employment Agreements or Guaranteed Bonuses

• Compensation Recovery Policy (Clawback) applies to Equity and Bonus Awards

• Double trigger vesting upon Change in Control

• No excise tax gross ups



## What is the composition of the Board of Directors and how often are members elected?

Our Board of Directors presently consists of 11 directors whose terms expire at this Annual Meeting. Our directors are elected annually. The average director tenure is 5.5 years, with our longest- and shortest-tenured directors having served for 13 years (Mr. Nelson) and for 1 year and 4 months, respectively (Ms. Domier).

As discussed in more detail later in this section, the Board has determined that 10 of the 11 individuals standing for election are independent under the rules of the New York Stock Exchange (“NYSE”).



## How often did the Board meet in fiscal 2018?

The Board of Directors met 5 times during fiscal 2018. Each of the directors who served in 2018 attended at least 75% of the meetings of the Board and the committees of which he or she was a member and that were held during the period he or she served as a director.

## What is the Board’s policy regarding director attendance at the Annual Meeting of Shareholders?

The Board of Director’s policy is that all directors should attend the Annual Meeting and all persons then serving as directors attended the 2018 Annual Meeting.

## How does the Board select nominees for the Board?

The Nominating and Governance Committee considers candidates for Board membership suggested by its members and other Board members, as well as management and shareholders. The Committee’s charter provides that it may retain a third-party executive search firm to identify candidates from time to time.
In accordance with the Governance Principles, our Board seeks members from diverse professional backgrounds who combine a broad spectrum of experience and expertise with a reputation for integrity. Directors should have experience in positions with a high degree of responsibility, be leaders in the companies or institutions with which they are affiliated



and are selected based upon contributions they can make to the Board and management. The committee’s assessment of a proposed candidate will include a review of the person’s judgment, experience, independence, understanding of the Company’s business or other related industries and such other factors as the Nominating and Governance Committee determines are relevant in light of the needs of the Board of Directors. The committee believes that its nominees should reflect a diversity of experience, gender, race, ethnicity and age. The Board does not have a specific policy regarding director diversity. The committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee expertise and the evaluations of other prospective nominees, if any.

In connection with this evaluation, it is expected that each committee member will interview the prospective nominee before the prospective nominee is presented to the full Board for consideration. After completing this evaluation and interview process, the committee will make a recommendation to the full Board as to the person(s) who should be nominated by the Board, and the Board determines the nominee(s) after considering the recommendation and report of the committee.

In 2017 we implemented several initiatives to transform the Company, centering on a new multi-year strategy to accelerate growth, reduce volatility and increase capital returns to shareholders. In connection with this transformation strategy we developed our “Recipe for Growth,” which focuses on four growth drivers intended to accelerate same-store sales growth and net-new restaurant development at KFC, Pizza Hut and Taco Bell around the world. The Company remains focused on building the world’s most loved, trusted and fastest growing restaurant brands by:

• Building Distinctive, Relevant and Easy Brands, by increasing investment in consumer insights, core product innovation, digital excellence and initiatives that strengthen the quality, convenience and appeal of the customer experience;

• Developing Unmatched Franchise Operating Capability, strengthening how we equip and recruit the best restaurant operators to deliver great customer experiences, and build and protect our brands;

• Driving Bold Restaurant Development through partnerships with growth-minded franchisees who can expand and penetrate markets with modern restaurants, strong economics and value; and

• Growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture.

We look for director candidates that have the skills and experience necessary to help us achieve success with respect to the four growth drivers and the Company’s implementation of its “Recipe for Growth.” As a result, the skills that our directors possess are thoroughly considered to ensure that they align with the Company’s goals.



The following table describes key characteristics of the Company’s “Recipe for Growth” and indicates how the skills our Board collectively possesses positively impacts the growth drivers:

<table><tr><td>Yum!&#x27;s Recipe for Growth</td><td>Relevant Skills our Board Collectively Possesses</td></tr><tr><td>Building Distinctive, Relevant &amp; Easy Brands, by increasing investment in consumer insights, core product innovation, digital excellence and initiatives that strengthen the quality, convenience and appeal of the customer experience.</td><td>Marketing/Brand Management. Experience marketing and managing well-known brands or the types of products and experiences we sell.</td></tr><tr><td>Developing Unmatched Franchise Operating Capability, by strengthening how we equip and recruit the best restaurant operators to deliver great customer experiences, and build and protect our brands;</td><td>Technology or Digital. Experience in leadership and understanding of technology, digital platforms and new media, data security, and data analytics.</td></tr><tr><td>Driving Bold Restaurant Development through partnerships with growth-minded franchisees who can expand and penetrate markets with modern restaurants, strong economics and value</td><td>Industry/Operations. Experience and understanding of operational and strategic issues facing large restaurant or consumer service driven companies.</td></tr><tr><td>Growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture. We have a large global workforce, which represents one of our primary resources, as well as one of our most significant operating expenses.</td><td>Global Experience. Experience at multinational companies or in international markets, which provides useful business and cultural perspectives.</td></tr><tr><td>Growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture. We have a large global workforce, which represents one of our primary resources, as well as one of our most significant operating expenses.</td><td>Finance. Experience in Public company management and financial stewardship.</td></tr><tr><td>Growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture. We have a large global workforce, which represents one of our primary resources, as well as one of our most significant operating expenses.</td><td>Talent Development. Experience building the knowledge, skills, and abilities of employees and helping them develop and achieve their potential within an organization.</td></tr><tr><td>Growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture. We have a large global workforce, which represents one of our primary resources, as well as one of our most significant operating expenses.</td><td>Leadership Experience. Experience as executive officer level business leader who demonstrates strong abilities to motivate and manage others and to effectively manage organizations.</td></tr></table>

For a shareholder to submit a candidate for consideration by the Nominating and Governance Committee, a shareholder must notify YUM’s Corporate Secretary, YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, Kentucky 40213. The recommendation must contain the information described on page 81.



## Director Biographies



Age 64

Director since 2016

Former Chief Sales Officer, Sprint Corporation



Michael J. Cavanagh

Age 53

Director since 2012

Senior Executive
Vice President and
Chief Financial
Officer, Comcast
Corporation
Paget L. Alves served as Chief Sales Officer of Sprint Corporation, a wireless and wireline communications services provider, from January 2012 to September 2013 after serving as President of that company’s Business Markets Group beginning in 2009. Mr. Alves currently serves on the boards of directors of International Game Technology PLC, Synchrony Financial, and Ariel Investments LLC.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Mr. Alves brings to the Board significant corporate leadership, global business, finance, brand management, and technology experience, drawing from his various executive roles at large companies, including his service as the Chief Sales Officer of a large wireless and wireline communications company. Mr. Alves also provides the Board with the benefits of his significant experience in public company directorship and committee membership.

• Independent of Company

Michael J. Cavanagh is Senior Executive Vice President and Chief Financial Officer of Comcast Corporation, a global media and technology company. He has held this position since July 2015. From July 2014 to May 2015 he served as Co-President and Co-Chief Operating Officer for The Carlyle Group, a global investment firm, and he was also a member of the Executive Group and Management Committee of The Carlyle Group. Prior to this, Mr. Cavanagh was the Co-Chief Executive Officer of the Corporate & Investment Bank of JPMorgan Chase & Co. from 2012 until 2014. From 2010 to 2012, he was the Chief Executive Officer of JPMorgan Chase & Co.'s Treasury & Securities Services business, one of the world's largest cash management providers and a leading global custodian. From 2004 to 2010, Mr. Cavanagh was Chief Financial Officer of JPMorgan Chase & Co.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

As Senior Executive Vice President and Chief Financial Officer of a global media and technology company, Mr. Cavanagh brings significant experience to our Board in the areas of corporate leadership, global business, operations and technology. In addition, Mr. Cavanagh provides the Board with the benefits of his significant experience and expertise in finance, having served as Chief Operating Officer of a global investment firm and as Chief Financial Officer of a global media and technology company.

• Independent of Company




Christopher M. Connor

Age 63

Director since 2017

Former
Chairman and
Chief Executive
Officer,
Sherwin-Williams
Company



Brian C. Cornell

Age 60

Director since 2015

Chairman and Chief Executive Officer, Target Corporation
Christopher M. Connor served as Chairman and Chief Executive Officer of The Sherwin-Williams Company, a global manufacturer of paint, architectural coatings, industrial finishes and associated supplies, until 2016. Mr. Connor held a number of executive positions at Sherwin-Williams beginning in 1983. He served as Chief Executive Officer from 1999 to 2015 and Chairman from 2000 to 2016. He currently serves on the boards of Eaton Corporation plc and International Paper Company.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Mr. Connor’s public company board experience with domestic and international businesses, and his having served as the Chairman and Chief Executive Officer of a Fortune 500 company, he brings to the Board extensive experience in important areas including corporate leadership, global business, operations, talent development, marketing and brand management, and talent development. Mr. Connor also brings with him significant experience in public company board committee membership.

• Independent of Company

Brian C. Cornell joined the Yum! Brands Board in 2015 and has served as Non-Executive Chairman since November 2018. Mr. Cornell is Chairman and Chief Executive Officer of Target Corporation, a general merchandise retailer. He has held this position since August 2014. Mr. Cornell served as the Chief Executive Officer of PepsiCo Americas Foods, a division of PepsiCo, Inc. from March 2012 to July 2014. From April 2009 to January 2012, Mr. Cornell served as the Chief Executive Officer and President of Sam’s Club, a division of Wal-Mart Stores, Inc. and as an Executive Vice President of Wal-Mart Stores, Inc. He has been a Director of Target Corporation since 2014. He has previously served as a Director of Home Depot, OfficeMax, Polaris Industries Inc., Centerplate, Inc. and Kirin-Tropicana, Inc.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Mr. Cornell’s service as Chairman and Chief Executive Officer of a large publicly traded merchandise retailer and his public company board experience with U.S. and international retailers, he brings extensive knowledge in important areas to our Board, including corporate leadership, global business experience, operations expertise, talent development and marketing and brand management experience. Mr. Cornell also provides our Board with expertise in strategic planning.

• Independent of Company




Greg Creed
Age 61

Director since 2014

Chief Executive Officer, YUM



Tanya Domier

Age 53

Director since 2018

Chief Executive Officer, Advantage Solutions, Inc.
Greg Creed is Chief Executive Officer of YUM. He has served in this position since January 2015. He served as Chief Executive Officer of Taco Bell Division from January 2014 to December 2014 and as Chief Executive Officer of Taco Bell U.S. from 2011 to December 2013. Prior to this position, Mr. Creed served as President and Chief Concept Officer of Taco Bell U.S., a position he held beginning in December 2006. Mr. Creed served as Chief Operating Officer of YUM from 2005 to 2006. He has served as a director of Whirlpool Corporation since 2017 and previously served as a director of International Games Technology from 2010 until 2015.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Mr. Creed has served as the Company’s Chief Executive Officer since 2015 and he brings significant corporate leadership, global business, talent development, industry and operations and marketing and brand management experience to our Board, from his time in that role, and from his prior years of experience in various other roles within the Company, including as Chief Executive Officer of Taco Bell. Mr. Creed also brings with him significant experience in public company directorship and committee membership.

Tanya L. Domier is Chief Executive Officer of Advantage Solutions, Inc., a North American provider of outsourced sales, marketing and business solutions, and has served in that role since January 2013. Prior to serving as Advantage Solutions' CEO, Ms. Domier served as its president and chief operating officer from 2010 to 2013. Ms. Domier joined Advantage Solutions in 1990 from the J.M. Smucker Company and has held a number of executive level roles in sales, marketing and promotions. Ms. Domier has served as a director of Advantage Solutions since 2006 and currently also serves as a director of Nordstrom, Inc.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Ms. Domier brings to the Board extensive experience in marketing and in developing digital technology solutions, having served as Chief Executive Officer of a major provider of sales, marketing and business solutions. In addition, Ms. Domier also provides the Board with expertise in the areas of corporate leadership, global business and finance from her career as an executive and from her significant experience in public company directorship and committee membership.

• Independent of Company




Mirian M. Graddick-Weir

Age 64

Director since 2012

Retired Executive
Vice President
Human Resources,
Merck & Co., Inc.



Thomas C. Nelson

Age 56

Director since 2006

Chairman, Chief Executive Officer and President, National Gypsum Company
Mirian M. Graddick-Weir retired as Executive Vice President of Human Resources for Merck & Co., Inc., a pharmaceutical company, in November, 2018. She had held that position since 2008. From 2006 until 2008, she was Senior Vice President of Human Resources of Merck & Co., Inc. Prior to this position, she served as Executive Vice President of Human Resources of AT&T Corp. from 2001 to 2006. Ms. Graddick-Weir served as a director of Harleysville Group Inc. from 2000 until 2012.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Ms. Graddick-Weir’s public company board experience and her senior leadership experience as the Executive Vice President of Human Resources for a major pharmaceutical company, she is able to provide our Board extensive knowledge in the areas of talent development and corporate leadership. In addition, Ms. Graddick-Weir also brings expertise in corporate operations to the Board and provides the Board with expertise in public company board committee membership.

• Independent of Company

Thomas C. Nelson is President and Chief Executive Officer of National Gypsum Company, a building products manufacturer, He has held this position since 1999 and was elected Chairman of the Board in January 2005. From 1995 to 1999, Mr. Nelson served as the Vice Chairman and Chief Financial Officer of National Gypsum. Mr. Nelson previously worked for Morgan Stanley & Co. and in the United States Defense Department as Assistant to the Secretary and was a White House Fellow. He serves as Director of Atrium Health and was a director of Belk, Inc. from 2003 to 2015. Since January 2015, Mr. Nelson has served as a director for the Federal Reserve Bank of Richmond.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Mr. Nelson’s public company board experience and his service as Chief Executive Officer of a major building products manufacturer, Mr. Nelson brings significant corporate leadership, operations and finance experience to our Board. In addition, Mr. Nelson also provides the Board with the benefits of his experience in government, having served as Assistant to the Secretary of the United States Defense Department and as a White House Fellow. Mr. Nelson also brings with him significant experience in public company board committee membership.

• Independent of Company




P. Justin Skala

Age 59

Director since 2016

Executive Vice
President, Chief
Growth & Strategy
Officer for
Colgate – Palmolive
Company



Elane B. Stock

Age 54

Director since 2014

Former
Group President,
Kimberly-Clark
International
P. Justin Skala is Executive Vice President, Chief Growth & Strategy Officer of the Colgate-Palmolive Company, a consumer products company. He has held this position since July 2018. From 2016 until 2018 he served as Chief Operating Officer, North America, Europe, Africa/Eurasia and Global Sustainability for Colgate-Palmolive Company. From 2013 to 2016 he was President of Colgate-North America and Global Sustainability for Colgate-Palmolive Company. From 2010 to 2013 he was the President of Colgate - Latin America. From 2007 to 2010, he was president of Colgate - Asia.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Mr. Skala’s executive leadership at one of the world’s most renowned consumer products companies, including service in the roles of Chief Operating Officer and as a division President, he is able to bring considerable experience to our Board in the areas of corporate leadership, global business and finance. Mr. Skala also provides our Board with expertise in the areas of operations, brand management and talent development.

• Independent of Company

Elane B. Stock served as Group President of Kimberly-Clark International, a division of Kimberly-Clark Corporation, a global consumer products company, from 2014 to 2016. From 2012 to 2014 she was the Group President for Kimberly-Clark Professional. Prior to this role, Ms. Stock was the Chief Strategy Officer of Kimberly-Clark Corporation. Earlier in her career, Ms. Stock was a partner at McKinsey & Company in the U.S. and Ireland, where she was the Managing Director. Ms. Stock currently serves on the Board of Equifax Inc. and Reckitt Benckiser.

## SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Ms. Stock brings significant corporate leadership, global business, operations and finance experience to our Board, having served in numerous corporate leadership positions, including as group President of a large consumer products company. In addition, Ms. Stock provides the Board with her expertise in strategy, marketing and brand management and her significant experience in public company directorship and committee membership.

• Independent of Company




Robert D. Walter joined the Yum! Brands Board in 2006 and served as Non-Executive Chairman from May 2016 to November 2018. Mr. Walter is the founder of Cardinal Health, Inc., a company that provides products and services supporting the health care industry. Mr. Walter retired from Cardinal Health in June 2008. Prior to his retirement from Cardinal Health, he served as Executive Director from November 2007 to June 2008. From April 2006 to November 2007, he served as Executive Chairman of the Board of Cardinal Health. From 1979 to April 2006, he served as Chairman and Chief Executive Officer of Cardinal Health. Mr. Walter also served as a director of American Express Company and Nordstrom, Inc., both until May 2018.

Age 73

Director since 2008

Founder and
Retired Chairman/
CEO, Cardinal
Health, Inc.
SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE:

Through Mr. Walter’s public company board experience and his prior service as Chief Executive Officer of a global healthcare and service provider business, he is able to provide our Board with significant experience in the areas of corporate leadership, finance and operations. In addition, Mr. Walter brings to our board significant experience in public company board committee membership.

• Independent of Company

If elected, we expect that all of the aforementioned nominees will serve as directors and hold office until the 2020 Annual Meeting of Shareholders and until their respective successors have been elected and qualified.

## Director Compensation

## How are directors compensated?

Employee Directors. Employee directors do not receive additional compensation for serving on the Board of Directors.

Non-Employee Directors Annual Compensation. The annual compensation for each non-employee Director is summarized in the table below. For 2018, each non-employee Director received an annual stock grant retainer with a fair market value of $240,000. Directors may request to receive up to one-half of their stock retainer in cash. The request must be submitted to the Chair of the Management Planning and Development Committee. Directors may also defer payment of their retainers pursuant to the Directors Deferred Compensation Plan. Deferrals are invested in phantom Company stock and paid out in shares of Company stock. Deferrals may not be made for less than two years

Chairman of the Board and Committee Chairperson Retainers. In recognition of their added duties, the Chairman of the Board (Mr. Walter in 2018) receives an additional $150,000 stock retainer annually and the Chairs of the Audit Committee (Mr. Nelson in 2018), Management Planning and Development Committee (Mr. Cornell in 2018) and the Nominating and Governance Committee (Mr. Walter in 2018) each receive an additional $25,000, $20,000 and $15,000 annual stock retainer, respectively. These committee chairperson retainers were paid in February of 2018.

Initial Stock Grant upon Joining Board. Non-employee directors also receive a one-time stock grant with a fair market value of $25,000 on the date of grant upon joining the Board, distribution of which is deferred until termination from the Board.

Matching Gifts. To further YUM’s support for charities, non-employee directors are able to participate in the YUM! Brands, Inc. Matching Gifts Program on the same terms as members of YUM’s Global Leadership Team. Under this program, the YUM! Brands Foundation will match up to $10,000 a year in contributions by the director to a charitable institution approved by the YUM! Brands Foundation. At its discretion, the Foundation may match director contributions exceeding $10,000.

Insurance. We also pay the premiums on directors' and officers' liability and business travel accident insurance policies. The annual cost of this coverage was approximately $2 million. This is not included in the tables below as it is not considered compensation to the directors.



In setting director compensation, the Company considers the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill level required by the Company of members of the Board. The Board reviews each element of director compensation at least every two years.

In November 2018, the Management Planning and Development Committee of the Board (“Committee”) benchmarked the Company’s director compensation against director compensation from the Company’s Executive Peer Group discussed at page 54. Data for this review was prepared for the Committee by its independent consultant, Meridian Compensation Partners LLC. This data revealed that the Company’s director compensation was approximately $20,000 below the 50th percentile measured against this benchmark, that the retainer paid to our Non-Executive Chairman is below market and that the retainers paid to the Chairpersons of the Audit Committee, the Management Planning and Development Committee, and the Nominating and Governance Committee were consistent with market practice. Based on this data, the Committee recommended a $20,000 increase to the annual amount paid to the Directors, raising their retainer to $260,000 annually. The Non-Executive Chairman’s retainer was also increased by $20,000 to $170,000 annually. The retainers paid to committee chairpersons were not increased.

<table><tr><td>Name</td><td>Fees Earned or Paid in Cash (\()</td><td>Stock Awards (\)) (1)</td><td>Option/SAR Awards (\)) (2)</td><td>All Other Compensation (\))</td><td>Total ($)</td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td><td>(f)</td></tr><tr><td>Alves, Paget</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td></tr><tr><td>Cavanagh, Michael</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td><tr><td>Connor, Christopher</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td></tr><tr><td>Cornell, Brian</td><td>—</td><td>260,000</td><td>—</td><td>—</td><td>260,000</td></tr><tr><td>Domier, Tanya</td><td>—</td><td>205,000</td><td>—</td><td>—</td><td>205,000</td></tr><tr><td>Graddick-Weir, Mirian</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td><tr><td>Nelson, Thomas</td><td>—</td><td>265,000</td><td>—</td><td>—</td><td>265,000</td></tr><tr><td>Skala, Justin</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td><tr><td>Stock, Elane</td><td>—</td><td>240,000</td><td>—</td><td>—</td><td>240,000</td></tr><tr><td>Walter, Robert</td><td>—</td><td>405,000</td><td>—</td><td>—</td><td>405,000</td></tr></tr></tr></tr></table>

(1) Amounts in column (c) represent the grant date fair value for annual stock retainer awards, Committee Chairperson retainer awards and Non-Executive Chairman awards granted to directors in 2018. Retainer awards are pro-rated for partial years of service.

(2) At December 31, 2018, the aggregate number of stock appreciation rights (“SARs”) awards outstanding for each non-employee director was:

<table><tr><td>Name</td><td>SARs</td></tr><tr><td>Alves, Paget</td><td>—</td></tr><tr><td>Cavanagh, Michael</td><td>18,531</td></tr><tr><td>Connor, Christopher</td><td>—</td></tr><tr><td>Cornell, Brian</td><td>6,491</td></tr><tr><td>Domier, Tanya</td><td>—</td></tr><tr><td>Graddick-Weir, Mirian</td><td>22,752</td></tr><tr><td>Nelson, Thomas</td><td>38,208</td></tr><tr><td>Skala, Justin</td><td>4,646</td></tr><tr><td>Stock, Elane</td><td>10,003</td></tr><tr><td>Walter, Robert</td><td>38,208</td></tr></table>



## What are the Company’s policies and procedures with respect to related person transactions?

Under the Company’s policies and procedures for the review of related person transactions the Nominating and Governance Committee reviews related person transactions in which we are or will be a participant to determine if they are in the best interests of our shareholders and the Company. Transactions, arrangements, or relationships or any series of similar transactions, arrangements or relationships in which a related person had or will have a material interest and that exceed $100,000 are subject to the Nominating and Governance committee’s review. Any member of the Nominating and Governance Committee who is a related person with respect to a transaction under review may not participate in the deliberation or vote respecting approval or ratification of the transaction.

Related persons are directors, director nominees, executive officers, holders of 5% or more of our voting stock and their immediate family members. Immediate family members are spouses, parents, stepparents, children, stepchildren, siblings, daughters-in-law, sons-in-law and any person, other than a tenant or domestic employee, who resides in the household of a director, director nominee, executive officer or holder of 5% or more of our voting stock.

After its review, the Nominating and Governance Committee may approve or ratify the transaction. The related person transaction policies and procedures provide that certain transactions are deemed to be pre-approved, even though they exceed $100,000. Pre-approved transactions include employment of executive officers, director compensation, and transactions with other companies if the aggregate amount of the transaction does not exceed the greater of $1 million or 2% of that other company’s total revenues and the related person is not an executive officer of that other company.

## Does the Company require stock ownership by directors?

The Board believes that the number of shares of the Company’s common stock owned by each non-management director is a personal decision; however, the Board strongly supports the position that non-management directors should own a meaningful number of shares in the Company and expects that each non-management director will (i) own Company common shares with a value of at least five times the annual Board retainer; (ii) accumulate those shares during the first five years of the director’s service on the Board; and (iii) hold these shares at least until the director departs the Board. Each director may sell enough shares to pay taxes in connection with the receipt of their retainer or the exercise of stock appreciation rights and the ownership guideline will be adjusted to reflect the sale to pay taxes.

## How much YUM stock do the directors own?

Stock ownership information for each director is shown in the table on page 38.

## Does the Company have stock ownership guidelines for executives and senior management?

The Committee has adopted formal stock ownership guidelines that set minimum expectations for executive and senior management ownership. These guidelines are discussed on page 55.
The Company has maintained an ownership culture among its executive and senior managers since its formation. Substantially all executive officers and members of senior management hold stock well in excess of the guidelines.



## How Can Shareholders Nominate for the Board?

Director nominations for inclusion in YUM’s proxy materials (Proxy Access). Our bylaws permit a shareholder, or group of up to 20 shareholders, owning continuously for at least three years shares of YUM stock representing an aggregate of at least 3% of our outstanding shares, to nominate and include in YUM’s proxy materials director nominees constituting up to 20% of YUM’s Board, provided that the shareholder(s) and nominee(s) satisfy the requirements in YUM’s bylaws. Notice of proxy access director nominees for the 2020 Annual Meeting of Shareholders must be received by us no earlier than November 7, 2019, and no later than December 7, 2019.
Director nominations to be brought before the 2020 Annual Meeting of Shareholders. Director nominations that a shareholder intends to present at the 2020 Annual Meeting of Shareholders, other than through the proxy access procedures described above, must have been received no later than February 16, 2020. These nominations must be submitted by a shareholder in accordance with the requirements specified in YUM’s bylaws.

Where to send director nominations for the 2020 Annual Meeting of Shareholders. Director nominations brought by shareholders must be delivered to YUM’s Corporate Secretary by mail at YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, Kentucky 40213 and received by YUM’s Corporate Secretary by the dates set forth above.

## What is the Board’s leadership structure?

On November 16, 2018, Brian C. Cornell assumed the position of Non-Executive Chairman of the Board. He was preceded in that position by Robert D. Walter, who had held that position since May 20, 2016. Applying our Corporate Governance Principles, the Board determined that based on Mr. Cornell’s independence, it would not appoint a Lead Director when Mr. Cornell became Non-Executive Chairman.

The Nominating and Governance Committee annually reviews the Board’s leadership structure and evaluates the performance and effectiveness of the Board of Directors. The Board retains the authority to modify its leadership structure in order to stay current with our Company’s circumstances and advance the best interests of the Company and its shareholders as and when appropriate. The Board’s annual self-evaluation includes questions regarding the Board’s opportunities for open communication and the effectiveness of executive sessions.

The Company’s Governance Principles provide that the Chief Executive Officer (“CEO”) may serve as Chairman of the Board. These Principles also provide for an independent Lead Director, when the CEO is serving as Chairman. During 2018, our CEO did not serve as Chairman. Our Board believes that Board independence and oversight of management are effectively maintained through a strong independent Chairman or Lead Director and through the Board’s composition, committee system and policy of having regular executive sessions of non-employee directors, all of which are discussed below, As Non-Executive Chairman, Mr. Cornell is responsible for supporting the CEO on corporate strategy along with leadership development. Mr. Cornell also works with the CEO in setting the agenda and schedule for meetings of the Board, in addition to the duties of the Lead Director described below.

As CEO, Mr. Creed is responsible for leading the Company’s strategies, organization design, people development and culture, and for providing the day-to-day leadership over operations.

To ensure effective independent oversight, the Board has adopted a number of governance practices discussed below.



## What are the Company’s governance policies and ethical guidelines?

• Board Committee Charters. The Audit, Management Planning and Development, and Nominating and Governance Committees of the YUM Board of Directors operate pursuant to written charters. These charters were approved by the Board of Directors and reflect certain best practices in corporate governance. These charters comply with the requirements of the NYSE. Each charter is available on the Company’s website at www.investors.yum.com/committee-composition-and-charters.

• Governance Principles. The Board of Directors has documented its corporate governance guidelines in the YUM! Brands, Inc. Corporate Governance Principles. These guidelines are available on the Company’s website at www.investors.yum.com/governance-documents.
• Ethical Guidelines. YUM’s Worldwide Code of Conduct was adopted to emphasize the Company’s commitment to the highest standards of business conduct. The Code of Conduct also sets forth information and procedures for employees to report misconduct, ethical or accounting concerns, or other violations of the Code of Conduct in a confidential manner. The Code of Conduct applies to the Board of Directors and all employees of the Company, including the principal executive officer, the principal financial officer and the principal accounting officer. Our directors and the senior-most employees in the Company are required to regularly complete a conflicts of interest questionnaire and certify in writing that they have read and understand the Code of Conduct. The Code of Conduct is available on the Company’s website at www.investors.yum.com/code-of-conduct. The Company intends to post amendments to or waivers from its Code (to the extent applicable to the Board of Directors or executive officers) on this website.

## What other significant Board practices does the Company have?

• Private Executive Sessions. Our non-management directors meet in executive session at each regular Board meeting. The executive sessions are attended only by the non-management directors and are presided over by the Lead Director or our Non-Executive Chairman, as applicable. Our independent directors meet in executive session at least once per year.

• Role of Lead Director. Our Governance Principles require the election, by the independent directors, of a Lead Director when the CEO is also serving as Chairman.

The Board currently does not have a Lead Director, and the duties of the Lead Director are fulfilled by Mr. Cornell as Non-Executive Chairman. Since Mr. Cornell is independent, the Board determined that it would not appoint a separate Lead Director upon Mr. Cornell’s appointment as Non-Executive Chairman.

The Lead Director position is structured so that one independent Board member is empowered with sufficient authority to ensure independent oversight of the Company and its management. The Lead Director position has no term limit and is subject only to annual approval by the independent members of the Board. Based upon the recommendation of the Nominating and Governance Committee, the Board has determined that the Lead Director, when appointed, is responsible for:

(a) Presiding at all executive sessions of the Board and any other meeting of the Board at which the Chairman is not present, and advising the Chairman and CEO of any decisions reached or suggestions made at any executive session,

(b) Approving in advance agendas and schedules for Board meetings and the information that is provided to directors,

(c) If requested by major shareholders, being available for consultations and direct communication,

(d) Serving as a liaison between the Chairman and the independent directors, and

(e) Calling special meetings of the independent directors.

• Advance Materials. Information and data important to the directors’ understanding of the business or matters to be considered at a Board or Board Committee meeting are, to the extent practical, distributed to the directors sufficiently in advance of the meeting to allow careful review prior to the meeting.



• Board and Committees’ Evaluations. The Board has an annual self-evaluation process that is led by the Nominating and Governance Committee. This assessment focuses on the Board’s contribution to the Company and emphasizes those areas in which the Board believes a better contribution could be made. As a part of this process, each Board member completes an individual written questionnaire and a personal interview, the results of which are summarized and discussed in an executive session. In addition, the Audit, Management Planning and Development and Nominating and Governance Committees also each conduct similar annual self-evaluations.

• Majority Voting Policy. Our Articles of Incorporation require majority voting for the election of directors in uncontested elections. This means that director nominees in an uncontested election for directors must receive a number of votes “for” his or her election in excess of the number of votes “against.” The Company’s Governance Principles further provide that any incumbent director who does not receive a majority of “for” votes will promptly tender to the Board his or her resignation from the Board. The resignation will specify that it is effective upon the Board’s acceptance of the resignation. The Board will, through a process managed by the Nominating and Governance Committee and excluding the nominee in question, accept or reject the resignation within 90 days after the Board receives the resignation. If the Board rejects the resignation, the reason for the Board’s decision will be publicly disclosed.

## What access do the Board and Board committees have to management and to outside advisors?

• Access to Management and Employees. Directors have full and unrestricted access to the management and employees of the Company. Additionally, key members of management attend Board meetings to present information about the results, plans and operations of the business within their areas of responsibility.

• Access to Outside Advisors. The Board and its committees may retain counsel or consultants without obtaining the approval of any officer of the Company in advance or otherwise. The Audit Committee has the sole authority to retain and terminate the independent auditor. The Nominating and Governance Committee has the sole authority to retain search firms to be used to identify director candidates. The Management Planning and Development Committee has the sole authority to retain compensation consultants for advice on executive compensation matters.

## What is the Board’s role in risk oversight?

The Board maintains overall responsibility for overseeing the Company’s risk management, including succession planning, food safety and cybersecurity. In furtherance of its responsibility, the Board has delegated specific risk-related responsibilities to the Audit Committee and to the Management Planning and Development Committee.

The Audit Committee engages in substantive discussions of risk management at its regular committee meetings held during the year. At these meetings, it receives functional risk review reports covering significant areas of risk from senior managers responsible for these functional areas, as well as receiving reports from the General Counsel and the Vice President, Internal Audit. Our Vice President, Internal Audit reports directly to the Chairman of the Audit Committee and our Chief Financial Officer ("CFO"). The Audit Committee also receives reports at each meeting regarding legal and regulatory risks from management and meets in separate executive sessions with our independent auditors and our Vice President, Internal Audit. The Audit Committee provides a summary to the full Board at each regular Board meeting of the risk area reviewed together with any other risk related subjects discussed at the Audit Committee meeting.

In addition, our Management Planning and Development Committee considers the risks that may be implicated by our compensation programs through a risk assessment conducted by management and reports its conclusions to the full Board.



## What is the Board’s role in the Company’s global sustainability initiatives?

The Company has an integrated, Board and executive-level governance structure to oversee its global sustainability initiatives. Oversight for environmental, social and governance issues ultimately resides with the Board of Directors. The Board receives regular updates on these matters from management through the Audit Committee. At the operational level, the Chief Communications and Public Affairs Officer is responsible for overseeing the global reputation of YUM and is responsible for shaping the Citizenship and Sustainability Strategy, as approved by the Board, with the Vice President, Government Relations and Citizenship & Sustainability.

## Has the Company conducted a risk assessment of its compensation policies and practices?

As stated in the Compensation Discussion and Analysis at page 39, the philosophy of our compensation programs is to reward performance by designing pay programs that incorporate team and individual performance, and shareholder return; emphasize long-term incentives; drive ownership mentality; and require executives to personally invest in Company stock.

In 2018, the Committee examined our compensation programs for all employees to determine whether they encourage unnecessary or excessive risk taking. In conducting this review, each of our compensation practices and programs was reviewed against the key risks facing the Company in the conduct of its business. Based on this review, the Committee concluded our compensation policies and practices do not encourage our employees to take unreasonable or excessive risks.

As part of this assessment, the Committee concluded the following policies and practices of the Company’s cash and equity incentive programs serve to reduce the likelihood of excessive risk taking:

• Our Compensation system is balanced, rewarding both short-term and long-term performance
• Long-term Company performance is emphasized. The majority of incentive compensation for the top level employees is associated with the long-term performance of the Company

• Strong stock ownership guidelines in place for approximately 190 senior employees are enforced

• The annual incentive and performance share plans both cap the level of performance over which no additional rewards are paid, thereby mitigating any incentive to take unreasonable risk

• The annual incentive target setting process is closely linked to the annual financial planning process and supports the Company’s overall strategic plan, which is reviewed and approved by the Board

• Compensation performance measures set for each Division are transparent and tied to multiple measurable factors, none of which exceed a 50% weighting; measures are both apparent to shareholders and drivers of returns

• The performance which determines employee rewards is closely monitored by the Audit Committee and the full Board

• The Company has a recoupment (clawback) policy

## How does the Board determine which directors are considered independent?

The Company’s Governance Principles, adopted by the Board, require that we meet the listing standards of the NYSE. The full text of the Governance Principles can be found on the Company’s website (www.investors.yum.com/governance-documents).

Pursuant to the Governance Principles, the Board undertook its annual review of director independence. During this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and the Company and its subsidiaries and affiliates. As provided in the Governance Principles, the purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent.



As a result of this review, the Board affirmatively determined that all of the directors are independent of the Company and its management under NYSE rules, with the exception of Greg Creed, who is not considered an independent director because of his employment by the Company.

In determining that the other directors did not have a material relationship with the Company, the Board determined that Messrs. Alves, Connor, Nelson, Skala, and Walter and Mmes. Domier, Graddick-Weir and Stock had no other relationship with the Company other than their relationship as a director. The Board did note as discussed in the next two paragraphs that Comcast Corporation and Target Corporation, which employ Mr. Cavanagh and Mr. Cornell, respectively, each have a business relationship with the Company; however, as noted below, the Board determined that these relationships were not material to either director, Comcast Corporation or Target Corporation, and therefore determined that Mr. Cavanagh and Mr. Cornell were independent.

Brian C. Cornell is the Chairman and Chief Executive Officer of Target Corporation. During 2018, the Company received approximately $10.7 million in license fees from Target Corporation in the normal course of business. Divisions of the Company paid Target Corporation approximately $2.1 million in rebates in 2018. Divisions of the Company have also offered Target approximately $2 million in additional incentives in 2019. The Board determined that these payments did not create a material relationship between the Company and Mr. Cornell or the Company and Target Corporation as the payments represent less than one-tenth of 1% of Target Corporation’s revenues. Furthermore, the licensing relationship between the Company and Target Corporation was initially entered into before Mr. Cornell joined the Board or became employed by Target Corporation. The Board determined that this relationship was not material to Mr. Cornell or Target Corporation.

Michael J. Cavanagh is the Senior Executive Vice President and Chief Financial Officer of Comcast Corporation. During 2018, the Company, its affiliates and their respective franchisees collectively paid approximately $40 million to affiliates of Comcast for broadband services. In addition, U.S. brand advertising cooperatives, to which each of the Company’s brands and their franchisees contribute funds to purchase media for advertising, purchased approximately $79 million in advertising from affiliates of Comcast. The Board determined that these payments did not create a material relationship between the Company and Mr. Cavanagh or the Company and Comcast Corporation as the payments represent less than 1% of Comcast Corporation’s revenues.

## How do shareholders communicate with the Board?

Shareholders and other parties interested in communicating directly with individual directors, the non-management directors as a group or the entire Board may do so by writing to the Nominating and Governance Committee, c/o Corporate Secretary, YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, Kentucky 40213. The Nominating and Governance Committee of the Board has approved a process for handling letters received by the Company and addressed to individual directors, non-management members of the Board or the Board. Under that process, the Corporate Secretary of the Company reviews all such correspondence and regularly forwards to a designated individual member of the Nominating and Governance Committee copies of all such correspondence (although we do not forward commercial correspondence and correspondence duplicative in nature; however, we will retain duplicate correspondence and all duplicate correspondence will be available for directors' review upon their request) and a summary of all such correspondence. The designated director of the Nominating and Governance Committee will forward correspondence directed to individual directors as he or she deems appropriate. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence. Written correspondence from shareholders relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company's Audit Committee Chair and to the internal audit department and handled in accordance with procedures established by the Audit Committee with respect to such matters (described below). Correspondence from shareholders relating to Management Planning and Development Committee matters are referred to the Chair of the Management Planning and Development Committee.



## What are the Company’s policies on reporting of concerns regarding accounting?

The Audit Committee has established policies on reporting concerns regarding accounting and other matters in addition to our policy on communicating with our non-management directors. Any person, whether or not an employee, who has a concern about the conduct of the Company or any of our people, with respect to accounting, internal accounting controls or auditing matters, may, in a confidential or anonymous manner, communicate that concern to our General Counsel, Scott A. Catlett. If any person believes that he or she should communicate with our Audit Committee Chair, Thomas C. Nelson, he or she may do so by writing him at c/o YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, KY 40213. In addition, a person who has such a concern about the conduct of the Company or any of our employees may discuss that concern on a confidential or anonymous basis by contacting The Network at 1 (800) 241-5689. The Network is our designated external contact for these issues and is authorized to contact the appropriate members of management and/or the Board of Directors with respect to all concerns it receives. The full text of our Policy on Reporting of Concerns Regarding Accounting and Other Matters is available on our website at www.investors.yum.com/governance-documents.



## What are the Committees of the Board?

The Board of Directors has standing Audit, Management Planning and Development, Nominating and Governance and Executive/Finance Committees.

<table><tr><td>Name of Committee and Members</td><td>Functions of the Committee</td><td>Number of Meetings in Fiscal 2018</td></tr><tr><td>Audit:</td><td>·Possesses sole authority regarding the selection and retention of independent auditors</td><td>8</td></tr><tr><td>Thomas C. Nelson, Chair</td><td>·Reviews and has oversight over the Company&#x27;s internal audit function</td><td></td></tr><tr><td>Paget L. Alves</td><td>·Reviews and approves the cost and scope of audit and non-audit services provided by the independent auditors</td><td></td></tr><tr><td>Tanya L. Domier</td><td>·Reviews the independence, qualification and performance of the independent auditors</td><td></td></tr><tr><td>P. Justin Skala</td><td>·Reviews the adequacy of the Company&#x27;s internal systems of accounting and financial control</td><td></td></tr><tr><td>Elane B. Stock</td><td>·Reviews the annual audited financial statements and results of the audit with management and the independent auditors</td><td></td></tr><tr><td></td><td>·Reviews the Company&#x27;s accounting and financial reporting principles and practices including any significant changes</td><td></td></tr><tr><td></td><td>·Advises the Board with respect to Company policies and procedures regarding compliance with applicable laws and regulations and the Company&#x27;s Worldwide Code of Conduct and Policy on Conflicts of Interest</td><td></td></tr><tr><td></td><td>·Discusses with management the Company&#x27;s policies with respect to risk assessment and risk management. Further detail about the role of the Audit Committee in risk assessment and risk management is included in the section entitled &quot;What is the Board&#x27;s role in risk oversight?&quot; set forth on page 20.</td><td></td></tr></table>

The Board of Directors has determined that all of the members of the Audit Committee are independent within the meaning of applicable SEC regulations and the listing standards of the NYSE and that Mr. Nelson, the Chair of the Committee, is qualified as an audit committee financial expert within the meaning of SEC regulations. The Board has also determined that Mr. Nelson has accounting and related financial management expertise within the meaning of the listing standards of the NYSE and that each member is financially literate within the meaning of the listing standards of the NYSE.

<table><tr><td>Name of Committee and Members</td><td>Functions of the Committee</td><td>Number of Meetings in Fiscal 2018</td></tr><tr><td>Management Planning and Development:</td><td>·Oversees the Company&#x27;s executive compensation plans and programs and reviews and recommends changes to these plans and programs</td><td>4</td></tr><tr><td>Christopher M. Connor, Chair</td><td>·Monitors the performance of the chief executive officer and other senior executives in light of corporate goals set by the Committee</td><td></td></tr><tr><td>Brian C. Cornell</td><td>·Reviews and approves the compensation of the chief executive officer and other senior executive officers</td><td></td></tr><tr><td>Michael J. Cavanagh</td><td>·Reviews management succession planning</td><td></td></tr><tr><td>Mirian M. Graddick-Weir</td><td></td><td></td></tr><tr><td>Robert D. Walter</td><td></td><td></td></tr></table>

The Board has determined that all of the members of the Management Planning and Development Committee are independent within the meaning of the listing standards of the NYSE.



<table><tr><td>Name of Committee and Members</td><td>Functions of the Committee</td><td>Number of Meetings in Fiscal 2018</td></tr><tr><td>Nominating and Governance:</td><td>· Identifies and proposes to the Board suitable candidates for Board membership</td><td>4</td></tr><tr><td>Mirian M. Graddick-Weir, Chair</td><td>· Advises the Board on matters of corporate governance</td><td></td></tr><tr><td>Michael J. Cavanagh</td><td>· Reviews and reassesses from time to time the adequacy of the Company’s Corporate Governance Principles</td><td></td></tr><tr><td>Brian C. Cornell</td><td>· Receives comments from all directors and reports annually to the Board with assessment of the Board’s performance</td><td></td></tr><tr><td>Thomas C. Nelson</td><td>· Prepares and supervises the Board’s annual review of director independence</td><td></td></tr><tr><td>Robert D. Walter</td><td></td><td></td></tr></table>

The Board has determined that all of the members of the Nominating and Governance Committee are independent within the meaning of the listing standards of the NYSE.

<table><tr><td>Name of Committee and Members</td><td>Functions of the Committee</td></tr><tr><td>Executive/Finance:</td><td>Exercises all of the powers of the Board in the management of the business and affairs of the Company consistent with applicable law while the Board is not in session</td></tr><tr><td>Brian C. Cornell, Chair</td><td></td></tr><tr><td>Christopher M. Connor</td><td></td></tr><tr><td>Greg Creed</td><td></td></tr><tr><td>Mirian M. Graddick-Weir</td><td></td></tr><tr><td>Thomas C. Nelson</td><td></td></tr></table>



# MATTERS REQUIRING SHAREHOLDER ACTION

## ITEM 1 Election of Directors (Item 1 on the Proxy Card)

## Who are this year’s nominees?

There are eleven (11) nominees recommended by the Nominating and Governance Committee of the Board of Directors for election this year to hold office until the 2020 Annual Meeting and until their respective successors are elected and qualified. Their biographies are provided above at pages 10 to 15. The biographies of each of the nominees contains information regarding the person’s service as a director, business experience, public-company director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes or skills that caused the Nominating and Governance Committee and the Board to determine that the person should serve as a director for the Company. In addition to the information presented above regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that he or she should serve as a director, we also believe that all of our director nominees have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to YUM and our Board. Finally, we value their significant experience on other public company boards of directors and board committees.

There are no family relationships among any of the directors and executive officers of the Company.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote FOR the election of these nominees.

## What if a nominee is unwilling or unable to serve?

That is not expected to occur. If it does, proxies may be voted for a substitute nominated by the Board of Directors.

## What vote is required to elect directors?

A nominee will be elected as a director if the number of “FOR” votes exceeds the number of “AGAINST” votes with respect to his or her election.

Our policy regarding the election of directors can be found in our Governance Principles at www.investors.yum.com/governance-documents and at page 19 under “What other significant Board practices does the Company have? — Majority Voting Policy.”



## ITEM 2 Ratification of Independent Auditors (Item 2 on the Proxy Card)

## What am I voting on?

A proposal to ratify the selection of KPMG LLP (“KPMG”) as our independent auditors for fiscal year 2019. The Audit Committee of the Board of Directors has selected KPMG to audit our consolidated financial statements. During fiscal 2018, KPMG served as our independent auditors and also provided other audit-related and non-audit services.

## Will a representative of KPMG be present at the meeting?

Representatives of KPMG will be present at the Annual Meeting and will have the opportunity to make a statement if they desire and will be available to respond to appropriate questions from shareholders.

## What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting. If the selection of KPMG is not ratified, the Audit Committee will reconsider the selection of independent auditors.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote FOR approval of this proposal.

## What were KPMG’s fees for audit and other services for fiscal years 2018 and 2017?

The following table presents fees for professional services rendered by KPMG for the audit of the Company’s annual financial statements for 2018 and 2017, and fees billed for audit-related services, tax services and all other services rendered by KPMG for 2018 and 2017.

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Audit fees \( ^{(1)} \)</td><td>5,477,000</td><td>6,406,000</td></tr><tr><td>Audit-related fees \( ^{(2)} \)</td><td>310,000</td><td>326,000</td></tr><tr><td>Tax fees \( ^{(3)} \)</td><td>563,000</td><td>482,000</td></tr><tr><td>All other fees</td><td>0</td><td>0</td></tr><tr><td>TOTAL FEES</td><td>6,350,000</td><td>7,214,000</td></tr></table>

(1) Audit fees include fees for the audit of the annual consolidated financial statements, reviews of the interim condensed consolidated financial statements included in the Company’s quarterly reports, audits of the effectiveness of the Company’s internal controls over financial reporting, statutory audits and services rendered in connection with the Company’s securities offerings including comfort letters and consents.

(2) Audit-related fees include fees associated with audits of financial statements and certain employee benefit plans, agreed upon procedures and other attestations.

(3) Tax fees consist principally of fees for international tax compliance, tax audit assistance, as well as value added tax and other tax advisory services.



## What is the Company’s policy regarding the approval of audit and non-audit services?

The Audit Committee has implemented a policy for the pre-approval of all audit and permitted non-audit services, including tax services, proposed to be provided to the Company by its independent auditors. Under the policy, the Audit Committee may approve engagements on a case-by-case basis or pre-approve engagements pursuant to the Audit Committee’s pre-approval policy. The Audit Committee may delegate pre-approval authority to one of its independent members and has currently delegated pre-approval authority up to certain amounts to its Chair.

Pre-approvals for services are granted at the January Audit Committee meeting each year. Any incremental audit or permitted non-audit services which are expected to exceed the relevant budgetary guideline must subsequently be pre-approved. In considering pre-approvals, the Audit Committee reviews a description of the scope of services falling within pre-designated services and imposes specific budgetary guidelines. Pre-approvals of designated services are generally effective for the succeeding 12 months.

The Corporate Controller monitors services provided by the independent auditors and overall compliance with the pre-approval policy. The Corporate Controller reports periodically to the Audit Committee about the status of outstanding engagements, including actual services provided and associated fees, and must promptly report any non-compliance with the pre-approval policy to the Chair of the Audit Committee. The complete policy is available on the Company’s website at www.investors.yum.com/committee-composition-and-charters.

## ITEM 3 Advisory Vote on Executive Compensation (Item 3 on the Proxy Card)

## What am I voting on?

In accordance with SEC rules, we are asking shareholders to approve, on a non-binding basis, the compensation of the Company’s Named Executive Officers as disclosed in this proxy statement.

## Our Performance-Based Executive Compensation Program Attracts and Retains Strong Leaders and Closely Aligns with Our Shareholders' Interests

Our performance-based executive compensation program is designed to attract, reward and retain the talented leaders necessary for our Company to succeed in the highly competitive market for talent, while maximizing shareholder returns. This approach has made our management team a key driver in the Company’s strong performance over both the long-and short-term. We believe that our compensation program has attracted and retained strong leaders, and is closely aligned with the interests of our shareholders.

In deciding how to vote on this proposal, we urge you to read the Compensation Discussion and Analysis section of this proxy statement, beginning on page 39, which discusses in detail how our compensation policies and procedures operate and are designed to meet our compensation goals and how our Management Planning and Development Committee makes compensation decisions under our programs.

Accordingly, we ask our shareholders to vote in favor of the following resolution at the Annual Meeting:

RESOLVED, that the shareholders approve, on an advisory basis, the compensation awarded to our Named Executive Officers, as disclosed pursuant to SEC rules, including the Compensation Discussion and Analysis, the compensation tables and related materials included in this proxy statement.



## What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting. While this vote is advisory and non-binding on the Company, the Board of Directors and the Management Planning and Development Committee will review the voting results and consider shareholder concerns in their continuing evaluation of the Company’s compensation program. Unless the Board of Directors modifies its policy on the frequency of this advisory vote, the next advisory vote on executive compensation will be held at the 2020 Annual Meeting of Shareholders.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote FOR approval of this proposal.

## ITEM 4 Shareholder Proposal Regarding the Issuance of a Report on Renewable Energy (Item 4 on the Proxy Card)

## What am I voting on?

The Sisters of Charity of the Blessed Virgin Mary, have advised us that it intends to present the following shareholder proposal at the Annual Meeting. We will furnish the address and share ownership of the proponent upon request. In accordance with federal securities regulations, we have included the text of the proposal and supporting statement exactly as submitted by the proponent. We are not responsible for the content of the proposal or any inaccuracies it may contain.

Resolved: Shareholders request that Yum! Brands senior management, with oversight from the Board of Directors, issue a report on climate change mitigation strategies, assessing the feasibility of adopting quantitative, company-wide goals for increasing Yum! Brands' use of renewable energy and any other measures deemed prudent by company management, to substantially reduce the company's greenhouse gas emissions and climate change risks associated with the use of fossil fuel-based energy.

The report should be issued within one year of this filing at reasonable cost and omit proprietary information.

## Supporting Statement:

By assessing goals to increase renewable energy as a share of total energy consumed, and other such measures to reduce greenhouse gas emissions that the company deems feasible, our company could prepare to take concrete, practical steps to reduce our emissions of greenhouse gases (GHGs) that contribute to climate change.

In order to mitigate the worst impacts of climate change, the Intergovernmental Panel on Climate Change estimates that a 45% reduction in anthropogenic GHG emissions globally is needed (from 2010 levels) by 2030 to stabilize global temperatures (Global Warming of 1.5 degrees C, IPCC, Oct 2018).

Assessing the feasibility of goals for renewable energy procurement and other greenhouse gas reducing measures could contribute to this end and serve as a practical step towards aligning our business operations with global efforts to limit climate change. This could help insulate our company from regulatory uncertainty and position Yum! Brands as contributing to climate solutions and produce reputational benefits.

Fortuitously, many major companies are finding that greenhouse gas reducing measures such as adopting



renewable energy are practical, and often also benefit their bottom line. Nationally, the US Energy Information Association reports the average cost of electricity at $0.1068/kWh for commercial customers in 2017, up from $0.1043 in 2016. By contrast, according to Bloomberg New Energy Finance's 2018 Sustainable Energy in America Factbook "the most competitive power purchase agreements (PPAs) came in at just over $20/MWh for solar [$0.02/kWh], while wind PPAs ... averaged an estimated $17/MWh in 2017 [$0.017/kWh]."

Unfortunately, Yum! Brands website is silent on specific goals to reduce the company’s greenhouse gas emissions. As such, Yum! lags behind its peers in the restaurant industry including McDonalds, which has recently adopted an approved Science-Based Target for GHG emissions reductions across their operations and supply chain. Many other leading food companies, including Kellogg, Grupo Bimbo, Mars, Nestle, and Starbucks are among the 154 RE100 member companies who have committed to going 100% renewable.

Accordingly, we urge Yum! Brands to emulate the best climate risk mitigation practices among its corporate peers and to study the feasibility of adopting goals for measures such as renewable energy sourcing, that can substantially reduce greenhouse gas emissions.

## What is the Company’s position regarding this proposal?

## Management Statement in Opposition to Shareholder Proposal

Our Board of Directors unanimously recommends that stockholders vote AGAINST this proposal, as it would divert time and resources that the Company has determined would be better used to support our strategy to target our sustainability efforts on areas that will provide the most meaningful impact, without providing a significant corresponding benefit to the Company.

Climate change mitigation strategies, including our use of renewable energy and any other measures to reduce the Company’s greenhouse gas emissions, have been a priority for the Company for the last several years as our sustainability strategy has evolved. Our approach to sustainability initiatives is guided by impact: we focus our efforts where we have the ability to influence meaningful outcomes.

With that principle in mind, our focus has been on reducing our energy consumption and the associated greenhouse gas emissions. In 2017 we achieved our 22% reduction target in energy consumption, as compared to our 2005 baseline, for company-owned and reporting franchise groups. The 2017 target followed up on our successful achievement of our 15% reduction goal in 2015.
The Company currently has a publicly stated goal to reduce average restaurant energy and greenhouse gas emissions by an additional 10 percent by the end of 2025. These initiatives to reduce our energy consumption are those that the Company has determined are best targeted to have the most direct impact. Moreover, the Company currently has in place procedures designed to mitigate risks involving greenhouse gas emissions and climate change, while ensuring that issues are surfaced and addressed in a timely manner.

Implementation of a broader reporting on our greenhouse gas emissions strategy is not necessary and would divert time, effort and resources, thereby limiting our ability to target our efforts on areas that will provide the most meaningful impact. For this reason, and other reasons outlined below, we believe that the request by the proponent is unnecessary, and has the potential to divert our resources with no corresponding benefit to the Company, our customers, or our shareholders.



## Why does the Company oppose the proposal?

Specifically related to the identification and communication of potential climate change mitigation strategies and use of renewable energy, the Company has in place the following:

• Public statements, policies and goals on Greenhouse Gas Emissions/Renewable Energy. The Company maintains a public website with policy statements representing our informed views and opinions on industry-related issues. Our fundamental, long-term strategy is twofold: First, it is to design, build and operate restaurants to be measurably more sustainable using green building standards to drive reductions in energy, GHG emissions, waste and water use and to report progress annually through CDP disclosures. Second, it is to work to elevate the supply chain to reduce deforestation though objectives including sourcing 100% of palm oil used for cooking and paper-based packaging from responsible and sustainable sources. Notably, we have a track record of setting and achieving goals for reducing our restaurant energy use and greenhouse gas emissions. The Company currently has a publicly stated goal to reduce average restaurant energy use and greenhouse gas emissions by an additional 10 percent by the end of 2025. This follows on our achievement in 2017 of our 22% reduction target in energy consumption, as compared to our 2005 baseline, for company-owned and reporting franchise groups. Further, the Company has conducted testing of onsite renewable energy applications, as well as Renewable Energy Credits. We continue to evaluate the feasibility of adoption of renewable energy measures.

• Comprehensive voluntary disclosure on environmental sustainability issues. On a biennial basis, with updates during intervening years, the Company publishes its Global Citizenship & Sustainability Report at http://citizenship.yum.com/. Included in the Report are the Company’s commitments in the material sustainability areas of food, planet and people. Progress updates for these commitments, including goals related to energy consumption and greenhouse gas, are included in the Report. In addition, the Company discloses its climate, water and forests practices through CDP on an annual basis.

• Collaboration with industry groups. The Company’s approach to GHG reduction through energy conservation has been informed by the Unites States Green Building Council’s (USGBC) LEED rating system. We have learned from having designed and built over 30 LEED certified buildings across the globe. We have been members of the USGBC since 2008. The Company’s palm oil and fiber policies and goals were developed in partnership with the World Wildlife Fund (WWF).

• Integrated, executive-level governance structure to oversee the Company’s global sustainability initiatives. Oversight for environmental, social and governance (ESG) issues ultimately resides with the Yum! Brands Board of Directors, briefed through its Audit Committee on a regular basis. At the operational level, the Chief Communications and Public Affairs Officer oversees the global reputation of Yum! and is responsible for shaping the Citizenship and Sustainability Strategy with the Vice President, Government Relations and Citizenship & Sustainability.

## What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote AGAINST this proposal.



# ITEM 5 Shareholder Proposal Regarding Issuance of Annual Reports on Efforts to Reduce Deforestation (Item 5 on the Proxy Card)

## What am I voting on?

SumOfUs on behalf of Mr. Keith Schnip, has advised us that it intends to present the following shareholder proposal at the Annual Meeting. We will furnish the address and share ownership of the proponent upon request. In accordance with federal securities regulations, we have included the text of the proposal and supporting statement exactly as submitted by the proponent. We are not responsible for the content of the proposal or any inaccuracies it may contain.

Resolved: Shareholders request that Yum'Brands. Inc. (YUM) issue annual reports to investors, at reasonable expense and excluding proprietary information, on how the company is curtailing the impact on the Earth's climate caused by deforestation in YUM's supply chain. The reports should include quantitative metrics on supply chain impacts on deforestation and progress on goals for reducing such impacts.

## Supporting Statement:

YUM utilizes beef, soy, palm oil, and pulp/paper in its business. These commodities are the leading drivers of deforestation globally. YUM's limited action on deforestation sets the company behind its peers and exposes the company to significant business and market risks that deforestation may pose, given the link between deforestation and climate change, including supply chain unreliability, damage to the company's brand value, and failure to meet shifting consumer and market expectations. The SCRIPT Soft Commodity Risk Platform scored YUM at 26 out of 100 due to lack of risk awareness, board oversight, overarching policies addressing deforestation risk, traceability, and timebound targets.

Deforestation has attracted significant attention from civil society, business and governments. It accounts for over 10% of global greenhouse gas emissions and contributes to climate change, biodiversity loss, soil erosion, disrupted rainfall patterns, community land conflicts and forced labor. Commercial agriculture accounted for over 70% of tropical deforestation, 49% of which was illegal, between 2000 and 2012. (https://www.theguardian.com/global-development/2014/sep/11/tropical-forests-illegally-destroyed-commercial-agriculture)

According to the 2018 report of the Intergovernmental Panel on Climate Change (IPCC), restoring landscapes and forests is one of the best, most cost-effective options available to combat impacts of climate change. (http://www.ipcc.ch/report/sr15/) Value chains that are illegally engaged in deforestation are vulnerable to interruption with new regulations and enforcement, to which companies must adapt.

Companies that have failed to mitigate the impacts of their supply chain may face reputational damage. In recent years, major media outlets have reported on specific companies' failure to adequately implement policies that address deforestation. This publicity, along with increased consumer awareness and concern about deforestation and climate change, poses a significant reputational risk.

Proponents believe meaningful indicators in a report like the one we request could include:

• For key commodities that YUM sources such as palm oil, soy, beef, and pulp/paper, the proportion that can be traced back to its source and the proportion verified as not contributing to physical expansion into peatlands or forests, and including the supply chain across all geographies; and

• Tracking these figures against an anticipated timeframe (as established by management) for meeting its sourcing goals for each commodity consistent with the criteria above, including processes for verification, supplier non-compliance protocols, and grievance processes.

We urge shareholders to support this proposal.



## What is the Company’s position regarding this proposal?

## Management Statement in Opposition to Shareholder Proposal

Our Board of Directors unanimously recommends that stockholders vote AGAINST this proposal, as it would divert time and resources that the Company has determined would be better used to support our strategy to target our sustainability efforts on areas that will provide the most meaningful impact, without providing a significant corresponding benefit to the Company.

Sustainable sourcing, including minimizing deforestation risk, has been a priority for the Company for the last several years as our sustainability strategy has evolved. Our approach to sustainability initiatives is guided by impact: we focus our efforts where we have the ability to influence meaningful outcomes. With that principle in mind, we have established and disclosed policies and time-bound, measurable goals for sourcing sustainable palm oil and fiber for paper packaging, where our sourcing decisions have the most direct impact. Moreover, the Company currently has in place procedures designed to mitigate deforestation risk and ensure that issues are surfaced and addressed in a timely manner.

Additional reporting on our deforestation policy is not feasible and would divert time, effort and resources to commodities (e.g., soy) where Yum can have a less direct or meaningful impact. For this reason, and other reasons outlined below, we believe that the request by the proponent is unnecessary, and has the potential to divert resources with no corresponding benefit to the Company, our customers, or our shareholders.

## Why does the Company oppose the proposal?

Specifically related to the identification and communication of potential climate impact caused by deforestation, the Company has in place the following:

• Public statements, policies and goals on deforestation issues. The Company maintains a public website with policy statements representing our informed views and opinions on industry-related issues. Notably, we have implemented policies and set goals for sourcing sustainable palm oil and fiber for paper packaging that seek to mitigate the impact of deforestation. Frying oil and packaging represent a significant procurement expenditure for the primary forest-related commodities, and thus they represent areas where our sourcing decisions may have material impact.

• Regarding packaging, the Company has implemented a policy and associated goal for sourcing sustainable fiber for paper-based packaging. Policy details can be reviewed at http://citizenship.yum.com/pdf/Paper-based-Packaging-Sourcing-Policy.pdf. As part of the policy, we give preference to suppliers that provide paper packaging certified by third parties such as the Forest Stewardship Council (FSC). The Company’s goal is to purchase 100% of paper-based packaging with fiber sourced from responsibly managed forests and recycled sources by the end of 2020.

• Regarding frying oil, the Company has implemented a policy and associated goal for sourcing sustainable palm oil for cooking. Policy details can be reviewed at http://citizenship.yum.com/pdf/Palm-Oil-Policy.pdf. As part of that policy, we give preference to suppliers that are certified by the Roundtable on Sustainable Palm Oil (“RSPO”). The company’s goal is to source 100% of our palm oil used for cooking from responsible and sustainable sources. In 2017, approximately 80% of our cooking palm oil was derived from sustainable palm. We will be reporting on our 2018 progress toward that goal later this year.

• Comprehensive voluntary disclosure on environmental sustainability issues. On a biennial basis, with updates during intervening years, the Company publishes its Global Citizenship & Sustainability Report at http://citizenship.yum.com/. Included in the Report are the Company’s commitments in the material sustainability areas of food, planet and people. Progress updates for these commitments, including goals related to the minimization of forest risks, are included in the Report. In addition, the Company discloses its climate, water and forests practices through CDP on an annual basis.

• Collaboration with industry groups. The Company’s palm oil and fiber policies and goals were developed in partnership with the World Wildlife Fund (WWF), which provides companies with practical counsel around sustainable food sourcing. In the area of sustainable palm oil sourcing specifically, the Company is a member of RSPO and in 2019 will be reporting its progress through that organization for the first time.



• Integrated, executive-level governance structure to oversee the Company’s global sustainability initiatives. Oversight for environmental, social and governance (ESG) issues ultimately resides with the Yum! Brands Board of Directors, briefed through its Audit Committee on a regular basis. At the operational level, the Chief Communications and Public Affairs Officer oversees the global reputation of Yum! and is responsible for shaping the Citizenship and Sustainability Strategy with the Vice President, Government Relations and Citizenship & Sustainability.

## What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote AGAINST this proposal.

## ITEM 6 Shareholder Proposal Regarding the Issuance of a Report on Sustainable Packaging (Item 6 on the Proxy Card)

## What am I voting on?

As You Sow, on behalf of the Wynnette M. LaBrosse Trust, has advised us that it intends to present the following shareholder proposal at the Annual Meeting. We will furnish the address and share ownership of the proponent upon request. In accordance with federal securities regulations, we have included the text of the proposal and supporting statement exactly as submitted by the proponent. We are not responsible for the content of the proposal or any inaccuracies it may contain.

WHEREAS waste and recycling issues were ranked among the 10 most important issues to stakeholders in a Yum Brands 2017 materiality assessment, yet the company lags competitors by lacking a commitment to phase out plastic straws, uses harmful polystyrene foam beverage cups in some markets, and lacks a commitment to front of house on-site container recycling.

The ocean contains an estimated 150 million tons of plastic, with about 8 million tons added annually, equivalent to a garbage truck load every minute. Experts predict there will be more plastic than fish by weight in oceans by 2050. Company straws, cups, and lids are found in street and marine litter. 500 million plastic straws are used by Americans daily, which are not recycled. Polystyrene foam used for beverage cups, is rarely recycled. Non-recyclable plastic packaging is more likely to be littered and carried into waterways. In the marine environment, plastic straws, cups, and cup lids break down into small indigestible particles that birds and marine animals mistake for food, resulting in entanglement, suffocation, and drowning. More than 250 species have been impacted. Plastic does $13 billion in damage to marine ecosystems annually.

Company packaging that degrades in waterways can also transfer hazardous chemicals to animals and potentially to humans. Plastics absorb toxics like PCBs, pesticides, and metals from water, transferring them to the marine food web and potentially to human diets, increasing risk of adverse effects to wildlife and humans. Polystyrene foam may pose a higher risk to marine animals than other plastics due to its hazardous constituent chemicals and research showing it can accumulate high concentrations of water borne toxins in a short time frame. Polystyrene has caused



decreased reproduction in laboratory populations of oysters and fish.

Antigua and Barbuda, Bangladesh, Barbados, France, Guyana, Haiti, Rwanda, Taiwan and states in India and Malaysia have enacted bans on foam packaging. More than 100 U.S. cities or counties have banned or restricted foam packaging. The problem can be exacerbated in developing countries with less sophisticated solid waste management systems. Recent scientific research estimates that one half of ocean plastic deposition comes from several rapidly developing Asian countries where our company does substantial business.

Competitor McDonald’s announced that it would phase out use of polystyrene foam packaging globally at the end of 2018. Competitor Starbucks has agreed to phase out plastic straws by 2020. The company also lacks a commitment to recycle front of house on-site post-consumer packaging. McDonald’s has committed to recycle post-consumer packaging in all restaurants globally by 2025.

BE IT RESOLVED Shareholders request that YUM Brands issue a report to shareholders, to be prepared at reasonable cost and omitting proprietary information, detailing efforts to achieve environmental leadership through a comprehensive policy on sustainable packaging.

Supporting statement:

Proponent believes that a comprehensive policy on sustainable packaging should, for example, address plastic straws, polystyrene beverage and food containers, and policies for front of house recycling. We urge shareholders to support this proposal.

## What is the Company’s position regarding this proposal?

## Management Statement in Opposition to Shareholder Proposal

Our Board of Directors unanimously recommends that stockholders vote AGAINST this proposal, as it would divert time and resources that the Company has determined would be better used to support our strategy to target our sustainability efforts on areas that will provide the most meaningful impact, without providing a significant corresponding benefit to the Company.

Sustainable packaging has been a priority for the Company for the last several years as our sustainability strategy has evolved. Our approach to sustainability initiatives is guided by impact: we focus our efforts where we have the ability to influence meaningful outcomes. With that principle in mind, our focus has been on our existing goal of diverting 50 percent of back-of-house operational waste from landfills, measured by weight, generated in our U.S. restaurants by the end of 2020. In addition, we have focused on our goal of purchasing 100 percent of our paper-based packaging from responsibly managed forests and recycled sources by the end of 2020. In January 2019, our KFC Division announced a significant new global sustainability commitment that all plastic-based, consumer-facing packaging will be recoverable or reusable by 2025. These initiatives are those that the Company has determined are best targeted to have the most direct impact. Moreover, the Company currently has in place procedures designed to mitigate packaging risks and ensure that issues are surfaced and addressed in a timely manner.

As the above highlights, implementation of broader reporting on our sustainable packaging policy, as requested by the proposal, is not necessary and would divert time, effort and resources, thereby limiting our ability to target our efforts on areas that will provide the most meaningful impact. For this reason, and other reasons outlined below, we believe that the request by the proponent is unnecessary, and has the potential to divert resources with no corresponding benefit to the Company, our customers, or our shareholders.



## Why does the Company oppose the proposal?

Specifically related to the identification and communication of a potential report on efforts to achieve environmental leadership through a comprehensive policy on sustainable packaging, the Company has in place the following:

• Public statements, policies and goals on sustainable packaging issues. The Company maintains a public website with policy statements representing our informed views and opinions on industry-related issues. Notably, we have implemented policies for more sustainable packaging and waste handling. Given that packaging is an important part of our waste equation, we have done the following:

• We are actively pursuing our goal of purchasing 100 percent of our paper-based packaging with fiber from responsibly managed forests and recycled sources by the end of 2020;

• We have focused on our goal of diverting 50 percent of back-of-house operational waste from landfills, measured by weight, generated in our U.S. restaurants by the end of 2020;

• KFC has made a global sustainability commitment that all plastic-based, consumer-facing packaging will be recoverable or reusable by 2025; and

• Taco Bell has replaced its cold drink cups with fully recyclable cold cups across 7,000 of its US restaurants, representing more than 95% of its drinks sold.

These policies and goals reflect our long-term intention to develop and implement more sustainable packaging and waste handling in our restaurants – by building on progress already made and industry innovations and infrastructure developments.
• Comprehensive voluntary disclosure on environmental sustainability issues. On a biennial basis, with updates during intervening years, the Company publishes its Global Citizenship & Sustainability Report at http://citizenship.yum.com/. Included in the Report are the Company’s commitments in the material sustainability areas of food, planet and people, which includes sustainable packaging. Progress updates for these commitments, including packaging goals, are included in the Report. In addition, the Company discloses its climate, water and forests practices through CDP on an annual basis.

• Collaboration with industry groups. We understand that the journey to more sustainable packaging includes innovation. The Company has joined the NextGen Cup Challenge, an initiative by the NextGen Consortium, a multi-year partnership of food-service industry leaders, to address single-use food packaging waste globally. In its initial phase, the project hopes to advance recoverable solutions for a fiber, hot and cold, to-go cup system. The Company believes that this initiative can be an important step toward unlocking wider innovations and in overcoming the global infrastructure challenges of single-use packaging.

• Integrated, executive-level governance structure to oversee the Company’s global sustainability initiatives. Oversight for environmental, social and governance (ESG) issues ultimately resides with the Yum! Brands Board of Directors, briefed through its Audit Committee on a regular basis. At the operational level, the Chief Communications and Public Affairs Officer oversees the global reputation of Yum! and is responsible for shaping the Citizenship and Sustainability Strategy with the Vice President, Government Relations and Citizenship & Sustainability.

## What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting.

## What is the recommendation of the Board of Directors?

The Board of Directors recommends that you vote AGAINST this proposal.



# STOCK OWNERSHIP INFORMATION

## Who are our largest shareholders?

This table shows ownership information for each YUM shareholder known to us to be the owner of 5% or more of YUM common stock. This information is presented as of December 31, 2018, and is based on a stock ownership report on Schedule 13G filed by such shareholders with the SEC and provided to us.

<table><tr><td>Name and Address of Beneficial Owner</td><td>Number of Shares Beneficially Owned</td><td>Percent of Class</td></tr><tr><td>The Vanguard Group</td><td>23,089,447 \( ^{(1)} \)</td><td>7.39%</td></tr><tr><td>100 Vanguard Blvd.</td><td></td><td></td></tr><tr><td>Malvern, PA 19355</td><td></td><td></td></tr><tr><td>Blackrock Inc.</td><td>21,595,217 \( ^{(2)} \)</td><td>6.90%</td></tr><tr><td>55 East 52 \( ^{\text{nd}} \)  Street</td><td></td><td></td></tr><tr><td>New York, NY 10055</td><td></td><td></td></tr></table>

(1) The filing indicates sole voting power for 372,013 shares, shared voting power for 102,844 shares, sole dispositive power for 22,620,360 shares and shared dispositive power for 469,087 shares.

(2) The filing indicates sole voting power for 18,948,347 shares, shared voting power for 0 shares, sole dispositive power of 21,595,217 shares and shared dispositive power for 0 shares.

## How much YUM common stock is owned by our directors and executive officers?

This table shows the beneficial ownership of YUM common stock as of December 31, 2018 by

• each of our directors,

• each of the executive officers named in the Summary Compensation Table on page 59, and

• all directors and executive officers as a group.

Unless we note otherwise, each of the following persons and their family members have sole voting and investment power with respect to the shares of common stock beneficially owned by him or her. None of the persons in this table (nor the Directors and executive officers as a group) holds in excess of one percent of the outstanding YUM common stock. Please see table above setting forth information concerning beneficial ownership by holders of five percent or more of YUM's common stock. Directors and executive officers as a group, beneficially own approximately 0.67%.

The table shows the number of shares of common stock and common stock equivalents beneficially owned as of December 31, 2018. Included are shares that could have been acquired within 60 days of December 31, 2018 through the exercise of stock options, stock appreciation rights (“SARs”) or distributions from the Company’s deferred compensation plans, together with additional underlying stock units as described in footnote (4) to the table. Under SEC rules, beneficial ownership includes any shares as to which the individual has either sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days through the exercise of any stock option or other right.



<table><tr><td rowspan="2">Name</td><td colspan="4">Beneficial Ownership</td><td rowspan="2">Additional Underlying Stock Units(4)</td><td rowspan="2">Total</td></tr><tr><td>Number of Shares Beneficially Owned(1)</td><td>Options/ SARs Exercisable within 60 Days(2)</td><td>Deferral Plans Stock Units(3)</td><td>Total Beneficial Ownership</td></tr><tr><td>Greg Creed(5)</td><td>163,283</td><td>582,546</td><td>97,270</td><td>843,099</td><td>45,590</td><td>888,689</td></tr><tr><td>Paget Alves</td><td>3,235</td><td>—</td><td>—</td><td>3,235</td><td>3,485</td><td>6,720</td></tr><tr><td>Michael J. Cavanagh</td><td>10,000</td><td>4,167</td><td>—</td><td>14,167</td><td>20,938</td><td>35,105</td></tr><tr><td>Christopher Connor</td><td>—</td><td>—</td><td>—</td><td>—</td><td>4,857</td><td>4,857</td></tr><tr><td>Brian C. Cornell</td><td>452</td><td>1,474</td><td>—</td><td>1,926</td><td>11,297</td><td>13,223</td></tr><tr><td>Tanya Domier</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,611</td><td>2,611</td></tr><tr><td>Mirian M. Graddick-Weir</td><td>—</td><td>5,216</td><td>—</td><td>5,216</td><td>24,158</td><td>29,374</td></tr><tr><td>Thomas C. Nelson</td><td>10,506</td><td>10,531</td><td>—</td><td>21,037</td><td>62,142</td><td>83,179</td></tr><tr><td>Justin Skala</td><td>2,150</td><td>1,064</td><td>—</td><td>3,214</td><td>7,104</td><td>10,318</td></tr><tr><td>Elane B. Stock</td><td>4,019</td><td>2,205</td><td>—</td><td>6,224</td><td>10,575</td><td>16,799</td></tr><tr><td>Robert D Walter(5)</td><td>112,284</td><td>10,531</td><td>—</td><td>122,815</td><td>50,438</td><td>173,253</td></tr><tr><td>David Gibbs</td><td>39,266</td><td>223,900</td><td>16,439</td><td>279,605</td><td>21,589</td><td>301,194</td></tr><tr><td>Tracy Skeans</td><td>6,459</td><td>58,521</td><td>9,487</td><td>74,467</td><td>1,147</td><td>75,614</td></tr><tr><td>Roger Eaton</td><td>40,162</td><td>167,075</td><td>15,878</td><td>223,115</td><td>62,910</td><td>286,025</td></tr><tr><td>David Russell</td><td>11,794</td><td>62,455</td><td>324</td><td>74,573</td><td>14,029</td><td>88,602</td></tr><tr><td>Marc Kesselman</td><td>—</td><td>15,360</td><td>17,739</td><td>33,099</td><td>4,953</td><td>38,052</td></tr><tr><td>All Directors and Executive Officers as a Group (17 persons)</td><td>406,593</td><td>1,154,910</td><td>157,137</td><td>1,718,640</td><td>347,823</td><td>2,066,463</td></tr></table>

(1) Shares owned outright. These amounts include the following shares held pursuant to YUM’s 401(k) Plan as to which each named person has sole voting power:

• Ms. Skeans, 4,927

• Mr. Russell, 1,017

• all executive officers as a group, 5,944 shares

(2) The amounts shown include beneficial ownership of shares that may be acquired within 60 days pursuant to SARs awarded under our employee or director incentive compensation plans. For SARs, we report the shares that would be delivered upon exercise (which is equal to the number of SARs multiplied by the difference between the fair market value of our common stock at year-end and the exercise price divided by the fair market value of the stock).

(3) These amounts shown reflect units denominated as common stock equivalents held in deferred compensation accounts for each of the named persons under our Director Deferred Compensation Plan or our Executive Income Deferral Program and include full value awards. Amounts payable under these plans will be paid in shares of YUM common stock at termination of directorship/employment or within 60 days if so elected.

(4) The amounts shown include units denominated as common stock equivalents held in deferred compensation accounts which become payable in shares of YUM common stock at a time (a) other than at termination of directorship/employment or (b) after 60 days.

(5) For Mr. Creed, these shares are held by a family LLC of which Mr. Creed is the manager. For Mr. Walter, these shares are held in a trust.



## SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% of the outstanding shares of YUM common stock to file with the SEC reports of their ownership and changes in their ownership of YUM common stock. Directors, executive officers and greater-than-ten percent shareholders are also required to furnish YUM with copies of all ownership reports they file with the SEC. To our knowledge, based solely on a review of the copies of such reports furnished to YUM and representations that no other reports were required, all of our directors and executive officers complied with all Section 16(a) filing requirements during fiscal 2018, except that Ms. Skeans had one late Form 4 report that reported 3 late transactions (the exercise of a SAR and two sales transactions) due to the broker’s failure to notify the executive officer or Company of the transactions.

## EXECUTIVE COMPENSATION

## Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) describes our executive compensation philosophy and program, the compensation decisions of the Management Planning and Development Committee (the “Committee”) for our named executive officers (“NEOs”) and factors considered in making those decisions.

## Table of Contents

I. Executive Summary ..... 40
A. YUM 2018 Performance ..... 40
B. Named Executive Officers ..... 41
C. Compensation Philosophy ..... 41
D. Compensation Overview ..... 42
E. Relationship between Company Pay and Performance ..... 42
II. Elements of Executive Compensation Program ..... 44
A. Base Salary ..... 44
B. Annual Performance-Based Cash Bonuses ..... 44
C. Long-Term Equity Performance-Based Incentives ..... 46
III. 2018 Named Executive Officer Total Direct Compensation and Performance Summary ..... 47
IV. Retirement and Other Benefits ..... 51
V. How Compensation Decisions Are Made ..... 52
VI. Compensation Policies and Practices ..... 55



## I. Executive Summary

## A. YUM 2018 Performance

In 2016 we launched a series of initiatives to transform the Company, centering on a new multi-year strategy to accelerate growth, reduce volatility and increase capital returns to shareholders. By the end of 2018, we intended to own less than 1,000 restaurants (at least 98% franchised) and, in 2019, intend to have reduced annual run rate net capital expenditures to approximately $100 million and to have improved our efficiency by lowering general and administrative expenses as a percentage of system sales to 1.7%. The transformation strategy builds upon the principle that a more focused, more franchised and more efficient company will accelerate growth and create significant long-term value for all of our stakeholders. Our four key growth drivers, discussed below, are the principal drivers of the Company’s strategic plans to accelerate same-store sales and net-new unit growth and serve as our guiding principles for strengthening and growing our KFC, Pizza Hut and Taco Bell brands around the world. In 2018, we achieved our goal of becoming at least 98% franchised and continued to make significant progress towards our 2019 goals.

Our successes in 2018 were possible because of our focus on four growth drivers, each a part of our “Recipe for Growth”, which form the basis of the Company’s strategic plans to accelerate same-store sales growth and net-new restaurant development at KFC, Pizza Hut and Taco Bell around the world. The Company remains focused on building the world’s most loved, trusted and fastest growing restaurant brands by: (i) building Distinctive, Relevant and Easy Brands, by increasing investment in consumer insights, core product innovation, digital excellence and initiatives that strengthen the quality, convenience and appeal of the customer experience; (ii) developing Unmatched Franchise Operating Capability, strengthening how we equip and recruit the best restaurant operators to deliver great customer experiences, and build and protect our brands; (iii) driving Bold Restaurant Development through partnerships with growth-minded franchisees who can expand and penetrate markets with modern restaurants, strong economics and value; and (iv) growing Unrivaled Culture and Talent to strengthen the customer experience and franchise success with best-in-class people capability and culture.

Strong brands are critical to our ability to deliver sustained growth and to create long-term shareholder value. As a part of strategic efforts to improve franchise unit level economics, the Company made an investment in Grubhub Inc., partnered with Telepizza and acquired QuikOrder, Inc. during 2018. These actions are designed to expand our delivery capabilities, increase our footprint and scale and enhance our technology capabilities going forward.

2018 was a successful year for the Company and its progress towards the transformation initiative. System sales grew 5%, with same store sales growth of 2%. We achieved net unit growth of 7%, as a result of an increase in our system restaurant count by 3,039 units. Our adjusted operating profit also increased approximately 11% during 2018 (see Appendix A: Reconciliation of Adjusted Operating Profit Growth to GAAP Operating Profit Growth). These results provide us with confidence that we are making meaningful progress towards our goal of building and strengthening our global KFC, Pizza Hut and Taco Bell brands. The following performance highlights illustrate the Company’s success in 2018

## 2018 Performance Highlights \( ^{1} \) 

Development
Net-New Unit Growth

7%

Total Net New Units \( ^{*} \) : 3,039

 \( ^{*} \) Including Telepizza

System Sales Growth

5%

Total Shareholder Return \( ^{2} $ 

14%

79 \( ^{th} \)  Percentile vs S&P 500 Consumer Discretionary Index

Strategic Investment, Acquisitions and Alliances:

☐ Grubhub

☐ QuikOrder

Telepizza



(1) Note: All comparisons are versus the same period a year ago. System sales figures in this section exclude the impact of foreign currency translation. See the Non-GAAP Items section in Item 7 of YUM's Form 10-K for the fiscal year ended on December 31, 2018 for a reconciliation of GAAP Company sales to System sales.

(2) Total shareholder return is calculated as the growth in YUM share price from the beginning of 2018 until the year-end, and includes assumed reinvestment of dividends.

## B. Named Executive Officers

The Company’s NEOs for 2018 are as follows:

<table><tr><td>Name</td><td>Title</td></tr><tr><td>Greg Creed</td><td>Chief Executive Officer</td></tr><tr><td>David W. Gibbs \( ^{(1)} \)</td><td>President, Chief Operating Officer and Chief Financial Officer</td></tr><tr><td>Roger G. Eaton \( ^{(2)} \)</td><td>Retired Chief Executive Officer of KFC Division</td></tr><tr><td>Tracy L. Skeans</td><td>Chief Transformation and People Officer</td></tr><tr><td>David E. Russell</td><td>Senior Vice President, Finance and Corporate Controller</td></tr><tr><td>Marc. L. Kesselman \( ^{(3)} \)</td><td>Former General Counsel, Corporate Secretary and Chief Government Affairs Officer</td></tr></table>

(1) Effective January 25, 2019, Mr. Gibbs was appointed as the Chief Operating Officer of the Company, in addition to his roles as President and Chief Financial Officer.

(2) Mr. Eaton retired as Chief Executive Officer of KFC Division, effective January 1, 2019.

(3) Mr. Kesselman ceased to be the Company’s General Counsel, Corporate Secretary and Chief Government Affairs Officer, effective June 30, 2018.

## C. Compensation Philosophy

The business performance of the Company is of the utmost importance in how our executives are compensated. Our compensation program is designed to both support our long-term growth model and hold our executives accountable to achieve key annual results year after year. YUM's compensation philosophy for the NEOs is reviewed annually by the Committee and has the following objectives:

<table><tr><td rowspan="2">Objective</td><td colspan="3">Pay Element</td></tr><tr><td>Base Salary</td><td>Annual Performance-Based Cash Bonuses</td><td>Long-Term Equity Performance-Based Incentives</td></tr><tr><td>Attract and retain the best talent to achieve superior shareholder results—To be consistently better than our competitors, we need to recruit and retain superior talent who are able to drive superior results. We have structured our compensation programs to be competitive and to motivate and reward high performers.</td><td>✓</td><td>✓</td><td>✓</td></tr><tr><td>Reward performance—The majority of NEO pay is performance based and therefore at risk. We design pay programs that incorporate team and individual performance goals that lead to shareholder return.</td><td></td><td>✓</td><td>✓</td></tr><tr><td>Emphasize long-term value creation—Our belief is simple: if we create value for shareholders, then we share a portion of that value with those responsible for the results.</td><td></td><td></td><td>✓</td></tr><tr><td>Drive ownership mentality—We require executives to invest in the Company’s success by owning a substantial amount of Company stock.</td><td></td><td></td><td>✓</td></tr></table>



## D. Compensation Overview

## 2018 Compensation Highlights

• In January of 2018, the Committee made the following decisions and took the following actions:

- The Committee set our CEO target compensation levels at the median of our Executive Peer Group (defined at page 54) for the CEO role;

- The Committee set the equity mix for our Global Leadership Team’s long-term incentive awards at 50% stock appreciation rights (“SARs”) and 50% performance share units (“PSUs”); and

- The Committee certified that our 2015 PSU awards under our Performance Share Plan paid out at 172% of target in 2018 based on the Company’s Total Shareholder Return (“TSR”) at the 79 percentile, compared to the S&P 500, for the 2015-2017 performance cycle (see discussion of PSUs at page 46).
• At our May 2018 Annual Meeting of Shareholders, shareholders approved our “Say on Pay” proposal in support of our executive compensation program, with 95% of votes cast in favor of the proposal.

• We continued our shareholder outreach program to better understand our investors’ opinions on our compensation practices and respond to their questions. Committee and management team members from compensation, investor relations and legal continued to be directly involved in engagement efforts during 2018 that served to reinforce our open door policy. The efforts included contacting our largest 35 shareholders, representing ownership of approximately 50% of our shares (discussed further on page 52).

## E. Relationship between Company Pay and Performance

To focus on both the short-term and long-term success of the Company, approximately 90% of our CEO’s target compensation is “at-risk” pay, with the compensation paid based on Company results. If short-term and long-term financial and operational target goals are not achieved, then performance-related compensation will decrease. If target goals are exceeded, then performance-related compensation will increase. As demonstrated below, our target pay mix for our CEO emphasizes our commitment to “at-risk” pay in order to tie pay to performance. For purposes of this section, our discussion is limited to our CEO, Mr. Creed. Our other NEOs’ target compensation is subject to a substantially similar set of considerations, which are discussed in Section III, 2018 Named Executive Officer Total Direct Compensation and Performance Summary, found at pages 47 to 51 of this CD&A.

CEO Target Pay Mix - 2018






## CEO Total Direct Compensation

The Committee sets the CEO’s target for total direct compensation (base salary, annual cash bonus and annual long-term incentive award value at grant date) every year to align appropriately with market data for our Executive Peer Group, taking into account the CEO’s performance, time in role and other job-related factors. For 2016 and 2017, the Committee set the CEO’s total compensation below the 50th percentile and for 2018, at the 50th percentile. The progression in target total compensation reflects the CEO’s growth in role and ongoing continued strong performance.

As demonstrated below, the CEO’s actual total direct compensation was above target for the last three years, reflecting the Company’s above target performance. For 2018, 67% of our CEO’s pay was in the form of long-term equity incentive compensation.

CEO Total Direct Compensation vs. Performance

<table><tr><td></td><td>2016</td><td>2017</td><td>2018</td></tr><tr><td>Adjusted Operating Profit Growth \( ^{1} \)</td><td>17%</td><td>15%</td><td>11%</td></tr><tr><td>System Sales Growth \( ^{2} \)</td><td>5%</td><td>4%</td><td>5%</td></tr><tr><td>Total Shareholder Return \( ^{3} \)</td><td>23%</td><td>31%</td><td>14%</td></tr></table>



(1) The Company uses Adjusted Operating Profit Growth as a key performance measure of results of operations for the purpose of evaluating performance against targets set under our YUM Leaders' Bonus Program. Refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth, as shown above, to GAAP Operating Profit Growth.

(2) System sales growth excludes the impact of foreign currency translation and, for 2017 and 2016, the impact of a 53rd week in 2016.

(3) Total shareholder return is calculated as the growth in YUM share price from the beginning of the respective year until the year-end, and includes assumed reinvestment of dividends.



## II. Elements of Executive Compensation Program

Our annual executive compensation program has three primary pay components: base salary; annual performance-based cash bonuses; and long-term equity performance-based incentives. We also offer retirement and other benefits.

<table><tr><td>Element</td><td>Objective</td><td>Form</td></tr><tr><td>Base salary</td><td>Attract and retain high-caliber talent and provide a fixed level of cash compensation.</td><td>Cash</td></tr><tr><td>Annual Performance-Based Cash Bonuses</td><td>Motivate high performance and reward short-term Company, team and individual performance.</td><td>Cash</td></tr><tr><td>Long-Term Equity Performance-Based Incentives</td><td>Align the interests of executives with shareholders and emphasize long-term results.</td><td>SARs &amp; PSUs</td></tr><tr><td>Retirement and Additional Benefits</td><td>Provide for long-term retirement income and basic health and welfare coverage.</td><td>Various</td></tr></table>

## A. Base Salary

We provide base salary to compensate our NEOs for their primary roles and responsibilities and to provide a stable level of annual compensation. A NEO’s salary varies based on the role, level of responsibility, experience, individual performance, potential and market value. Specific salary increases take into account these factors. The Committee reviews each NEO’s salary and performance annually.

## B. Annual Performance-Based Cash Bonuses

Our performance-based annual bonus program, the YUM Leaders' Bonus Program, is a cash-based plan. The principal purpose of the YUM Leaders' Bonus product is to motivate and reward short-term team and individual performance that drives shareholder value.

The formula for calculating the performance-based annual bonus under the YUM Leaders' Bonus Program is the product of the following:

<table><tr><td>Base Salary</td><td>X</td><td>Target Bonus Percentage</td><td>X</td><td>Team Performance (0 - 200%)</td><td>X</td><td>Individual Performance (0 - 150%)</td><td>=</td><td>Bonus Payout (0 - 300%)</td></tr></table>

## Team Performance

In light of the Company’s transformation, which began in 2016 and continued throughout 2017 and 2018, the Committee carefully considered our strategic direction to become a pure-play franchisor and established team performance measures, targets and weights in January 2018 after receiving input and recommendations from management. The team performance targets were also reviewed by the Board to ensure that the goals support the Company’s overall strategic objectives.

The performance targets were developed through the Company’s annual financial planning process, which takes into account KFC, Pizza Hut and Taco Bell (each, a “Division”) growth strategies, historical performance, and the expected future operating environment for each Division.
When setting targets for each specific team performance measure, the Company takes into account overall business goals and structures the target to motivate achievement of desired performance consistent with our growth commitment to shareholders. The performance targets are comparable to those we disclose to our investors and, when determined to be appropriate by our Committee, may be slightly above or below disclosed guidance.

A leverage formula for each team performance measure magnifies the potential impact that performance above or below the performance target will have on the calculation of the annual bonus. This leverage increases the payouts when targets are exceeded and reduces payouts when performance is below target. There is a threshold level of performance



for all measures that must be met in order for any bonus to be paid. Additionally, all measures have a cap on the level of performance over which no additional bonus will be paid regardless of performance above the cap.

The Committee may approve adjustments to Division targets or may exclude certain pre-established items from the financial results used to determine the annual bonus when doing so is consistent with the objectives and intent at the time the targets were originally set in order to focus executives on the fundamentals of the Company’s underlying business performance.

As part of the 2018 target-setting process the Committee decided that KFC and/or YUM Operating Profit growth performance for 2018 annual incentive purposes should be measured adjusting for certain factors that were not considered indicative of underlying business performance for the year. These factors included amounts associated with Special Items (as defined in our Form 10K), the impacts of foreign currency translation, the profit dilution resulting from the refranchising of company-owned stores, general and administrative reductions, incremental Pizza Hut US system advertising expense we agreed to as part of the Pizza Hut Transformation Agreement and the impact of a 2018 required change in the accounting standards for revenue recognition. For further details, refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth.

## Detailed Breakdown of 2018 Team Performance

The team performance targets, actual results, weights and overall performance for each measure for our NEOs are outlined below. The long-term drivers of value for YUM are profit growth, same-store sales growth and new store development. Accordingly, the Committee selected these performance measures for the Company’s annual incentive plan and were included at both the corporate and divisional levels. For Divisions, the team performances are weighted 75% on Division operating measures and 25% on YUM team performance.

<table><tr><td colspan="7">Team Performance</td></tr><tr><td>NEO</td><td>Measures</td><td colspan="5">Earned Award</td></tr><tr><td></td><td></td><td>Target Actual</td><td>as % of Target</td><td>Weighting</td><td>Final Team Performance</td><td></td></tr><tr><td>Creed</td><td>Adjusted Operating Profit Growth \( ^{1} \)</td><td>12%</td><td>11.4%</td><td>92</td><td>50%</td><td>46</td></tr><tr><td>Gibbs</td><td>System Same-Store Sales Growth</td><td>3.0%</td><td>2.0%</td><td>75</td><td>25%</td><td>19</td></tr><tr><td>Skeans</td><td>System Net New Units</td><td>1,645</td><td>3,039</td><td>200</td><td>25%</td><td>50</td></tr><tr><td>Russell \( ^{[2]} \)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Kesselman \( ^{[2]} \)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>FINAL YUM TEAM FACTOR</td><td></td><td></td><td></td><td></td><td>115</td></tr><tr><td>Eaton</td><td>Adjusted Operating Profit Growth \( ^{1} \)</td><td>12%</td><td>12.8%</td><td>115</td><td>50%</td><td>58</td></tr><tr><td></td><td>System Same-Store Sales Growth</td><td>3.0%</td><td>2.4%</td><td>84</td><td>25%</td><td>21</td></tr><tr><td></td><td>System Net New Units</td><td>850</td><td>1,134</td><td>200</td><td>25%</td><td>50</td></tr><tr><td></td><td>Total Weighted Team Performance — KFC (75%)</td><td></td><td></td><td></td><td></td><td>129</td></tr><tr><td></td><td>Total Weighted Team Performance — YUM (25%)</td><td></td><td></td><td></td><td></td><td>115</td></tr><tr><td></td><td>FINAL KFC TEAM FACTOR</td><td></td><td></td><td></td><td></td><td>126</td></tr></table>

(1) Refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth, as shown above, to GAAP Operating Profit Growth.

(2) Mr. Russell received a 120 team factor based on a discretionary adjustment that was made for all YUM employees who were not members of the YUM Global Leadership Team. Mr. Kesselman received a 100 team factor in connection with his departure from the Company.



## Individual Performance

Each NEO’s Individual Performance Factor is determined by the Committee based upon its subjective determination of the NEO’s individual performance for the year, including consideration of specific objective individual performance goals set at the beginning of the year.

## C. Long-Term Equity Performance-Based Incentives

We provide performance-based long-term equity compensation to our NEOs to encourage long-term decision making that creates shareholder value. To that end, we use vehicles that motivate and balance the tradeoffs between short-term and long-term performance. Performance-based long-term equity compensation also serves as a retention tool.

Our NEOs are awarded long-term incentives annually based on the Committee’s subjective assessment of the following items for each NEO (without assigning weight to any particular item):

• Prior year individual and team performance

• Expected contribution in future years

- Consideration of the market value of the executive’s role compared with similar roles in our Executive Peer Group

• Achievement of stock ownership guidelines

## Equity Mix

Each year, the Committee reviews the mix of long-term incentives. For 2018, the Committee continued to choose SARs and PSU awards because these equity vehicles focus and reward management for enhancing long-term shareholder value, thereby aligning our NEOs with the interests of our shareholders.

At the beginning of 2018, the Committee determined a target grant value for each member of the Global Leadership Team and the split of that value between SARs and PSU grants. For each NEO (other than Mr. Russell), the target grant value was split 50% SARs and 50% PSUs. Mr. Russell received 100% SARs because PSUs are not granted to Company employees at his level. For each NEO, the breakdown between SARs award values and PSU award values can be found under the Summary Compensation Table, page 59 at columns e and f.

## Stock Appreciation Rights Awards

The Committee believes that SARs reward value creation generated from sustained results. In 2018, we granted to each of our NEOs SARs which have ten-year terms and vest over four years. The exercise price of each SAR award was based on the closing market price of the underlying YUM common stock on the date of grant. Therefore, SAR awards will only have value if our NEOs are successful in increasing the share price above the awards’ exercise price.

## Performance Share Awards

Pursuant to the Performance Share Plan under our Long Term Incentive Plan (“LTIP”), we granted our NEOs (other than Mr. Russell) PSU awards in 2018. PSU awards are earned equally based on the Company’s 3-year average TSR relative to the companies in the S&P 500 Consumer Discretionary Index and on compound annual 3-year growth of the Company’s Earnings Per Share (“EPS”). Incorporating TSR and EPS supports the Company’s pay-for-performance philosophy while diversifying performance criteria by using measures not used in the annual bonus plan and aligning our NEOs’ reward with the creation of shareholder value. If TSR is negative, payouts may not exceed the target irrespective of the actual TSR percentile ranking of the Company. The target, threshold and maximum number of shares that may be paid under these awards for each NEO are described at page 61.

For the performance period covering 2018 – 2020, each NEO (other than Mr. Russell) will earn a percentage of his or her target PSU award, with 50% of the payout based on the achieved TSR percentile ranking and the other 50% based on EPS growth. Indicative payouts as a percentage of target are as set forth in the table below:

<table><tr><td></td><td>Threshold</td><td>Target</td><td>Maximum</td></tr><tr><td>TSR Percentile Ranking</td><td>&lt;30%</td><td>30%</td><td>50%</td></tr><tr><td>Payout as % of Target</td><td>0%</td><td>35%</td><td>100%</td></tr><tr><td>EPS Growth (3-year CAGR, ex foreign currency translation)</td><td>&lt;7%</td><td>7%</td><td>12%</td></tr><tr><td>Payout as % of Target</td><td>0%</td><td>35%</td><td>100%</td></tr></table>



Dividend equivalents will accrue during the performance period and will be distributed as additional shares but only in the same proportion and at the same time as the original awards are earned. If no shares are earned, no dividend equivalents will be paid. The awards are eligible for deferral under the Company’s Executive Income Deferral (“EID”) Program.

## III. 2018 Named Executive Officer Total Direct Compensation and Performance Summary

Below is a summary of each of our NEOs' total direct compensation – which includes base salary, annual cash bonus, and long-term incentive awards – and an overview of their 2018 performance relative to our annual and long-term incentive performance goals. The process the Committee used to determine each officer's 2018 compensation is described more fully in "How Compensation Decisions Are Made" beginning on page 52.

## CEO Compensation

## Greg Creed

Chief Executive Officer

## 2018 Performance Summary

Our Board, under the leadership of the Committee Chair, approved Mr. Creed’s goals at the beginning of the year and conducted a mid-year and year-end evaluation of his performance. These evaluations included a review of his leadership pertaining to the achievement of his goals that included business results, leadership in the development and implementation of Company strategies, and development of Company culture and talent.

The Committee determined that Mr. Creed’s overall performance for 2018 merited an individual factor of 125. This individual factor was combined with YUM’s team factor of 115 (discussed at page 44) to calculate his annual cash bonus. This determination was based on the Committee’s subjective assessment of Mr. Creed’s performance against his goals which included the following items (without assigning a weight to any particular item):

• YUM Adjusted Operating Profit Growth of approximately 11%

• Worldwide system sales growth of 5%

• Net new restaurant openings of 3,039; net unit growth of 7%
• KFC’s and Taco Bell’s above target performance for Adjusted Operating Profit Growth

• KFC’s, and Pizza Hut International’s above target performance for System Net New Units

• Management of the Company during the second year of its transformation into a pure-play franchisor

• Leadership during the strategic transactions involving Grubhub Inc., Telepizza and QuikOrder, Inc.

• Development of leadership and leadership bench, and fostering customer-focused employee culture

## 2018 Committee Decisions

In January, Mr. Creed’s compensation was adjusted as follows:

• Base salary was increased 3%;

• Annual cash bonus target was increased to 175% of base salary; and

• Grant value of long-term incentive equity awards were increased by 33% recognizing his performance in leading the Company in implementing its Recipe for Growth, time in role and impact on the business.

These decisions positioned Mr. Creed’s total target compensation to approximately the 50th percentile of the Company’s Executive Peer Group.



The graphics below illustrate Mr. Creed’s direct compensation:





## Other NEO 2018 Total Direct Compensation

## David W. Gibbs

President, Chief Operating Officer and Chief Financial Officer

## 2018 Performance Summary

The Committee determined Mr. Gibbs’ performance for the year merited a 135 individual performance factor. The Committee recognized Mr. Gibbs’ performance in the position of President and CFO of the Company, including driving shareholder value creation and returns through optimization of our capital structure, increasing restaurant development, driving YUM’s Adjusted Operating Profit Growth of 11%, leading the effort to refranchise a significant number of Company-owned restaurants, and in leading the continued implementation of the Company’s transformation strategy. Mr. Gibbs was also recognized for his leadership during the strategic transactions involving Grubhub Inc., Telepizza and QuikOrder, Inc. Mr. Gibbs’ individual performance factor was combined with a team factor of 115 (discussed at page 44) to calculate his annual cash bonus.

Effective January 25, 2019, Mr. Gibbs was promoted to President, Chief Operating Officer and Chief Financial Officer.

## 2018 Committee Decisions

In January, Mr. Gibbs’ compensation was adjusted as follows:

• Base salary was increased 7%;

• Annual cash bonus target remained unchanged at 105% of base salary; and

• Grant value of long-term incentive equity awards were increased by 25% to better align with market compensation norms and internal peer equity, as well as to reflect performance and time in role.

These decisions positioned Mr. Gibbs’ total direct compensation between the 50th and 75th percentile of the Executive Peer Group (defined at page 54) for his position.



## 2018 Performance Summary

The Committee determined Mr. Eaton’s performance as the CEO, KFC Division, merited a 125 individual performance factor. Under Mr. Eaton’s leadership, KFC achieved significantly above-target net new unit growth, as well as above-target Adjusted Operating Profit Growth. Mr. Eaton was also recognized for increasing KFC delivery capabilities to over 10,000 restaurants, driving compliance with food safety, information security and Foreign Corrupt Practices Act (“FCPA”) standards, and providing leadership in the refranchising of a significant number of restaurants. Mr. Eaton’s individual performance factor was combined with a team factor of 126 (discussed at page 44) to calculate his annual cash bonus.

## Tracy L. Skeans

Chief Transformation and People Officer

## 2018 Performance Summary

The Committee determined that Ms. Skeans' performance merited a 125 individual performance factor. The Committee recognized Ms. Skeans for providing strategic leadership in the organizational transformation of the Company, as well as her efforts in cultivating the Company's culture and talent. Ms. Skeans was also recognized for driving compliance with food safety, information security and FCPA standards and improving brand protection and crisis communications protocols. Ms. Skeans' individual factor was combined with a team factor of 115 (discussed at page 44) to calculate her annual cash bonus.

## 2018 Committee Decisions

In January, Mr. Eaton’s compensation was adjusted as follows:

• Base salary was increased 3% percent;

• Annual cash bonus target remained unchanged at 100% of base salary; and

• Grant value of long-term incentive equity awards remained unchanged from previous year.

These decisions positioned Mr. Eaton’s total direct compensation between the 50th and 75th percentile of the Executive Peer Group (defined at page 54) for his position.

## 2018 Committee Decisions

In January, Ms. Skeans’ compensation was adjusted as follows:

• Base salary was increased 12%;

• Annual cash bonus target remained unchanged at 85% of base salary; and

• Grant value of long-term incentive equity awards was increased by 14% to better align with market compensation norms and internal peer equity, as well as to reflect performance and her time in the role.

• Ms. Skeans also received a CEO Award SARs grant of $1,000,000, recognizing her leadership for accelerating diversity & inclusion initiatives, championing the use of repeatable models around the globe, and developing and implementing talent and leadership programs that drove attraction, retention and best-in-class engagement scores.

These decisions positioned Ms. Skeans’ total direct compensation at slightly above the 50th percentile of the Executive Peer Group (defined at page 54) for her position.



## David E. Russell

Senior Vice President, Finance and Corporate Controller

## 2018 Performance Summary

The Committee determined Mr. Russell’s performance for the year merited a 140 individual performance factor. The Committee recognized Mr. Russell’s performance in leading the effort to implement a new financial management system and in supporting the Company’s transformation strategy. Mr. Russell was also recognized for his leadership during the strategic transactions involving Grubhub Inc., Telepizza and QuikOrder, Inc. Mr. Russell’s individual performance factor was combined with a team factor of 120 (discussed at page 44) to calculate his annual cash bonus.

## Marc L. Kesselman

Former General Counsel, Corporate Secretary and Chief Government Affairs Officer

## 2018 Performance Summary

Mr. Kesselman was the Company’s General Counsel, Corporate Secretary and Chief Government Affairs Officer through June 30, 2018, and is no longer an employee of YUM. He is included in the Summary Compensation Table as required by SEC rules because his compensation while an employee of YUM was at a level that would have required disclosure had he been an executive officer at the end of 2018.

The Committee approved a 100 individual performance factor for Mr. Kesselman, in connection with his departure from the Company.

## 2018 Committee Decisions

In January, Mr. Russell’s compensation was adjusted as follows:

• Base salary was increased 3%;

• Annual cash bonus target remained unchanged at 65% of base salary; and

• Target grant value of long-term incentive equity awards remained unchanged.

These decisions positioned Mr. Russell’s total direct compensation between the 50 \( ^{th} \)  and 75 \( ^{th} \)  percentile of the Executive Peer Group (defined at page 54) for his position.

## 2018 Committee Decisions

In January, Mr. Kesselman’s compensation was adjusted as follows:

• Base salary was increased 2%;

• Annual cash bonus target remained unchanged at 85% of base salary; and

• Grant value of long-term incentive equity awards remained unchanged from previous year.

These decisions positioned Mr. Kesselman’s total direct compensation at approximately the 50 \( ^{th} \)  percentile of the Executive Peer Group (defined at page 54) for his position.



The graphic below illustrates the 2018 total direct compensation of our Named Executive Officers, other than Mr. Creed and Mr. Kesselman:



## IV. Retirement and Other Benefits

## Retirement Benefits

We offer several types of competitive retirement benefits.

The YUM! Brands Retirement Plan (“Retirement Plan”) is a broad-based qualified plan designed to provide a retirement income based on years of service with the Company and average annual earnings. The plan is U.S.-based and was closed to new entrants in 2001. Mr. Gibbs, Ms. Skeans and Mr. Russell are active participants in the Retirement Plan and Mr. Creed maintains a balance in the Retirement Plan from the years that he was a participant.

For executives hired or re-hired after September 30, 2001, the Company implemented the Leadership Retirement Plan (“LRP”). This is an unfunded, unsecured account-based retirement plan which allocates a percentage of pay to an account payable to the executive following the later to occur of the executive’s separation of employment from the Company or attainment of age 55. For 2018, Mr. Kesselman was eligible for the LRP. Under the LRP, Mr. Kesselman received an annual allocation to his account equal to 8% of his base salary and target bonus, and an annual earnings credit of 5% on the balance.

The Company provides retirement benefits for certain international employees through the Third Country National Plan (“TCN”). The TCN is an unfunded, unsecured account-based retirement plan that provides an annual contribution between 7.5% and 15% of salary and target bonus and an annual earnings credit of 5% on the balance. The level of contribution is based on the participants’ role and their home country retirement plan. Messrs. Creed and Eaton are the only NEOs who participate in the TCN. Under this plan, Messrs. Creed and Eaton each receive an annual contribution equal to 15% of base salary and target bonus and an annual earnings credit of 5%.

Benefits payable under these plans are described in more detail beginning on page 66.



## Medical, Dental, Life Insurance and Disability Coverage

We also provide other benefits such as medical, dental, life insurance and disability coverage to each NEO through benefit plans, which are also provided to all eligible U.S.-based salaried employees. Eligible employees can purchase additional life, dependent life

## Perquisites

The Company provides very limited number of perquisites. The CEO and his spouse were required to use charter or approved commercial aircraft for personal as well as business travel pursuant to the Company’s executive security program established by the Board of Directors. Our program provides that upon the CEO reaching $200,000 in costs for his personal use, any costs for personal aircraft use of and accidental death and dismemberment coverage as part of their employee benefits package. Our broad-based employee disability plan limits the annual benefit coverage to $300,000.

above $200,000 will be reimbursed to the Company in accordance with the requirements of the Federal Aviation Administration regulations. We do not provide tax gross-ups on the personal use of the charter or approved commercial aircraft. For 2018, the incremental cost of Mr. Creed’s personal use of charter or commercial aircraft was $134,043.

## V. How Compensation Decisions Are Made

## Shareholder Outreach, Engagement and 2018 Vote on NEO Compensation

At our 2018 Annual Meeting of Shareholders, 95% of votes cast on our annual advisory vote on NEO compensation were in favor of our NEOs' compensation program, as disclosed in our 2018 proxy statement. During 2018, we continued our shareholder outreach program to better understand our investors' opinions on our compensation practices and respond to their questions. Committee members and management team members from compensation, investor relations and legal continued to be directly involved in engagement efforts that served to reinforce our open door policy. The efforts included:

• Contacting our largest 35 shareholders, representing ownership of approximately 50% of our shares

• Dialogue with proxy advisory firms

• Investor road shows and conferences

• Presenting shareholder feedback to the Committee

• Considering letters from shareholders

Our annual engagement efforts allow many shareholders the opportunity to provide feedback. The Committee carefully considers shareholder and advisor feedback, among other factors discussed in this CD&A, in making its compensation decisions. Shareholder feedback, including the 2018 voting results on NEO compensation, has influenced and reinforced a number of compensation design changes over the years, including:

• Continued benchmarking of CEO compensation at market median.

• Continued adjustment of CEO long-term equity incentive mix from a mix comprised of 75% SARs and 25% PSUs in 2016 to a mix comprised of 50% SARs and 50% PSUs in 2017 and 2018.

• Moving to two performance metrics under our PSUs – TSR and EPS, beginning with PSU grants in 2017.

• Changed PSU award metrics to include the Company’s 3-year average TSR relative to the companies in the S&P 500 Consumer Discretionary Index, rather than the average relative to the entire S&P 500.

The Company and the Committee appreciate the feedback from our shareholders and plan to continue these engagement efforts.



## Role of the Committee

Compensation decisions are ultimately made by the Committee using its judgment, focusing primarily on each NEO’s performance against his financial and strategic objectives, qualitative factors and the Company’s overall performance. The Committee considers the total compensation of each NEO and retains discretion to make decisions that are reflective of overall business performance and each executive’s strategic contributions to the business. In making its compensation decisions, the Committee typically follows the annual process described below:

## COMMITTEE ANNUAL COMPENSATION PROCESS

■ Reviews competitive analysis/benchmarking for CEO and direct reports

■ Reviews bonus and performance share plan metrics, targets, and leverage recommendations for the following year

■ Reviews market analysis of Director compensation and makes recommendations to Board

■ Reviews compensation trends

Mid-Year update to full Board on CEO’s progress against goals

■ Evaluates feedback from shareholders and proxy advisors



Evaluates and approves CEO and direct reports' performance against pre-established goals and compensation decisions

■ Approves bonus and performance share plan results for the prior year

■ Approves bonus and performance share plan metrics, targets and leverage for the current year

■ Reviews tally sheets

■ Confirms CEO and CEO’s direct reports meet ownership guidelines

■ Completes compensation risk assessment

■ Conducts independence analysis of compensation consultant retaining sole authority to continue or terminate its relationship with outside advisors, including consultant

■ Reviews and approves inclusion of CD&A in proxy statement

## Role of the Independent Consultant

The Committee’s charter states the Committee may retain outside compensation consultants, lawyers or other advisors. The Committee retains an independent consultant, Meridian Compensation Partners, LLC (“Meridian”), to advise it on certain compensation matters. The Committee has instructed Meridian that:

• it is to act independently of management and at the direction of the Committee;

• its ongoing engagement will be determined by the Committee;

• it is to inform the Committee of relevant trends and regulatory developments;

• it is to provide compensation comparisons based on information that is derived from comparable businesses of a similar size to the Company for the NEOs; and
• it is to assist the Committee in its determination of the annual compensation package for our CEO and other NEOs.

The Committee considered the following factors, among others, in determining that Meridian is independent of management and its provision of services to the Committee did not give rise to a conflict of interest:

• Meridian did not provide any services to the Company unrelated to executive compensation.

• Meridian has no business or personal relationship with any member of the Committee or management.

• Meridian’s partners and employees who provide services to the Committee are prohibited from owning YUM stock per Meridian’s firm policy.



## Comparator Compensation Data

Our Committee uses an evaluation of how our NEO target compensation levels compare to those of similarly situated executives at companies that comprise our Executive Peer Group (defined below) as one of the factors in setting executive compensation. The Executive Peer Group is made up of retail, hospitality, food, nondurable consumer goods companies, specialty eatery and quick service restaurants, as these represent the sectors with which the Company is most likely to compete for executive talent. The companies selected from these sectors must also be reflective of the overall market characteristics of our executive talent market, relative leadership position in their sector, size as measured by revenues, complexity of their business, and in some cases global reach.

## Executive Peer Group

The Committee established the current peer group of companies (the “Executive Peer Group”) for all NEOs at the end of 2016 for pay determinations beginning in 2017. The composition of the Executive Peer Group was updated at that time to allow for more relevant comparisons following the separation of Yum China Holdings, Inc. in October 2016, given the reduced size of the Company and the current complexities of its business. This Executive Peer Group is comprised of the following companies:

<table><tr><td>AutoZone Inc.</td><td>Domino&#x27;s Pizza, Inc.</td><td>General Mills, Inc.</td><td>L. Brands Inc.</td><td>Sherwin-William Co.</td></tr><tr><td>Bloomin&#x27; Brands, Inc.</td><td>Dr. Pepper Snapple Group, Inc.</td><td>Hershey Co.</td><td>Marriott Int&#x27;l, Inc.</td><td>VF Corp.</td></tr><tr><td>Brinker Int&#x27;l, Inc.</td><td>Estee Lauder Cos, Inc.</td><td>Hilton Worldwide Holdings</td><td>McDonald&#x27;s Corporation</td><td>Wendy&#x27;s Co.</td></tr><tr><td>Colgate Palmolive Company</td><td>Foot Locker, Inc.</td><td>Hyatt Hotels Corp.</td><td>Mondelez Int&#x27;l, Inc.</td><td>Wyndham Worldwide Corp.</td></tr><tr><td>Darden Restaurants, Inc.</td><td>Gap, Inc.</td><td>Kimberly-Clark Corp.</td><td>Penske Automotive Group, Inc.</td><td></td></tr></table>

At the time the benchmarking analysis was prepared, the Executive Peer Group’s median annual revenues were $9.3 billion, while YUM annual revenues were estimated at $14.4 billion (calculated as described below).

For companies with significant franchise operations, measuring size can be complex. Management responsibilities encompass more than just the revenues and operations directly owned and operated by the company. There are responsibilities for managing the relationships, arrangements, and overall scope of the franchising enterprise, in particular, managing product introductions, marketing, promoting new unit development, and customer satisfaction and overall operations improvements across the entire franchise system. Accordingly, in calibrating the size of our organization and underlying operating divisions during the 2017 benchmarking process, our philosophy was to add 25% of franchisee and licensee sales to the Company’s sales to establish an appropriate revenue benchmark. The reason for this approach was twofold:

• Market-competitive compensation opportunities are related to scope of responsibility, often measured by company size, i.e., revenues; and

• Scope of responsibility for a franchising organization lies between corporate-reported revenues and system wide sales.

We believe this approach is measured and reasoned in its approach to calibrating market competitive compensation opportunities without using organizations unduly larger than the Company.

## Competitive Positioning and Setting Compensation

At the beginning of 2018, the Committee considered Executive Peer Group compensation data as a frame of reference for establishing compensation targets for base salary, annual bonus and long-term incentives for each NEO. In making compensation decisions, the Committee considers market data for comparable



positions to each of our NEO roles. The Committee reviews market data and makes a decision for each NEO, most often in a range around market median for each element of compensation, including base salary, target bonus and long-term incentive target. In addition to the market data, the Committee takes into account the role, level of responsibility, experience, individual performance and potential of each NEO. The Committee reviews the NEOs' compensation and performance annually.

## VI. Compensation Policies and Practices

Below are compensation and governance best practices we employ that provide a foundation for our pay-for-performance program and align our program with Company and shareholder interests.

<table><tr><td>We Do</td><td>We Don&#x27;t Do</td></tr><tr><td>✓ Have an independent compensation committee (Management Planning &amp; Development Committee), which oversees the Company&#x27;s compensation policies and strategic direction</td><td>✗ Employment agreements</td></tr><tr><td>✓ Directly link Company performance to pay outcomes</td><td>✗ Re-pricing of SARs</td></tr><tr><td>✓ Have executive ownership guidelines that are reviewed annually against Company guidelines</td><td>✗ Grants of SARs with exercise price less than fair market value of common stock on date of grant</td></tr><tr><td>✓ Have a &quot;clawback&quot; policy under which the Company may recoup compensation if executive&#x27;s conduct results in significant financial or reputational harm to Company</td><td>✗ Permit executives to hedge or pledge Company stock</td></tr><tr><td>✓ Make a substantial portion of NEO target pay &quot;at risk&quot;</td><td>✗ Payment of dividends or dividend equivalents on PSUs unless or until they vest</td></tr><tr><td>✓ Have double-trigger vesting of equity awards upon a change in control</td><td>✗ Excise tax gross-ups upon change in control</td></tr><tr><td>✓ Utilize an independent Compensation Consultant</td><td>✗ Excessive executive perquisites, such as country club memberships</td></tr><tr><td>✓ Incorporate comprehensive risk mitigation into plan design</td><td></td></tr><tr><td>✓ Periodically review our Executive Peer Group to align appropriately with Company size and complexity</td><td></td></tr><tr><td>✓ Evaluate CEO and executive succession plans</td><td></td></tr><tr><td>✓ Conduct annual shareholder engagement program to obtain feedback from shareholders for consideration in annual compensation program design</td><td></td></tr></table>

## YUM's Executive Stock Ownership Guidelines

The Committee has established stock ownership guidelines for approximately 190 of our senior employees, including the NEOs. If a NEO or other executive does not meet his or her ownership guidelines, he or she is not eligible for a long-term equity incentive award. In 2018, all NEOs and all other employees subject to guidelines met or exceeded their ownership guidelines.



<table><tr><td>NEO</td><td>Ownership Guidelines</td><td>Shares Owned \( ^{(1)} \)</td><td>Value of Shares \( ^{(2)} \)</td><td>Multiple of Salary</td></tr><tr><td>Creed</td><td>7x base salary</td><td>825,179</td><td>725,850,454</td><td>60.7</td></tr><tr><td>Gibbs</td><td>3x base salary</td><td>285,316</td><td>526,226,247</td><td>29.1</td></tr><tr><td>Eaton</td><td>3x base salary</td><td>270,147</td><td>524,831,912</td><td>29.2</td></tr><tr><td>Skeans</td><td>2x base salary</td><td>67,655</td><td>6,218,848</td><td>9.2</td></tr><tr><td>Russell</td><td>1x base salary</td><td>88,602</td><td>8,144,296</td><td>19.8</td></tr><tr><td>Kesselman</td><td>2x base salary</td><td>15,360</td><td>1,411,891</td><td>2.3</td></tr></table>

(1) Calculated as of December 31, 2018 and represents shares beneficially owned outright, shares underlying vested in-the-money SARs, and all RSUs awarded under the Company’s EID Program.

(2) Based on YUM closing stock price of $91.92 as of December 31, 2018.

## Payments upon Termination of Employment

The Company does not have agreements with its executives concerning payments upon termination of employment except in the case of a change in control of the Company. The Committee believes these are appropriate agreements for retaining NEOs and other executive officers to preserve shareholder value in case of a potential change in control. The Committee periodically reviews these agreements and other aspects of the Company’s change-in-control program.

The Company’s change-in-control agreements, in general, entitle executives who are direct reports to our CEO and are terminated other than for cause within two years of the change in control, to receive a benefit of two times salary and bonus. The terms of these change-in-control agreements are described beginning on page 71.

The Company does not provide tax gross-ups for executives, including the NEOs, for any excise tax due under Section 4999 of the Internal Revenue Code and has implemented a “best net after-tax” approach to address any potential excise tax imposed on executives. If any excise tax is due, the Company will not make a gross-up payment, but instead will reduce payments to an executive if the reduction will provide the NEO the best net after-tax result. If full payment to

## YUM's SARs Granting Practices

Historically, we have made SARs grants annually at the Committee’s January meeting. This meeting date is set by the Board of Directors more than six months prior to the actual meeting. The Committee sets the annual grant date as the second business day after our fourth quarter earnings release. The exercise price of these awards is set as the closing price on the date of grants. We make grants at the same time other elements of annual compensation are determined so that we can consider all elements of compensation in making the grants. We do not backdate or make grants a NEO will result in the best net after-tax result, the full amount will be paid, but the NEO will be solely responsible for any potential excise tax payment. Also, the Company has implemented “double trigger” vesting for equity awards, pursuant to which outstanding awards will fully and immediately vest only if the executive is employed on the date of a change in control of the Company and is involuntarily terminated (other than by the Company for cause) on or within two years following the change in control.

In case of retirement, the Company provides retirement benefits described above, life insurance benefits (to employees eligible under the Retirement Plan), the continued ability to exercise vested SARs and the ability to vest in performance share awards on a pro-rata basis.

With respect to consideration of how these benefits fit into the overall compensation policy, the change-in-control benefits are reviewed from time to time by the Committee for competitiveness. The Committee believes the benefits provided in case of a change in control are appropriate, support shareholder interests and are consistent with the policy of attracting and retaining highly qualified employees.

retroactively. In addition, we do not time such grants in coordination with our possession or release of material, non-public or other information. All equity awards are granted under our shareholder approved LTIP.

Grants may also be made on other dates the Board of Directors meets. These grants generally are CEO Awards, which are awards to individual employees (subject to Committee approval) in recognition of superlative performance and extraordinary impact on business results.



Management recommends the awards be made pursuant to our LTIP to the Committee, however, the Committee determines whether and to whom it will issue grants and determines the amount of the grant. The Board of Directors has delegated to our CEO and our Chief People Officer, the ability to make grants to employees who are not executive officers and whose

## Limits on Future Severance Agreement Policy

The Committee has adopted a policy to limit future severance agreements with our NEOs and our other executives. The policy requires the Company to seek shareholder approval for future severance payments to a NEO if such payments would exceed 2.99 times the sum of (a) the NEO’s annual base salary as in effect immediately prior to termination of employment; and (b) the highest annual bonus awarded to the NEO by the Company in any of the Company’s three full fiscal

## Compensation Recovery Policy

Pursuant to the Company’s Compensation Recovery Policy (i.e., “clawback”), the Committee may require executive officers (including the NEOs) to return compensation paid or may cancel any award or bonuses not yet vested or earned if the executive officers engaged in misconduct or violation of Company policy that resulted in significant financial or reputational harm or violation of Company policy, or

## Hedging and Pledging of Company Stock

Under our Code of Conduct, no employee or director is permitted to engage in securities transactions that would allow them either to insulate themselves from, or profit from, a decline in the Company stock price. Similarly, no employee or director may enter into hedging transactions in the Company’s stock. Such

## Deductibility of Executive Compensation

The provisions of Section 162(m) of the Internal Revenue Code limit the tax deduction for compensation in excess of $1 million paid to certain NEOs. The Committee believes that the pre-2018 SARs, RSU and PSU awards satisfy the requirements for exemption under Internal Revenue Code Section 162(m).

The provisions of Section 162(m) of the Internal Revenue Code limit the deductibility of all annual compensation in excess of $1 million paid to certain grant is less than approximately 30,000 SARs annually. In the case of these grants, the Committee sets all the terms of each award, except the actual number of SARs, which is determined by our CEO and our Chief People Officer pursuant to guidelines approved by the Committee in January of each year.

years immediately preceding the fiscal year in which termination of employment occurs or, if higher, the executive’s target bonus. Certain types of payments are excluded from this policy, such as amounts payable under arrangements that apply to classes of employees other than the NEOs or that predate the implementation of the policy, as well as any payment the Committee determines is a reasonable settlement of a claim that could be made by the NEO.

contributed to the use of inaccurate metrics in the calculation of incentive compensation. Under this policy, when the Board determines that recovery of compensation is appropriate, the Company could require repayment of all or a portion of any bonus, incentive payment, equity-based award or other compensation, and cancellation of an award or bonus to the fullest extent permitted by law.

transactions include (without limitation) short sales as well as any hedging transactions in derivative securities (e.g. puts, calls, swaps, or collars) or other speculative transactions related to YUM’s stock. Pledging of Company stock is also prohibited.

executive officers. The exception for performance-based compensation does not apply, except with respect to compensation that is subject to a transition rule because it is paid pursuant to a binding contract that was in place on November 2, 2017 and not materially modified after that date. The Committee believes that shareholder interests are best served if its discretion and flexibility in awarding compensation is not restricted, even though some compensation awards will result in non-deductible compensation



expenses. Therefore, the Committee has approved salaries and other awards for executive officers that were not fully deductible because of Section 162(m) and, in light of the repeal of the performance-based compensation exception to Section 162(m), expects in the future to approve additional compensation that is not deductible for income tax purposes.

## Management Planning and Development Committee Report

The Management Planning and Development Committee of the Board of Directors reports that it has reviewed and discussed with management the section of this proxy statement titled “Compensation Discussion and Analysis” and, on the basis of that review and discussion, recommended to the Board that the section be incorporated by reference into the Company’s Annual Report on Form 10-K and included in this proxy statement.

## THE MANAGEMENT PLANNING AND DEVELOPMENT COMMITTEE

Christopher M. Connor, Chair

Brian C. Cornell

Michael J. Cavanagh

Miran M. Graddick-Weir

Robert D. Walter



The following tables provide information on the compensation of the Named Executive Officers (“NEOs”) for our 2018 fiscal year. The Company’s NEOs are our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers for our 2018 fiscal year determined in accordance with SEC rules and one former executive officer who was no longer serving as an executive officer as of the end of the year.

## Summary Compensation Table

<table><tr><td>Name and Principal Position</td><td>Year</td><td>Salary (\()</td><td>Bonus (\))</td><td>Stock Awards (\))</td><td>Option/ SAR Awards (\))</td><td>Non-Equity Incentive Plan Compensation (\))</td><td>Change in Pension Value and Nongualified Deferred Compensation Earnings (\))</td><td>All Other Compensation (\))</td><td>Total (\))</td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td><td>(f)</td><td>(g)</td><td>(h)</td><td>(i)</td><td></td></tr><tr><td>Greg Creed</td><td>2018</td><td>1,244,615</td><td>—</td><td>4,450,008</td><td>4,450,009</td><td>3,144,531</td><td>21,348</td><td>696,527</td><td>14,007,038</td></tr><tr><td>Chief Executive Officer of YUM</td><td>2017</td><td>1,208,846</td><td>—</td><td>3,350,020</td><td>3,350,007</td><td>3,814,493</td><td>66,286</td><td>578,955</td><td>12,368,607</td></tr><tr><td></td><td>2016</td><td>1,188,942</td><td>—</td><td>5,500,066</td><td>4,500,008</td><td>3,591,094</td><td>56,100</td><td>544,472</td><td>15,380,682</td></tr><tr><td>David W. Gibbs</td><td>2018</td><td>890,769</td><td>—</td><td>1,375,001</td><td>1,375,009</td><td>1,467,113</td><td>1,870,004</td><td>19,101</td><td>6,996,997</td></tr><tr><td>President and Chief Financial Officer of YUM</td><td>2017</td><td>833,846</td><td>—</td><td>1,100,036</td><td>1,100,003</td><td>1,917,027</td><td>2,564,062</td><td>19,346</td><td>7,534,320</td></tr><tr><td></td><td>2016</td><td>792,115</td><td>—</td><td>1,875,052</td><td>1,625,020</td><td>1,751,680</td><td>577,153</td><td>6,969</td><td>6,627,989</td></tr><tr><td>Roger G. Eaton</td><td>2018</td><td>846,154</td><td>—</td><td>1,000,008</td><td>1,000,006</td><td>1,338,750</td><td>20,114</td><td>320,433</td><td>4,525,465</td></tr><tr><td>Retired Chief Executive Officer of KFC Division</td><td>2017</td><td>821,154</td><td>—</td><td>1,000,008</td><td>1,000,007</td><td>1,986,600</td><td>30,388</td><td>301,007</td><td>5,139,164</td></tr><tr><td></td><td>2016</td><td>812,500</td><td>—</td><td>1,875,052</td><td>1,125,009</td><td>1,113,600</td><td>30,853</td><td>288,290</td><td>5,245,304</td></tr><tr><td>Tracy L. Skeans</td><td>2018</td><td>664,231</td><td>—</td><td>625,015</td><td>1,625,010</td><td>824,766</td><td>325,022</td><td>8,665</td><td>4,072,709</td></tr><tr><td>Chief Transformation and People Officer of YUM(7)</td><td>2017</td><td>600,385</td><td>—</td><td>550,052</td><td>550,009</td><td>1,076,325</td><td>776,398</td><td>8,413</td><td>3,561,582</td></tr><tr><td>David E. Russell</td><td>2018</td><td>410,154</td><td>—</td><td>449,904</td><td>297,644</td><td>112,476</td><td>93,860</td><td>37,676</td><td>1,701,714</td></tr><tr><td>Senior Vice President, Finance and Corporate Controller of YUM</td><td>2017</td><td>396,154</td><td>—</td><td>544,180</td><td>328,915</td><td>136,045</td><td>494,542</td><td>32,838</td><td>1,932,674</td></tr><tr><td></td><td>2016</td><td>476,867</td><td>180,000</td><td>397,313</td><td>496,870</td><td>297,984</td><td>162,407</td><td>33,236</td><td>2,044,677</td></tr><tr><td>Marc L. Kesselman</td><td>2018</td><td>603,462</td><td>—</td><td>625,015</td><td>625,004</td><td>514,250</td><td>1,734</td><td>560,623</td><td>2,930,088</td></tr><tr><td>Former General Counsel, Corporate Secretary and Chief Government Affairs Officer</td><td>2017</td><td>591,923</td><td>—</td><td>625,056</td><td>625,013</td><td>814,258</td><td>1,435</td><td>91,304</td><td>2,748,989</td></tr><tr><td></td><td>2016</td><td>530,769</td><td>500,000</td><td>2,300,083</td><td>1,400,006</td><td>916,162</td><td>—</td><td>83,606</td><td>5,730,626</td></tr></table>

(1) Amounts shown are not reduced to reflect the NEOs' elections, if any, to defer receipt of salary into the Executive Income Deferral ("EID") Program or into the Company's 401(k) Plan.

(2) Amounts shown in this column, except for Mr. Russell, represent the grant date fair values for performance share units (PSUs) granted in 2018, 2017 and 2016. Further information regarding the 2018 awards is included in the "Grants of Plan-Based Awards" and "Outstanding Equity Awards at Year-End" tables later in this proxy statement. The grant date fair value of the PSUs reflected in this column is the target payout based on the probable outcome of the performance condition, determined as of the grant date. The maximum potential values of the February 2018 PSUs is 200% of target. For 2018, Mr. Creed's PSU maximum value at grant date fair value would be $8,900,016; Mr. Gibbs' PSU maximum value would be $2,750,002; Mr. Eaton's PSU maximum value would be $2,000,016; Ms. Skeans' PSU maximum value would be $1,250,030; and Mr. Kesselman's PSU maximum value would be $1,250,030. Mr. Russell did not receive a PSU award for 2018, 2017 or 2016 since he does not directly report to the CEO and therefore is not eligible. Mr. Russell was instead permitted to defer his annual incentive award into RSUs under the Company's EID Program. Under the EID Program (which is described in more detail beginning on page 68), an eligible executive may defer all or a portion of his or her annual incentive award and invest that deferral into stock units, RSUs, or other investment alternatives offered under the program. An executive who elects to defer his or her annual incentive award into RSUs receives additional RSUs equal to 33% of the RSUs acquired with the deferral of the annual incentive award ("matching contribution") subject to a two-year risk of forfeiture of the original deferral amount and the additional RSUs. For Mr. Russell, the amount in this column for 2018



represents the deferral of 75% of his annual incentive award ($337,428) for 2018, plus his matching contribution ($112,476). The other NEOs are not eligible to participate in this program, as NEOs who receive PSUs are not eligible for the EID matching stock program.

(3) The amounts shown in this column represent the grant date fair values of the stock appreciation rights (SARs) awarded in 2018, 2017 and 2016, respectively. For a discussion of the assumptions and methodologies used to value the awards reported in column (e) and column (f), please see the discussion of stock awards and option awards contained at Note 15 to the Consolidated Financial Statements in Item 8 of YUM's Form 10-K for the fiscal year ended December 31, 2018. For Ms. Skeans, this amount includes the February 2018 CEO SAR award with a grant date fair value of $1,000,006. See the Grants of Plan-Based Awards table for details.

(4) Amounts in this column reflect the annual incentive awards earned for the 2018, 2017 and 2016 fiscal year performance periods, which were awarded by our Management Planning and Development Committee (“Committee”) in January 2019, January 2018 and January 2017, respectively, under the Yum Leaders’ Bonus Program, which is described further in our Compensation Discussion and Analysis (“CD&A”) beginning at page 39 under the heading “Annual Performance-Based Cash Bonuses”. Pursuant to SEC rules, annual incentives deferred into RSUs under the EID Program and subject to a risk of forfeiture are reported in column (e). If the deferral or a portion of the deferral is not subject to a risk of forfeiture, it is reported in column (g). For 2018, Mr. Russell elected to defer 75% of his annual incentive ($337,428) into RSUs resulting in the remaining portion of his annual incentive ($112,476) reported in column (g).

(5) Amounts in this column represent the above market earnings as established pursuant to SEC rules which have accrued under each of their accounts under the Third Country National Plan (“TCN”) for Messrs. Creed and Eaton which are described in more detail beginning at page 68 under the heading “Nonqualified Deferred Compensation”. Also listed in this column for Messrs. Creed, Gibbs, Russell and Ms. Skeans are the amounts of aggregate change in actuarial present values of their accrued benefits under all actuarial pension plans during the 2018 fiscal year (using interest rate and mortality assumptions consistent with those used in the Company’s financial statements). Mr. Creed is not an active participant in the Retirement Plan but maintains a balance in the Retirement Plan from the two years (2002 and 2003) during which he was a participant and for 2018 there was no increase in actuarial value of his benefit. For Mr. Gibbs the actuarial present value of his benefits under the pension plan increased $96,732 during the 2018 fiscal year. For Ms. Skeans and Mr. Russell the actuarial present value of their benefits under the pension plan did not increase during the 2018 fiscal year. In addition, for Mr. Gibbs, Ms. Skeans and Mr. Russell, the actuarial present value of their benefits under the Yum! Brands Pension Equalization Plan (“PEP”) increased $1,773,272, $354,906 and $117,643 respectively, during the 2018 fiscal year. Messrs. Eaton and Kesselman were hired after September 30, 2001, and are ineligible for the Company’s actuarial pension plans. See the Pension Benefits Table at page 66 for a detailed discussion of the Company’s pension benefits.

(6) Amounts in this column are explained in the All Other Compensation Table and footnotes to that table, which follows.

(7) Ms. Skeans became an NEO in 2017. No amounts are reported for her for 2016 since she was not an NEO for that year.

## All Other Compensation Table

The following table contains a breakdown of the compensation and benefits included under All Other Compensation in the Summary Compensation Table above for 2018.

<table><tr><td>Name</td><td>Perquisites and other personal benefits (\()^{(1)}\)</td><td>Tax Reimbursements (\()^{(2)}\)</td><td>Insurance premiums (\()^{(3)}\)</td><td>LRP/TCN Contributions (\()^{(4)}\)</td><td>Total (\()^{(5)}\)</td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td><td>(f)</td></tr><tr><td>Creed</td><td>153,794</td><td>—</td><td>27,108</td><td>515,625</td><td>696,527</td></tr><tr><td>Gibbs</td><td>7,657</td><td>—</td><td>11,444</td><td>—</td><td>19,101</td></tr><tr><td>Eaton</td><td>34,555</td><td>20,292</td><td>10,586</td><td>255,000</td><td>320,433</td></tr><tr><td>Skeans</td><td>5,009</td><td>—</td><td>3,656</td><td>—</td><td>8,665</td></tr><tr><td>Russell</td><td>35,705</td><td>—</td><td>1,971</td><td>—</td><td>37,676</td></tr><tr><td>Kesselman</td><td>467,768</td><td>—</td><td>3,315</td><td>89,540</td><td>560,623</td></tr></table>

(1) Amounts in this column include executive physical examinations and charitable matching gifts. For Mr. Creed, amount in this column also includes personal use of charter and commercial aircraft. For Mr. Eaton, amounts in this column represent expatriate adjustments. None of the amounts in this column individually exceeded the greater of $25,000 or 10% of the total amount of these perquisites and other personal benefits shown in this column for each NEO, except with respect to the cost of personal use of charter and commercial aircraft by Mr. Creed ($134,043) and expatriate adjustments ($30,956) for Mr. Eaton. For Mr. Kesselman, amounts in this column also include payments made in connection with his departure from the Company totaling $442,768.



(2) Amounts in this column reflect payments to the executive of tax reimbursements. For Mr. Eaton, this amount represents a tax gross up related to home leave expenses.

(3) These amounts reflect the income each executive was deemed to receive from IRS tables related to Company-provided life insurance in excess of $50,000. The Company provides every salaried employee with life insurance coverage up to one times the employee’s salary plus target bonus.

(4) For Messrs. Creed and Eaton, this column represents the Company’s annual allocation to the TCN, an unfunded, unsecured account based retirement plan. For Mr. Kesselman this column represents the Company’s annual allocations to the LRP, an unfunded, unsecured account based retirement plan.

## Grants of Plan-Based Awards

The following table provides information on SARs, RSUs and PSUs granted in 2018 to each of the Company’s NEOs. The full grant date fair value of these awards is shown in the Summary Compensation Table at page 59.

<table><tr><td>Name</td><td>Grant Date</td><td>Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)</td><td>Estimated Future Payouts Under Equity Incentive Plan Awards(2)</td><td>All Other Stock Awards: Number of Shares of Stock Units (#)</td><td>All Other Option/ SAR Awards; Number of Securities Underlying Options (#)(3)</td><td>Exercise or Base Price of Option/ SAR Awards ($/Sh)(4)</td><td>Grant Date Fair Value ($)(5)</td></tr><tr><td>(a)</td><td>Grant Date</td><td>Threshold ($)</td><td>Target ($)</td><td>Maximum ($)</td><td>Target ($)</td><td>Maximum ($)</td><td>(i)</td></tr><tr><td>Creed</td><td>2/12/2018</td><td>0</td><td>2,187,500</td><td>6,562,500</td><td>—</td><td>54,481</td><td>108,962</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>271,342</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>81.68</td></tr><tr><td>Gibbs</td><td>2/12/2018</td><td>0</td><td>945,000</td><td>2,835,000</td><td>—</td><td>16,834</td><td>33,668</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>83,842</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>81.68</td></tr><tr><td>Eaton</td><td>2/12/2018</td><td>0</td><td>850,000</td><td>2,550,000</td><td>—</td><td>12,243</td><td>24,486</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>60,976</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>81.68</td></tr><tr><td>Skeans</td><td>2/12/2018</td><td>0</td><td>573,750</td><td>1,721,250</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>38,110</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>60,976</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>81.68</td></tr><tr><td>Russell</td><td>2/12/2018</td><td>0</td><td>267,800</td><td>803,400</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>18,149</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>—</td></tr><tr><td>Kesselman</td><td>2/12/2018</td><td>0</td><td>514,250</td><td>1,542,750</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>2/12/2018</td><td></td><td></td><td></td><td></td><td></td><td>38,110</td></tr><tr><td></td><td>3/23/2018</td><td></td><td></td><td></td><td></td><td></td><td>81.68</td></tr></table>

(1) Amounts in columns (c), (d) and (e) provide the minimum amount, target amount and maximum amount payable as annual incentive compensation under the Yum Leaders' Bonus Program based on the Company's performance and on each executive's individual performance during 2018. The actual amount of annual incentive compensation awards are shown in column (g) (and columns (e) and (g) for Mr. Russell) of the Summary Compensation Table on page 59. The performance measurements, performance targets, and target bonus percentages are described in the CD&A beginning on page 39 under the discussion of annual incentive compensation.

(2) Reflects grants of PSU awards subject to performance-based vesting conditions in 2018. The PSU awards granted March 23, 2018 vest on December 31, 2020 and PSU award payouts are weighted 50% on the Company’s achievement of specified relative total shareholder return (“TSR”) rankings against the S&P 500 Consumer Discretionary Index and 50% on compound annual growth of the Company’s Earnings Per Share (“EPS”) during the performance period ending on December 31, 2020. With respect to the 50% weighted on a TSR percentile ranking for the Company, payouts are determined by comparing the Company’s relative TSR ranking against the S&P 500 Consumer Discretionary Index as measured at the end of the performance period; if a 50% TSR percentile ranking target is achieved, this factor would provide



for 100% weighting for the PSU payout with respect to this factor; if less than 30% TSR percentile ranking is achieved, this factor would provide for 0% weighting for the PSU payout with respect to this factor; if the Company's TSR percentile ranking is 75% or higher, it would provide for 200% of target weighting for the PSU payout with respect to this factor. With respect to the 50% weighted on the compound annual growth of the Company's EPS measured at the end of the performance period, if EPS growth of 12% is achieved, this factor would provide for 100% weighting for the PSU payout with respect to this factor; if less than 7% EPS growth is achieved, this factor would provide for 0% weighting for the PSU payout with respect to this factor; if Company EPS growth of 17% or higher is achieved, it would provide for weighting of 200% of target for the PSU payout with respect to this factor. The terms of the PSU awards provide that in case of a change in control during the first year of the award, shares will be distributed assuming target performance was achieved subject to reduction to reflect the portion of the performance period following the change in control. In case of a change in control after the first year of the award, shares will be distributed assuming performance at the greater of target level or projected level at the time of the change in control subject to reduction to reflect the portion of the performance period following the change in control.

(3) Amounts in this column reflect the number of SARs granted to executives during the Company’s 2018 fiscal year. SARs allow the grantee to receive the number of shares of YUM common stock that is equal in value to the appreciation in YUM common stock with respect to the number of SARs granted from the date of grant to the date of exercise. For each executive, grants were made on February 12, 2018. These SAR grants become exercisable in equal installments on the first, second, third and fourth anniversaries of the grant date. In addition to her regular SAR grant ($625,004), Ms. Skeans also received a CEO Award SAR grant ($1,000,006) which has a different vesting schedule. That grant becomes 100% vested on the fourth anniversary of the grant date.

The terms of each SAR grant provide that, in case of a change in control, if an executive is employed on the date of a change in control and is involuntarily terminated on or within two years following the change in control (other than by the Company for cause) then all outstanding awards become exercisable immediately.

Executives who have attained age 55 with 10 years of service who retire at least one year following the grant date will continue to vest following retirement through the fourth anniversary of the grant date. The SARs that vest in retirement must be exercised before the earlier of (i) the five year anniversary of the executive's retirement or (ii) the expiration dates of the SARs (generally 10 years from the grant date). Unvested SARs of executives who die will immediately vest and may be exercised by the executive's beneficiary before the earlier of (i) the five year anniversary of the executive's death or (ii) the expiration dates of the SARs (generally 10 years from the grant date). If an executive's employment is terminated due to gross misconduct, the entire award is forfeited. For other employment terminations, all vested or previously exercisable SARs as of the last day of employment must be exercised within 90 days following termination of employment.

(4) The exercise price of the SARs granted in 2018 equals the closing price of YUM common stock on their grant date.

(5) Amounts in this column reflect the full grant date fair value of the PSU awards shown in column (g) and the SARs shown in column (j). The grant date fair value is the amount that the Company is expensing in its financial statements over the award's vesting schedule. For each PSU award, fair value is calculated by multiplying the per unit value of the award ($81.68) by the target number of units corresponding to the most probable outcome of performance conditions on the grant date. For SARs, fair value of $16.40 was calculated using the Black-Scholes method on the grant date. For additional information regarding valuation assumptions of SARs, see the discussion of stock awards and option awards contained at Note 15 to the Consolidated Financial Statements in Item 8 of YUM's Form 10-K for the fiscal year ended December 31, 2018.



## Outstanding Equity Awards at Year-End

The following table shows the number of shares covered by exercisable and unexercisable SARs, and unvested RSUs and PSUs held by the Company’s NEOs on December 31, 2018.

<table><tr><td rowspan="2">Name</td><td rowspan="2">Grant Date</td><td colspan="3">Number of Securities Underlying Unexercised Options/ SARs (#)</td><td colspan="3">Number of Securities Underlying Unexercised Options/ SARs [#)</td><td colspan="3">Number of Shares or Units of Stock That Have Not Vested (#)</td><td colspan="3">Market Value of Shares or Units of Stock That Have Not Vested ($)</td><td colspan="3">Equity incentive plan awards: Number of unearned shares, or other rights that have not vested(#)</td><td colspan="3">Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested(#)</td></tr><tr><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td></td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grande</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grandee</td><td>Grand</td></tr></table>



<table><tr><td colspan="12">Option/SAR Awards(1)</td></tr><tr><td>Name</td><td>Grant Date</td><td>Number of Securities Underlying Unexercised Options/ SARs (#) Exercisable</td><td>Number of Securities Underlying Unexercised Options/ SARs (#) Unexercisable</td><td>Option/ SAR Exercise Price ($)</td><td>Option/ SAR Expiration Date</td><td>Number of Shares or Units of Stock That Have Not Vested (#)(2)</td><td>Market Value of Shares or Units of Stock That Have Not Vested ($)(3)</td><td>Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested(4)</td><td>Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested(4)</td><td></td><td></td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td><td>(f)</td><td>(g)</td><td>(h)</td><td>(i)</td><td>(j)</td><td></td><td></td></tr><tr><td rowspan="10">Skeans</td><td>2/5/2010*</td><td>1,627</td><td>—</td><td>$ 23.48</td><td>2/5/2020</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2010*</td><td>6,068</td><td>—</td><td>$ 23.48</td><td>2/5/2020</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/4/2011*</td><td>6,732</td><td>—</td><td>$ 35.10</td><td>2/4/2021</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/8/2012*</td><td>9,065</td><td>—</td><td>$ 45.88</td><td>2/8/2022</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2013*</td><td>11,295</td><td>—</td><td>$ 44.81</td><td>2/6/2023</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014*</td><td>11,537</td><td>—</td><td>$ 50.22</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014*</td><td>13,573</td><td>—</td><td>$ 50.22</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015*</td><td>12,681</td><td>4,228(1)</td><td>$ 52.64</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016*</td><td>19,452</td><td>19,452(1)</td><td>$ 49.66</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016*</td><td>—</td><td>17,306(1)</td><td>$ 49.66</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td rowspan="10">Russell</td><td>2/10/2017*</td><td>9,683</td><td>29,050(1)</td><td>$ 68.00</td><td>2/10/2027</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/12/2018*</td><td>—</td><td>38,110(1)</td><td>$ 78.07</td><td>2/12/2028</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/12/2018*</td><td>—</td><td>60,976(1)</td><td>$ 78.07</td><td>2/12/2028</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014**</td><td>2,889</td><td>—</td><td>$ 21.30</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014**</td><td>13,595</td><td>—</td><td>$ 21.30</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015**</td><td>4,229</td><td>4,229(1)</td><td>$ 22.32</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>9,736</td><td>19,472(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>17,323(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>39,546</td><td>3,635,068</td><td></td></tr><tr><td rowspan="10">Kesselman</td><td>2/5/2010*</td><td>12,876</td><td>—</td><td>$ 23.48</td><td>2/5/2020</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/4/2011*</td><td>12,961</td><td>—</td><td>$ 35.10</td><td>2/4/2021</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/4/2011*</td><td>10,047</td><td>—</td><td>$ 35.10</td><td>2/4/2021</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/8/2012*</td><td>11,434</td><td>—</td><td>$ 45.88</td><td>2/8/2022</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2013*</td><td>11,220</td><td>—</td><td>$ 44.81</td><td>2/6/2023</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014*</td><td>13,573</td><td>—</td><td>$ 50.22</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015*</td><td>10,145</td><td>3,382(1)</td><td>$ 52.64</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015*</td><td>—</td><td>13,527(1)</td><td>$ 52.64</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016*</td><td>8,598</td><td>8,599(1)</td><td>$ 49.66</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016*</td><td>—</td><td>17,197(1)</td><td>$ 49.66</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td rowspan="10">Kesselman</td><td>2/10/2017*</td><td>5,790</td><td>17,373(1)</td><td>$ 68.00</td><td>2/10/2027</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/12/2018*</td><td>—</td><td>18,149(1)</td><td>$ 78.07</td><td>2/12/2028</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2010**</td><td>12,882</td><td>—</td><td>$ 9.96</td><td>2/5/2020</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/4/2011**</td><td>12,960</td><td>—</td><td>$ 14.88</td><td>2/4/2021</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/4/2011**</td><td>10,047</td><td>—</td><td>$ 14.88</td><td>2/4/2021</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/8/2012**</td><td>11,448</td><td>—</td><td>$ 19.46</td><td>2/8/2022</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2013**</td><td>11,223</td><td>—</td><td>$ 19.00</td><td>2/6/2023</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2014**</td><td>13,595</td><td>—</td><td>$ 21.30</td><td>2/5/2024</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015**</td><td>10,148</td><td>3,383(1)</td><td>$ 22.32</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/6/2015**</td><td>—</td><td>13,531(1)</td><td>$ 22.32</td><td>2/6/2025</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td rowspan="10">Kesselman</td><td>2/5/2010**</td><td>8,607</td><td>8,608(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>17,215(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>48,458(1)</td><td>$ 49.66</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/10/2017*</td><td>—</td><td>33,012(1)</td><td>$ 68.00</td><td>2/10/2027</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/12/2018*</td><td>—</td><td>38,110(1)</td><td>$ 78.07</td><td>2/12/2028</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>48,505</td><td>48,506(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>48,505</td><td>48,506(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>48,505</td><td>48,506(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>48,505</td><td>48,506(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2/5/2016**</td><td>—</td><td>48,505</td><td>48,506(1)</td><td>$ 21.06</td><td>2/5/2026</td><td></td><td></td><td></td><td></td><td></td></tr></table>

* YUM Awards

** YUM China Awards

(1) The actual vesting dates for unexercisable awards are as follows:

(i) Unexercisable award will vest on February 5, 2019.

(ii) Remainder of unexercisable award will vest on February 6, 2019.

(iii) One-half of the unexercisable award will vest on each of February 5, 2019 and 2020.

(iv) One-third of the unexercisable award will vest on each of February 10, 2019, 2020 and 2021.

(v) One-fourth of the unexercisable award will vest on each of February 12, 2019, 2020, 2021 and 2022.

(vi) One-half of the unexercisable award will vest on each of May 20, 2019 and 2020.

(vii) Unexercisable award will vest on February 5, 2020.

(viii) Unexercisable award will vest on February 12, 2022.



(☒) Unexercisable award will vest on February 6, 2019.
(☒) Unexercisable award will vest on February 5, 2021.

(2) For Mr. Russell, this amount represents deferrals of bonuses into the EID Program’s Matching Stock Fund. For Mr. Kesselman, this amount represents deferrals of bonuses into EID Program investments other than the Matching Stock Fund. For Mr. Russell the amount represents the deferral of his 2016 and 2017 bonuses and for Mr. Kesselman it represents a 2016 sign-on bonus RSU award that vests one-third each year over 3 years.

(3) The market value of the YUM awards are calculated by multiplying the number of shares covered by the award by $91.92, the closing price of YUM stock on the NYSE on December 31, 2018. The market value of the Yum China awards are calculated by multiplying the number of shares covered by the award by $33.53, the closing price of Yum China stock on the NYSE on December 31, 2018.

(4) The awards reflected in this column are unvested performance-based PSU awards with three-year performance periods that are scheduled to vest on December 31, 2019 and 2020 if the performance targets are met. Also reflected in this column are the unvested performance-based Launch Grant PSU awards, which are scheduled to vest on December 31, 2019, if the performance targets are met. The Launch Grants will pay out at the close of the performance period (December 31, 2019) if specified General and Administrative Expense reductions are made by year-end 2019. In accordance with SEC rules, the PSU awards are reported at their maximum payout value.

## Option Exercises and Stock Vested

The table below shows the number of shares of YUM and Yum China common stock acquired during 2018 upon exercise of stock option and SAR awards and vesting of stock awards in the form of RSUs and PSUs, each including accumulated dividends and before payment of applicable withholding taxes and broker commissions.

<table><tr><td rowspan="2">Name</td><td colspan="2">Option/SAR Awards</td><td colspan="2">Stock Awards</td></tr><tr><td>Number of Shares Acquired on Exercise (#)</td><td>Value Realized on Exercise ($)</td><td>Number of Shares Acquired on Vesting (#)</td><td>Value realized on Vesting ($)</td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td></tr><tr><td>Creed</td><td>547,080</td><td>24,895,096</td><td>96,849(1)</td><td>8,902,360</td></tr><tr><td>Gibbs</td><td>57,565</td><td>3,499,064</td><td>28,380(1)</td><td>2,608,690</td></tr><tr><td>Eaton</td><td>355,462</td><td>22,324,918</td><td>28,380(1)</td><td>2,608,690</td></tr><tr><td>Skeans</td><td>636</td><td>55,961</td><td>20,454(1)(2)</td><td>1,829,621</td></tr><tr><td>Russell</td><td>11,665</td><td>1,049,904</td><td>1,349(2)</td><td>107,650</td></tr><tr><td>Kesselman</td><td>24,188</td><td>2,167,204</td><td>30,829(1)(3)</td><td>2,543,403</td></tr></table>

(1) For each of Messrs. Creed, Gibbs, Eaton and Kesselman and Ms. Skeans, this amount includes PSUs that vested on December 31, 2018 with respect to the 2016-2018 performance period and were paid out in 2019. For each of Messrs. Creed, Gibbs, Eaton and Kesselman and Ms. Skeans, this amount also includes the portion of the 2016 Launch Grant PSUs that vested on December 31, 2018.

(2) For Messrs. Russell and Ms. Skeans, this amount includes the deferral of the 2015 cash incentive award, which was deferred into RSUs under the EID program in 2016 and vested in 2018.

(3) For Mr. Kesselman, this amount includes a sign-on RSU that vested in 2018.



## Pension Benefits

The table below shows the present value of accumulated benefits payable to each of the NEOs, including the number of years of service credited to each NEO, under the YUM! Brands Retirement Plan (“Retirement Plan”), and the YUM! Brands Pension Equalization Plan (“PEP”) determined using interest rate and mortality rate assumptions consistent with those used in the Company’s financial statements.

<table><tr><td>Name</td><td>Plan Name</td><td>Number of Years of Credited Service (#)</td><td>Present Value of Accumulated Benefit ($)</td><td>Payments During Last Fiscal Year ($)</td></tr><tr><td>(a)</td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td></tr><tr><td>Creed \( ^{(i)} \)</td><td>Qualified Retirement Plan</td><td>2</td><td>193,610</td><td>—</td></tr><tr><td></td><td>PEP</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Gibbs</td><td>Qualified Retirement Plan</td><td>30</td><td>1,220,964</td><td>—</td></tr><tr><td></td><td>PEP</td><td>30</td><td>7,076,064</td><td>—</td></tr><tr><td>Russell</td><td>Qualified Retirement Plan</td><td>20</td><td>568,314</td><td>—</td></tr><tr><td></td><td>PEP</td><td>20</td><td>973,426</td><td>—</td></tr><tr><td>Skeans</td><td>Qualified Retirement Plan</td><td>18</td><td>446,922</td><td>—</td></tr><tr><td></td><td>PEP</td><td>18</td><td>1,450,049</td><td>—</td></tr><tr><td>Kesselman \( ^{(ii)} \)</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Eaton \( ^{(iii)} \)</td><td>—</td><td>—</td><td>—</td><td>—</td></tr></table>

(i) Mr. Creed is not an active participant in the Retirement Plan but maintains a balance in the Retirement Plan for the two years (2002 and 2003) during which he was a participant in the plan. As discussed at page 51, Mr. Creed participates in the Third Country National plan, an unfunded, unsecured deferred account-based retirement plan.

(ii) Messrs. Eaton and Kesselman are not accruing benefits under these plans because they were hired after September 30, 2001 and are therefore ineligible for these benefits. As discussed at page 51, Mr. Eaton participates in the TCN and Mr. Kesselman participated in LRP.

## (1) YUM! Brands Retirement Plan

The Retirement Plan provides an integrated program of retirement benefits for salaried employees who were hired by the Company prior to October 1, 2001. The Retirement Plan replaces the same level of pre-retirement pensionable earnings for all similarly situated participants. The Retirement Plan is a tax qualified plan, and it is designed to provide the maximum possible portion of this integrated benefit on a tax qualified and funded basis.

## Benefit Formula

Benefits under the Retirement Plan are based on a participant’s final average earnings (subject to the limits under Internal Revenue Code Section 401(a)(17)) and service under the plan. Upon termination of employment, a participant’s normal retirement benefit from the plan is equal to

A. 3% of Final Average Earnings times Projected Service up to 10 years of service, plus
B. 1% of Final Average Earnings times Projected Service in excess of 10 years of service, minus

C. 0.43% of Final Average Earnings up to Social Security covered compensation multiplied by Projected Service up to 35 years of service

the result of which is multiplied by a fraction, the numerator of which is actual service as of date of termination, and the denominator of which is the participant’s Projected Service.

Projected Service is the service that the participant would have earned if he had remained employed with the Company until his normal retirement age (generally age 65).

If a participant leaves employment after becoming eligible for early or normal retirement, benefits are calculated using the formula above except that actual service attained at the participant’s retirement date is used in place of Projected Service.



## Final Average Earnings

A participant’s final average earnings is determined based on his highest five consecutive years of pensionable earnings. Pensionable earnings is the sum of the participant’s base pay and annual incentive compensation from the Company, including amounts under the Yum Leaders’ Bonus Program. In general, base pay includes salary, vacation pay, sick pay and short-term disability payments. Extraordinary bonuses and lump sum payments made in connection with a participant’s termination of employment are not included.

## Vesting

A participant receives a year of vesting service for each year of employment with the Company. A participant is 0% vested until he has been credited with at least five years of vesting service. Upon attaining five years of vesting service, a participant becomes 100% vested. All NEOs eligible for the Retirement Plan are 100% vested.

## Normal Retirement Eligibility

A participant is eligible for normal retirement following the later of age 65 or 5 years of vesting service.

## Early Retirement Eligibility and Reductions

A participant is eligible for early retirement upon reaching age 55 with 10 years of vesting service. A participant who has met the requirements for early retirement and who elects to begin receiving payments from the plan prior to age 62 will receive a reduction of 1/12 of 4% for each month benefits begin before age 62. Benefits are unreduced at age 62.

The table below shows when each of the NEOs becomes eligible for early retirement and the estimated lump sum value of the benefit each participant would receive from YUM plans (both qualified and non-qualified) if he or she retired from the Company on December 31, 2018 and received a lump sum payment.

<table><tr><td>Name</td><td>Earliest Retirement Date</td><td>Estimated Lump Sum from a Qualified Plan \( ^{(1)} \)</td><td>Estimated Lump Sum from a Non-Qualified Plan \( ^{(2)} \)</td><td>Total Estimated Lump Sum</td></tr><tr><td>Greg Creed</td><td>January 1, 2019</td><td>206,406</td><td>—</td><td>206,406</td></tr><tr><td>David W. Gibbs</td><td>January 1, 2019</td><td>1,466,770</td><td>8,577,230</td><td>10,044,000</td></tr><tr><td>Tracy L. Skeans</td><td>February 1, 2028</td><td>1,409,109</td><td>4,289,618</td><td>5,698,727</td></tr><tr><td>David E. Russell</td><td>September 1, 2024</td><td>1,137,849</td><td>2,133,953</td><td>3,501,802</td></tr></table>

(1) The Retirement Plan

(2) PEP

The estimated lump sum values in the table above are calculated assuming no increase in the participant’s Final Average Earnings. The lump sums are estimated using the mortality table and interest rate assumptions in the Retirement Plan for participants who would actually commence benefits on January 1, 2019. Actual lump sums may be higher or lower depending on the mortality table and interest rate in effect at the time of distribution and the participant’s Final Average Earnings at his date of retirement.

## Lump Sum Availability

Lump sum payments are available to participants who meet the requirements for early or normal retirement. Participants who leave the Company prior to meeting the requirements for Early or Normal Retirement must take their benefits in the form of a monthly annuity and no lump sum is available. When a lump sum is paid from the plan, it is calculated based on actuarial assumptions for lump sums required by Internal Revenue Code Section 417(e)(3).

## (2) PEP

The PEP is an unfunded, non-qualified plan that complements the Retirement Plan by providing benefits that federal tax law bars providing under the Retirement Plan. Benefits are generally determined and payable under the same terms and conditions as the Retirement Plan (except as noted below) without regard to federal tax limitations on amounts of includible compensation and maximum benefits. Benefits paid are reduced by the value of benefits



payable under the Retirement Plan. Participants who earned at least $75,000 during calendar year 1989 are eligible to receive benefits calculated under the Retirement Plan’s pre-1989 formula, if this calculation results in a larger benefit from the PEP. Mr. Gibbs qualifies for benefits under this formula. This formula is similar to the formula described above under the Retirement Plan except that part C of the formula is calculated as follows:

1-2/3% of an estimated primary Social Security amount multiplied by Projected Service up to 30 years

PEP retirement distributions are always paid in the form of a lump sum. In the case of a participant whose benefits are payable based on the pre-1989 formula, the lump sum value is calculated as the actuarial equivalent to the participant’s 50% Joint and Survivor Annuity with no reduction for survivor coverage. In all other cases, lump sums are calculated as the actuarial equivalent of the participant’s life only annuity. Participants who terminate employment prior to meeting eligibility for Early or Normal Retirement must take their benefits from this plan in the form of a monthly annuity.

## (3) Present Value of Accumulated Benefits

For all plans, the Present Value of Accumulated Benefits (determined as of December 31, 2018) is calculated assuming that each participant is eligible to receive an unreduced benefit payable in the form of a single lump sum at age 62. This is consistent with the methodologies used in financial accounting calculations. In addition, the economic assumptions for the lump sum interest rate, post retirement mortality, and discount rate are also consistent with those used in financial accounting calculations at each measurement date.

## Nonqualified Deferred Compensation

Amounts reflected in the Nonqualified Deferred Compensation table below are provided for under the Company’s EID, LRP and TCN plans. These plans are unfunded, unsecured deferred, account-based compensation plans. For each calendar year, participants are permitted under the EID Program to defer up to 85% of their base pay and up to 100% of their annual incentive award.

## EID Program

Deferred Investments under the EID Program. Amounts deferred under the EID Program may be invested in the following phantom investment alternatives (12 month investment returns, as of December 31, 2018, are shown in parentheses, except for the YUM China Stock Fund, which was removed as an investment option as of October 31, 2018, and thus a 10 month investment return is shown):

• YUM! Stock Fund (14.60%*)

• YUM! Matching Stock Fund (14.60%*)

• S&P 500 Index Fund (-4.46%)

• Bond Market Index Fund (-0.04%)

• Stable Value Fund (2.20%)

• YUM China Stock Fund – 10 months (-9.16%)

All of the phantom investment alternatives offered under the EID Program are designed to match the performance of actual investments; that is, they provide market rate returns and do not provide for preferential earnings. The S&P 500 index fund, bond market index fund and stable value fund are designed to track the investment return of like-named funds offered under the Company’s 401(k) Plan. The YUM! Stock Fund and YUM! Matching Stock Fund track the investment return of the Company’s common stock. Participants may transfer funds between the investment alternatives on a quarterly basis except (1) funds invested in the YUM! Stock Fund or YUM! Matching Stock Fund may not be transferred once invested in these funds and (2) a participant may only elect to invest into the YUM! Matching Stock Fund at the time the annual incentive deferral election is made. In the case of the Matching Stock Fund, participants



who defer their annual incentive into this fund acquire additional phantom shares (RSUs) equal to 33% of the RSUs received with respect to the deferral of their annual incentive into the YUM! Matching Stock Fund (the additional RSUs are referred to as “matching contributions”). The RSUs attributable to the matching contributions are allocated on the same day the RSUs attributable to the annual incentive are allocated, which is the same day we make our annual stock appreciation right grants. Eligible amounts attributable to the matching contribution under the YUM! Matching Stock Fund are included in column (c) below as contributions by the Company (and represent amounts actually credited to the NEO’s account during 2018).

Beginning with their 2009 annual incentive award, those who are eligible for PSU awards are no longer eligible to participate in the Matching Stock Fund. Following the separation of Yum China Holdings, Inc., in October of 2016, the Yum China Stock Fund was made available as an investment option under the EID Program, but only with respect to invested amounts that resulted from the conversion of YUM shares into Yum China shares at separation. Funds could be transferred out of this fund, but the fund did not allow for additional investment. The Yum China Stock Fund was removed as an investment option as of October 31, 2018.

RSUs attributable to annual incentive deferrals into the YUM! Matching Stock Fund and matching contributions vest on the second anniversary of the grant (or upon a change of control of the Company, if earlier) and are payable as shares of YUM common stock pursuant to the participant's deferral election. Unvested RSUs held in a participant's YUM! Matching Stock Fund account are forfeited if the participant voluntarily terminates employment with the Company within two years of the deferral date. If a participant terminates employment involuntarily, the portion of the account attributable to the matching contributions is forfeited and the participant will receive an amount equal to the amount of the original amount deferred. If a participant dies or becomes disabled during the restricted period, the participant fully vests in the RSUs. Dividend equivalents are accrued during the restricted period but are only paid if the RSUs vest. In the case of a participant who has attained age 55 with 10 years of service, or age 65 with five years of service, RSUs attributable to bonus deferrals into the YUM! Matching Stock Fund vest immediately and RSUs attributable to the matching contribution vest on the second anniversary of the deferral date.

Distributions under EID Program. When participants elect to defer amounts into the EID Program, they also select when the amounts ultimately will be distributed to them. Distributions may either be made in a specific year –whether or not employment has then ended – or at a time that begins at or after the executive’s retirement, separation or termination of employment. Distributions can be made in a lump sum or quarterly or annual installments for up to 20 years. Initial deferrals are subject to a minimum two year deferral. In general, with respect to amounts deferred after 2005 or not fully vested as of January 1, 2005, participants may change their distribution schedule, provided the new elections satisfy the requirements of Section 409A of the Internal Revenue Code. In general, Section 409A requires that:

• Distribution schedules cannot be accelerated (other than for a hardship)

• To delay a previously scheduled distribution,

– A participant must make an election at least one year before the distribution otherwise would be made, and

– The new distribution cannot begin earlier than five years after it would have begun without the election to re-defer.

With respect to amounts deferred prior to 2005, to delay a distribution the new distribution cannot begin until two years after it would have begun without the election to re-defer.

Investments in the YUM! Stock Fund and YUM! Matching Stock Fund are only distributed in shares of Company stock.

## LRP

LRP Account Returns. The LRP provides an annual earnings credit to each participant’s account based on the value of participant’s account at the end of each year. Under the LRP, Mr. Kesselman received an annual earnings credit equal to 5% of his account balance, while he was employed with the Company. The Company’s contribution (“Employer Credit”) for 2018 was equal to 8% of salary plus target bonus for Mr. Kesselman.

Distributions under LRP. Under the LRP, participants age 55 or older are entitled to a lump sum distribution



of their account balance in the quarter following their separation of employment. Participants under age 55 with a vested LRP benefit that, combined with any other deferred compensation benefits covered under Code Section 409A exceeds $15,000, will not receive a distribution until the calendar quarter that follows the participant’s 55th birthday.

## TCN

TCN Account Returns. The TCN provides an annual earnings credit to each participant’s account based on the value of each participant’s account at the end of each year. Under the TCN, Messrs. Creed and Eaton receive an annual earnings credit equal to 5%. For Messrs. Creed and Eaton, the Employer Credit for 2018 was equal to 15% of their salaries plus target bonuses.

Distributions under TCN. Under the TCN, participants age 55 or older with a balance of $15,000 or more, are entitled to a lump sum distribution of their account balance in the quarter following their separation of employment. Participants under age 55 who separate employment with the Company will receive interest annually and their account balance will be distributed in the quarter following their 55th birthday.

<table><tr><td>Name</td><td>Plan Name</td><td>Executive Contributions in Last FY ($) (1)</td><td>Registrant Contributions in Last FY ($) (2)</td><td>Aggregate Earnings in Last FY ($) (3)</td><td>Aggregate Withdrawals/ Distributions ($) (4)</td><td>Aggregate Balance at Last FYE ($) (5)</td></tr><tr><td>(a)</td><td></td><td>(b)</td><td>(c)</td><td>(d)</td><td>(e)</td><td>(f)</td></tr><tr><td rowspan="3">Creed</td><td>EID</td><td>—</td><td>—</td><td>699,884</td><td>232,306</td><td>12,945,177</td></tr><tr><td>TCN</td><td>—</td><td>515,625</td><td>137,469</td><td>19,233</td><td>3,383,245</td></tr><tr><td>Total</td><td>—</td><td>515,625</td><td>837,353</td><td>251,539</td><td>16,328,422</td></tr><tr><td rowspan="2">Gibbs</td><td>EID</td><td>—</td><td>—</td><td>103,561</td><td>83,043</td><td>3,732,617</td></tr><tr><td>Total</td><td>—</td><td>—</td><td>103,561</td><td>83,043</td><td>3.732,617</td></tr><tr><td rowspan="3">Eaton</td><td>EID</td><td>—</td><td>—</td><td>507,147</td><td>—</td><td>9,207,724</td></tr><tr><td>TCN</td><td>—</td><td>255,000</td><td>98,598</td><td>9,512</td><td>2,316,046</td></tr><tr><td>Total</td><td>—</td><td>255,000</td><td>605,745</td><td>9,512</td><td>11,523,770</td></tr><tr><td rowspan="2">Skeans</td><td>EID</td><td>—</td><td>—</td><td>25,636</td><td>331,761</td><td>359,754</td></tr><tr><td>Total</td><td>—</td><td>—</td><td>25,636</td><td>331,761</td><td>359.754</td></tr><tr><td rowspan="2">Russell</td><td>EID</td><td>408,135</td><td>136,045</td><td>194,512</td><td>218,965</td><td>1,428,480</td></tr><tr><td>Total</td><td>408,135</td><td>136,045</td><td>194,512</td><td>218,965</td><td>1,428,480</td></tr><tr><td rowspan="3">Kesselman</td><td>EID</td><td>203,565</td><td>—</td><td>(26,890)</td><td>—</td><td>675,763</td></tr><tr><td>LRP</td><td>—</td><td>89,540</td><td>8,498</td><td>—</td><td>268,007</td></tr><tr><td>Total</td><td>203,565</td><td>89,540</td><td>(18,392)</td><td>—</td><td>943,770</td></tr></table>

(1) Amounts in column (b) reflect deferred amounts that were also reported as compensation in our Summary Compensation Table filed last year or, would have been reported as compensation in our Summary Compensation Table last year if the executive were a NEO, and deferrals of base salary into the EID Program.

(2) Amounts in column (c) reflect Company contributions for EID, LRP and/or TCN allocation. See footnote 5 of the Summary Compensation Table for more detail.

(3) Amounts in column (d) reflect earnings during the last fiscal year on deferred amounts. All earnings are based on the investment alternatives offered under the EID Program or the earnings credit provided under the LRP or the TCN described in the narrative above this table. The EID Program earnings are market based returns and, therefore, are not reported in the Summary Compensation Table. For Mr. Kesselman, of his earnings reflected in this column, $1,734 was deemed above market earnings accruing to his account under the LRP. For Messrs. Creed and Eaton, of their earnings reflected in this column, $28,044 and $20,114, respectively, were deemed above market earnings accruing to their accounts under the TCN. For above market earnings on nonqualified deferred compensation, see the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table.

(4) All amounts shown in column (e) were distributed in accordance with the executive’s deferral election, except in the case of the following amounts distributed to pay payroll taxes due upon their account balance under the EID Program, LRP or TCN for 2018.

<table><tr><td>Creed</td><td>19,233</td></tr><tr><td>Gibbs</td><td>—</td></tr><tr><td>Eaton</td><td>9,512</td></tr><tr><td>Skeans</td><td>15,484</td></tr><tr><td>Russell</td><td>10,879</td></tr><tr><td>Kesselman</td><td>—</td></tr></table>



(5) Amounts reflected in column (f) are the year-end balances for each executive under the EID Program, TCN and the LRP. As required under SEC rules, below is the portion of the year-end balance for each executive which has previously been reported as compensation to the executive in the Company’s Summary Compensation Table for 2018 and prior years.

<table><tr><td>Creed</td><td>6,072,875</td></tr><tr><td>Gibbs</td><td>—</td></tr><tr><td>Eaton</td><td>823,855</td></tr><tr><td>Skeans</td><td>—</td></tr><tr><td>Russell</td><td>1,026,425</td></tr><tr><td>Kesselman</td><td>497,246</td></tr></table>

## Potential Payments Upon Termination or Change in Control

The information below describes and quantifies certain compensation that would become payable under existing plans and arrangements if the NEO’s employment had terminated on December 31, 2018, given the NEO’s compensation and service levels as of such date and, if applicable, based on the Company’s closing stock price on that date. These benefits are in addition to benefits available generally to salaried employees, such as distributions under the Company’s 401(k) Plan, retiree medical benefits, disability benefits and accrued vacation pay.

Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event, the Company’s stock price and the executive’s age.

SAR Awards. If one or more NEOs terminated employment for any reason other than retirement, death, disability or following a change in control as of December 31, 2018, they could exercise the SARs that were exercisable on that date as shown at the Outstanding Equity Awards at Year-End table on page 63, otherwise all SARs, pursuant to their terms, would have been forfeited and cancelled after that date. If the NEO had retired, died or become disabled as of December 31, 2018, exercisable SARs would remain exercisable through the term of the award. Except in the case of a change in control, no SARs become exercisable on an accelerated basis. Benefits a NEO may receive on a change of control are discussed below.
Executive Income Deferral Program. As described in more detail beginning at page 68, the NEOs participate in the EID Program, which permits the deferral of salary and annual incentive compensation. The last column of the Nonqualified Deferred Compensation Table on page 70 includes each NEO’s aggregate balance at December 31, 2018. The NEOs are entitled to receive their vested amount under the EID Program in case of voluntary termination of employment. In the case of involuntary termination of employment, they are entitled to receive their vested benefit and the amount of the unvested benefit that corresponds to their deferral. In the case of death, disability or retirement after age 65, they or their beneficiaries are entitled to their entire account balance as shown in the last column of the Nonqualified Deferred Compensation table on page 70.

In the case of an involuntary termination of employment as of December 31, 2018, each NEO would receive the following: Mr. Creed $12,945,177, Mr. Gibbs $3,732,617, Mr. Eaton $9,207,724, Ms. Skeans $359,754, and Mr. Russell $1,428,480. As discussed at page 68, these amounts reflect bonuses previously deferred by the executive and appreciation on these deferred amounts (see page 68 for discussion of investment alternatives available under the EID). Thus, these EID account balances represent deferred base salary or bonuses (earned in prior years) and appreciation of their accounts based primarily on the performance of the Company’s stock.

Leadership Retirement Plan. Under the LRP, participants age 55 are entitled to a lump sum distribution of their account balance following their termination of employment. Participants under age 55 who terminate with more than five years of service will receive their account balance at their 55 \( ^{th} \)  birthday.



Third Country National Plan. Under the TCN, participants age 55 or older are entitled to a lump sum distribution of their account balance in the quarter following their termination of employment. Participants under age 55 who terminate will receive interest annually and their account balance will be distributed in the quarter following their 55 \( ^{th} \)  birthday. In case of termination of employment as of December 31, 2018, Mr. Creed would have received 3,383,245 and Mr. Eaton would have received 2,316,046.

Performance Share Unit Awards. If one or more NEOs terminated employment for any reason other than retirement or death or following a change in control and prior to achievement of the performance criteria and vesting period, then the award would be cancelled and forfeited. If the NEO had retired, or died as of December 31, 2018, the PSU award would be paid out based on actual performance for the performance period, subject to a pro rata reduction reflecting the portion of the performance period not worked by the NEO. If any of these payouts had occurred on December 31, 2018, Messrs. Creed, Gibbs, and Eaton and Ms. Skeans would have been entitled to 9,992,278, 3,345,817, 3,017,885, and 1,779,827, respectively, assuming target performance.

Pension Benefits. The Pension Benefits Table on page 66 describes the general terms of each pension plan in which the NEOs participate, the years of credited service and the present value of the annuity payable to each NEO assuming termination of employment as of December 31, 2018. The table on page 67 provides the present value of the lump sum benefit payable to each NEO when they attain eligibility for Early Retirement (i.e., age 55 with 10 years of service) under the plans.

Life Insurance Benefits. For a description of the supplemental life insurance plans that provide coverage to the NEOs, see the All Other Compensation Table on page 60. If the NEOs had died on December 31, 2018, the survivors of Messrs. Creed, Gibbs, Eaton, Ms. Skeans and Mr. Russell would have received Company-paid life insurance of 3,000,000, 1,722,000, 1,650,000, 1,120,000 and 660,000, respectively, under this arrangement. Executives and all other salaried employees can purchase additional life insurance benefits up to a maximum combined company paid and additional life insurance of 3.5 million. This additional benefit is not paid or subsidized by the Company and, therefore, is not shown here.

Change in Control. Change in control severance agreements are in effect between YUM and certain key executives (including Messrs. Creed, Gibbs, Eaton and Ms. Skeans). These agreements are general obligations of YUM, and provide, generally, that if, within two years subsequent to a change in control of YUM, the employment of the executive is terminated (other than for cause, or for other limited reasons specified in the change in control severance agreements) or the executive terminates employment for Good Reason (defined in the change in control severance agreements to include a diminution of duties and responsibilities or benefits), the executive will be entitled to receive the following:

• a proportionate annual incentive assuming achievement of target performance goals under the bonus plan or, if higher, assuming continued achievement of actual Company performance until date of termination,

• a severance payment equal to two times the sum of the executive’s base salary and the target bonus or, if higher, the actual bonus for the year preceding the change in control of the Company, and

• outplacement services for up to one year following termination.

In March 2013, the Company eliminated excise tax gross-ups and implemented a best net after-tax method. See the Company’s CD&A on page 39 for more detail.

The change in control severance agreements have a three-year term and are automatically renewable each January 1 for another three-year term. An executive whose employment is not terminated within two years of a change in control will not be entitled to receive any severance payments under the change in control severance agreements.

Generally, pursuant to the agreements, a change in control is deemed to occur:

(i) if any person acquires 20% or more of the Company’s voting securities (other than securities acquired directly from the Company or its affiliates);

(ii) if a majority of the directors as of the date of the agreement are replaced other than in specific circumstances; or



(iii) upon the consummation of a merger of the Company or any subsidiary of the Company other than (a) a merger where the Company’s directors immediately before the change in control constitute a majority of the directors of the resulting organization, or (b) a merger effected to implement a recapitalization of the Company in which no person is or becomes the beneficial owner of securities of the Company representing 20% or more of the combined voting power of the Company’s then-outstanding securities.

In addition to the payments described above, upon a change in control:

• All outstanding SARs held by the executive and not otherwise exercisable will fully and immediately vest following a change in control if the executive is employed on the date of the change in control of the Company and is involuntarily terminated (other than by the Company for cause) on or within two years following the change in control. See Company’s CD&A on page 39 for more detail.
• All RSUs under the Company’s EID Program held by the executive will automatically vest.

• Pursuant to the Company’s Performance Share Plan under the LTIP, all PSU awards awarded in the year in which the change in control occurs, will be paid out at target assuming a target level performance had been achieved for the entire performance period, subject to a pro rata reduction to reflect the portion of the performance period after the change in control. All PSUs awarded for performance periods that began before the year in which the change in control occurs will be paid out assuming performance achieved for the performance period was at the greater of target level performance or projected level of performance at the time of the change in control, subject to pro rata reduction to reflect the portion of the performance period after the change in control. In all cases, executives must be employed with the Company on the date of the change in control and involuntarily terminated upon or following the change in control and during the performance period. See Company’s CD&A on page 39 for more detail.

If a change in control and each NEO’s involuntary termination had occurred as of December 31, 2018, the following payments or other benefits would have been made or become available.

<table><tr><td></td><td>Creed</td><td>Gibbs</td><td>Eaton</td><td>Skeans</td><td>Russel(1)</td></tr><tr><td>Severance Payment</td><td>10,128,986</td><td>5,634,054</td><td>5,673,200</td><td>3,502,650</td><td>—</td></tr><tr><td>Annual Incentive</td><td>3,144,531</td><td>1,467,113</td><td>1,338,750</td><td>824,766</td><td>—</td></tr><tr><td>Accelerated Vesting of SARs</td><td>22,609,379</td><td>8,008,032</td><td>5,093,830</td><td>4,292,927</td><td>2,932,869</td></tr><tr><td>Accelerated Vesting of RSUs</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1,199,286</td></tr><tr><td>Acceleration of PSU Performance/Vesting</td><td>9,992,278</td><td>3,345,817</td><td>3,017,885</td><td>1,779,827</td><td>—</td></tr><tr><td>Outplacement</td><td>25,000</td><td>25,000</td><td>25,000</td><td>25,000</td><td>—</td></tr><tr><td>TOTAL</td><td>45,900,174</td><td>18,480,016</td><td>15,148,665</td><td>10,425,170</td><td>4,132,155</td></tr></table>

(1) A severance payment and annual incentive is not listed for Mr. Russell because he does not have a change in control agreement with the Company, as he is not a direct report to the CEO.

In connection with his departure from the Company, Mr. Kesselman received payments from the Company totaling $442,768.

## CEO Pay Ratio

Each year Yum! Brands and our franchisees around the world create thousands of restaurant jobs, which are part-time, entry-level opportunities to grow careers at KFC, Pizza Hut and Taco Bell. Wherever we operate, our employee compensation practices comply with local regulations and are designed to attract and retain the best talent. We’re proud that 80% of our Company-owned restaurant general managers located in the U.S. began as hourly employees and often earn competitive pay greater than the average American household income. Approximately 90% of our Company-owned restaurant employees are part-time. At least 60% have been employed by the Company for less than a year.



As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and applicable SEC rules, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Mr. Creed, our Chief Executive Officer (our “CEO”).

To identify the median employee, we used the December 2018 base wages or base salary information for all employees who were employed by us on December 31, 2018, excluding our CEO. We included all full-time and part-time employees and annualized the employees' base salary or base wages to reflect their compensation for 2018. We believe the use of base wages or base salary for all employees is a consistently applied compensation measure.

As of December 31, 2018, our global workforce used for determining the pay ratio was estimated to be 32,076 employees (16,480 in the U.S. and 15,596 internationally).

After calculating employee compensation, our median employee was identified as a part-time Taco Bell restaurant employee in the United States. After identifying the median employee, we calculated total annual compensation in accordance with the requirements of the Summary Compensation Table.

For 2018, the total compensation of our CEO, as reported in the Summary Compensation Table at page 59, was $14,007,038. The total compensation of our median employee was estimated to be $11,865. As a result, we estimate that our CEO to median employee pay ratio is 1181:1.

This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described above. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices. As such, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.



# EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes, as of December 31, 2018, the equity compensation plans under which we may issue shares of stock to our directors, officers, current employees and former employees. Those plans include the Long Term Incentive Plan (the “LTIP”) and the Restaurant General Manager Stock Option Plan (“RGM Plan”).

<table><tr><td>Plan Category</td><td>Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)</td><td>Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)</td><td>Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)</td></tr><tr><td>Equity compensation plans approved by security holders</td><td>9,748,812 \( ^{(1)} \)</td><td>51.88 \( ^{(2)} \)</td><td>28,326,263 \( ^{(3)} \)</td></tr><tr><td>Equity compensation plans not approved by security holders</td><td>170,937 \( ^{(4)} \)</td><td>50.33 \( ^{(2)} \)</td><td>—</td></tr><tr><td>TOTAL</td><td>9,919,749 \( ^{(1)} \)</td><td>51.84 \( ^{(2)} \)</td><td>28,326,263 \( ^{(3)} \)</td></tr></table>

(1) Includes 2,515,616 shares issuable in respect of RSUs, performance units and deferred units.

(2) Weighted average exercise price of outstanding Options and SARs only.

(3) Includes 14,163,131 shares available for issuance of awards of stock units, restricted stock, restricted stock units and performance share unit awards under the LTIP Plan.

(4) Awards are made under the RGM Plan.

## What are the key features of the LTIP?

The LTIP provides for the issuance of up to 92,600,000 shares of stock as non-qualified stock options, incentive stock options, SARs, restricted stock, restricted stock units, performance shares or performance units. Only our employees and directors are eligible to receive awards under the LTIP. The purpose of the LTIP is to motivate participants to achieve long range goals, attract and retain eligible employees, provide incentives competitive with other similar companies and align the interest of employees and directors with those of our shareholders. The LTIP is administered by the Management Planning and Development Committee of the Board of Directors (the "Committee"). The exercise price of a stock option grant or SAR under the LTIP may not be less than the average market price of our stock on the date of grant for years prior to 2008 or the closing price of our stock on the date of the grant beginning in 2008, and no options or SARs may have a term of more than ten years. The options and SARs that are currently outstanding under the LTIP generally vest over a one to four year period and expire ten years from the date of the grant. Our shareholders approved the LTIP in 1999, and the plan as amended in 2003, 2008 and 2016. The performance measures of the LTIP were re-approved by our shareholders in 2013 and in 2016.

## What are the key features of the RGM Plan?

Effective May 20, 2016, we canceled the remaining shares available for issuance under the RGM Plan, except for the approximately 220,000 shares necessary to satisfy then outstanding awards. No future awards will be made under the RGM Plan. The RGM Plan has provided for the issuance shares of common stock at a price equal to or greater than the closing price of our stock on the date of grant. The RGM Plan allowed us to award non-qualified stock options, SARs, restricted stock and RSUs. Employees, other than executive officers, have been eligible to receive awards under the RGM Plan. The purpose of



the RGM Plan was (i) to give restaurant general managers (“RGMs”) the opportunity to become owners of stock, (ii) to align the interests of RGMs with those of YUM’s other shareholders, (iii) to emphasize that the RGM is YUM’s #1 leader, and (iv) to reward the performance of RGMs. In addition, the Plan provides incentives to Area Coaches, Franchise Business Leaders and other supervisory field operation positions that support RGMs and have profit and loss responsibilities within a defined region or area. While all non-executive officer employees have been eligible to receive awards under the RGM plan, all awards granted have been to RGMs or their direct supervisors in the field. Grants to RGMs generally have four year vesting and expire after ten years. The RGM Plan is administered by the Committee, and the Committee has delegated its responsibilities to the Chief People Officer of the Company. The Board of Directors approved the RGM Plan on January 20, 1998.



# AUDIT COMMITTEE REPORT

## Who serves on the Audit Committee of the Board of Directors?

The members of the Audit Committee are Paget L. Alves, Tanya L. Domier, P. Justin Skala, Elane B. Stock and Thomas C. Nelson, Chair.

The Board of Directors has determined that all of the members of the Audit Committee are independent within the meaning of applicable SEC regulations and the listing standards of the NYSE and that Mr. Nelson, the chair of the Committee, is qualified as an audit committee financial expert within the meaning of SEC regulations. The Board has also determined that Mr. Nelson has accounting and related financial management expertise within the meaning of the listing standards of the NYSE and that each member of the Committee is financially literate within the meaning of the NYSE listing standards.

## What document governs the activities of the Audit Committee?

The Audit Committee operates under a written charter adopted by the Board of Directors. The Committee’s responsibilities are set forth in this charter, which was amended and restated effective November 22, 2013. The charter is reviewed by management at least annually, and any recommended changes are presented to the Audit Committee for review and approval. The charter is available on our Web site at www.investors.yum.com/corporate-governance/committee-composition-and-charters.

## What are the responsibilities of the Audit Committee?

The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of the integrity of the Company’s financial statements, the adequacy of the Company’s system of internal controls and procedures and disclosure controls and procedures, the Company’s risk management, the Company’s compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence and the performance of the Company’s internal audit function and independent auditors. The Committee has the authority to obtain advice and assistance from outside legal, accounting or other advisors as the Committee deems necessary to carry out its duties and receive appropriate funding, as determined by the Committee, from the Company for such advice and assistance.

The Committee has sole authority over the selection of the Company’s independent auditors and manages the Company’s relationship with its independent auditors (who report directly to the Committee). KPMG LLP has served as the Company’s independent auditors since 1997. Each year, the Committee evaluates the performance, qualifications and independence of the independent auditors. The Committee is also involved in the selection of the lead audit partner. In evaluating the Company’s independent auditors, the Committee considers the quality of the services provided, as well as the independent auditors’ and lead partner’s capabilities and technical expertise and knowledge of the Company’s operations and industry.

The Committee met 8 times during 2018. The Committee schedules its meetings with a view to ensuring that it devotes appropriate attention to all of its tasks. The Committee’s meetings generally include private sessions with the Company’s independent auditors and with the Company’s internal auditors, in each case without the presence of the Company’s management, as well as executive sessions consisting of only Committee members. In addition to the scheduled meetings, senior management confers with the Committee or its Chair from time to time, as senior management deems advisable or appropriate, in connection with issues or concerns that arise throughout the year.

Management is responsible for the Company’s financial reporting process, including its system of internal control over financial reporting, and for the preparation of



consolidated financial statements in accordance with accounting principles generally accepted in the U.S. The Company’s independent auditors are responsible for auditing those financial statements in accordance with professional standards and expressing an opinion as to their material conformity with U.S. generally accepted accounting principles and for auditing the effectiveness of the Company’s internal control over financial reporting. The Committee’s responsibility is to monitor and review the Company’s financial reporting process and discuss management’s report on the Company’s internal control over financial reporting. It is not the Committee’s duty or responsibility to conduct audits or

## What matters have members of the Audit Committee discussed with management and the independent auditors?

As part of its oversight of the Company’s financial statements, the Committee reviews and discusses with both management and the Company’s independent auditors all annual and quarterly financial statements prior to their issuance. With respect to each 2018 fiscal reporting period, management advised the Committee that each set of financial statements reviewed had been prepared in accordance with accounting principles generally accepted in the U.S., and reviewed significant accounting and disclosure issues with the Committee. These reviews included discussions with the independent auditors of matters required to be discussed pursuant to Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 1301 (Communication with Audit Committees), including the quality (not merely the acceptability) of the Company’s accounting principles, the reasonableness of significant judgments, the clarity of disclosures in the financial statements and disclosures related to critical accounting practices. The Committee has also discussed with KPMG LLP matters relating to its independence, including a review of audit and non-audit fees and the written disclosures and letter received from KPMG LLP required by applicable accounting reviews or procedures. The Committee has relied, without independent verification, on management’s representations that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the U.S. and that the Company’s internal control over financial reporting is effective. The Committee has also relied, without independent verification, on the opinion of the independent auditors included in their report regarding the Company’s financial statements and effectiveness of internal control over financial reporting.

requirements of the PCAOB regarding KPMG LLP’s communications with the Committee concerning independence. The Committee also considered whether non-audit services provided by the independent auditors are compatible with the independent auditors’ independence. The Committee also received regular updates, and written summaries as required by the PCAOB rules (for tax and other services), on the amount of fees and scope of audit, audit-related, tax and other services provided.

In addition, the Committee reviewed key initiatives and programs aimed at strengthening the effectiveness of the Company’s internal and disclosure control structure. As part of this process, the Committee continued to monitor the scope and adequacy of the Company’s internal auditing program, reviewing staffing levels and steps taken to implement recommended improvements in internal procedures and controls. The Committee also reviews and discusses legal and compliance matters with management, and, as necessary or advisable, the Company’s independent auditors.

## Has the Audit Committee made a recommendation regarding the audited financial statements for fiscal 2018?

Based on the Committee’s discussions with management and the independent auditors and the Committee’s review of the representations of management and the report of the independent auditors to the Board of Directors and shareholders, and subject to the limitations on the Committee’s role and responsibilities referred to above and in the Audit Committee Charter, the Committee recommended to the Board of Directors that it include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for filing with the SEC.



## Who prepared this report?

This report has been furnished by the members of the Audit Committee:

Thomas C. Nelson, Chair

Paget L. Alves

Tanya L. Domier

P. Justin Skala

Elane B. Stock



# ADDITIONAL INFORMATION

## Who pays the expenses incurred in connection with the solicitation of proxies?

Expenses in connection with the solicitation of proxies will be paid by us. Proxies are being solicited principally by mail, by telephone and through the Internet. In addition, our directors, officers and regular employees, without additional compensation, may solicit proxies personally, by e-mail, telephone, fax or special letter. We will reimburse brokerage firms and others for their expenses in forwarding proxy materials to the beneficial owners of our shares.

## How may I elect to receive shareholder materials electronically and discontinue my receipt of paper copies?

YUM shareholders with shares registered directly in their name who received shareholder materials in the mail may elect to receive future annual reports and proxy statements from us and to vote their shares through the Internet instead of receiving copies through the mail. We are offering this service to provide shareholders with added convenience, to reduce our environmental impact and to reduce Annual Report printing and mailing costs.

To take advantage of this option, shareholders must subscribe to one of the various commercial services that offer access to the Internet. Costs normally associated with electronic access, such as usage and telephone charges, will be borne by the shareholder.

To elect this option, go to www.computershare.com, click on Shareholder Account Access, log in and locate the option to receive Company mailing via e-mail. Shareholders who elect this option will be notified by mail how to access the proxy materials and how to vote their shares on the Internet or by phone.

If you consent to receive future proxy materials electronically, your consent will remain in effect unless it is withdrawn by writing our Transfer Agent, Computershare, Inc., 462 South 4 \( ^{th} \)  Street, Suite 1600, Louisville, Kentucky 40202 or by logging onto our Transfer Agent’s website at www.computershare.com and following the applicable instructions. Also, while this consent is in effect, if you decide you would like to receive a hard copy of the proxy materials, you may call, write or e-mail Computershare, Inc.

## I share an address with another shareholder and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?

The Company has adopted a procedure called “householding” which has been approved by the SEC. The Company and some brokers household proxy materials, delivering a single Notice and, if applicable, this proxy statement and Annual Report, to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders or they participate in electronic delivery of proxy materials. Shareholders who participate in householding will continue to access and receive separate proxy cards. This process will help reduce our printing and postage fees, as well as save natural resources. If at any time you no longer wish to participate in householding and would prefer to receive a separate proxy statement, or if you are receiving multiple copies of the proxy statement and wish to receive only one, please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. You can notify us by sending a written request to YUM! Brands, Inc., Investor Relations, 1441 Gardiner Lane, Louisville, KY 40213 or by calling Investor Relations at 1 (888) 298-6986 or by sending an e-mail to yum.investor@yum.com.



## May I propose actions for consideration at next year’s Annual Meeting of Shareholders or nominate individuals to serve as directors?

Under the rules of the SEC, if a shareholder wants us to include a proposal in our proxy statement and proxy card for presentation at our 2020 Annual Meeting of Shareholders, the proposal must be received by us at our principal executive offices at YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, Kentucky 40213 by December 7, 2019. The proposal should be sent to the attention of the Corporate Secretary.

Under our bylaws, certain procedures are provided that a shareholder must follow to nominate persons for election as directors or to introduce an item of business at an Annual Meeting of Shareholders that is not included in our proxy statement. These procedures provide that nominations for director nominees and/or an item of business to be introduced at an Annual Meeting of Shareholders must be submitted in writing to our Corporate Secretary at our principal executive offices and you must include information set forth in our bylaws. We must receive the notice of your intention to introduce a nomination or to propose an item of business at our 2020 Annual Meeting no later than the date specified in our bylaws. If the 2020 Annual Meeting is not held within 30 days before or after the anniversary of the date of this year’s Annual Meeting, then the nomination or item of business must be received by the tenth day following the earlier of the date of mailing of the notice of the meeting or the public disclosure of the date of the meeting. Assuming that our 2020 Annual Meeting is held within 30 days of the anniversary of this Annual Meeting, we must receive notice of your intention to introduce a nomination or other item of business at that meeting by February 16, 2020.
In addition, our bylaws provide for proxy access for director nominations by shareholders (as described at page 18). A shareholder, or group of up to 20 shareholders, owning continuously for at least three years shares of YUM common stock representing an aggregate of at least 3% of our outstanding shares, may nominate, and include in YUM's proxy materials, director nominees constituting up to 20% of YUM's Board, provided that the shareholder(s) and nominee(s) satisfy the requirements in YUM's bylaws. Notice of proxy access director nominees must be received no earlier than November 7, 2019, and no later than December 7, 2019.

The Board is not aware of any matters that are expected to come before the 2019 Annual Meeting other than those referred to in this proxy statement. If any other matter should come before the Annual Meeting, the individuals named on the form of proxy intend to vote the proxies in accordance with their best judgment.

The chairman of the Annual Meeting may refuse to allow the transaction of any business, or to acknowledge the nomination of any person, not made in compliance with the foregoing procedures.

Bylaw Provisions. You may contact YUM's Corporate Secretary at the address mentioned above for a copy of the relevant bylaw provisions regarding the requirements for making shareholder proposals and nominating director candidates.



# APPENDIX A: Reconciliation of Adjusted Operating Profit Growth

The Company uses non-GAAP Adjusted Operating Profit Growth as a key performance measure of results of operations for the purpose of evaluating performance against targets set under our YUM Leaders' Bonus Program. Adjusted Operating Profit Growth is the calculated growth rate from our prior year's non-GAAP Adjusted Base Operating Profit to the current fiscal year's non-GAAP Adjusted Base Operating Profit. Adjusted Operating Profit Growth includes adjustments to our GAAP Operating Profit that we believe are necessary to ensure that growth rates for bonus purposes are indicative of underlying business performance. General and administrative expense reductions expected to be realized in 2018 related to YUM's Strategic Transformation Initiatives were incorporated into our targets for KFC and YUM Adjusted Operating Profit Growth during the target-setting process and are thus not included in the reconciliation below.

Reconciliation of GAAP Operating Profit to Adjusted Base Operating Profit

<table><tr><td></td><td>KFC</td><td>YUM</td></tr><tr><td>2017 GAAP Operating Profit</td><td>$ 981</td><td>$ 2,761</td></tr><tr><td>Special Items (Income) Expense — Operating Profit \( ^{(a)} \)</td><td></td><td>(1,001)</td></tr><tr><td>Impact of Pizza Hut U.S. Transformation Agreement \( ^{(d)} \)</td><td></td><td>25</td></tr><tr><td>Impact of Refranchising \( ^{(e)} \)</td><td>(75)</td><td>(122)</td></tr><tr><td>Other</td><td>1</td><td>19</td></tr><tr><td>2017 Adjusted Base Operating Profit</td><td>$ 907</td><td>$ 1,682</td></tr><tr><td>2018 GAAP Operating Profit</td><td>$ 959</td><td>$ 2,296</td></tr><tr><td>Special Items (Income) Expense — Operating Profit \( ^{(a)} \)</td><td></td><td>(530)</td></tr><tr><td>Impact of Revenue Recognition Standard \( ^{(c)} \)</td><td>36</td><td>41</td></tr><tr><td>Impact of Pizza Hut U.S. Transformation Agreement \( ^{(d)} \)</td><td></td><td>13</td></tr><tr><td>Impact of Refranchising \( ^{(e)} \)</td><td>20</td><td>42</td></tr><tr><td>Other</td><td>8</td><td>13</td></tr><tr><td>Foreign Currency Impact on Reported Operating Profit \( ^{(b)} \)</td><td></td><td>(1)</td></tr><tr><td>2018 Adjusted Base Operating Profit</td><td>$1,023</td><td>$ 1,874</td></tr><tr><td>Adjusted Operating Profit Growth</td><td>12.8%</td><td>11.4%</td></tr></table>

a) In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), the Company provides non-GAAP measurements which present operating results on a basis excluding Special Items. The Company uses earnings excluding Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of earnings excluding Special Items provides additional information to investors to facilitate the comparison of past and present results, excluding items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature. Special Items are not allocated to our Divisions and, thus, are not necessary to include as an adjustment when determining Adjusted Operating Profit Growth for the KFC Division. Refer to page 29 of YUM’s Form 10-K for further details related to these Special Items.

b) The Company excludes the impact of foreign currency translation from the calculation of Adjusted Operating Profit Growth. The foreign currency impact is determined by translating current year results at prior year average exchange rates. We believe the elimination of the foreign currency impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

c) 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 of Item 8 in YUM’s Form 10-K. We adopted Topic 606 on January 1, 2018, using the modified retrospective method. Therefore, the GAAP Operating Profit for fiscal 2017 has not been adjusted and continues to be reported under our accounting policies related to revenue recognition prior to the adoption of Topic 606. The Company has added back to 2018 GAAP Operating Profit the negative impact resulting from the adoption of Topic 606.



d) In May 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising and digital and technology contributions by franchisees. In connection with this agreement, we incurred $13 million of incremental system advertising expense in 2018 and $25 million of incremental system advertising expense in 2017. These amounts were added back to GAAP Operating Profit when determining Adjusted Base Operating Profit.

e) 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 GAAP 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 removed from 2017 GAAP Operating Profit the net impact of stores refranchised in 2017 so as to present 2017 Adjusted Base Operating Profit as if those stores were refranchised for all of 2017 (as they were in 2018). We have added back to 2018 GAAP Operating Profit the net impact of stores refranchised in 2018 so as to present 2018 Adjusted Based Operating Profit as if those stores were Company-owned for all of 2018 (as they were in 2017).






Washington, D. C. 20549

# FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission file number 1-13163



## YUM! BRANDS, INC.

(Exact name of registrant as specified in its charter)

<table><tr><td>North Carolina</td><td>13-3951308</td></tr><tr><td>(State or other jurisdiction of incorporation or organization)</td><td>(L.R.S. Employer Identification No.)</td></tr><tr><td>1441 Gardiner Lane, Louisville, Kentucky</td><td>40213</td></tr><tr><td>(Address of principal executive offices)</td><td>(Zip Code)</td></tr></table>

(502) 874-8300

Registrant's telephone number, including area code:

<table><tr><td colspan="2">SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT</td></tr><tr><td>Title of Each Class</td><td>Name of Each Exchange on Which Registered</td></tr><tr><td>Common Stock, no par value</td><td>New York Stock Exchange</td></tr></table>

<table><tr><td colspan="4">SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:</td></tr><tr><td colspan="3">None</td><td></td></tr><tr><td colspan="2">Indicate by check mark</td><td>Yes</td><td>No</td></tr><tr><td colspan="2">• if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.</td><td>✓</td><td>☐</td></tr><tr><td colspan="2">• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.</td><td>☐</td><td>✓</td></tr><tr><td colspan="2">• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.</td><td>✓</td><td>☐</td></tr><tr><td colspan="2">• whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).</td><td>✓</td><td>☐</td></tr><tr><td colspan="2">• if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant&#x27;s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.</td><td colspan="2">✓</td></tr><tr><td colspan="4">• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of &quot;large accelerated filer&quot;, &quot;accelerated filer&quot;, &quot;smaller reporting company&quot;, and &quot;emerging growth company&quot; in Rule 12b-2 of the Exchange Act (Check one):</td></tr><tr><td>Large accelerated filer: ☑</td><td>Accelerated filer: ☐</td><td>Non-accelerated filer: ☐</td><td>Smaller reporting company: ☐</td></tr><tr><td colspan="2">• If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.</td><td colspan="2">☐</td></tr><tr><td colspan="2">• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).</td><td>☐</td><td>✓</td></tr></table>

The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June 30, 2018 computed by reference to the closing price of the registrant's Common Stock on the New York Stock Exchange Composite Tape on such date was approximately $24.7 billion. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant. The number of shares outstanding of the registrant's Common Stock as of February 13, 2019 was 306,414,175 shares.

## DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement furnished to shareholders of the registrant in connection with the annual meeting of shareholders to be held on May 16, 2019 are incorporated by reference into Part III.



## Table of Contents

PART I 2
ITEM 1 Business 2
ITEM 1A Risk Factors 5
ITEM 1B Unresolved Staff Comments 13
ITEM 2 Properties 13
ITEM 3 Legal Proceedings 14
ITEM 4 Mine Safety Disclosures 14

PART II 15
ITEM 5 Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
ITEM 6 Selected Financial Data 17
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 39
ITEM 8 Financial Statements and Supplementary Data 40
ITEM 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 84
ITEM 9A Controls and Procedures 84
ITEM 9B Other Information 84

PART III 85
ITEM 10 Directors, Executive Officers and Corporate Governance 85
ITEM 11 Executive Compensation 85
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 85
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 85
ITEM 14 Principal Accountant Fees and Services 85

PART IV 86
ITEM 15 Exhibits and Financial Statement Schedules 86



## Forward-Looking Statements

In this Form 10-K, as well as in other written reports and oral statements, we present “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe harbor provisions.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “seek,” “project,” “model,” “ongoing,” “will,” “should,” “forecast,” “outlook” or similar terminology. Forward-looking statements are based on our current expectations, estimates, assumptions and/or projections, our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those indicated by those statements. There can be no assurance that our expectations, estimates, assumptions and/or projections will be achieved. Factors that could cause actual results and events to differ materially from our expectations and forward-looking statements include (i) the risks and uncertainties described in the Risk Factors included in Part I, Item 1A of this Form 10-K and (ii) the factors described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form 10-K. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The forward-looking statements included in this Form 10-K are only made as of the date of this Form 10-K and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances.



## PART I

## ITEM 1 Business

YUM! Brands, Inc. (referred to herein as "YUM", the "Registrant" or the "Company"), was incorporated under the laws of the state of North Carolina in 1997. The principal executive offices of YUM are located at 1441 Gardiner Lane, Louisville, Kentucky 40213, and the telephone number at that location is (502) 874-8300. Our website address is http://www.yum.com.
YUM, together with its subsidiaries, is referred to in this Form 10-K annual report (“Form 10-K”) as the Company. The terms “we,” “us” and “our” are also used in the Form 10-K to refer to the Company. Throughout this Form 10-K, the terms “restaurants,” “stores” and “units” are used interchangeably. While YUM does not directly own or operate any restaurants, throughout this document we may refer to restaurants that are owned or operated by our subsidiaries as being Company-owned.

## Overview of Business

YUM has over 48,000 restaurants in more than 140 countries and territories primarily operating under the three concepts of KFC, Pizza Hut and Taco Bell (the “Concepts”). These three concepts are global leaders of the chicken, pizza and Mexican-style food categories, respectively. At December 31, 2018, 98% of our units are operated by independent franchisees or licensees under the terms of franchise or license agreements. The terms “franchise” or “franchisee” within this Form 10-K are meant to describe third parties that operate units under either franchise or license agreements.

Following is a summary of our Concepts' operations and a brief description of each Concept as of and for the year ended December 31, 2018:

<table><tr><td></td><td>Number of Units</td><td>% of Units International</td><td>Number of Countries and Territories</td><td>% Franchised</td><td>System Sales (in Millions)</td></tr><tr><td>KFC Division</td><td>22,621</td><td>82%</td><td>136</td><td>99%</td><td>$ 26,239</td></tr><tr><td>Pizza Hut Division*</td><td>18,431</td><td>59%</td><td>111</td><td>99%</td><td>12,212</td></tr><tr><td>Taco Bell Division</td><td>7,072</td><td>7%</td><td>27</td><td>93%</td><td>10,786</td></tr><tr><td>YUM*</td><td>48,124</td><td>62%</td><td>145</td><td>98%</td><td>$ 49,237</td></tr></table>

* Unit information includes 1,282 units operating under the Teleqpiza brand as of December 31, 2018. See Part II, Item 7 for a description of the Teleqpiza strategic alliance.

## KFC

KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early developer of the quick service food business and a pioneer of the restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952. KFC restaurants across the world offer fried and non-fried chicken products such as sandwiches, chicken strips, chicken-on-the-bone and other chicken products marketed under a variety of names.

## Pizza Hut

- The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and within a year, the first franchise unit was opened. Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. Pizza Hut operates in the delivery, carryout and casual dining segments around the world.

## Taco Bell

- The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey, California, and in 1964, the first Taco Bell franchise was sold. Taco Bell specializes in Mexican-style food products, including various types of tacos, burritos, quesadillas, salads, nachos and other related items.



## Business Strategy

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

## Information about Operating Segments

As of December 31, 2018, YUM consists of three operating segments:

- The KFC Division which includes the worldwide operations of the KFC concept

- The Pizza Hut Division which includes the worldwide operations of the Pizza Hut concept

- The Taco Bell Division which includes the worldwide operations of the Taco Bell concept

## Franchise Agreements

The franchise programs of the Company are designed to promote consistency and quality, and the Company is selective in granting franchises. The Company is focused on partnering with franchisees who have the commitment, capability and capitalization to grow our Concepts. Franchisees can range in size from individuals owning just one restaurant to large publicly-traded companies.

The Company utilizes both store-level franchise and master franchise programs to grow its businesses. Of our over 47,000 franchised units at December 31, 2018, approximately 30% operate under our master franchise programs, primarily units in China and those operating under the Telepizza strategic alliance (see Part II, Item 7 for a description of the Telepizza strategic alliance). The remainder of our franchise units operate under store-level franchise agreements. Under both types of franchise programs, franchisees supply capital by purchasing or leasing the land, building, equipment, signs, seating, inventories and supplies and, over the longer term, by reinvesting in the business. In certain historical refranchising transactions the Company may have retained ownership of land and building and continues to lease them to the franchisee. Store-level franchise agreements typically require payment to the Company of certain upfront fees such as initial fees paid upon opening of a store, fees paid to renew the term of the franchise agreement and fees paid in the event the franchise agreement is transferred to another franchisee. Franchisees also pay monthly continuing fees based on a percentage of their restaurants' sales (typically 4% - 6%) and are required to spend a certain amount to advertise and promote the brand. Under master franchise arrangements, the Company enters into agreements that allow master franchisees to operate restaurants as well as sub-franchise restaurants within certain geographic territories. Master franchisees are typically responsible for overseeing development within their territories and performing certain other administrative duties with regard to the oversight of sub-franchisees. In exchange, master franchisees retain a certain percentage of fees payable by the sub-franchisees under their franchise agreements and typically pay lower fees for the restaurants they operate. Our largest master franchisee, Yum China, pays the Company a continuing fee of 3% on system sales of our Concepts in mainland China.
The Company believes that it is important to maintain strong and open relationships with its franchisees and their representatives. To this end, the Company invests a significant amount of time working with the franchisee community and their representative organizations on key aspects of the business, including products, equipment, operational improvements and standards and management techniques.

## Restaurant Operations

Through its Concepts, YUM develops, operates and franchises a worldwide system of both traditional and non-traditional Quick Service Restaurants ("QSR"). Traditional units can feature dine-in, carryout, drive-thru and delivery services. Non-traditional units include express units and kiosks that have a more limited menu, usually generate lower sales volumes and operate in non-traditional locations like malls, airports, gasoline service stations, train stations, subways, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient.

Most restaurants in each Concept offer consumers the ability to dine in and/or carryout food. In addition, Taco Bell and KFC offer a drive-thru option in many stores. Pizza Hut offers a drive-thru option on a much more limited basis. Pizza Hut typically offers delivery service, while, on a more limited but expanding basis, KFC and Taco Bell allow for consumers to have the Concepts' food delivered either through store-level or third-party delivery services. On February 7, 2018, certain of our subsidiaries entered into a master services agreement with an affiliate of Grubhub, Inc. ("Grubhub"), an online and mobile takeout food-ordering company in the U.S., which is intended to provide dedicated support for the KFC and Taco Bell branded online delivery channels in the U.S. through Grubhub's online ordering platform, logistics and last-mile support for delivery orders, as well as point-of-sale integration to streamline operations.

Restaurant management structure varies by Concept and unit size. Generally, each restaurant is led by a restaurant general manager (“RGM”), together with one or more assistant managers, depending on the operating complexity and sales volume of the restaurant. Each Concept issues detailed manuals, which may then be customized to meet local regulations and customs. These manuals set forth standards and requirements for all aspects of restaurant operations, including food safety and quality, food handling and product preparation procedures, equipment maintenance, facility standards and accounting control procedures. The restaurant management teams are responsible for the day-to-day operation of each unit and for ensuring compliance with operating standards. CHAMPS – which stands for Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service – is our proprietary systemwide program for training, measuring and rewarding employee performance against key customer measures. CHAMPS is intended to align the operating processes of our entire system around one core set of standards. RGMs’ efforts, including CHAMPS performance measures, are monitored by Area Coaches, where sufficient scale allows. Area Coaches typically work with approximately six to twelve restaurants.

## Supply and Distribution

The Company and franchisees of the Concepts are substantial purchasers of a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include chicken, cheese, beef and pork products, paper and packaging materials. Prices paid for these supplies fluctuate. When prices increase, the Concepts may attempt to pass on such increases to their customers, although there is no assurance that this can be



done practically. The Company does not typically experience significant continuous shortages of supplies, and alternative sources for most of these products are generally available.

In the U.S., the Company, along with the representatives of the Company’s KFC, Pizza Hut and Taco Bell franchisee groups, are members of Restaurant Supply Chain Solutions, LLC (“RSCS”), which is responsible for purchasing certain restaurant products and equipment. The core mission of RSCS is to provide the lowest possible sustainable store-delivered prices for restaurant products and equipment. This arrangement combines the purchasing power of the Company-owned and franchisee restaurants, which the Company believes leverages the system’s scale to drive cost savings and effectiveness in the purchasing function. The Company also believes that RSCS fosters closer alignment of interests and a stronger relationship with its franchisee community.

Most food products, paper and packaging supplies, and equipment used in restaurant operations are distributed to individual restaurant units by third-party distribution companies. In the U.S., McLane Foodservice, Inc. is the exclusive distributor for the majority of items used in Company-owned restaurants and for a substantial number of franchisee stores.

Outside the U.S., we and our Concepts’ franchisees primarily use decentralized sourcing and distribution systems involving many different global, regional and local suppliers and distributors. We and our franchisees have approximately 6,300 food and paper suppliers, including U.S.-based suppliers that export to many countries.

## Advertising and Promotional Programs

Company-owned and franchise restaurants are required to spend a percentage of their respective restaurants' sales on advertising programs with the goal of increasing sales and enhancing the reputation of the Concepts. Advertising may be conducted nationally, regionally and locally. When multiple franchisees operate in the same country or region the national and regional advertising spending is typically conducted by a cooperative to which the franchisees and Company-owned stores, if any, contribute funds as a percentage of restaurants' sales. The contributions are primarily used to pay for expenses relating to purchasing media for advertising, market research, commercial production, talent payments and other support functions for the respective Concepts. We control the advertising activities of certain advertising cooperatives through our majority voting rights.

## Trademarks and Patents

The Company and its Concepts own numerous registered trademarks and service marks. The Company believes that many of these marks, including its Kentucky Fried Chicken \( ^{®} \) , KFC \( ^{®} \) , Pizza Hut \( ^{®} \)  and Taco Bell \( ^{®} \)  marks, have significant value and are materially important to its business. The Company’s policy is to pursue registration of its important marks whenever feasible and to oppose vigorously any infringement of its marks.

The use of certain of these marks by franchisees has been authorized in our franchise agreements. Under current law and with proper use, the Company’s rights in its marks can generally last indefinitely. The Company also has certain patents on restaurant equipment which, while valuable, are not material to its business.

## Working Capital

Information about the Company’s working capital is included in MD&A in Part II, Item 7 and the Consolidated Statements of Cash Flows in Part II, Item 8.

## Seasonal Operations

The Company does not consider its operations to be seasonal to any material degree.

## Competition

The retail food industry, in which our Concepts compete, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including those in the QSR segment), and is intensely competitive with respect to price and quality of food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service reputation, restaurant location and attractiveness and maintenance of properties. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly in urbanized areas. The retail food industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Each of our Concepts competes with international, national and regional restaurant chains as well as locally-owned restaurants, not only for customers, but also for management and hourly personnel, suitable real estate sites and qualified franchisees. Given the various types and vast number of competitors, our Concepts do not constitute a significant portion of the retail food industry in terms of number of system units or system sales, either on a worldwide or individual country basis.

## Environmental Matters

The Company is not aware of any federal, state or local environmental laws or regulations that will materially affect its earnings or competitive position, or result in material capital expenditures. However, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. During 2018, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

## Government Regulation

U.S. Operations. The Company and its U.S. operations, as well as our franchisees, are subject to various federal, state and local laws affecting its business, including laws and regulations concerning information security, labor and employment, health, marketing, food labeling, sanitation and safety. Each of our and our Concepts' franchisees' restaurants in the U.S. must comply with licensing requirements and regulations promulgated by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located. In addition, each Concept must comply with various state and federal laws that regulate the franchisor/franchisee relationship. To date, the Company has not been materially adversely affected by such licensing requirements and regulations or by any difficulty, delay or failure to obtain required licenses or approvals.

International Operations. Our and our Concepts' franchisees' restaurants outside the U.S. are subject to national and local laws and regulations which are similar to those affecting U.S. restaurants. The restaurants outside the U.S. are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment, as well as anti-bribery and anti-corruption laws.

See Item 1A “Risk Factors” for a discussion of risks relating to federal, state, local and international regulation of our business.



## Employees

As of year end 2018, the Company and its subsidiaries employed approximately 34,000 persons. The Company believes that it provides working conditions and compensation that compare

## Available Information

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

## ITEM 1A Risk Factors

You should carefully review the risks described below as they identify important factors that could cause our actual results to differ materially from our forward-looking statements and historical trends.

## Food safety and food-borne illness concerns may have an adverse effect on our business.

Food-borne illnesses, such as E. coli, Listeria, Salmonella and Trichinosis, occur or may occur within our system from time to time. In addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from time to time. Any report or publicity linking us or one of our Concepts' restaurants, including restaurants operated by us or our Concepts' franchisees, or linking our competitors or the retail food industry generally, to instances of food-borne illness or food safety issues could adversely affect our Concepts' brands and reputations as well as our revenues and profits, and possibly lead to product liability claims, litigation and damages. If a customer of one of our Concepts becomes ill from food borne illnesses or as a result of food safety issues, restaurants in our system may be temporarily closed, which could disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. In addition, instances or allegations of food-borne illness or food safety issues, real or perceived, involving our restaurants, restaurants of competitors, or suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our restaurants, could result in negative publicity that could adversely affect our sales or the sales of our Concepts' franchisees. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our Concepts' franchisees.

## Health concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, including various strains favorably with those of its principal competitors. The majority of employees are paid on an hourly basis. Some employees are subject to labor council relationships that vary due to the diverse countries in which the Company operates. The Company and its Concepts consider employee relations to be good.

Our Corporate Governance Principles and our Code of Conduct are also located within the Investor Relations section of the Company’s website. The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document. These documents, as well as our SEC filings, are available in print free of charge to any shareholder who requests a copy from our Investor Relations Department.

of avian flu or swine flu, such as H1N1. The occurrence of such an outbreak of an epidemic, illness or other adverse public health developments could materially disrupt our business and operations. Such events could also significantly impact our industry and cause a temporary closure of restaurants, which could severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.

Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having the avian flu or swine flu, or other illnesses such as hepatitis A or norovirus, since this could require us or our business partners to quarantine some or all of such employees or disinfect our restaurant facilities. Outbreaks of avian flu occur from time to time around the world, and such outbreaks have resulted in confirmed human cases. It is possible that outbreaks could reach pandemic levels. Public concern over avian flu generally may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. Because poultry is a menu offering for our Concepts, this would likely result in lower revenues and profits for us and our Concepts' franchisees. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact profit margins and revenues for us and our Concepts' franchisees.

Furthermore, other viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff restaurants. We could also be adversely affected if government authorities impose mandatory closures, seek voluntary closures, impose restrictions on operations of restaurants, or restrict the import or export of products, or if suppliers issue mass recalls of products. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may affect our business.



## Our operating results and growth strategies are closely and increasingly tied to the success of our Concepts' franchisees.

A significant and growing portion of our restaurants are operated by our Concepts' franchisees. At the end of 2018, over 98% of our stores are operated by franchisees. Our refranchising efforts have increased our dependence on the financial success and cooperation of our Concepts' franchisees. In addition, our long-term system sales growth targets depend on an acceleration of our historical net system unit growth rate. Nearly all of this unit growth is expected to result from new unit openings by our Concepts' franchisees. If our Concepts' franchisees do not meet our expectations for new unit development, we may fall short of our system sales targets.

We have limited control over how our Concepts' franchisees' businesses are run, and their inability to operate successfully could adversely affect our operating results through decreased royalty payments. If our Concepts' franchisees fail to adequately capitalize their businesses or incur too much debt, if their operating expenses or commodity prices increase or if economic or sales trends deteriorate such that they are unable to operate profitably or repay existing debt, it could result in their financial distress, including insolvency or bankruptcy. If a significant franchisee of one of our Concepts' becomes, or a significant number of our Concepts' franchisees in the aggregate become, financially distressed, our operating results could be impacted through reduced or delayed royalty payments and reduced new unit development. In addition, we are secondarily liable on certain of our Concepts' franchisees' lease agreements, including lease agreements that we have guaranteed or assigned to franchisees in connection with the refranchising of certain Company-owned restaurants. Our operating results could be impacted by any increased rent obligations for such leased properties to the extent our Concepts' franchisees default on such lease agreements.

Our success also depends on the willingness and ability of our Concepts’ franchisees to implement major initiatives such as restaurant remodels or equipment or technology upgrades, which may require financial investment. Our Concepts may be unable to successfully implement strategies that we believe are necessary for further growth if their franchisees do not participate, which in turn may harm the growth prospects and financial condition of the Company. Additionally, the failure of our Concepts’ franchisees to focus on the fundamentals of restaurant operations, such as quality, service and cleanliness (even if such failures do not rise to the level of breaching the related franchise documents), could have a negative impact on our business.

## We may not achieve our target development goals, aggressive development could cannibalize existing sales and new restaurants may not be profitable.

Our growth strategy depends on our and our Concepts' franchisees' ability to increase net restaurant count in markets around the world. The successful development of new units depends in large part on the ability of our Concepts' franchisees to open new restaurants and to operate these restaurants profitably. We cannot guarantee that we, or our Concepts' franchisees, including Yum China, will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce operating results similar to those of our existing restaurants. Other risks that could impact our ability to increase the number of our restaurants include prevailing economic conditions and trade or economic sanctions and our, or our Concepts' franchisees', ability to obtain suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, obtain required permits and approvals in a timely manner, hire and train qualified management teams and restaurant crews, and meet construction schedules.

Expansion into target markets could also be affected by our Concepts' franchisees' willingness to invest capital or ability to obtain financing to construct and open new restaurants. If it becomes more difficult or more expensive for our Concepts' franchisees to obtain financing to develop new restaurants, or if the perceived return on invested capital is not sufficiently attractive, the expected growth of our system could slow and our future revenues and operating cash flows could be adversely impacted.

In addition, the development of new restaurants could impact the sales of our Concepts' existing restaurants nearby. There can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets.

## We may not successfully implement our transformation initiatives or fully realize the anticipated benefits from the transformation.

We are in the process of implementing our previously announced strategic transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands. Following our becoming 98% franchised as of the end of 2018, the remaining components of this transformation include, among other things, a plan to significantly reduce annual capital expenditures and our general and administrative costs by the end of 2019. We cannot assure you that we will be able to successfully implement our transformation initiatives. Further, our ability to achieve the anticipated benefits of this transformation, including the anticipated levels of cost savings and efficiency, within expected timeframes is subject to many estimates and assumptions, which are, in turn, subject to significant economic, competitive and other uncertainties, some of which are beyond our control. There is no assurance that we will successfully implement, or fully realize the anticipated positive impact of, our transformation initiatives, or execute successfully on our transformation strategy, in the expected timeframes or at all. In addition, there can be no assurance that our efforts, if properly executed, will result in our desired outcome of improved financial performance.

## We have significant exposure to the Chinese market through our largest franchisee, Yum China, which subjects us to risks that could negatively affect our business.

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



franchisee. As a result, our overall financial results are significantly affected by Yum China’s results. Yum China’s business is exposed to risks in China, which include, among others, changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), consumer preferences, the regulatory environment, and tax laws and regulations including the tax treatment of the royalty paid to YUM, as well as increased media scrutiny of our Concepts and industry, fluctuations in foreign exchange rates, increased restrictions or tariffs on imported supplies as a result of trade disputes and increased competition. Further, any significant or prolonged deterioration in U.S.-China relations could adversely affect our Concepts in China if Chinese consumers reduce the frequency of their visits to Yum China’s restaurants. Chinese law regulates Yum China’s business conducted within China. Our royalty income from the Yum China business is therefore subject to numerous uncertainties based on the policies of the Chinese government, as they may change from time to time. If Yum China’s business is harmed or development of our Concepts’ restaurants is slowed in China due to any of these factors, it could negatively impact the royalty paid by Yum China to us, which would negatively impact our financial results or our growth prospects.

Our relationship with Yum China is governed primarily by a Master License Agreement, which may be terminated upon the occurrence of certain events, such as the insolvency or bankruptcy of Yum China. In addition, if we are unable to enforce our intellectual property or contract rights in China, if Yum China is unable or unwilling to satisfy its obligations under the Master License Agreement, or if the Master License Agreement is otherwise terminated, it could result in an interruption in the operation of our brands that have been exclusively licensed to Yum China for use in China. Such interruption could cause a delay in, or loss of, royalty income to us, which would negatively impact our financial results.

## Our international operations subject us to risks that could negatively affect our business.

A significant portion of our Concepts’ restaurants are operated in countries and territories outside of the U.S., including in emerging markets, and we intend to continue expansion of our international operations. As a result, our business and the businesses of our Concepts’ franchisees are increasingly exposed to risks inherent in international operations. These risks, which can vary substantially by country, include political instability, corruption, anti-American sentiment and social and ethnic unrest, as well as changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), the regulatory environment, income and non-income based tax rates and laws, sanctions, foreign exchange control regimes including restrictions on currency conversion, consumer preferences and the laws and policies that govern foreign investment in countries where our Concepts’ restaurants are operated. In addition, we and our franchisees do business in jurisdictions that may be subject to trade or economic sanction regimes and such sanctions could be expanded. Any failure to comply with such sanction regimes or other similar laws or regulations could result in the assessment of damages, the imposition of penalties, suspension of business licenses, or a cessation of operations at our or our franchisees’ businesses, as well as damage to our and our Concepts’ brands’ images and reputations, all of which could harm our profitability.

## Foreign currency risks and foreign exchange controls could adversely affect our financial results.

Our results of operations and the value of our foreign assets are affected by fluctuations in currency exchange rates, which may adversely affect reported earnings. More specifically, an increase in the value of the U.S. dollar relative to other currencies, such as the Chinese Renminbi (“RMB”), Australian Dollar, the British Pound and the Euro, as well as currencies in certain other markets, such as the Malaysian Ringgit and Russian Ruble, could have an adverse effect on our reported earnings. There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash flows. In addition, the governments in certain countries where we operate, including China, restrict the conversion of local currency into foreign currencies and, in certain cases, the remittance of currency out of the country. Yum China’s income is almost exclusively derived from the earnings of its Chinese subsidiaries, with substantially all revenues of its Chinese subsidiaries denominated in RMB. Any significant fluctuation in the value of the RMB could materially impact the U.S. dollar value of royalty payments made to us by Yum China, which could result in lower revenues. In addition, restrictions on the conversion of RMB to U.S. dollars or further restrictions on the remittance of currency out of China could result in delays in the remittance of Yum China’s license fee, which could impact our liquidity.

## Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us to litigation and damage our reputation.

We receive and maintain certain personal, financial and other information about our customers, employees and franchisees. In addition, our vendors and/or franchisees receive and maintain certain personal, financial and other information about our employees and customers. The use and handling of this information is regulated by evolving and increasingly demanding laws and regulations in various jurisdictions, as well as by certain third-party contracts. If our security and information systems are compromised as a result of data corruption or loss, cyber-attack or a network security incident or if our employees, franchisees or vendors fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could result in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and result in a loss of customer confidence, which could adversely affect our results of operations and financial condition. Additionally, we could be subject to litigation and government enforcement actions as a result of any such failure.

Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries where we, our Concepts and our Concepts' franchisees do business. For example, the European Union adopted a new regulation that became effective in May 2018, The General Data Protection Regulation (“GDPR”), which requires companies to meet new requirements regarding the handling of personal data. In addition, in June 2018 the State of California enacted the California Consumer Privacy Act (the “CCPA”), which will become effective in 2020, requiring companies that process information on California residents to, among other things, make new disclosures to consumers about data collection, use and sharing practices. Our failure to adhere to or successfully implement appropriate processes to adhere to the



requirements of GDPR, CCPA and other evolving laws and regulations in this area could result in financial penalties, legal liability and could damage our and our Concepts' brands' reputations.

## Unreliable or inefficient restaurant or consumer interfacing technology or the failure to successfully implement technology initiatives in the future could adversely impact operating results.

We and our Concepts’ franchisees’ rely heavily on information technology systems in the conduct of our business, some of which are managed, hosted, provided and/or used by third parties, including, for example, point-of-sale processing in our restaurants, management of our supply chain and various other processes and procedures. These systems are subject to damage, interruption or failure due to theft, fire, power outages, telecommunications failure, computer viruses, security breaches, malicious cyber-attacks or other catastrophic events. Certain technology systems may also be unreliable or inefficient, and technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systems operations. If our or our Concepts’ franchisees’ information technology systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process transactions, which could result in lost sales, customer or employee dissatisfaction, or negative publicity that could negatively impact our reputation, results of operations and financial condition.

We and our Concepts’ franchisees rely on technology not only to efficiently operate our restaurants but also to drive the customer experience, sales growth and margin improvement. Execution of our growth strategy will be dependent on our initiatives to implement technology solutions and gather and leverage data to enhance restaurant operations and improve the customer experience. Our strategic technology initiatives may not be timely implemented or may not achieve the desired results. Even if we effectively implement and manage our technology initiatives, they may not result in sales growth or margin improvement. Additionally, implementing the evolving technology demands of the consumer may place a significant financial burden on us and our Concepts’ franchisees.

## There are risks associated with our increasing dependence on digital commerce platforms to maintain and grow sales. Such platforms may experience disruptions, which could harm our ability to compete and conduct our business.

Customers are increasingly using e-commerce websites and apps, both domestically and internationally, like pizzahut.com, Pizza Hut, KFC and Taco Bell apps, as well as apps owned by third-party delivery aggregators such as Grubhub and third-party mobile payment processors, to order and pay for our Concepts' products. As a result, our Concepts and our Concepts' franchisees are increasingly reliant on digital ordering and payment as a sales channel. These digital ordering and payment platforms could be damaged or interrupted by power loss, technological failures, user errors, cyber-attacks, other forms of sabotage or acts of God. In particular, Pizza Hut relies on digital orders for a significant portion of its sales and could experience interruptions of its digital ordering platforms, which could limit or delay customers' ability to order through such platforms. Any such limitation or delay would negatively impact Pizza Hut's sales and customer experience and perception. In addition, if Pizza Hut's digital ordering platforms do not meet customers' expectations in terms of security, speed, attractiveness, or ease of use, customers may be less inclined to return to such digital ordering platforms, which could negatively impact our sales, results of operations and financial condition.

Yum China, our largest franchisee, utilizes third-party mobile payment apps such as Alipay and WeChat as a means through which to generate sales and process payments. Should customers become unable to access mobile payment apps in China, or should the relationship between Yum China and one or more third-party mobile payment processors become interrupted, our results of operations could be negatively impacted.

## Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact our business.

In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business, reputation, financial condition, and results of operations, regardless of the information's accuracy. The damage may be immediate without affording us an opportunity for redress or correction.

In addition, social media is frequently used by our Concepts to communicate with their respective customers and the public in general. Failure by our Concepts to use social media effectively or appropriately, particularly as compared to our Concepts’ respective competitors, could lead to a decline in brand value, customer visits and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our Concepts’ brands, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results of operations.

## Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.

The products sold by our Concepts and their franchisees are sourced from a wide variety of domestic and international suppliers.



We, along with our Concepts' franchisees, are also dependent upon third parties to make frequent deliveries of food products and supplies that meet our specifications at competitive prices. Shortages or interruptions in the supply of food items and other supplies to our Concepts' restaurants could adversely affect the availability, quality and cost of items we use and the operations of our restaurants. In February 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. 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 for a period of time. Future, similar shortages or disruptions could be caused by inclement weather, natural disasters, inaccurate forecasting of customer demand, problems in production or distribution, restrictions on imports or exports including due to trade disputes, the inability of vendors to obtain credit, political instability in the countries in which the suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers' or distributors' failure to meet our standards or requirements, product quality issues, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements, product recalls, the cancellation of supply or distribution agreements or an inability to renew such arrangements or to find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our Concepts' franchisees. The pending withdrawal of the United Kingdom from the European Union, particularly if such withdrawal occurs without a transition agreement in effect, may result in the reimposition of customs and border controls, which in turn may result in shortages or interruptions in supply to our Concepts in the United Kingdom with consequences similar to those described above. In the U.S., the Company, along with representatives of the Company's KFC, Pizza Hut and Taco Bell franchise groups, are members of Restaurant Supply Chain Solutions, LLC ("RSCS"), which is responsible for purchasing certain restaurant products and equipment. Any failure or inability of RSCS to perform its purchasing obligations could result in shortages or interruptions in the availability of food and other supplies.

A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales. In addition, failure by a key supplier or distributor for our Concepts and/or our Concepts' franchisees to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disruption could have an adverse effect on our business.

## Labor shortages or difficulty finding qualified employees could slow our growth, harm our business and reduce our profitability.

Restaurant operations are highly service-oriented and our success depends in part upon our and our Concepts' franchisees' ability to attract, retain and motivate a sufficient number of qualified employees, including franchisee management, restaurant managers and other crew members. The market for qualified employees in the retail food industry is very competitive. Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants by us and our Concepts' franchisees and could adversely impact operation of our Concepts' existing restaurants. Any such delays, material increases in employee turnover rate in franchisee management or existing restaurants or widespread employee dissatisfaction could have a material adverse effect on our and our Concepts' franchisees' business and results of operations.

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

## Changes in labor and other operating costs could adversely affect our results of operations.

An increase in the costs of employee wages, benefits and insurance (including workers' compensation, general liability, property and health) as well as other operating costs such as rent and energy costs could adversely affect our operating results. Such increases could result from government imposition of higher minimum wages or from general economic or competitive conditions. Any increase in such operating expenses could adversely affect our and our Concepts' franchisees' profit margins. In addition, competition for qualified employees could also compel us or our Concepts' franchisees to pay higher wages to attract or retain key crew members, which could result in higher labor costs and decreased profitability.

## A broader standard for determining joint employer status may adversely affect our business operations and increase our liabilities.

The National Labor Relations Board (the “NLRB”) in 2014 adopted a new and broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under the National Labor Relations Act. If this joint employer liability standard is upheld or adopted by other government agencies and/or applied generally to franchise relationships under other laws like the U.S. Fair Labor Standards Act, it could cause us or our Concepts to be liable or held responsible for unfair labor practices and other violations and could subject our Concepts to other liabilities, and/or require our Concepts to conduct collective bargaining negotiations, regarding employees of totally separate, independent employers, most notably our Concepts' franchisees. In such event, our operating expenses may increase as a result of required modifications to our business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability.

## An increase in food prices may have an adverse impact on our and our Concepts’ franchisees’ profit margins.

Our and our Concepts' franchisees' businesses depend on reliable sources of large quantities of raw materials such as proteins (including poultry, pork, beef and seafood), cheese, oil, flour and vegetables (including potatoes and lettuce). Raw materials purchased for use in our Concepts' restaurants are subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions, such as weather conditions or natural events or disasters that affect expected harvests of such raw



materials, or taxes and tariffs including as a result of trade disputes. As a result, the historical prices of raw materials used in the operation of our Concepts' restaurants have fluctuated. We cannot assure you that we or our Concepts' franchisees will continue to be able to purchase raw materials at reasonable prices, or that the cost of raw materials will remain stable in the future. In addition, a significant increase in gasoline prices could result in the imposition of fuel surcharges by our distributors.

Because we and our Concepts’ franchisees provide competitively priced food, we may not have the ability to pass through to our customers the full amount of any commodity price increases. If we and our Concepts’ franchisees are unable to manage the cost of raw materials or to increase the prices of products proportionately, our and our franchisees’ profit margins may be adversely impacted.

## Our Concepts’ brands may be harmed or diluted through franchisee and third-party activity.

Although we monitor and regulate franchisee activities through our Concepts’ franchise agreements, franchisees or other third parties may refer to or make statements about our Concepts’ brands that do not make proper use of our trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our Concepts’ brands or place our Concepts’ brands in a context that may tarnish their reputation. This may result in dilution of, or harm to, our intellectual property or the value of our Concepts’ brands.

Franchisee noncompliance with the terms and conditions of our franchise agreements may reduce the overall goodwill of our Concepts' brands, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties, including our Concepts' current and former franchisees, may use our intellectual property to trade on the goodwill of our Concepts' brands, resulting in consumer confusion or brand dilution. Any reduction of our Concepts' brands' goodwill, consumer confusion, or brand dilution is likely to impact sales, and could materially and adversely impact our business and results of operations.

## Our success depends substantially on our corporate reputation and on the value and perception of our brands.

Our success depends in large part upon our ability and our Concepts’ franchisees’ ability to maintain and enhance the value of our brands and our customers’ loyalty to our brands. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring, and whether originating from us, franchisees, competitors, governments, suppliers or distributors, can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation. For example, our Concepts’ brands could be damaged by claims or perceptions about the quality or safety of our products or the quality or reputation of our suppliers, distributors or franchisees, regardless of whether such claims or perceptions are true. Similarly, entities in our supply chain may engage in conduct, including alleged human rights abuses or environmental wrongdoing, and any such conduct could damage our or our Concepts’ brands’ reputations. Any such incidents (even if resulting from actions of a competitor or franchisee) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our Concepts’ brands and/or our products and reduce consumer demand for our products, which would likely result in lower revenues and profits. Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by a Company officer, or an employee or representative of us or a franchisee.

## We could be party to litigation that could adversely affect us by increasing our expenses, diverting management attention or subjecting us to significant monetary damages and other remedies.

We are regularly involved in legal proceedings, which include consumer, employment, real estate related, tort, intellectual property, breach of contract, securities, derivative and other litigation. See the discussion of legal proceedings in Note 19 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated. Regardless of whether any such claims have merit, or whether we are ultimately held liable or settle, such litigation may be expensive to defend and may divert resources and management attention away from our operations and negatively impact reported earnings. With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also adversely affect our Concepts’ reputations, which in turn could adversely affect our results of operations.

In addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain and other adverse effects. These concerns could lead to an increase in the regulation of the content or marketing of our products. We may also be subject to such claims in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and fast-casual segments of the retail food industry) may harm our Concepts’ reputations and adversely affect our business, financial condition and results of operations.

## Changes in, or noncompliance with, governmental regulations may adversely affect our business operations, growth prospects or financial condition.

Our Concepts and their franchisees are subject to numerous laws and regulations around the world. These laws change regularly and are increasingly complex. For example, we are subject to:

- The Americans with Disabilities Act in the U.S. and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.

- The U.S. Fair Labor Standards Act, which governs matters such as minimum wages, overtime and other working conditions, as well



as family leave mandates and a variety of similar state laws that govern these and other employment law matters.

- Laws and regulations in government-mandated health care benefits such as the Patient Protection and Affordable Care Act in the U.S.

- Laws and regulations relating to nutritional content, nutritional labeling, product safety, product marketing and menu labeling.

• Laws relating to state and local licensing.

- Laws relating to the relationship between franchisors and franchisees.

- Laws and regulations relating to health, sanitation, food, workplace safety, child labor, including laws regulating the use of certain “hazardous equipment”, and fire safety and prevention.

- Laws and regulations relating to union organizing rights and activities.

- Laws relating to information security, privacy (including the European Union’s GDPR), cashless payments, and consumer protection.

• Laws relating to currency conversion or exchange.

• Laws relating to international trade and sanctions.

• Tax laws and regulations.

• Anti-bribery and anti-corruption laws.

• Environmental laws and regulations.

• Federal and state immigration laws and regulations in the U.S.

Compliance with new or existing laws and regulations could impact our or our Concepts' franchisees' operations. The compliance costs associated with these laws and regulations could be substantial. Any failure or alleged failure to comply with these laws or regulations could adversely affect our reputation, international expansion efforts, growth prospects and financial results or result in, among other things, litigation, revocation of required licenses, internal investigations, governmental investigations or proceedings, administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could also harm our Concepts' reputations and adversely affect our revenues.

## Failure to comply with anti-bribery or anti-corruption laws could adversely affect our business operations.

The U.S. Foreign Corrupt Practices Act, the UK Bribery Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices are the subject of increasing emphasis and enforcement around the world. There can be no assurance that our employees, contractors, agents or other third parties will not take actions in violation of our policies or applicable law, particularly as we expand our operations in emerging markets and elsewhere. Any such violations or suspected violations could subject us to civil or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our reputation, brands, international expansion efforts and growth prospects, business and operating results. Publicity relating to any noncompliance or alleged noncompliance could also harm our Concepts' reputations and adversely affect our revenues and results of operations.

## Tax matters, including changes in tax rates or laws, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property, withholding and franchise taxes in both the U.S. and various foreign jurisdictions. We are also subject to ongoing and/or regular reviews, examinations and audits by the U.S. Internal Revenue Service ("IRS") and other taxing authorities with respect to such income and non-income based taxes inside and outside of the U.S. Our accruals for tax liabilities are based on past experience, interpretations of applicable law, and judgments about potential actions by tax authorities, but such accruals require significant judgment which may be incorrect and may result in payments greater than the amounts accrued. If the IRS or another taxing authority disagrees with our tax positions, we could face additional tax liabilities, including interest and penalties. Payment of additional amounts upon final settlement or adjudication of any disputes could have a material impact on our results of operations and financial position.

In addition, we are directly and indirectly affected by new tax laws and regulation and the interpretation of tax laws and regulations worldwide. Changes in laws, regulation or interpretation of existing laws and regulations in the U.S. and other jurisdictions where we are subject to taxation could increase our taxes and have an adverse effect on our results of operations and financial condition. Changes in tax laws may arise as a result of guidance issued by the Organisation for Economic Co-operation and Development ("OECD"), a coalition of member nations including the United States. The OECD guidance, referred to as the Base Erosion and Profit Shifting ("BEPS") Action Plan, does not have the force of law, but certain countries may enact tax legislation, modify tax treaties, and/or increase audit scrutiny based on the BEPS guidance. To the extent BEPS principles are adopted by major jurisdictions in which we operate, it could increase our taxes and have a material adverse impact on our results of operations and financial position. In addition, public perception that we are not paying a sufficient amount of taxes could damage our Concepts' reputations, which could harm our profitability.

## The Yum China spin-off and certain related transactions could result in substantial U.S. tax liability.

We received opinions of outside counsel substantially to the effect that, for U.S. federal income tax purposes, the Yum China spin-off and certain related transactions qualified as generally tax-free under Sections 355 and 361 of the U.S. Internal Revenue Code. The opinions relied on various facts and assumptions, as well as certain representations as to factual matters and undertakings (including with respect to future conduct) made by Yum China and us. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, we may not be able to rely on these opinions of outside counsel. Accordingly, notwithstanding receipt of the opinions of outside counsel, the conclusions reached in the tax opinions may be challenged by the IRS. Because the opinions are not binding on the IRS or the courts, there can be no assurance that the IRS or the courts will not prevail in any such challenge.

If, notwithstanding receipt of any opinion, the IRS were to conclude that the Yum China spin-off was taxable, in general, we would recognize taxable gain as if we had sold the Yum China common stock in a taxable sale for its fair market value. In addition, each



U.S. holder of our Common Stock who received shares of Yum China common stock in connection with the spin-off transaction would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the shares of Yum China common stock received. That distribution would be taxable to each such U.S. stockholder as a dividend to the extent of our current and accumulated earnings and profits. For each such U.S. stockholder, any amount that exceeded our earnings and profits would be treated first as a non-taxable return of capital to the extent of such stockholder's tax basis in our shares of Common Stock with any remaining amount being taxed as a capital gain.

## The Yum China spin-off may be subject to China indirect transfer tax.

In February 2015, the Chinese State Administration of Taxation (“SAT”) issued the Bulletin on Several Issues of Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-resident Enterprises (“Bulletin 7”). Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a China resident enterprise (“Chinese interests”), by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. Using general anti-tax avoidance provisions, the SAT may treat an indirect transfer as a direct transfer of Chinese interests if the transfer has avoided Chinese tax by way of an arrangement without reasonable commercial purpose. As a result, gains derived from such indirect transfer may be subject to Chinese enterprise income tax, and the transferee or other person who is obligated to pay for the transfer would be obligated to withhold the applicable taxes, currently at a rate of up to 10% of the capital gain in the case of an indirect transfer of equity interests in a China resident enterprise.

We evaluated the potential applicability of Bulletin 7 in connection with the Separation in the form of a tax free restructuring and believe it is more likely than not that Bulletin 7 does not apply. We believe that the restructuring has reasonable commercial purpose.

However, there are significant uncertainties regarding what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the Chinese tax authorities will ultimately view the spin-off. As a result, our position could be challenged by the Chinese tax authorities resulting in a tax at a rate of 10% assessed on the difference between the fair market value and the tax basis of Yum China. As our tax basis in Yum China was minimal, the amount of such a tax could be significant and have a material adverse effect on our results of operations and our financial condition.

## Failure to protect our service marks or other intellectual property could harm our business.

We regard our Yum \( ^{®} \) , KFC \( ^{®} \) , Pizza Hut \( ^{®} \)  and Taco Bell \( ^{®} \)  service marks, and other service marks and trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks in the U.S. and foreign jurisdictions. However, from time to time we become aware of names and marks identical or confusingly similar to our service marks being used by other persons. Although our policy is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which our Concepts have, or may in the future open or franchise, a restaurant. There can be no assurance that these protections will be adequate, and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources. We may also face claims of infringement that could interfere with the use of the proprietary know-how, concepts, recipes, or trade secrets used in our business. Defending against such claims may be costly, and we may be prohibited from using such proprietary information in the future or forced to pay damages, royalties, or other fees for using such proprietary information, any of which could negatively affect our business, reputation, financial condition, and results of operations.

## Our business may be adversely impacted by changes in consumer discretionary spending and general economic conditions.

Purchases at our Concepts’ restaurants are discretionary for consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions. Our and our franchisees’ results of operations are dependent upon discretionary spending by consumers, which may be affected by general economic conditions globally or in one or more of the markets we serve. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in the level of disposable income, the price of gasoline, stock market performance and changes in the level of consumer confidence. These and other macroeconomic factors could have an adverse effect on our sales, profitability or development plans, which could harm our financial condition and operating results.

## The retail food industry in which we operate is highly competitive.

The retail food industry in which our Concepts operate is highly competitive with respect to price and quality of food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. If consumer or dietary preferences change, if our marketing efforts are unsuccessful, or if our Concepts’ restaurants are unable to compete successfully with other retail food outlets in new and existing markets, our and our franchisees’ businesses could be adversely affected. We also face growing competition as a result of convergence in grocery, convenience, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly in urbanized areas, and is expected to continue to increase. Increased competition could have an adverse effect on sales, profitability or development plans, which could harm our or our franchisees’ financial condition and operating results.



Our substantial indebtedness makes us more sensitive to adverse economic conditions, may limit our ability to plan for or respond to significant changes in our business, and requires a significant amount of cash to service our debt payment obligations that we may be unable to generate or obtain.

As of December 31, 2018, our total outstanding short-term borrowings and long-term debt was approximately $10 billion. Subject to the limits contained in the agreements governing our outstanding indebtedness, we may incur additional debt from time to time, which would increase the risks related to our high level of indebtedness.

Specifically, our high level of indebtedness could have important potential consequences, including, but not limited to:

• increasing our vulnerability to, and reducing our flexibility to plan for and respond to, adverse economic and industry conditions and changes in our business and the competitive environment;

• requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, dividends, share repurchases or other corporate purposes;

• increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets;

• restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

• placing us at a disadvantage compared to other less leveraged competitors or competitors with comparable debt at more favorable interest rates;
• increasing our exposure to the risk of increased interest rates insofar as current and future borrowings are subject to variable rates of interest;

• increasing our exposure to the risk of discontinuance or modification of certain reference rates including LIBOR, which are used to calculate applicable interest rates of our indebtedness and certain derivative instruments that hedge interest rate risk;

• making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;

• limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing;

• imposing restrictive covenants on our operations, which, if not complied with, could result in an event of default, which in turn, if not cured or waived, could result in the acceleration of the applicable debt, and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies; and

• increasing our exposure to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around the world and our debt is primarily denominated in U.S. dollars.

There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other liquidity needs. If our business does not generate sufficient cash flow from operations in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to pay our indebtedness or to fund other liquidity needs, our financial condition and results of operations may be adversely affected. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a material adverse effect on our business and financial condition.

## ITEM 1B Unresolved Staff Comments

The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2018 fiscal year and that remain unresolved.

## ITEM 2 Properties

As of year end 2018, the Company’s Concepts owned land, building or both for 339 units worldwide in connection with the operation of our 856 Company-owned restaurants. These units are further detailed as follows:

• The KFC Division owned land, building or both for 72 units.

• The Pizza Hut Division owned land, building or both for 4 units.

• The Taco Bell Division owned land, building or both for 263 units.

The Company currently owns or leases land, building or both related to approximately 1,000 units, not included in the property counts above, that it leases or subleases to franchisees, principally in the U.S., United Kingdom, Australia, Germany and France.

Company-owned restaurants in the U.S. with leases are generally leased for initial terms of 15 or 20 years and generally have renewal options; however, Pizza Hut delivery/carryout units in the U.S. generally are leased for significantly shorter initial terms with shorter renewal options. Company-owned restaurants outside the U.S. with leases have initial lease terms and renewal options that vary by country.

The KFC Division and Pizza Hut Division corporate headquarters and a KFC and Pizza Hut research facility in Plano, Texas are owned by Pizza Hut. Taco Bell leases its corporate headquarters and research facility in Irvine, California. The YUM corporate headquarters and a KFC research facility in Louisville, Kentucky are owned by KFC. Additional information about the Company’s properties is included in the Consolidated Financial Statements in Part II, Item 8.

The Company believes that its properties are generally in good operating condition and are suitable for the purposes for which they are being used.



## ITEM 3 Legal Proceedings

The Company is subject to various lawsuits covering a variety of allegations. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s annual results of operations, financial condition or cash flows. Matters faced by the Company include, but are not limited to, claims from franchisees, suppliers, employees, customers and others related to operational, contractual or employment issues as well as claims that the Company has infringed on third-party intellectual property rights. In addition, the Company brings claims from time-to-time relating to infringement of, or challenges to, our intellectual property, including registered marks. Finally, as a publicly-traded company, disputes arise from time-to-time with our shareholders, including allegations that the Company breached federal securities laws or that officers and/or directors breached fiduciary duties. Descriptions of significant current specific claims and contingencies, if any, appear in Note 19, Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, which is incorporated by reference into this item.

## ITEM 4 Mine Safety Disclosures

Not applicable.

## Executive Officers of the Registrant

The executive officers of the Company as of February 20, 2019, and their ages and current positions as of that date are as follows:

Greg Creed, 61, is Chief Executive Officer of YUM. He has served in this position since January 2015. He served as Chief Executive Officer of Taco Bell Division from January 2014 to December 2014 and as Chief Executive Officer of Taco Bell U.S. from 2011 to December 2013. Prior to this position, Mr. Creed served as President and Chief Concept Officer of Taco Bell U.S., a position he held beginning in December 2006.

David Gibbs, 55, is President, Chief Operating Officer and Chief Financial Officer of YUM. He has served as President and Chief Financial Officer since May 2016 and as Chief Operating Officer since January 2019. Prior to these positions, he served as Chief Executive Officer of Pizza Hut Division from January 2015 to April 2016. From January 2014 to December 2014, Mr. Gibbs served as President of Pizza Hut U.S. Prior to this position, Mr. Gibbs served as President and Chief Financial Officer of Yum! Restaurants International, Inc. ("YRI") from May 2012 through December 2013. Mr. Gibbs served as Chief Financial Officer of YRI from January 2011 to April 2012. He was Chief Financial Officer of Pizza Hut U.S. from September 2005 to December 2010.

Scott Catlett, 42, is General Counsel and Corporate Secretary of YUM. He has served in this position since July 2018. Prior to serving as General Counsel he served as Vice President and Deputy General Counsel of YUM from November 2015 to June 2018. From September 2007 to October 2015 Mr. Catlett held various Yum positions including Vice President & Associate General Counsel.

Tony Lowings, 60, is Chief Executive Officer of KFC Division, a position he has held since January 2019. Prior to that, he served as President and Chief Operations Officer of KFC Division from August 2018 to December 2018. From November 2016 to July 2018 he served as Managing Director of Asia-Pacific and from February 2013 to October 2016 as Managing Director of KFC SOPAC (Australia and New Zealand). Mr. Lowings served in various positions including Chief Operations Officer of YRI and Managing Director of Latin America and the Caribbean for KFC, Pizza Hut and Taco Bell and General Manager of KFC and Pizza Hut in Australia and New Zealand from January 2010 to January 2013.

David Russell, 49, is Senior Vice President, Finance and Corporate Controller of YUM. He has served as YUM’s Corporate Controller since February 2011 and as Senior Vice President, Finance since February 2017. Prior to serving as Corporate Controller, Mr. Russell served in various positions at the Vice President-level in the Yum Finance Department, including Controller-Designate from November 2010 to February 2011 and Vice President, Assistant Controller from January 2008 to December 2010.

Tracy Skeans, 46, is Chief Transformation and People Officer of YUM. She has served as Chief People Officer since January 2016 and Chief Transformation Officer since November 2016. From January 2015 to December 2015, she was President of Pizza Hut International. Prior to this position, Ms. Skeans served as Chief People Officer of Pizza Hut Division from December 2013 to December 2014 and Chief People Officer of Pizza Hut U.S. from October 2011 to November 2013. From July 2009 to September 2011, she served as Director of Human Resources for Pizza Hut U.S and was on the Pizza Hut U.S. Finance team from September 2000 to June 2009.

Executive officers are elected by and serve at the discretion of the Board of Directors.



## ITEM 5 Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Common Stock trades under the symbol YUM and is listed on the New York Stock Exchange (“NYSE”). The following sets forth the dividends per common share declared by quarter for the Company’s Common Stock.

<table><tr><td>Quarter</td><td>2018</td><td>2017</td></tr><tr><td>First</td><td>$ 0.36</td><td>$ 0.30</td></tr><tr><td>Second</td><td>0.36</td><td>0.30</td></tr><tr><td>Third</td><td>0.36</td><td>—</td></tr><tr><td>Fourth</td><td>0.36</td><td>0.30</td></tr></table>

In 2018, the Company paid four cash dividends of $0.36 per share. In 2017, the Company paid four cash dividends of $0.30 per share. This included a dividend distributed February 3, 2017, that had been declared on December 21, 2016. Over the long term, the Company targets an annual dividend payout ratio of 45% to 50% of Net Income, before Special Items.

As of February 13, 2019, there were 43,458 registered holders of record of the Company’s Common Stock.

## Issuer Purchases of Equity Securities

The following table provides information as of December 31, 2018, with respect to shares of Common Stock repurchased by the Company during the quarter then ended.

<table><tr><td>Fiscal Periods</td><td>Total number of shares purchased (thousands)</td><td>Average price paid per share</td><td>Total number of shares purchased as part of publicly announced plans or programs (thousands)</td><td>Approximate dollar value of shares that may yet be purchased under the plans or programs (millions)</td></tr><tr><td>10/1/18 - 10/31/18</td><td>1,249</td><td>$ 89.12</td><td>1,249</td><td>$ 1,691</td></tr><tr><td>11/1/18 - 11/30/18</td><td>1,478</td><td>$ 89.44</td><td>1,478</td><td>$ 1,559</td></tr><tr><td>12/1/18 - 12/31/18</td><td>5,032</td><td>$ 90.01</td><td>5,032</td><td>$ 1,106</td></tr><tr><td>Total</td><td>7,759</td><td></td><td>7,759</td><td>$ 1,106</td></tr></table>

On August 10, 2018, our Board of Directors authorized share repurchases through December 2019 of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock. As of December 31, 2018, we have remaining capacity to repurchase up to $1.1 billion of Common Stock under this authorization.



## Stock Performance Graph

This graph compares the cumulative total return of our Common Stock to the cumulative total return of the S&P 500 Index and the S&P 500 Consumer Discretionary Sector Index, a peer group that includes YUM, for the period from December 31, 2013 to December 31, 2018. The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 31, 2013 and that all cash dividends were reinvested.



<table><tr><td></td><td>12/31/2013</td><td>12/31/2014</td><td>12/31/2015</td><td>12/30/2016</td><td>12/29/2017</td><td>12/31/2018</td></tr><tr><td>YUM</td><td>$ 100</td><td>$ 98</td><td>$ 101</td><td>$ 124</td><td>$ 163</td><td>$ 187</td></tr><tr><td>S&amp;P 500</td><td>$ 100</td><td>$ 114</td><td>$ 115</td><td>$ 129</td><td>$ 157</td><td>$ 150</td></tr><tr><td>S&amp;P Consumer Discretionary</td><td>$ 100</td><td>$ 110</td><td>$ 121</td><td>$ 128</td><td>$ 157</td><td>$ 159</td></tr></table>

Source of total return data: Bloomberg



## ITEM 6 Selected Financial Data

## SELECTED FINANCIAL DATA

YUM! BRANDS, INC. AND SUBSIDIARIES

<table><tr><td>(in millions, except per share and unit amounts)</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Income Statement Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Revenues</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 2,000</td><td>$ 3,572</td><td>$ 4,189</td><td>$ 4,336</td><td>$ 4,503</td></tr><tr><td>Franchise and property revenues</td><td>2,482</td><td>2,306</td><td>2,167</td><td>2,082</td><td>2,084</td></tr><tr><td>Franchise contributions for advertising and other services</td><td>1,206</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>5,688</td><td>5,878</td><td>6,356</td><td>6,418</td><td>6,587</td></tr><tr><td>Refranchising (gain) loss</td><td>(540)</td><td>(1,083)</td><td>(163)</td><td>23</td><td>(16)</td></tr><tr><td>Operating Profit</td><td>2,296</td><td>2,761</td><td>1,682</td><td>1,434</td><td>1,517</td></tr><tr><td>Other pension (income) expense</td><td>14</td><td>47</td><td>32</td><td>40</td><td>N/A</td></tr><tr><td>Interest expense, net</td><td>452</td><td>445</td><td>307</td><td>141</td><td>146</td></tr><tr><td>Income from continuing operations before income taxes</td><td>1,839</td><td>2,274</td><td>1,345</td><td>1,253</td><td>1,374</td></tr><tr><td>Income from continuing operations</td><td>1,542</td><td>1,340</td><td>1,018</td><td>926</td><td>1,006</td></tr><tr><td>Income from discontinued operations, net of tax</td><td>N/A</td><td>N/A</td><td>625</td><td>357</td><td>45</td></tr><tr><td>Net Income</td><td>1,542</td><td>1,340</td><td>1,643</td><td>1,283</td><td>1,051</td></tr><tr><td>Basic earnings per share from continuing operations</td><td>4.80</td><td>3.86</td><td>2.58</td><td>2.13</td><td>2.27</td></tr><tr><td>Basic earnings per share from discontinued operations</td><td>N/A</td><td>N/A</td><td>1.59</td><td>0.82</td><td>0.10</td></tr><tr><td>Basic earnings per share</td><td>4.80</td><td>3.86</td><td>4.17</td><td>2.95</td><td>2.37</td></tr><tr><td>Diluted earnings per share from continuing operations</td><td>4.69</td><td>3.77</td><td>2.54</td><td>2.09</td><td>2.22</td></tr><tr><td>Diluted earnings per share from discontinued operations</td><td>N/A</td><td>N/A</td><td>1.56</td><td>0.81</td><td>0.10</td></tr><tr><td>Diluted earnings per share</td><td>4.69</td><td>3.77</td><td>4.10</td><td>2.90</td><td>2.32</td></tr><tr><td>Diluted earnings per share from continuing operations excluding Special Items</td><td>3.17</td><td>2.96</td><td>2.46</td><td>2.31</td><td>2.20</td></tr><tr><td>Cash Flow Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Provided by operating activities</td><td>$ 1,176</td><td>$ 1,030</td><td>$ 1,248</td><td>$ 1,260</td><td>$ 1,217</td></tr><tr><td>Capital spending</td><td>234</td><td>318</td><td>427</td><td>442</td><td>508</td></tr><tr><td>Proceeds from refranchising of restaurants</td><td>825</td><td>1,773</td><td>370</td><td>213</td><td>83</td></tr><tr><td>Repurchase shares of Common Stock</td><td>2,390</td><td>1,960</td><td>5,403</td><td>1,200</td><td>820</td></tr><tr><td>Dividends paid on Common Stock</td><td>462</td><td>416</td><td>744</td><td>730</td><td>669</td></tr><tr><td>Balance Sheet Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Total assets</td><td>$ 4,130</td><td>$ 5,311</td><td>$ 5,453</td><td>$ 4,939</td><td>$ 5,073</td></tr><tr><td>Long-term debt</td><td>9,751</td><td>9,429</td><td>9,059</td><td>2,988</td><td>3,003</td></tr><tr><td>Total debt</td><td>10,072</td><td>9,804</td><td>9,125</td><td>3,908</td><td>3,268</td></tr><tr><td>Other Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Number of units at year end</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Franchise</td><td>47,268</td><td>43,603</td><td>40,834</td><td>39,320</td><td>37,959</td></tr><tr><td>Company</td><td>856</td><td>1,481</td><td>2,841</td><td>3,163</td><td>3,279</td></tr><tr><td>System</td><td>48,124</td><td>45,084</td><td>43,675</td><td>42,483</td><td>41,238</td></tr><tr><td>System net new unit growth</td><td>7%</td><td>3%</td><td>3%</td><td>3%</td><td>3%</td></tr></table>



## PART II

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

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>System and same-store sales</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>KFC Division System sales</td><td>$26,239</td><td>$24,515</td><td>$23,242</td><td>$22,628</td><td>$23,458</td></tr><tr><td>System sales growth</td><td>7%</td><td>5%</td><td>3%</td><td>(3)%</td><td>1%</td></tr><tr><td>System sales growth, ex FX</td><td>6%</td><td>6%</td><td>7%</td><td>5%</td><td>4%</td></tr><tr><td>Same-store sales growth</td><td>2%</td><td>3%</td><td>2%</td><td>1%</td><td>1%</td></tr><tr><td>Pizza Hut Division System sales</td><td>12,212</td><td>12,034</td><td>12,019</td><td>11,999</td><td>12,106</td></tr><tr><td>System sales growth (decline)</td><td>1%</td><td>—%</td><td>—%</td><td>(1)%</td><td>1%</td></tr><tr><td>System sales growth, ex FX</td><td>1%</td><td>1%</td><td>2%</td><td>3%</td><td>2%</td></tr><tr><td>Same-store sales growth (decline)</td><td>—%</td><td>—%</td><td>(2)%</td><td>—%</td><td>(2)%</td></tr><tr><td>Taco Bell Division System sales</td><td>10,786</td><td>10,145</td><td>9,660</td><td>9,102</td><td>8,459</td></tr><tr><td>System sales growth</td><td>6%</td><td>5%</td><td>6%</td><td>8%</td><td>4%</td></tr><tr><td>System sales growth, ex FX</td><td>6%</td><td>5%</td><td>6%</td><td>8%</td><td>4</td></tr><tr><td>Same-store sales growth</td><td>4%</td><td>4%</td><td>2%</td><td>5%</td><td>3%</td></tr><tr><td>Shares outstanding at year end</td><td>306</td><td>332</td><td>355</td><td>420</td><td>434</td></tr><tr><td>Cash dividends declared per common share</td><td>$ 1.44</td><td>$ 0.90</td><td>$ 1.73</td><td>$ 1.74</td><td>$ 1.56</td></tr><tr><td>Market price per share at year end</td><td>$ 91.92</td><td>$ 81.61</td><td>$ 63.33</td><td>$ 73.05</td><td>$ 73.14</td></tr></table>

The table above reflects the impact of the adoption of new revenue recognition accounting standards in fiscal year 2018. Refer to Note 2 in our Consolidated Financial Statements for information regarding our adoption of the new revenue recognition standards.

System unit growth in 2018 includes addition of 1,282 Telepizza units. See Management’s Discussion and Analysis (“MD&A”) Part II, Item 7 for a description of the Telepizza strategic alliance.

Fiscal years for our U.S. and certain international subsidiaries that operate on a weekly periodic calendar include 52 weeks in 2018, 2017, 2015 and 2014 and 53 weeks in 2016. Refer to Note 2 in our Consolidated Financial Statements for additional details related to our fiscal calendar.

Discontinued operations in 2016, 2015 and 2014 reflects the spin-off of our China business into an independent, publicly traded company (the “Separation”). See Note 1 in our Consolidated Financial Statements.

Historical stock prices prior to November 1, 2016, do not reflect any adjustment for the impact of the Separation.

The non-GAAP measures of System sales, System sales excluding the impacts of foreign currency translation (“FX”) and Diluted earnings per share from continuing operations excluding Special Items are discussed in further detail in our MD&A within Part II, Item 7.

See discussion of our 2018, 2017 and 2016 Special Items in our MD&A. Special Items in 2015 negatively impacted Operating Profit by $91 million and negatively impacted Net Income by $95 million, due to costs associated with the KFC Acceleration Agreement and Refranchising losses. Special Items in 2014 positively impacted Operating Profit by $16 million and positively impacted Net Income by $12 million, primarily due to Refranchising gains.

Selected financial data for years 2016 and 2015 has been recast from that originally presented to present the change in our reporting calendar and retroactively adopting a new accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. 2014 reflects our Balance Sheet and store count data that were recast for purposes of presenting 2015 Consolidated Statement of Cash Flows and unit growth. No other data presented in 2014 has been recast. Refer to Note 5 in our Consolidated Financial Statements for additional details related to our change in reporting calendar.

The selected financial data should be read in conjunction with the Consolidated Financial Statements.

## 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 publicise 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);



## PART II

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

• 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.

2018 financial highlights:

<table><tr><td rowspan="2"></td><td colspan="5">% Change</td></tr><tr><td>System Sales, Ex FX</td><td>Same-Store Sales</td><td>Net New Units</td><td>GAAP Operating Profit</td><td>Core Operating Profit</td></tr><tr><td>KFC Division</td><td>+6</td><td>+2</td><td>+5</td><td>(2)</td><td>(2)</td></tr><tr><td>Pizza Hut Division</td><td>+1</td><td>Even</td><td>+10</td><td>+2</td><td>+2</td></tr><tr><td>Taco Bell Division</td><td>+6</td><td>+4</td><td>+3</td><td>+2</td><td>+2</td></tr><tr><td>Worldwide</td><td>+5</td><td>+2</td><td>+7</td><td>(17)</td><td>Even</td></tr></table>

Additionally:

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

• During the year, we refreshished 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:

<table><tr><td rowspan="2"></td><td colspan="5">% Change</td></tr><tr><td>System Sales, Ex FX</td><td>Same-Store Sales</td><td>Net New Units</td><td>GAAP Operating Profit</td><td>Core Operating Profit</td></tr><tr><td>KFC Division</td><td>+6</td><td>+3</td><td>+4</td><td>+13</td><td>+12</td></tr><tr><td>Pizza Hut Division</td><td>+1</td><td>Even</td><td>+2</td><td>(7)</td><td>(6)</td></tr><tr><td>Taco Bell Division</td><td>+5</td><td>+4</td><td>+4</td><td>+4</td><td>+4</td></tr><tr><td>Worldwide</td><td>+4</td><td>+2</td><td>+3</td><td>+64</td><td>+7</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="3">Results Excluding 53 \( ^{rd} \)  Week in 2016 (% Change)</td></tr><tr><td>System Sales, Ex FX</td><td>Core Operating Profit</td><td></td></tr><tr><td>KFC Division</td><td></td><td>+6</td><td>+14</td></tr><tr><td>Pizza Hut Division</td><td></td><td>+2</td><td>(5)</td></tr><tr><td>Taco Bell Division</td><td></td><td>+7</td><td>+6</td></tr><tr><td>Worldwide</td><td></td><td>+5</td><td>+9</td></tr></table>



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

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

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

## Performance Metrics

<table><tr><td rowspan="2">Unit Count</td><td rowspan="2">2018</td><td rowspan="2">2017</td><td rowspan="2">2016</td><td colspan="2">% Increase (Decrease)</td></tr><tr><td>2018</td><td>2017</td></tr><tr><td>Franchise \( ^{(a)} \)</td><td>47,268</td><td>43,603</td><td>40,834</td><td>8</td><td>7</td></tr><tr><td>Company-owned</td><td>856</td><td>1,481</td><td>2,841</td><td>(42)</td><td>(48)</td></tr><tr><td></td><td>48,124</td><td>45,084</td><td>43,675</td><td>7</td><td>3</td></tr></table>

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



## PART II

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

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Same-Store Sales Growth</td><td>2</td><td>2</td><td>1</td></tr></table>

## Non-GAAP Items

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

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>System Sales Growth, reported</td><td>5</td><td>4</td><td>3</td></tr><tr><td>System Sales Growth, excluding FX</td><td>5</td><td>4</td><td>5</td></tr><tr><td>System Sales Growth, excluding FX and 53 \( ^{rd} \)  week</td><td>N/A</td><td>5</td><td>4</td></tr><tr><td>Core Operating Profit Growth</td><td>Even</td><td>7</td><td>11</td></tr><tr><td>Core Operating Profit Growth, excluding 53 \( ^{rd} \)  week</td><td>N/A</td><td>9</td><td>9</td></tr><tr><td>Diluted EPS from Continuing Operations Growth, excluding Special Items</td><td>7</td><td>20</td><td>7</td></tr><tr><td>Effective Tax Rate excluding Special Items</td><td>20.4%</td><td>18.8%</td><td>26.3%</td></tr></table>

<table><tr><td rowspan="2">Detail of Special Items</td><td colspan="4">Year</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>Refranchising gain (loss) (See Note 5)</td><td>$ 540</td><td>$ 1,083</td><td>$ 163</td><td></td></tr><tr><td>YUM&#x27;s Strategic Transformation Initiatives (See Note 5)</td><td>(8)</td><td>(23)</td><td>(67)</td><td></td></tr><tr><td>Costs associated with Pizza Hut U.S. Transformation Agreement (See Note 5)</td><td>(6)</td><td>(31)</td><td>—</td><td></td></tr><tr><td>Costs associated with KFC U.S. Acceleration Agreement (See Note 5)</td><td>(2)</td><td>(17)</td><td>(26)</td><td></td></tr><tr><td>Non-cash credits (charges) associated with share-based compensation (See Note 5)</td><td>3</td><td>(18)</td><td>(30)</td><td></td></tr><tr><td>Other Special Items Income (Expense)</td><td>3</td><td>7</td><td>(5)</td><td></td></tr><tr><td>Special Items Income - Operating Profit</td><td>530</td><td>1,001</td><td>35</td><td></td></tr><tr><td>Special Items - Other Pension Income (Expense) (See Note 5)</td><td>—</td><td>(23)</td><td>(26)</td><td></td></tr><tr><td>Special Items Income from Continuing Operations before Income Taxes</td><td>530</td><td>978</td><td>9</td><td></td></tr><tr><td>Tax Benefit (Expense) on Special Items(a)</td><td>(96)</td><td>(256)</td><td>24</td><td></td></tr><tr><td>Tax Benefit (Expense) - U.S. Tax Act(b)</td><td>66</td><td>(434)</td><td>—</td><td></td></tr><tr><td>Special Items Income, net of tax</td><td>$ 500</td><td>$ 288</td><td>$ 33</td><td></td></tr><tr><td>Average diluted shares outstanding</td><td>329</td><td>355</td><td>400</td><td></td></tr><tr><td>Special Items diluted EPS</td><td>$ 1.52</td><td>$ 0.81</td><td>$ 0.08</td><td></td></tr><tr><td>Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week</td><td></td><td></td><td></td><td></td></tr><tr><td>Consolidated</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Operating Profit</td><td>$ 2,296</td><td>$ 2,761</td><td>$ 1,682</td><td></td></tr><tr><td>Special Items Income - Operating Profit</td><td>530</td><td>1,001</td><td>35</td><td></td></tr><tr><td>Foreign Currency Impact on Divisional Operating Profit(c)</td><td>1</td><td>—</td><td>N/A</td><td></td></tr><tr><td>Core Operating Profit</td><td>1,765</td><td>1,760</td><td>1,647</td><td></td></tr><tr><td>Impact of 53rd Week</td><td>N/A</td><td>N/A</td><td>28</td><td></td></tr><tr><td>Core Operating Profit, excluding 53rd Week</td><td>$ 1,765</td><td>$ 1,760</td><td>$ 1,619</td><td></td></tr><tr><td>KFC Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Operating Profit</td><td>$ 959</td><td>$ 981</td><td>$ 871</td><td></td></tr><tr><td>Foreign Currency Impact on Divisional Operating Profit(c)</td><td>—</td><td>4</td><td>N/A</td><td></td></tr><tr><td>Core Operating Profit</td><td>959</td><td>977</td><td>871</td><td></td></tr><tr><td>Impact of 53rd Week</td><td>N/A</td><td>N/A</td><td>11</td><td></td></tr><tr><td>Core Operating Profit, excluding 53rd Week</td><td>$ 959</td><td>$ 977</td><td>$ 860</td><td></td></tr></table>



<table><tr><td rowspan="2">Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week</td><td colspan="4">Year</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>Pizza Hut Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Operating Profit</td><td>$     348</td><td>$     341</td><td>$     367</td><td></td></tr><tr><td>Foreign Currency Impact on Divisional Operating Profit(c)</td><td>1</td><td>(4)</td><td>N/A</td><td></td></tr><tr><td>Core Operating Profit</td><td>347</td><td>345</td><td>367</td><td></td></tr><tr><td>Impact of 53rd Week</td><td>N/A</td><td>N/A</td><td>5</td><td></td></tr><tr><td>Core Operating Profit, excluding 53rd Week</td><td>$     347</td><td>$     345</td><td>$     362</td><td></td></tr><tr><td>Taco Bell Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Operating Profit</td><td>$     633</td><td>$     619</td><td>$     595</td><td></td></tr><tr><td>Foreign Currency Impact on Divisional Operating Profit(c)</td><td>—</td><td>—</td><td>N/A</td><td></td></tr><tr><td>Core Operating Profit</td><td>633</td><td>619</td><td>595</td><td></td></tr><tr><td>Impact of 53rd Week</td><td>N/A</td><td>N/A</td><td>12</td><td></td></tr><tr><td>Core Operating Profit, excluding 53rd Week</td><td>$     633</td><td>$     619</td><td>$     583</td><td></td></tr><tr><td>Reconciliation of Diluted EPS from Continuing Operations to Diluted EPS from Continuing Operations, excluding Special Items</td><td></td><td></td><td></td><td></td></tr><tr><td>Diluted EPS from Continuing Operations</td><td>$     4.69</td><td>$     3.77</td><td>$     2.54</td><td></td></tr><tr><td>Special Items Diluted EPS</td><td>1.52</td><td>0.81</td><td>0.08</td><td></td></tr><tr><td>Diluted EPS from Continuing Operations excluding Special Items</td><td>$     3.17</td><td>$     2.96</td><td>$     2.46</td><td></td></tr><tr><td>Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Effective Tax Rate</td><td>16.2%</td><td>41.1%</td><td>24.3%</td><td></td></tr><tr><td>Impact on Tax Rate as a result of Special Items(a)</td><td>(4.2)%</td><td>22.3%</td><td>(2.0)%</td><td></td></tr><tr><td>Effective Tax Rate excluding Special Items(b)</td><td>20.4%</td><td>18.8%</td><td>26.3%</td><td></td></tr><tr><td>Reconciliation of GAAP Company sales to System sales</td><td></td><td></td><td></td><td></td></tr><tr><td>Consolidated</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Company sales(d)</td><td>$     2,000</td><td>$     3,572</td><td>$     4,189</td><td></td></tr><tr><td>Franchise sales</td><td>47,237</td><td>43,122</td><td>40,732</td><td></td></tr><tr><td>System sales</td><td>49,237</td><td>46,694</td><td>44,921</td><td></td></tr><tr><td>Foreign Currency Impact on System sales(e)</td><td>186</td><td>(90)</td><td>N/A</td><td></td></tr><tr><td>System sales, excluding FX</td><td>49,051</td><td>46,784</td><td>44,921</td><td></td></tr><tr><td>Impact of 53rd week</td><td>N/A</td><td>N/A</td><td>434</td><td></td></tr><tr><td>System sales, excluding FX and 53rd Week</td><td>$     49,051</td><td>$     46,784</td><td>$     44,487</td><td></td></tr><tr><td>KFC Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Company sales(d)</td><td>$     894</td><td>$     1,928</td><td>$     2,156</td><td></td></tr><tr><td>Franchise sales</td><td>25,345</td><td>22,587</td><td>21,086</td><td></td></tr><tr><td>System sales</td><td>26,239</td><td>24,515</td><td>23,242</td><td></td></tr><tr><td>Foreign Currency Impact on System sales(e)</td><td>142</td><td>(28)</td><td>N/A</td><td></td></tr><tr><td>System sales, excluding FX</td><td>26,097</td><td>24,543</td><td>23,242</td><td></td></tr><tr><td>Impact of 53rd week</td><td>N/A</td><td>N/A</td><td>165</td><td></td></tr><tr><td>System sales, excluding FX and 53rd Week</td><td>$     26,097</td><td>$     24,543</td><td>$     23,077</td><td></td></tr><tr><td>Pizza Hut Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Company sales(d)</td><td>$     69</td><td>$     285</td><td>$     493</td><td></td></tr><tr><td>Franchise sales</td><td>12,143</td><td>11,749</td><td>11,526</td><td></td></tr><tr><td>System sales</td><td>12,212</td><td>12,034</td><td>12,019</td><td></td></tr><tr><td>Foreign Currency Impact on System sales(e)</td><td>47</td><td>(66)</td><td>N/A</td><td></td></tr><tr><td>System sales, excluding FX</td><td>12,165</td><td>12,100</td><td>12,019</td><td></td></tr><tr><td>Impact of 53rd week</td><td>N/A</td><td>N/A</td><td>113</td><td></td></tr><tr><td>System sales, excluding FX and 53rd Week</td><td>$     12,165</td><td>$     12,100</td><td>$     11,906</td><td></td></tr></table>



## PART II

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

<table><tr><td rowspan="2">Reconciliation of GAAP Company sales to System sales</td><td colspan="4">Year</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>Taco Bell Division</td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP Company sales \( ^{(d)} \)</td><td>$ 1,037</td><td>$ 1,359</td><td>$ 1,540</td><td></td></tr><tr><td>Franchise sales</td><td>9,749</td><td>8,786</td><td>8,120</td><td></td></tr><tr><td>System sales</td><td>10,786</td><td>10,145</td><td>9,660</td><td></td></tr><tr><td>Foreign Currency Impact on System sales \( ^{(e)} \)</td><td>(3)</td><td>4</td><td>N/A</td><td></td></tr><tr><td>System sales, excluding FX</td><td>10,789</td><td>10,141</td><td>9,660</td><td></td></tr><tr><td>Impact of 53 \( ^{rd} \)  week</td><td>N/A</td><td>N/A</td><td>156</td><td></td></tr><tr><td>System sales, excluding FX and 53 \( ^{rd} \)  Week</td><td>$ 10,789</td><td>$ 10,141</td><td>$ 9,504</td><td></td></tr></table>

(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 policies 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.

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

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 ("GLITI") 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 GLITI 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 53 \( ^{rd} \)  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 53 \( ^{rd} \)  week on Revenues and Operating Profit for the year ended December 31, 2016:

<table><tr><td></td><td>KFC Division</td><td>Pizza Hut Division</td><td>Taco Bell Division</td><td>Total</td></tr><tr><td>Revenues</td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 26</td><td>$ 5</td><td>$ 24</td><td>$ 55</td></tr><tr><td>Franchise and property revenues</td><td>8</td><td>6</td><td>7</td><td>21</td></tr><tr><td>Total revenues</td><td>$ 34</td><td>$ 11</td><td>$ 31</td><td>$ 76</td></tr><tr><td>Operating Profit</td><td></td><td></td><td></td><td></td></tr><tr><td>Franchise and property expenses</td><td>$ 8</td><td>$ 6</td><td>$ 7</td><td>$ 21</td></tr><tr><td>Restaurant profit</td><td>6</td><td>1</td><td>7</td><td>14</td></tr><tr><td>G&amp;A expenses</td><td>(3)</td><td>(2)</td><td>(2)</td><td>(7)</td></tr><tr><td>Operating Profit</td><td>$ 11</td><td>$ 5</td><td>$ 12</td><td>$ 28</td></tr></table>

## 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.

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



<table><tr><td rowspan="2">Unit Count</td><td colspan="5">% Increase (Decrease)</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td>2018</td><td>2017</td></tr><tr><td>Franchise</td><td>22,297</td><td>20,819</td><td>19,236</td><td>7</td><td>8</td></tr><tr><td>Company-owned</td><td>324</td><td>668</td><td>1,407</td><td>(51)</td><td>(53)</td></tr><tr><td>Total</td><td>22,621</td><td>21,487</td><td>20,643</td><td>5</td><td>4</td></tr></table>

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

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

## Company Sales and Restaurant Profit

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

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

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

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 53 \( ^{rd} \)  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.



## PART II

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

## 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 53 \( ^{rd} \)  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 53 \( ^{rd} \)  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.

<table><tr><td rowspan="2"></td><td rowspan="2">2018</td><td rowspan="2">2017</td><td rowspan="2">2016</td><td colspan="2">% B/(W)</td><td colspan="3">% B/(W)</td></tr><tr><td colspan="2">2018</td><td colspan="3">2017</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

<table><tr><td rowspan="2">Unit Count</td><td colspan="2">2018</td><td colspan="2">2017</td><td colspan="2">2016</td><td colspan="2">% Increase (Decrease)</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Franchise</td><td>18,369</td><td>16,588</td><td>15,871</td><td>11</td><td>5</td><td></td><td></td><td></td></tr><tr><td>Company-owned</td><td>62</td><td>160</td><td>549</td><td>(61)</td><td>(71)</td><td></td><td></td><td></td></tr><tr><td>Total</td><td>18,431</td><td>16,748</td><td>16,420</td><td>10</td><td>2</td><td></td><td></td><td></td></tr></table>



<table><tr><td></td><td>2017</td><td>New Builds</td><td>Closures</td><td>Refranchised</td><td>Other \( ^{(a)} \)</td><td>2018</td></tr><tr><td>Franchise</td><td>16,588</td><td>1,106</td><td>(705)</td><td>97</td><td>1,283</td><td>18,369</td></tr><tr><td>Company-owned</td><td>160</td><td>2</td><td>(3)</td><td>(97)</td><td>—</td><td>62</td></tr><tr><td>Total</td><td>16,748</td><td>1,108</td><td>(708)</td><td>—</td><td>1,283</td><td>18,431</td></tr></table>

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

(a) Includes 1,282 Telepizza restaurants.

## Company Sales and Restaurant Profit

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

<table><tr><td rowspan="2">Income / (Expense)</td><td colspan="5">2018 vs. 2017</td></tr><tr><td>2017</td><td>Store Portfolio Actions</td><td>Other</td><td>FX</td><td>2018</td></tr><tr><td>Company sales</td><td>$ 285</td><td>$ (218)</td><td>$ 1</td><td>$ 1</td><td>$ 69</td></tr><tr><td>Cost of sales</td><td>(83)</td><td>64</td><td>—</td><td>—</td><td>(19)</td></tr><tr><td>Cost of labor</td><td>(94)</td><td>70</td><td>(2)</td><td>—</td><td>(26)</td></tr><tr><td>Occupancy and other</td><td>(94)</td><td>69</td><td>2</td><td>(1)</td><td>(24)</td></tr><tr><td>Company restaurant expenses</td><td>$ (271)</td><td>$ 203</td><td>$ —</td><td>$ (1)</td><td>$ (69)</td></tr><tr><td>Restaurant profit</td><td>$ 14</td><td>$ (15)</td><td>$ 1</td><td>$ —</td><td>$ —</td></tr></table>

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

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 53 \( ^{rd} \)  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 53 \( ^{rd} \)  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 53 \( ^{rd} \)  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.

<table><tr><td rowspan="2"></td><td colspan="4">% B/(W)</td><td colspan="3">% B/(W)</td></tr><tr><td colspan="4">2018</td><td colspan="3">2017</td></tr><tr><td></td><td>2018</td><td>2017</td><td>2016</td><td>Reported</td><td>Ex FX</td><td>Reported</td><td>Ex FX</td></tr><tr><td>System Sales</td><td>$ 10,786</td><td>$ 10,145</td><td>$ 9,660</td><td>6</td><td>6</td><td>5</td><td>5</td></tr><tr><td>Same-Store Sales Growth</td><td></td><td></td><td></td><td>4</td><td>N/A</td><td>4</td><td>N/A</td></tr><tr><td>Company sales</td><td>$ 1,037</td><td>$ 1,359</td><td>$ 1,540</td><td>(24)</td><td>(24)</td><td>(12)</td><td>(12)</td></tr><tr><td>Franchise and property revenues</td><td>590</td><td>521</td><td>485</td><td>13</td><td>13</td><td>7</td><td>7</td></tr><tr><td>Franchise contributions for advertising and other services</td><td>429</td><td>—</td><td>—</td><td>N/A</td><td>N/A</td><td>N/A</td><td>N/A</td></tr><tr><td>Total revenues</td><td>$ 2,056</td><td>$ 1,880</td><td>$ 2,025</td><td>9</td><td>9</td><td>(7)</td><td>(7)</td></tr><tr><td>Restaurant profit</td><td>$ 244</td><td>$ 305</td><td>$ 342</td><td>(20)</td><td>(20)</td><td>(11)</td><td>(11)</td></tr><tr><td>Restaurant margin %</td><td>23.5%</td><td>22.4%</td><td>22.2%</td><td>1.1 ppts.</td><td>1.1 ppts.</td><td>0.2 ppts.</td><td>0.2 ppts.</td></tr><tr><td>G&amp;A expenses</td><td>$ 177</td><td>$ 188</td><td>$ 211</td><td>6</td><td>6</td><td>11</td><td>11</td></tr><tr><td>Franchise and property expenses</td><td>28</td><td>22</td><td>21</td><td>(31)</td><td>(31)</td><td>(6)</td><td>(5)</td></tr><tr><td>Franchise advertising and other services expense</td><td>428</td><td>—</td><td>—</td><td>N/A</td><td>N/A</td><td>N/A</td><td>N/A</td></tr><tr><td>Operating Profit</td><td>$ 633</td><td>$ 619</td><td>$ 595</td><td>2</td><td>2</td><td>4</td><td>4</td></tr></table>

<table><tr><td>Unit Count</td><td>2018</td><td>2017</td><td>2016</td><td>2018</td><td>2017</td></tr><tr><td>Franchise</td><td>6,602</td><td>6,196</td><td>5,727</td><td>7</td><td>8</td></tr><tr><td>Company-owned</td><td>470</td><td>653</td><td>885</td><td>(28)</td><td>(26)</td></tr><tr><td>Total</td><td>7,072</td><td>6,849</td><td>6,612</td><td>3</td><td>4</td></tr></table>

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

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



## Company Sales and Restaurant Profit

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

<table><tr><td rowspan="2">Income / (Expense)</td><td colspan="4">2018 vs. 2017</td></tr><tr><td>2017</td><td>Store Portfolio Actions</td><td>Other</td><td>2018</td></tr><tr><td>Company sales</td><td>$ 1,359</td><td>$ (363)</td><td>$ 41</td><td>$ 1,037</td></tr><tr><td>Cost of sales</td><td>(356)</td><td>96</td><td>(1)</td><td>(261)</td></tr><tr><td>Cost of labor</td><td>(394)</td><td>103</td><td>(8)</td><td>(299)</td></tr><tr><td>Occupancy and other</td><td>(304)</td><td>74</td><td>(3)</td><td>(233)</td></tr><tr><td>Company restaurant expense</td><td>$ (1,054)</td><td>$ 273</td><td>$ (12)</td><td>$ (793)</td></tr><tr><td>Restaurant profit</td><td>$ 305</td><td>$ (90)</td><td>$ 29</td><td>$ 244</td></tr></table>

<table><tr><td rowspan="2">Income / (Expense)</td><td colspan="4">2017 vs. 2016</td></tr><tr><td>2016</td><td>Store Portfolio Actions</td><td>Other</td><td>53rd Week</td></tr><tr><td>Company sales</td><td>$ 1,540</td><td>$ (195)</td><td>$ 38</td><td>$ (24)</td></tr><tr><td>Cost of sales</td><td>(397)</td><td>50</td><td>(15)</td><td>6</td></tr><tr><td>Cost of labor</td><td>(443)</td><td>55</td><td>(13)</td><td>7</td></tr><tr><td>Occupancy and other</td><td>(358)</td><td>44</td><td>6</td><td>4</td></tr><tr><td>Company restaurant expense</td><td>$ (1,198)</td><td>$ 149</td><td>$ (22)</td><td>$ 17</td></tr><tr><td>Restaurant profit</td><td>$ 342</td><td>$ (46)</td><td>$ 16</td><td>$ (7)</td></tr></table>

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 53 \( ^{rd} \)  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 53 \( ^{rd} \)  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

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

## 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 reflect 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.

<table><tr><td></td><td>2016(a)</td></tr><tr><td>Total revenues</td><td>$ 5,776</td></tr><tr><td>Total income from discontinued operations before income taxes(b)</td><td>571</td></tr><tr><td>Income tax (benefit) provision(c)</td><td>(65)</td></tr><tr><td>Income from discontinued operations, net of tax</td><td>625</td></tr></table>

(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

## 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 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.

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.

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

See Note 10 for details on 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:

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

(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 acknowledgement 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.



# ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates, commodity prices and the value of our equity investment in Grubhub. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of financial and commodity derivative instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for trading purposes, and we have processes in place to monitor and control their use.

## Interest Rate Risk

We have a market risk exposure to changes in interest rates, principally in the U.S. Our outstanding total debt of $10.1 billion includes 76% fixed-rate debt and 24% variable-rate debt. We have attempted to minimize the interest rate risk from variable-rate debt through the use of interest rate swaps that, as of December 31, 2018, result in a fixed interest rate on $1.55 billion of our variable rate debt. As a result, approximately 91% of our $10.1 billion of outstanding debt at December 31, 2018 is effectively fixed-rate debt. See Note 10 for details on these issuances and repayments and Note 12 for details related to interest rate swaps.

As of both December 31, 2018 and December 31, 2017 a hypothetical 100 basis-point increase in short-term interest rates would result, over the following twelve-month period after consideration of the aforementioned interest rate swaps, in an increase of approximately $9 million in Interest expense, net within our Consolidated Statements of Income. These estimated amounts are based upon the current level of variable-rate debt that has not been swapped to fixed and assume no changes in the volume or composition of that debt and exclude any impact from interest income related to cash and cash equivalents.

The fair value of our cumulative fixed-rate debt of $7.7 billion as of December 31, 2018, would decrease approximately $400 million as a result of the same hypothetical 100 basis-point increase. At December 31, 2018, a hypothetical 100 basis-point decrease in short-term interest rates would decrease the fair value of our interest rate swaps approximately $100 million. Fair value was determined based on the present value of expected future cash flows considering the risks involved and using discount rates appropriate for the durations.

## Foreign Currency Exchange Rate Risk

Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations and the fair value of our foreign currency denominated financial instruments. Historically, we have chosen not to hedge foreign currency risks related to our foreign currency denominated earnings and cash flows through the use of financial instruments. In addition, we attempt to minimize the exposure related to foreign currency denominated financial instruments by purchasing goods and services from third parties in local currencies when practical. Consequently, foreign currency denominated financial instruments consist primarily of intercompany receivables and payables. At times, we utilize forward contracts and cross-currency swaps to reduce our exposure related to these intercompany receivables and payables. The notional amount and maturity dates of these contracts match those of the underlying receivables or payables such that our foreign currency exchange risk related to these instruments is minimized.

The Company’s foreign currency net asset exposure (defined as foreign currency assets less foreign currency liabilities) totaled approximately $1.6 billion as of December 31, 2018. Operating in international markets exposes the Company to movements in foreign currency exchange rates. The Company’s primary exposures result from our operations in Asia-Pacific, Europe and the Americas. For the fiscal year ended December 31, 2018 Operating Profit would have decreased approximately $135 million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar. This estimated reduction assumes no changes in sales volumes, local currency sales or input prices.

## Commodity Price Risk

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive

## Equity Investment Risk

YUM holds 2,820,464 shares of Grubhub common stock (See Note 5). As of December 31, 2018, the NYSE composite closing sales price of Grubhub was $76.81. A hypothetical 10% decline in the price of these shares would result in a $21 million decrease in the fair value of these investments, which would be reflected as a charge environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors.

in Investment (income) expense, net within our Consolidated Statements of Income. The effects of changes in market prices for equity securities are unpredictable, which could cause significant fluctuations in our quarterly and annual results.



## ITEM 8 Financial Statements and Supplementary Data

## Index to Financial Information

<table><tr><td></td><td>Page Reference</td></tr><tr><td>Consolidated Financial Statements</td><td></td></tr><tr><td>Report of Independent Registered Public Accounting Firm</td><td>41</td></tr><tr><td>Consolidated Statements of Income</td><td>42</td></tr><tr><td>Consolidated Statements of Comprehensive Income</td><td>43</td></tr><tr><td>Consolidated Statements of Cash Flows</td><td>44</td></tr><tr><td>Consolidated Balance Sheets</td><td>45</td></tr><tr><td>Consolidated Statements of Shareholders&#x27; Equity (Deficit)</td><td>46</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>47</td></tr></table>

## Financial Statement Schedules

No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the above-listed financial statements or notes thereto.



# Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
YUM! Brands, Inc.:

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

We have audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and Subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and shareholders' equity (deficit) for each of the fiscal years in the three-year period ended December 31, 2018, and the related notes (collectively, the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

## Change in Accounting Principle

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in fiscal year 2018 due to the adoption of Topic 606: Revenue from Contracts with Customers.

## Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting in the accompanying Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

## Definition and Limitations of Internal Control Over Financial Reporting

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

We have served as the Company’s auditor since 1997.

Louisville, Kentucky

February 20, 2019



## Consolidated Statements of Income

## YUM! BRANDS, INC. AND SUBSIDIARIES

FISCAL YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

<table><tr><td>(in millions, except per share data)</td><td>2018</td><td>2017</td><td>2016 (As Restated)</td></tr><tr><td>Revenues</td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 2,000</td><td>$ 3,572</td><td>$ 4,189</td></tr><tr><td>Franchise and property revenues</td><td>2,482</td><td>2,306</td><td>2,167</td></tr><tr><td>Franchise contributions for advertising and other services</td><td>1,206</td><td>—</td><td>—</td></tr><tr><td>Total revenues</td><td>5,688</td><td>5,878</td><td>6,356</td></tr><tr><td>Costs and Expenses, Net</td><td></td><td></td><td></td></tr><tr><td>Company restaurant expenses</td><td>1,634</td><td>2,954</td><td>3,489</td></tr><tr><td>General and administrative expenses</td><td>895</td><td>999</td><td>1,129</td></tr><tr><td>Franchise and property expenses</td><td>188</td><td>237</td><td>201</td></tr><tr><td>Franchise advertising and other services expense</td><td>1,208</td><td>—</td><td>—</td></tr><tr><td>Refranchising (gain) loss</td><td>(540)</td><td>(1,083)</td><td>(163)</td></tr><tr><td>Other (income) expense</td><td>7</td><td>10</td><td>18</td></tr><tr><td>Total costs and expenses, net</td><td>3,392</td><td>3,117</td><td>4,674</td></tr><tr><td>Operating Profit</td><td>2,296</td><td>2,761</td><td>1,682</td></tr><tr><td>Investment (income) expense, net</td><td>(9)</td><td>(5)</td><td>(2)</td></tr><tr><td>Other pension (income) expense</td><td>14</td><td>47</td><td>32</td></tr><tr><td>Interest expense, net</td><td>452</td><td>445</td><td>307</td></tr><tr><td>Income from continuing operations before income taxes</td><td>1,839</td><td>2,274</td><td>1,345</td></tr><tr><td>Income tax provision</td><td>297</td><td>934</td><td>327</td></tr><tr><td>Income from continuing operations</td><td>1,542</td><td>1,340</td><td>1,018</td></tr><tr><td>Income from discontinued operations, net of tax</td><td>N/A</td><td>N/A</td><td>625</td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 1,340</td><td>$ 1,643</td></tr><tr><td>Basic Earnings per Common Share from continuing operations</td><td>$ 4.80</td><td>$ 3.86</td><td>$ 2.58</td></tr><tr><td>Basic Earnings per Common Share from discontinued operations</td><td>N/A</td><td>N/A</td><td>$ 1.59</td></tr><tr><td>Basic Earnings Per Common Share</td><td>$ 4.80</td><td>$ 3.86</td><td>$ 4.17</td></tr><tr><td>Diluted Earnings per Common Share from continuing operations</td><td>$ 4.69</td><td>$ 3.77</td><td>$ 2.54</td></tr><tr><td>Diluted Earnings per Common Share from discontinued operations</td><td>N/A</td><td>N/A</td><td>$ 1.56</td></tr><tr><td>Diluted Earnings Per Common Share</td><td>$ 4.69</td><td>$ 3.77</td><td>$ 4.10</td></tr><tr><td>Dividends Declared Per Common Share</td><td>$ 1.44</td><td>$ 0.90</td><td>$ 1.73</td></tr></table>

See accompanying Notes to Consolidated Financial Statements.



## Consolidated Statements of Comprehensive Income

## YUM! BRANDS, INC. AND SUBSIDIARIES

## FISCAL YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

<table><tr><td>(in millions)</td><td>2018</td><td>2017</td><td>2016 (As Restated)</td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 1,340</td><td>$ 1,643</td></tr><tr><td>Other comprehensive income (loss), net of tax:</td><td></td><td></td><td></td></tr><tr><td>Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature</td><td></td><td></td><td></td></tr><tr><td>Adjustments and gains (losses) arising during the year</td><td>(94)</td><td>115</td><td>(174)</td></tr><tr><td>Reclassifications of adjustments and (gains) losses into Net Income</td><td>(4)</td><td>55</td><td>(11)</td></tr><tr><td></td><td>(98)</td><td>170</td><td>(185)</td></tr><tr><td>Tax (expense) benefit</td><td>6</td><td>(8)</td><td>21</td></tr><tr><td></td><td>(92)</td><td>162</td><td>(164)</td></tr><tr><td>Changes in pension and post-retirement benefits</td><td></td><td></td><td></td></tr><tr><td>Unrealized gains (losses) arising during the year</td><td>32</td><td>(17)</td><td>(62)</td></tr><tr><td>Reclassification of (gains) losses into Net Income</td><td>22</td><td>52</td><td>44</td></tr><tr><td></td><td>54</td><td>35</td><td>(18)</td></tr><tr><td>Tax (expense) benefit</td><td>(13)</td><td>(14)</td><td>4</td></tr><tr><td></td><td>41</td><td>21</td><td>(14)</td></tr><tr><td>Changes in derivative instruments</td><td></td><td></td><td></td></tr><tr><td>Unrealized gains (losses) arising during the year</td><td>19</td><td>(52)</td><td>57</td></tr><tr><td>Reclassification of (gains) losses into Net Income</td><td>(39)</td><td>58</td><td>(22)</td></tr><tr><td></td><td>(20)</td><td>6</td><td>35</td></tr><tr><td>Tax (expense) benefit</td><td>6</td><td>(2)</td><td>(16)</td></tr><tr><td></td><td>(14)</td><td>4</td><td>19</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td>(65)</td><td>187</td><td>(159)</td></tr><tr><td>Comprehensive Income</td><td>$ 1,477</td><td>$ 1,527</td><td>$ 1,484</td></tr></table>

See accompanying Notes to Consolidated Financial Statements.



## Consolidated Statements of Cash Flows

## YUM! BRANDS, INC. AND SUBSIDIARIES

## FISCAL YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

<table><tr><td>(in millions)</td><td>2018</td><td>2017</td><td>2016 (As Restated)</td></tr><tr><td>Cash Flows - Operating Activities from Continuing Operations</td><td></td><td></td><td></td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 1,340</td><td>$ 1,643</td></tr><tr><td>Income from discontinued operations, net of tax</td><td>—</td><td>—</td><td>(625)</td></tr><tr><td>Depreciation and amortization</td><td>137</td><td>253</td><td>310</td></tr><tr><td>Refranchising (gain) loss</td><td>(540)</td><td>(1,083)</td><td>(163)</td></tr><tr><td>Investment (income) expense, net</td><td>(9)</td><td>(5)</td><td>(2)</td></tr><tr><td>Contributions to defined benefit pension plans</td><td>(16)</td><td>(55)</td><td>(41)</td></tr><tr><td>Deferred income taxes</td><td>(11)</td><td>634</td><td>28</td></tr><tr><td>Share-based compensation expense</td><td>50</td><td>65</td><td>80</td></tr><tr><td>Changes in accounts and notes receivable</td><td>(66)</td><td>(19)</td><td>(23)</td></tr><tr><td>Changes in prepaid expenses and other current assets</td><td>—</td><td>(10)</td><td>—</td></tr><tr><td>Changes in accounts payable and other current liabilities</td><td>(68)</td><td>(173)</td><td>(40)</td></tr><tr><td>Changes in income taxes payable</td><td>65</td><td>(55)</td><td>20</td></tr><tr><td>Other, net</td><td>92</td><td>138</td><td>61</td></tr><tr><td>Net Cash Provided by Operating Activities from Continuing Operations</td><td>1,176</td><td>1,030</td><td>1,248</td></tr><tr><td>Cash Flows - Investing Activities from Continuing Operations</td><td></td><td></td><td></td></tr><tr><td>Capital spending</td><td>(234)</td><td>(318)</td><td>(427)</td></tr><tr><td>QuikOrder acquisition, net of cash acquired</td><td>(66)</td><td>—</td><td>—</td></tr><tr><td>Investment in Grubhub Inc. common stock</td><td>(200)</td><td>—</td><td>—</td></tr><tr><td>Proceeds from refranchising of restaurants</td><td>825</td><td>1,773</td><td>370</td></tr><tr><td>Other, net</td><td>(12)</td><td>17</td><td>53</td></tr><tr><td>Net Cash Provided by (Used in) Investing Activities from Continuing Operations</td><td>313</td><td>1,472</td><td>(4)</td></tr><tr><td>Cash Flows - Financing Activities from Continuing Operations</td><td></td><td></td><td></td></tr><tr><td>Proceeds from long-term debt</td><td>1,556</td><td>1,088</td><td>6,900</td></tr><tr><td>Repayments of long-term debt</td><td>(1,264)</td><td>(385)</td><td>(323)</td></tr><tr><td>Revolving credit facilities, three months or less, net</td><td>—</td><td>—</td><td>(685)</td></tr><tr><td>Short-term borrowings, by original maturity</td><td></td><td></td><td></td></tr><tr><td>More than three months - proceeds</td><td>59</td><td>—</td><td>1,400</td></tr><tr><td>More than three months - payments</td><td>(59)</td><td>—</td><td>(2,000)</td></tr><tr><td>Three months or less, net</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Repurchase shares of Common Stock</td><td>(2,390)</td><td>(1,960)</td><td>(5,403)</td></tr><tr><td>Dividends paid on Common Stock</td><td>(462)</td><td>(416)</td><td>(744)</td></tr><tr><td>Debt issuance costs</td><td>(13)</td><td>(32)</td><td>(86)</td></tr><tr><td>Net transfers from discontinued operations</td><td>—</td><td>—</td><td>289</td></tr><tr><td>Other, net</td><td>(47)</td><td>(90)</td><td>(92)</td></tr><tr><td>Net Cash Used in Financing Activities from Continuing Operations</td><td>(2,620)</td><td>(1,795)</td><td>(744)</td></tr><tr><td>Effect of Exchange Rate on Cash and Cash Equivalents</td><td>(63)</td><td>61</td><td>(34)</td></tr><tr><td>Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Continuing Operations</td><td>(1,194)</td><td>768</td><td>466</td></tr><tr><td>Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Year</td><td>1,668</td><td>831</td><td>365</td></tr><tr><td>Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Year</td><td>$ 474</td><td>$ 1,599</td><td>$ 831</td></tr><tr><td>Cash Provided by Operating Activities from Discontinued Operations</td><td>$ —</td><td>$ —</td><td>$ 829</td></tr><tr><td>Cash Used in Investing Activities from Discontinued Operations</td><td>—</td><td>—</td><td>(287)</td></tr><tr><td>Cash Used in Financing Activities from Discontinued Operations</td><td>—</td><td>—</td><td>(292)</td></tr></table>

See accompanying Notes to Consolidated Financial Statements.



## Consolidated Balance Sheets

## YUM! BRANDS, INC. AND SUBSIDIARIES

DECEMBER 31, 2018 AND 2017

<table><tr><td>(in millions)</td><td>2018</td><td>2017</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Current Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 292</td><td>$ 1,522</td></tr><tr><td>Accounts and notes receivable, net</td><td>561</td><td>400</td></tr><tr><td>Prepaid expenses and other current assets</td><td>354</td><td>384</td></tr><tr><td>Advertising cooperative assets, restricted</td><td>—</td><td>201</td></tr><tr><td>Total Current Assets</td><td>1,207</td><td>2,507</td></tr><tr><td>Property, plant and equipment, net</td><td>1,237</td><td>1,594</td></tr><tr><td>Goodwill</td><td>525</td><td>512</td></tr><tr><td>Intangible assets, net</td><td>242</td><td>214</td></tr><tr><td>Other assets</td><td>724</td><td>345</td></tr><tr><td>Deferred income taxes</td><td>195</td><td>139</td></tr><tr><td>Total Assets</td><td>$ 4,130</td><td>$ 5,311</td></tr><tr><td>LIABILITIES AND SHAREHOLDERS&#x27; DEFICIT</td><td></td><td></td></tr><tr><td>Current Liabilities</td><td></td><td></td></tr><tr><td>Accounts payable and other current liabilities</td><td>$ 911</td><td>$ 813</td></tr><tr><td>Income taxes payable</td><td>69</td><td>123</td></tr><tr><td>Short-term borrowings</td><td>321</td><td>375</td></tr><tr><td>Advertising cooperative liabilities</td><td>—</td><td>201</td></tr><tr><td>Total Current Liabilities</td><td>1,301</td><td>1,512</td></tr><tr><td>Long-term debt</td><td>9,751</td><td>9,429</td></tr><tr><td>Other liabilities and deferred credits</td><td>1,004</td><td>704</td></tr><tr><td>Total Liabilities</td><td>12,056</td><td>11,645</td></tr><tr><td>Shareholders&#x27; Deficit</td><td></td><td></td></tr><tr><td>Common Stock, no par value, 750 shares authorized; 306 shares and 332 shares issued in 2018 and 2017, respectively</td><td>—</td><td>—</td></tr><tr><td>Accumulated deficit</td><td>(7,592)</td><td>(6,063)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(334)</td><td>(271)</td></tr><tr><td>Total Shareholders&#x27; Deficit</td><td>(7,926)</td><td>(6,334)</td></tr><tr><td>Total Liabilities and Shareholders&#x27; Deficit</td><td>$ 4,130</td><td>$ 5,311</td></tr></table>

See accompanying Notes to Consolidated Financial Statements.



## Consolidated Statements of Shareholders' Equity (Deficit)

## YUM! BRANDS, INC. AND SUBSIDIARIES

## FISCAL YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

<table><tr><td rowspan="2">(in millions)</td><td colspan="9">Yum! Brands, Inc.</td></tr><tr><td>Issued Common Stock</td><td>Retained Earnings (Accumulated Deficit)</td><td>Accumulated Other Comprehensive Income (Loss)</td><td>Noncontrolling Interests</td><td>Total Shareholders&#x27; Equity (Deficit)</td><td>Redeemable Noncontrolling Interest</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2015 (As Restated)</td><td>420</td><td>$ -</td><td>$ 1,187</td><td>$ (252)</td><td>$ 58</td><td>$ 993</td><td>$ 6</td><td></td><td></td></tr><tr><td>Net Income (loss)</td><td></td><td></td><td>1,643</td><td></td><td>18</td><td>1,661</td><td></td><td>(7)</td><td></td></tr><tr><td>Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $21 million)</td><td></td><td></td><td></td><td>(153)</td><td>(3)</td><td>(156)</td><td></td><td>1</td><td></td></tr><tr><td>Reclassification of translation adjustments into income</td><td></td><td></td><td></td><td>(11)</td><td></td><td>(11)</td><td></td><td></td><td></td></tr><tr><td>Pension and post-retirement benefit plans (net of tax impact of $4 million)</td><td></td><td></td><td></td><td>(14)</td><td></td><td>(14)</td><td></td><td></td><td></td></tr><tr><td>Net gain on derivative instruments (net of tax impact of $16 million)</td><td></td><td></td><td></td><td>19</td><td></td><td>19</td><td></td><td></td><td></td></tr><tr><td>Comprehensive Income (loss)</td><td></td><td></td><td></td><td></td><td></td><td>1,499</td><td></td><td>(6)</td><td></td></tr><tr><td>Dividends declared</td><td></td><td></td><td>(661)</td><td></td><td>(6)</td><td>(667)</td><td></td><td></td><td></td></tr><tr><td>Separation of China business</td><td></td><td></td><td>(1,927)</td><td>(47)</td><td>(67)</td><td>(2,041)</td><td></td><td></td><td></td></tr><tr><td>Repurchase of shares of Common Stock</td><td>(68)</td><td>(49)</td><td>(5,399)</td><td></td><td></td><td>(5,448)</td><td></td><td></td><td></td></tr><tr><td>Employee share-based award exercises (includes tax impact of $85 million)</td><td>3</td><td>(4)</td><td></td><td></td><td></td><td>(4)</td><td></td><td></td><td></td></tr><tr><td>Share-based compensation events</td><td></td><td>53</td><td></td><td></td><td></td><td>53</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2016 (As Restated)</td><td>355</td><td>$ -</td><td>$ (5,157)</td><td>$ (458)</td><td>$ -</td><td>$ (5,615)</td><td>$ -</td><td></td><td></td></tr><tr><td>Net Income</td><td></td><td></td><td>1,340</td><td></td><td></td><td>1,340</td><td></td><td></td><td></td></tr><tr><td>Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $8 million)</td><td></td><td></td><td></td><td>107</td><td></td><td>107</td><td></td><td></td><td></td></tr><tr><td>Reclassification of translation adjustments into income</td><td></td><td></td><td></td><td>55</td><td></td><td>55</td><td></td><td></td><td></td></tr><tr><td>Pension and post-retirement benefit plans (net of tax impact of $14 million)</td><td></td><td></td><td></td><td>21</td><td></td><td>21</td><td></td><td></td><td></td></tr><tr><td>Net gain on derivative instruments (net of tax impact of $2 million)</td><td></td><td></td><td></td><td>4</td><td></td><td>4</td><td></td><td></td><td></td></tr><tr><td>Comprehensive Income</td><td></td><td></td><td></td><td></td><td></td><td>1,527</td><td></td><td></td><td></td></tr><tr><td>Dividends declared</td><td></td><td></td><td>(311)</td><td></td><td></td><td>(311)</td><td></td><td></td><td></td></tr><tr><td>Repurchase of shares of Common Stock</td><td>(27)</td><td>-</td><td>(1,915)</td><td></td><td></td><td>(1,915)</td><td></td><td></td><td></td></tr><tr><td>Employee share-based award exercises</td><td>4</td><td>(58)</td><td>(20)</td><td></td><td></td><td>(78)</td><td></td><td></td><td></td></tr><tr><td>Share-based compensation events</td><td>-</td><td>58</td><td>-</td><td></td><td></td><td>58</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2017</td><td>332</td><td>$ -</td><td>$ (6,063)</td><td>$ (271)</td><td>$ -</td><td>$ (6,334)</td><td>$ -</td><td></td><td></td></tr><tr><td>Net Income</td><td></td><td></td><td>1,542</td><td></td><td></td><td>1,542</td><td></td><td></td><td></td></tr><tr><td>Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $6 million)</td><td></td><td></td><td></td><td>(88)</td><td></td><td>(88)</td><td></td><td></td><td></td></tr><tr><td>Reclassification of translation adjustments into income</td><td></td><td></td><td></td><td>(4)</td><td></td><td>(4)</td><td></td><td></td><td></td></tr><tr><td>Pension and post-retirement benefit plans (net of tax impact of $13 million)</td><td></td><td></td><td></td><td>41</td><td></td><td>41</td><td></td><td></td><td></td></tr><tr><td>Net loss on derivative instruments (net of tax impact of $6 million)</td><td></td><td></td><td></td><td>(14)</td><td></td><td>(14)</td><td></td><td></td><td></td></tr><tr><td>Comprehensive Income</td><td></td><td></td><td></td><td></td><td></td><td>1,477</td><td></td><td></td><td></td></tr><tr><td>Dividends declared</td><td></td><td></td><td>(464)</td><td></td><td></td><td>(464)</td><td></td><td></td><td></td></tr><tr><td>Repurchase of shares of Common Stock</td><td>(28)</td><td>(38)</td><td>(2,356)</td><td></td><td></td><td>(2,394)</td><td></td><td></td><td></td></tr><tr><td>Employee share-based award exercises</td><td>2</td><td>(41)</td><td></td><td></td><td></td><td>(41)</td><td></td><td></td><td></td></tr><tr><td>Share-based compensation events</td><td></td><td>79</td><td></td><td></td><td></td><td>79</td><td></td><td></td><td></td></tr><tr><td>Adoption of accounting standards</td><td></td><td></td><td>(251)</td><td>2</td><td></td><td>(249)</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2018</td><td>306</td><td>$ -</td><td>$ (7,592)</td><td>$ (334)</td><td>$ -</td><td>$ (7,926)</td><td>$ -</td><td></td><td></td></tr></table>

See accompanying Notes to Consolidated Financial Statements.



# Notes to Consolidated Financial Statements

(Tabular amounts in millions, except share data)

## NOTE 1 Description of Business

YUM! Brands, Inc. and its Subsidiaries (collectively referred to herein as the "Company," "YUM," "we," "us" or "our") franchises or operates a system of over 48,000 quick service restaurants in more than 140 countries and territories. At December 31, 2018, 98% of these restaurants were owned and operated by franchisees. The company's KFC, Pizza Hut and Taco Bell brands (collectively the "Concepts") are global leaders of the chicken, pizza and Mexican-style food categories.

Through our widely-recognized Concepts, we develop, operate or franchise a system of both traditional and non-traditional quick service restaurants. The terms “franchise” or “franchisee” within these Consolidated Financial Statements are meant to describe third parties that operate units under either franchise or license agreements. Our traditional restaurants feature dine-in, carryout and, in some instances, drive-thru or delivery service. Non-traditional units include express units and kiosks which have a more limited menu and operate in non-traditional locations like malls, airports, gasoline service stations, train stations, subways, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient. We also operate or franchise multibrand units, where two or more of our Concepts are operated in a single unit.

As of December 31, 2018, YUM consisted of three operating segments:

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

- The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
- The Taco Bell Division which includes our worldwide operations of the Taco Bell concept

On October 31, 2016 (the “Distribution Date”), we completed the spin-off of our China business (the “Separation”) into an independent, publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). On the Distribution Date, we distributed to each of our shareholders of record as of the close of business on October 19, 2016 (the “Record Date”) one share of Yum China common stock for each share of our Common Stock held as of the Record Date. The distribution was structured to be a tax free distribution to our U.S. shareholders for federal income tax purposes in the U.S. Yum China’s common stock trades on the New York Stock Exchange under the symbol “YUMC.” After the distribution, we do not beneficially own any shares of Yum China common stock.

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 all periods presented. See additional information related to the impact of the Separation in Note 4.

## NOTE 2 Summary of Significant Accounting Policies

Our preparation of the accompanying Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Principles of Consolidation and Basis of Preparation. Intercompany accounts and transactions have been eliminated in consolidation. We consolidate entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. We also consider for consolidation an entity, in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it.
Our most significant variable interests are in entities that operate restaurants under our Concepts' franchise and license arrangements. We do not have an equity interest in any of our franchisee businesses. Additionally, we do not typically provide significant financial support such as loans or guarantees to our franchisees. However, we do have variable interests in certain franchisees through real estate lease arrangements to which we are a party. At the end of 2018, YUM has future lease payments due from franchisees, on a nominal basis, of approximately $1.1 billion, and we are secondarily liable on certain other lease agreements that have been assigned to franchisees. See the Lease Guarantees and Franchise Loan Pool and Equipment Guarantees sections in Note 19. As our franchise and license arrangements provide our franchisee entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might otherwise be considered a VIE.

See Note 19 for additional information on our entity that operates a franchise lending program that is a VIE in which we have a variable interest but for which we are not the primary beneficiary and thus do not consolidate.



We participate in various advertising cooperatives with our franchisees, typically within a country where we have both Company-owned restaurants and franchise restaurants, established to collect and administer funds contributed for use in advertising and promotional programs designed to increase sales and enhance the reputation of the Company and its franchise owners. Contributions to the advertising cooperatives are required for both Company-owned and franchise restaurants and are generally based on a percentage of restaurant sales. We maintain certain variable interests in these cooperatives. As the cooperatives are required to spend all funds collected on advertising and promotional programs, total equity at risk is not sufficient to permit the cooperatives to finance their activities without additional subordinated financial support. Therefore, these cooperatives are VIEs. As a result of our voting rights, we consolidate certain of these cooperatives for which we are the primary beneficiary.

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

Fiscal year 2016 included 53 weeks for our U.S. businesses and for our international subsidiaries that reported on a period calendar. The 53 \( ^{rd} $  week added 76 million to Total revenues and 28 million to Operating Profit in our 2016 Consolidated Statement of Income.

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

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

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

## Company Sales

Revenues from the sale of food items by Company-owned restaurants are recognized as Company sales when a customer purchases the food, which is when our obligation to perform is summarized in Note 5. The impact of the change in accounting principle on the current period Consolidated Financial Statements is similar to the impact on the prior period results discussed in Note 5.

Our next fiscal year scheduled to include a 53rd week is 2019.

Foreign Currency. The functional currency of our foreign entities is the currency of the primary economic environment in which the entity operates. Functional currency determinations are made based upon a number of economic factors, including but not limited to cash flows and financing transactions. The operations, assets and liabilities of our entities outside the U.S. are initially measured using the functional currency of that entity. Income and expense accounts for our operations of these foreign entities are then translated into U.S. dollars at the average exchange rates prevailing during the period. Assets and liabilities of these foreign entities are then translated into U.S. dollars at exchange rates in effect at the balance sheet date. As of December 31, 2018, net cumulative translation adjustment losses of $245 million are recorded in Accumulated other comprehensive loss (“AOCI”) in the Consolidated Balance Sheet.

The majority of our foreign currency net asset exposure is in countries where we have Company-owned restaurants. As we manage and share resources at the individual brand level within a country, cumulative translation adjustments are recorded and tracked at the foreign-entity level that represents the operations of our individual brands within that country. Translation adjustments recorded in AOCI are subsequently recognized as income or expense generally only upon sale of the related investment in a foreign entity, or upon a sale of assets and liabilities within a foreign entity that represents a complete or substantially complete liquidation of that foreign entity. For purposes of determining whether a sale or complete or substantially complete liquidation of an investment in a foreign entity has occurred, we consider those same foreign entities for which we record and track cumulative translation adjustments.

Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in Other (income) expense in our Consolidated Statements of Income.

Reclassifications. We have reclassified certain items in the Consolidated Financial Statements for prior periods to be comparable with the classification for the fiscal year ended December 31, 2018. These reclassifications had no effect on previously reported Net Income.

Revenue Recognition. From 2014 through 2017, the Financial Accounting Standards Board (“FASB”) issued standards to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries (“Topic 606”). We adopted Topic 606 at the beginning of the year ended December 31, 2018. Below is a discussion of how our revenues are earned, our accounting policies pertaining to revenue recognition prior to the adoption of Topic 606 (“Legacy GAAP”), our accounting policies pertaining to revenue recognition subsequent to the adoption of Topic 606 and other required disclosures. Refer to Note 5 for information regarding the cumulative effect adjustment recorded to Accumulated deficit as of the beginning of the year ended December 31, 2018 to reflect the adoption of Topic 606. Also included in Note 5 is disclosure of the amount by which each balance sheet and income statement line item was impacted in the current reporting period as compared to Legacy GAAP.

satisfied. The timing and amount of revenue recognized related to Company sales was not impacted by the adoption of Topic 606.



## Franchise and Property Revenues

## Franchise Revenues

Our most significant source of revenues arises from the operation of our Concepts' stores by our franchisees. Franchise rights may be granted through a store-level franchise agreement or through a master franchise agreement that set out the terms of our arrangement with the franchisee. Our franchise agreements require that the franchisee remit continuing fees to us as a percentage of the applicable restaurant's sales in exchange for the license of the intellectual property associated with our Concepts' brands (the "franchise right"). Our franchise agreements also typically require certain, less significant, upfront franchise fees such as initial fees paid upon opening of a store, fees paid to renew the term of the franchise right and fees paid in the event the franchise agreement is transferred to another franchisee.

Continuing fees represent the substantial majority of the consideration we receive under our franchise agreements. Continuing fees are typically billed and paid monthly and are usually 4%-6% for store-level franchise agreements. Master franchise agreements allow master franchisees to operate restaurants as well as sub-franchise restaurants within certain geographic territories. The percentage of sales that we receive for restaurants owned or operated by our master franchisees as a continuing fee is typically less than the percentage we receive for restaurants operating under a store-level franchise agreement. Upfront franchise fees are typically billed and paid when a new franchise or sub-franchise agreement becomes effective or when an existing agreement is transferred to another franchisee or sub-franchisee.

Under Legacy GAAP, continuing fees were recognized as the related restaurant sales occurred. The timing and amount of revenue recognized related to continuing fees was not impacted by the adoption of Topic 606 based on the application of the sales-based royalty exception within Topic 606. Under Legacy GAAP, revenue related to initial fees was recognized upon store opening and renewal and transfer fees were recognized when the related agreement became effective. Upon the adoption of Topic 606, we have determined that the services we provide in exchange for these upfront franchise fees, which primarily relate to pre-opening support, are highly interrelated with the franchise right and are not individually distinct from the ongoing services we provide to our franchisees. As a result, upon the adoption of Topic 606, upfront franchise fees are

## Franchise Contributions for Advertising and Other Services

## Advertising Cooperatives

Under Legacy GAAP, receipts and expenditures related to advertising cooperatives we were required to consolidate were presented on a net basis in our Consolidated Statements of Income and Consolidated Statements of Cash Flow. Additionally, assets and liabilities of the advertising cooperatives we were required to consolidate were presented within Advertising cooperative assets, restricted and Advertising cooperative liabilities, respectively, within our Consolidated Balance Sheets. In accordance with the provisions of Topic 606, we have determined we act as a principal in the transactions entered into by the advertising cooperatives we are required to consolidate based on our responsibility to define the nature of the goods or services provided and/or our responsibility to define which franchisees receive the benefit of the goods or services. Additionally, we have determined the advertising services provided to franchisees are highly interrelated with the franchise right and therefore not distinct. Franchisees remit to us a percentage of restaurant sales as consideration for providing the advertising services. As a result, revenues for advertising services are recognized when the related restaurant sales occur based on the application of recognized as revenue over the term of each respective franchise or sub-franchise agreement. Revenues for these upfront franchise fees are recognized on a straight-line basis, which is consistent with the franchisee's or sub-franchisee's right to use and benefit from the intellectual property. Revenues from continuing fees and upfront franchise fees are presented within Franchise and property revenues in our Consolidated Statements of Income.

Additionally, from time-to-time we provide non-refundable consideration to franchisees in the form of cash or other incentives (e.g. cash payments to incent new unit openings, free or subsidized equipment, etc.). The Company’s intent in providing such consideration is to drive new unit development or same-store sales growth that will result in higher future revenues for the Company. Under Legacy GAAP, this consideration was recognized when we were obligated to provide the incentive and was presented as either a reduction to Franchise and property revenues, if cash was provided directly to the franchisee, or as Franchise and property expenses, if cash was not provided directly to the franchisee. Due to the adoption of Topic 606, such payments are capitalized and presented within Prepaid expense and other current assets or Other assets. These capitalized balances are being amortized as a reduction in Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates.

## Property Revenues

From time to time, we enter into rental agreements with franchisees for the lease or sublease of restaurant locations. These rental agreements typically originate from refranchising transactions and revenues related to the agreements are recognized as they are earned. Amounts owed under the rental agreements are typically billed and paid on a monthly basis. Revenues from rental agreements with franchisees are presented within Franchise and property revenues within our Consolidated Statements of Income. Related expenses are presented as Franchise and property expenses within our Consolidated Statements of Income and primarily include depreciation or, in the case of a sublease, rental expense. The timing and amount of revenue and expenses recognized related to the rental of restaurants we lease or sublease was not impacted by the adoption of Topic 606.

the sales-based royalty exception within Topic 606. Revenues for these services are typically billed and paid on a monthly basis. These revenues are presented as Franchise contributions for advertising and other services. Expenses incurred to provide these services are presented as Franchise advertising and other services expense. When revenues of an advertising cooperative exceed the related advertising expenses, advertising costs are accrued up to the amount of revenues on an annual basis. Lastly, upon adoption of Topic 606 we have reclassified assets and liabilities of advertising cooperatives we are required to consolidate to the respective balance sheet caption to which the assets and liabilities relate.

## Other Services

On a much more limited basis, we provide goods or services to certain franchisees that are individually distinct from the franchise right because they do not require integration with other goods or services we provide. Such arrangements typically relate to supply chain, quality assurance and information technology services. In instances where we rely on third parties to provide goods or services



to franchisees at our direction, we have determined we act as a principal in these transactions. The extent to which we provide such goods or services varies by brand, geographic region and, in some instances, franchisee. Similar to advertising services, receipts and expenditures related to these other services were presented on a net basis under Legacy GAAP. Upon adoption of Topic 606, revenues from the goods or services described above are presented as Franchise contributions for advertising and other services within our Consolidated Statements of Income. Expenses related to the provisioning of these goods and services are recorded in Franchise advertising and other services expense. These revenues are recognized as the goods or services are transferred to the franchisee and related expenses are recognized as incurred.

## Franchise Support Costs

The internal costs we incur to provide support services to our franchisees for which we do not receive a direct reimbursement are charged to General and administrative expenses ("G&A") as incurred. Certain direct costs of our franchisee operations are charged to Franchise and property expenses. These costs include provisions for estimated uncollectible fees, rent or depreciation expense associated with restaurants we lease or sublease to franchisees, franchise marketing funding, amortization expense for franchise-related intangible assets, value added taxes on royalties and certain other direct incremental franchise support costs.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue transaction and collected from a customer are excluded from revenue under both Legacy GAAP and Topic 606.

## Disaggregation of Total Revenues

The following table disaggregates revenue by Concept, for our two most significant markets based on Operating Profit and for all other markets. We believe this disaggregation best reflects the extent to which the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors.

<table><tr><td rowspan="2"></td><td colspan="5">2018</td></tr><tr><td>KFC Division</td><td>Pizza Hut Division</td><td>Taco Bell Division</td><td>Total</td><td></td></tr><tr><td>U.S.</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 72</td><td>$ 37</td><td>$ 1,034</td><td>$ 1,143</td><td></td></tr><tr><td>Franchise revenues</td><td>171</td><td>284</td><td>539</td><td>994</td><td></td></tr><tr><td>Property revenues</td><td>23</td><td>4</td><td>27</td><td>54</td><td></td></tr><tr><td>Franchise contributions for advertising and other services</td><td>9</td><td>269</td><td>428</td><td>706</td><td></td></tr><tr><td>China</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Franchise revenues</td><td>201</td><td>59</td><td>—</td><td>260</td><td></td></tr><tr><td>Other</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>822</td><td>32</td><td>3</td><td>857</td><td></td></tr><tr><td>Franchise revenues</td><td>825</td><td>248</td><td>24</td><td>1,097</td><td></td></tr><tr><td>Property revenues</td><td>74</td><td>3</td><td>—</td><td>77</td><td></td></tr><tr><td>Franchise contributions for advertising and other services</td><td>447</td><td>52</td><td>1</td><td>500</td><td></td></tr><tr><td></td><td>$ 2,644</td><td>$ 988</td><td>$ 2,056</td><td>$ 5,688</td><td></td></tr></table>

## Contract Liabilities

Our contract liabilities are comprised of unamortized upfront fees received from franchisees. A summary of significant changes to the contract liability balance during 2018 is presented below.

<table><tr><td></td><td>Deferred Franchise Fees</td></tr><tr><td>Balance at January 1, 2018</td><td>$ 392</td></tr><tr><td>Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period</td><td>(66)</td></tr><tr><td>Increase for upfront fees associated with contracts that became effective during the period, net of amounts recognized as revenue during the period</td><td>102</td></tr><tr><td>Other \( ^{(a)} \)</td><td>(14)</td></tr><tr><td>Balance at December 31, 2018</td><td>$ 414</td></tr></table>

(a) Includes impact of foreign currency translation as well as the recognition of deferred franchise fees into Refranchising (gain) loss upon the modification of existing franchise agreements when entering into master franchise agreements.



We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows:

<table><tr><td>Less than 1 year</td><td>$ 60</td></tr><tr><td>1 - 2 years</td><td>55</td></tr><tr><td>2 - 3 years</td><td>51</td></tr><tr><td>3 - 4 years</td><td>47</td></tr><tr><td>4 - 5 years</td><td>42</td></tr><tr><td>Thereafter</td><td>159</td></tr><tr><td>Total</td><td>$ 414</td></tr></table>

We have applied the optional exemption, as provided for under Topic 606, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.

Direct Marketing Costs. To the extent we participate in advertising cooperatives, we expense our contributions as incurred, which are based on a percentage of sales of our Company restaurants. We charge direct marketing costs incurred outside of a cooperative to expense ratably in relation to revenues over the year in which incurred and, in the case of advertising production costs, in the year the advertisement is first shown. Deferred direct marketing costs, which are classified as prepaid expenses, consist of media and related advertising production costs that will generally be used for the first time in the next fiscal year and have historically not been significant. We report the majority of our direct marketing costs in Company restaurant expenses. Advertising incurred on behalf of franchised restaurants by the Company is recorded within Franchise and property expenses, including $12.5 million and $25 million related to the Pizza Hut U.S. Transformation Agreement in 2018 and 2017, respectively, and $10 million, $20 million and $20 million related to the KFC U.S. Acceleration Agreement in 2018, 2017 and 2016, respectively. See Note 5 for further discussion of these agreements. Advertising expenses incurred by our Company-owned restaurants and those incurred on behalf of franchised restaurants by the Company totaled $131 million, $245 million and $260 million in 2018, 2017 and 2016, respectively. In 2018 we incurred an additional $1,035 million in spending attributable to franchise contributions to advertising cooperatives that we consolidate and are now reporting on a gross basis within our Consolidated Statements of Income subsequent to the adoption Topic 606.

Share-Based Employee Compensation. We recognize ongoing share-based payments to employees, including grants of employee stock options and stock appreciation rights ("SARs"), in the Consolidated Financial Statements as compensation cost over the service period based on their fair value on the date of grant. This compensation cost is recognized over the service period on a straight-line basis, net of an assumed forfeiture rate, for awards that actually vest. Forfeiture rates are estimated at grant date based on historical experience and compensation cost is adjusted in subsequent periods for differences in actual forfeitures from the previous estimates. We present this compensation cost consistent with the other compensation costs for the employee recipient in either Company restaurant expenses or G&A. See Note 15 for further discussion of our share-based compensation plans.

Legal Costs. Settlement costs are accrued when they are deemed probable and reasonably estimable. Anticipated legal fees related to self-insured workers' compensation, employment practices liability, general liability, automobile liability, product liability and property losses (collectively, "property and casualty losses") are accrued when deemed probable and reasonably estimable. Legal fees not related to self-insured property and casualty losses are recognized as incurred. See Note 19 for further discussion of our legal proceedings.
Impairment or Disposal of Property, Plant and Equipment. Property, plant and equipment ("PP&E") is tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The assets are not recoverable if their carrying value is less than the undiscounted cash flows we expect to generate from such assets. If the assets are not deemed to be recoverable, impairment is measured based on the excess of their carrying value over their fair value.

For purposes of impairment testing for our restaurants, we have concluded that an individual restaurant is the lowest level of independent cash flows unless it is more likely than not that we will refranchise restaurants as a group. We review our long-lived assets of such individual 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 use two consecutive years of operating losses as our primary indicator of potential impairment for our semi-annual impairment testing of these restaurant assets. We evaluate the recoverability of these restaurant assets by comparing the estimated undiscounted future cash flows, which are based on our entity-specific assumptions, to the carrying value of such assets. For restaurant assets that are not deemed to be recoverable, we write-down an impaired restaurant to its estimated fair value, which becomes its new cost basis. Fair value is an estimate of the price a franchisee would pay for the restaurant and its related assets and is determined by discounting the estimated future after-tax cash flows of the restaurant, which include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make such as sales growth and margin improvement. The discount rate used in the fair value calculation is our estimate of the required rate of return that a franchisee would expect to receive when purchasing a similar restaurant 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. Individual restaurant-level impairment is recorded within Other (income) expense.

In executing our refranchising initiatives, we most often offer groups of restaurants for sale. When we believe it is more likely than not a restaurant or groups of restaurants will be refranchised for a price less than their carrying value, but do not believe the restaurant(s) have met the criteria to be classified as held for sale, we review the restaurants for impairment. We evaluate the recoverability of these restaurants assets by comparing estimated sales proceeds plus holding period cash flows, if any, to the carrying value of the restaurant or group of restaurants. For restaurant assets that are not deemed to be recoverable, we recognize impairment for any excess of carrying value over the fair value of the restaurants, which is based on the expected net sales proceeds. To the extent ongoing agreements to be entered into with the franchisee simultaneous with the refranchising are expected to contain terms, such as royalty rates, not at prevailing market rates, we consider the off-market



terms in our impairment evaluation. We recognize any such impairment charges in Refranchising (gain) loss. Refranchising (gain) loss includes the gains or losses from the sales of our restaurants to new and existing franchisees, including any impairment charges discussed above, and associated termination, relocation or retention costs associated with store-level employees of refranchised stores or employees of restaurant-support centers which we have closed due to refranchising. We recognize gains on restaurant refranchisings when the sale transaction closes and control of the restaurant operations have transferred to the franchisee.

When we decide to close a restaurant, it is reviewed for impairment and depreciable lives are adjusted based on the expected disposal date. Other costs incurred when closing a restaurant such as costs of disposing of the assets as well as other facility-related expenses from previously closed stores are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, if any. Any costs recorded upon store closure as well as any subsequent adjustments to liabilities for remaining lease obligations as a result of lease termination or changes in estimates of sublease income are recorded in Other (income) expense. To the extent we sell assets, primarily land, associated with a closed store, any gain or loss upon that sale is also recorded in Other (income) expense.

Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, sublease income and refranchising proceeds. Accordingly, actual results could vary significantly from our estimates.

Guarantees. We recognize, at inception of a guarantee, a liability for the fair value of certain obligations undertaken. The majority of our guarantees are issued as a result of assigning our interest in obligations under operating leases as a condition to the refranchising of certain Company restaurants. We recognize a liability for the fair value of such lease guarantees upon refranchising and upon subsequent renewals of such leases when we remain secondarily liable. The related expense and any subsequent changes are included in Refranchising (gain) loss. Any expense and subsequent changes in the guarantees for other franchise support guarantees not associated with a refranchising transaction are included in Franchise and property expenses.

Income Taxes. We record deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences or carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our Income tax provision in the period that includes the enactment date. Additionally, in determining the need for recording a valuation allowance against the carrying amount of deferred tax assets, we consider the amount of taxable income and periods over which it must be earned, actual levels of past taxable income and known trends and events or transactions that are expected to affect future levels of taxable income. Where we determine that it is more likely than not that all or a portion of an asset will not be realized, we record a valuation allowance.

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 (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by 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. We evaluate these amounts on a quarterly basis to ensure that they have been appropriately adjusted for audit settlements and other events we believe may impact the outcome. Changes in judgment that result in subsequent recognition, derecognition or a change in measurement of a tax position taken in a prior annual period (including any related interest and penalties) are recognized as a discrete item in the interim period in which the change occurs. We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision.

We do not record a deferred tax liability for unremitted earnings of our foreign subsidiaries to the extent that the earnings meet the indefinite reversal criteria. This criteria is met if the foreign subsidiary has invested, or will invest, the earnings indefinitely. The decision as to the amount of unremitted earnings that we intend to maintain in non-U.S. subsidiaries considers items including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity plans and expected cash requirements in the U.S.

See Note 17 for a further discussion of our income taxes.

Fair Value Measurements. Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For those assets and liabilities we record or disclose at fair value, we determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets, we determine fair value based upon the quoted market price of similar assets or the present value of expected future cash flows considering the risks involved, including counterparty performance risk if appropriate, and using discount rates appropriate for the duration. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation.

<table><tr><td>Level 1</td><td>Inputs based upon quoted prices in active markets for identical assets.</td></tr><tr><td>Level 2</td><td>Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.</td></tr><tr><td>Level 3</td><td>Inputs that are unobservable for the asset.</td></tr></table>

Cash and Cash Equivalents. Cash equivalents represent funds we have temporarily invested (with original maturities not exceeding three months), including short-term, highly liquid debt securities. Cash and overdraft balances that meet the criteria for right of setoff are presented net on our Consolidated Balance Sheet.

Receivables. The Company’s receivables are primarily generated from ongoing business relationships with our franchisees as a result of franchise and lease agreements. Trade receivables consisting of royalties from franchisees, including Yum China, are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable, net on our Consolidated Balance Sheet. Upon adoption of Topic 606, Accounts and notes receivable, net also includes receivables generated from advertising cooperatives that we consolidate that, under Legacy GAAP, were previously recorded in Advertising cooperative assets, restricted. Our provision for uncollectible franchisee receivable balances is based upon pre-defined aging criteria or upon the occurrence of other events that indicate that we may not collect the balance due. Additionally, we monitor the financial condition of our franchisees and record provisions for estimated losses on receivables when we believe it probable that our franchisees will be unable to make their required payments. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. We recorded $11 million, $5 million and less than $1 million in net provisions within Franchise and property expenses in 2018, 2017 and 2016, respectively, related to uncollectible franchise and



license receivables. Receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts.

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Accounts and notes receivable</td><td>$ 592</td><td>$ 419</td></tr><tr><td>Allowance for doubtful accounts</td><td>(31)</td><td>(19)</td></tr><tr><td>Accounts and notes receivable, net</td><td>$ 561</td><td>$ 400</td></tr></table>

Our financing receivables primarily consist of notes receivables and direct financing leases with franchisees which we enter into from time-to-time. As these receivables primarily relate to our ongoing business agreements with franchisees, we consider such receivables to have similar risk characteristics and evaluate them as one collective portfolio segment and class for determining the allowance for doubtful accounts. We monitor the financial condition of our franchisees and record provisions for estimated losses on receivables when we believe it is probable that our franchisees will be unable to make their required payments. Balances of notes receivable and direct financing leases due within one year are included in Accounts and notes receivable, net while amounts due beyond one year are included in Other assets. Amounts included in Other assets totaled $62 million (net of an allowance of $1 million) and $38 million at December 31, 2018 and December 31, 2017, respectively. Financing receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. Interest income recorded on financing receivables has historically been insignificant.

Property, Plant and Equipment. We state PP&E at cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets as follows: 5 to 25 years for buildings and leasehold improvements and 3 to 20 years for machinery and equipment. We suspend depreciation and amortization on assets that are held for sale.

Leases and Leasehold Improvements. The Company leases land, buildings or both for certain of its restaurants and restaurant support centers worldwide. The length of our lease terms, which vary by country and often include renewal options, are an important factor in determining the appropriate accounting for leases including the initial classification of the lease as capital or operating and the timing of recognition of rent expense over the duration of the lease. We include renewal option periods in determining the term of our leases when failure to renew the lease would impose a penalty on the Company in such an amount that a renewal appears to be reasonably assured at the inception of the lease. The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements which might be impaired if we choose not to continue the use of the leased property. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. We generally do not receive leasehold improvement incentives upon opening a store that is subject to a lease.

We expense rent associated with leased land or buildings while a restaurant is being constructed whether rent is paid or we are subject to a rent holiday. Additionally, certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rent during the lease term. For leases with fixed escalating payments and/or rent holidays, we record rent expense on a straight-line basis over the lease term, including any option periods considered in the determination of that lease term. Contingent rentals are based on sales levels in excess of stipulated amounts, and thus are not considered minimum lease payments and are included in rent expense when attainment of the contingency is considered probable (e.g. when Company sales occur).
Goodwill and Intangible Assets. From time-to-time, the Company acquires restaurants from one of our Concept’s franchisees or acquires another business. Goodwill from these acquisitions represents the excess of the cost of a business acquired over the net of the amounts assigned to assets acquired, including identifiable intangible assets and liabilities assumed. Goodwill is not amortized and has been assigned to reporting units for purposes of impairment testing. Our reporting units are our business units (which are aligned based on geography) in our KFC, Pizza Hut and Taco Bell Divisions.

We evaluate goodwill for impairment on an annual basis or more often if an event occurs or circumstances change that indicate impairment might exist. We have selected the beginning of our fourth quarter as the date on which to perform our ongoing annual impairment test for goodwill. We may elect to perform a qualitative assessment for our reporting units to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not performed, or if as a result of a qualitative assessment it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, then the reporting unit’s fair value is compared to its carrying value. Fair value is the price a willing buyer would pay for a reporting unit, and is generally estimated using discounted expected future after-tax cash flows from Company-owned restaurant operations and franchise royalties. 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. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value.

If we record goodwill upon acquisition of a restaurant(s) from a franchisee and such restaurant(s) is then sold within two years of acquisition, the goodwill associated with the acquired restaurant(s) is written off in its entirety. If the restaurant is refranchised two years or more subsequent to its acquisition, 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 and 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 includes a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transition. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements. Appropriate adjustments are made if a franchise agreement includes terms that are determined to not be at prevailing market rates. As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations. As a result, the percentage of a reporting unit’s goodwill that will be written off in a refranchising transaction will be less than the percentage of the reporting unit’s Company-owned restaurants that are refranchised in that transaction and goodwill can be allocated to a reporting unit with only franchise restaurants.

Our definite-lived intangible assets that are not allocated to an individual restaurant are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. An intangible asset that is deemed not recoverable on an undiscounted basis is written down to its estimated fair value, which is our estimate of the price a willing buyer would pay for the intangible asset based on discounted



expected future after-tax cash flows. For purposes of our impairment analysis, we update the cash flows that were initially used to value the definite-lived intangible asset to reflect our current estimates and assumptions over the asset’s future remaining life.

Capitalized Software. We state capitalized software at cost less accumulated amortization within Intangible assets, net on our Consolidated Balance Sheets. We calculate amortization on a straight line basis over the estimated useful life of the software which ranges from 3 to 7 years.

Derivative Financial Instruments. We use derivative instruments primarily to hedge interest rate and foreign currency risks. These derivative contracts are entered into with financial institutions. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.

We record all derivative instruments on our Consolidated Balance Sheet at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations immediately. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the results of operations immediately.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At December 31, 2018 and December 31, 2017, all of the counterparties to our interest rate swaps, foreign currency swaps and foreign currency forwards had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.

Common Stock Share Repurchases. From time-to-time, we repurchase shares of our Common Stock under share repurchase programs authorized by our Board of Directors. Shares repurchased constitute authorized, but unissued shares under the North Carolina laws under which we are incorporated. Additionally, our Common Stock has no par or stated value. Accordingly, we record the full value of share repurchases, or other deductions to Common Stock such as shares cancelled upon employee share-based award exercises, upon the trade date, against Common Stock on our Consolidated Balance Sheet except when to do so would result in a negative balance in such Common Stock account. In such instances, on a period basis, we record the cost of any further share repurchases, or other deductions to Common Stock as an addition to Accumulated deficit. Due to the large number of share repurchases of our stock over the past several years, our Common Stock balance is frequently zero at the end of any period. Accordingly, $2,356 million, $1,915 million and $5,399 million in share repurchases in 2018, 2017 and 2016, respectively, and $20 million related to shares cancelled upon employee share-based award exercises in 2017 were recorded as an addition to Accumulated deficit. See Note 16 for additional information on our share repurchases.

Pension and Post-retirement Medical Benefits. We measure and recognize the overfunded or underfunded status of our pension and post-retirement plans as an asset or liability in our Consolidated Balance Sheet as of our fiscal year end. The funded status represents the difference between the projected benefit obligations and the fair value of plan assets, which is calculated on a plan-by-plan basis. The projected benefit obligation and related funded status are determined using assumptions as of the end of each year. The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of future salary increases, as applicable. The difference between the projected benefit obligations and the fair value of plan assets that has not previously been recognized in our Consolidated Statement of Income is recorded as a component of AOCI.

The net periodic benefit costs associated with the Company’s defined benefit pension and post-retirement medical plans are determined using assumptions regarding the projected benefit obligation and, for funded plans, the market-related value of plan assets as of the beginning of each year, or remeasurement period, if applicable. We record the service cost component of net periodic benefit costs in G&A. Non-service cost components are recorded in Other pension (income) expense. We have elected to use a market-related value of plan assets to calculate the expected return on assets, net of administrative and investment fees paid from plan assets, in net periodic benefit costs. We recognize differences in the fair value versus the market-related value of plan assets evenly over five years. For each individual plan we amortize into pension expense the net amounts in AOCI, as adjusted for the difference between the fair value and market-related value of plan assets, to the extent that such amounts exceed 10% of the greater of a plan’s projected benefit obligation or market-related value of assets, over the remaining service period of active participants in the plan or, for plans with no active participants, over the expected average life expectancy of the inactive participants in the plan. We record a curtailment when an event occurs that significantly reduces the expected years of future service or eliminates the accrual of defined benefits for the future services of a significant number of employees. We record a curtailment gain when the employees who are entitled to the benefits terminate their employment; we record a curtailment loss when it becomes probable a loss will occur.

We recognize settlement gains or losses only when we have determined that the cost of all settlements in a year will exceed the sum of the service and interest costs within an individual plan.

Recent Accounting Pronouncements. Starting in February 2016 and continuing into 2018, the FASB 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 Consolidated Financial Statements upon adoption.

The standards provide a number of optional practical expedients and policy elections in transition. We currently expect to elect the 'package of practical expedients' under which we will not reassess under the standards our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We currently expect to elect the short-term lease recognition exemption for all leases that qualify, meaning we would not recognize right-of-use assets or lease liabilities for those leases. We do not currently expect to elect the practical expedient to not separate lease and non-lease components for leases with franchisees, which is our most significant leasing activity with both lease and non-lease components.

We have made significant progress in assessing the impact of the standards and planning for their adoption and implementation. We have completed a scoping analysis and worldwide data gathering process of our current lease portfolio. We are substantially complete with reviewing the information for completeness of the lease portfolio,



analyzing the financial statement impact of adopting the standards, and evaluating the impact of adoption on our existing accounting policies and disclosures.

Based on our current volume of store leases we expect this adoption will result in a material increase in the Total Assets and Total Liabilities on our Consolidated Balance Sheet. We do not anticipate adoption will have a significant impact on our Consolidated Statements of Income or Cash Flows. Upon adoption, we currently expect to recognize additional lease liabilities of $750 million and corresponding right-of-use assets of $675 million.

In January 2016, the FASB issued a standard that updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. We adopted this standard beginning with the quarter ended March 31, 2018. While the adoption of this standard did not have a material impact on our Financial Statements the standard requires our investment in Grubhub common stock, which was consummated in April 2018 (See Note 5), to be remeasured to fair value in each future reporting period with corresponding changes recorded in our Consolidated Statement of Income.

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. As required, we adopted this standard in the quarter ended March 31, 2018 and have recorded a cumulative adjustment to beginning retained earnings to write-off the unamortized tax consequences of certain historical intra-entity transfers of assets. As a result, we recognized a reduction in Other assets of $30 million with an offsetting increase to our Accumulated deficit.

In August 2017, the FASB issued a standard that refines and expands existing hedge accounting guidance. We adopted this standard beginning with the quarter ended March 31, 2018. The adoption of this standard did not have a material impact on the Financial Statements.

In February 2018, the FASB issued a standard that allows a reclassification to retained earnings for tax effects that were stranded within AOCI subsequent to the accounting in the fourth quarter of 2017 necessary as a result of the enactment of the Tax Cuts and Jobs Act of 2017. We adopted this standard during the quarter ended March 31, 2018 and reclassified stranded tax effects of $19 million from AOCI with a corresponding decrease to Accumulated deficit at the beginning of our first quarter 2018. These stranded tax effects primarily related to the remeasurement of deferred tax assets associated with pension losses within AOCI. The Company’s policy is to follow the specific identification approach for releasing stranded tax effects from AOCI.

NOTE 3 Earnings Per Common Share (“EPS”)

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Income from continuing operations</td><td>$ 1,542</td><td>$ 1,340</td><td>$ 1,018</td></tr><tr><td>Income from discontinued operations</td><td>N/A</td><td>N/A</td><td>625</td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 1,340</td><td>$ 1,643</td></tr><tr><td>Weighted-average common shares outstanding (for basic calculation)</td><td>322</td><td>347</td><td>394</td></tr><tr><td>Effect of dilutive share-based employee compensation</td><td>7</td><td>8</td><td>6</td></tr><tr><td>Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)</td><td>329</td><td>355</td><td>400</td></tr><tr><td>Basic EPS from continuing operations</td><td>$ 4.80</td><td>$ 3.86</td><td>$ 2.58</td></tr><tr><td>Basic EPS from discontinued operations</td><td>N/A</td><td>N/A</td><td>1.59</td></tr><tr><td>Basic EPS</td><td>$ 4.80</td><td>$ 3.86</td><td>$ 4.17</td></tr><tr><td>Diluted EPS from continuing operations</td><td>$ 4.69</td><td>$ 3.77</td><td>$ 2.54</td></tr><tr><td>Diluted EPS from discontinued operations</td><td>N/A</td><td>N/A</td><td>$ 1.56</td></tr><tr><td>Diluted EPS</td><td>$ 4.69</td><td>$ 3.77</td><td>$ 4.10</td></tr><tr><td>Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)</td><td>2.0</td><td>2.3</td><td>5.0</td></tr></table>

(a) These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.

## NOTE 4 Discontinued Operations

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

In connection with the Separation, the Company and Yum China entered into a Separation and Distribution Agreement as well as various other agreements that provide a framework for the relationships between the parties, including among others a Tax Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement and a Master License Agreement. These agreements provided for the allocation between the Company and Yum China of assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Separation and govern certain relationships between the Company and Yum China after the Separation.

For all the periods prior to the Separation, the financial results of Yum China are presented as Income from discontinued operations, net of



tax in the Consolidated Statements of Income and Cash flows from discontinued operations in our Consolidated Statements of Cash Flows.

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

Additionally, these financial results reflect a deduction for royalties on sales of KFC and Pizza Hut Company-owned stores in China that prior to the Separation were paid, pursuant to an intercompany franchise agreement, by an entity of Yum China to a Company entity. This royalty expense was not reflected in our China Division results that were presented prior to the Separation, as it was then an intercompany transaction that was eliminated in consolidation, but has been reflected in our Company's discontinued operations as such royalty arrangement continued pursuant to the Master License Agreement. Additionally, our China Division results that were presented prior to the Separation have been adjusted to exclude the portion of the royalties paid by third-party franchisees in China that have historically and continue to be remitted to a Company entity. These adjustments to our previously presented China Division results in determining Income from discontinued operations, net of tax were offset by adjustments to our KFC and Pizza Hut Divisions' results such that there was no impact on total reported Net Income.

The following table presents the financial results of the Company’s discontinued operations:

<table><tr><td></td><td>2016(a)</td></tr><tr><td>Company sales</td><td>$ 5,667</td></tr><tr><td>Franchise and property revenues</td><td>109</td></tr><tr><td>Company restaurant expenses</td><td>(4,766)</td></tr><tr><td>G&amp;A expenses(b)</td><td>(406)</td></tr><tr><td>Franchise and property expenses</td><td>(45)</td></tr><tr><td>Other income (expense)(c)</td><td>(8)</td></tr><tr><td>Refranchising gain</td><td>12</td></tr><tr><td>Interest income, net</td><td>8</td></tr><tr><td>Income from discontinued operations before income taxes</td><td>571</td></tr><tr><td>Income tax benefit(d)</td><td>65</td></tr><tr><td>Income from discontinued operations — including noncontrolling interests</td><td>636</td></tr><tr><td>Income from discontinued operations — noncontrolling interests</td><td>(11)</td></tr><tr><td>Income from discontinued operations, net of tax</td><td>$ 625</td></tr></table>

(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 relate to transaction advisors, legal and other consulting fees.

(c) Includes store closure and impairment expenses and equity income from KFC franchisees in which Yum China owns a minority interest.

(d) 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 Separation.

Cash inflows from Yum China to the Company in 2018, 2017 and 2016, subsequent to the Separation, related to the Master License Agreement was $233 million, $217 million and $16 million, respectively, net of taxes paid and primarily related to royalty revenues.

## NOTE 5 Items Affecting Comparability of Net Income and Cash Flows

## QuikOrder Acquisition

On December 21, 2018, we completed the acquisition of QuikOrder, LLC, an online ordering software and service provider for the restaurant industry ("QuikOrder"), who has been a provider of services to Company and franchise restaurants of our Pizza Hut U.S. business for nearly two decades. The purchase price to be allocated for accounting purposes of $77 million consisted of cash, net of cash acquired, in the amount of $66 million, settlement of a prepaid asset of $6 million related to our preexisting contractual relationship with QuikOrder and contingent consideration of $5 million. The acquisition is part of our strategy to deliver an easy and personalized online ordering experience and accelerate digital innovation. The financial results of QuikOrder have been included in our Consolidated Financial Statements since the date of the acquisition but did not significantly impact our results for the year ended December 31, 2018. Subsequent to the acquisition, fees paid by franchisees for use of the QuikOrder software are being presented within Franchise contributions for advertising and other services. Associated costs we incur are being primarily presented within Franchise advertising and other services expense.

The primary assets recorded as a result of the preliminary purchase price allocation were goodwill of $39 million and amortizable intangible assets (primarily software) of $33 million. The goodwill recorded resulted from increased synergies expected to be achieved through leveraging our scale and resources to enhance the services previously offered by QuikOrder. The goodwill amortization is deductible for tax purposes and has been allocated to the Pizza Hut U.S. reporting unit.



The pro forma impact on our results of operations if the acquisition had been completed as of the beginning of 2017 would not have been significant. The direct transaction costs associated with the acquisition were also not material and were expensed as incurred.

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

We recognized $434 million in our Income tax provision for the year ended December 31, 2017 as a result of the December 22, 2017 enactment of the Tax Act. 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 Act. See Note 17.

## Refranchising (Gain) Loss

The Refranchising (gain) loss by reportable segment is presented below. Given the size and volatility of recent refranchising initiatives, our chief operating decision maker (“CODM”) does not consider the impact of Refranchising (gain) loss when assessing segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes.

During the years ended December 31, 2018, 2017 and 2016, we refranchised 660, 1,470 and 432 restaurants, respectively. We received $825 million, $1,773 million and $370 million in pre-tax proceeds in 2018, 2017 and 2016, respectively, related to these transactions.

A summary of Refranchising (gain) loss is as follows:

<table><tr><td rowspan="2"></td><td colspan="4">Refranchising (gain) loss</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>KFC Division</td><td>$ (240)</td><td>$ (581)</td><td>$ (44)</td><td></td></tr><tr><td>Pizza Hut Division</td><td>13</td><td>(16)</td><td>(48)</td><td></td></tr><tr><td>Taco Bell Division</td><td>(313)</td><td>(486)</td><td>(71)</td><td></td></tr><tr><td>Worldwide</td><td>$ (540)</td><td>$ (1,083)</td><td>$ (163)</td><td></td></tr></table>

As a result of classifying restaurant and related assets as held-for-sale and ceasing depreciation expense as well as recording any related write-downs to fair value, depreciation expense was reduced versus what would have otherwise been recorded by $3 million and $10 million during the years ended December 31, 2018 and 2017, respectively. Our CODM does not consider the impact of these depreciation reductions, which were recorded within Company restaurant expenses when assessing segment performance. These depreciation reductions were not allocated to the Division segments resulting in depreciation expense continuing to be recorded within our Divisional results at the rate at which it was prior to the held-for-sale classification.

## YUM's Strategic Transformation Initiatives

In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands (“YUM’s Strategic Transformation Initiatives”) following the then anticipated separation of our China business on October 31, 2016. Major features of the Company’s strategic transformation plans involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. We incurred pre-tax costs of $8 million, $23 million and $67 million related to our Strategic Transformation Initiatives in 2018, 2017 and 2016, respectively, primarily recorded in G&A. In 2018 and 2017, these costs included contract termination costs and relocation and severance costs for restaurant-support center employees. In 2016, these costs included restaurant-support center employee severance costs, charges associated with a voluntary retirement program offered to certain U.S. restaurant-support center employees, consulting costs incurred to facilitate YUM’s Strategic Transformation Initiatives and losses associated with our sale of Corporate aircraft upon our decision to no longer own aircraft. Due to the scope of the initiatives as well as their significance, our CODM does not consider the associated cost when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results for performance reporting purposes.

## Modifications of Share-based Compensation Awards

In connection with the Separation, we modified certain share-based compensation awards held as part of our Executive Income Deferral (“EID”) Plan in phantom shares of YUM Common Stock to provide one phantom Yum China share-based award for each outstanding phantom YUM share-based award. Through October 31, 2018, these Yum China awards could be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards within G&A in our Consolidated Income Statement. During 2018, 2017 and 2016, we recorded pre-tax credits of $3 million, charges of $18 million and charges of $30 million, respectively, related to these awards due to changes in the market price of Yum China’s common stock. Given these adjustments were a direct result of the Separation, our CODM did not consider their impact when assessing segment performance. As such, these amounts were not being allocated to any of our segment operating results.

As of October 31, 2018, deferrals in phantom shares of Yum China common stock are no longer an investment option within our EID Plan and any balances relating to these shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund remained classified as a liability and any appreciation or depreciation in these investments from the transfer date forward will be recognized as compensation expense and included in our segment operating results consistent with existing investments in these funds. Any balances directed into phantom shares of YUM Common Stock were reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock. See Note 15 for further description of our EID Plan.



## Pizza Hut U.S. Transformation Agreement

In May 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and that includes a permanent franchisee commitment to incremental advertising as well as digital and technology contributions (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million from 2017 to 2019 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities.

We invested $39 million related to the Transformation Agreement in 2017, which included $8 million of investments that we capitalized and $31 million that was expensed primarily as Franchise and property expenses or G&A. The $31 million expense amount included $5 million of franchisee incentive payments that under Legacy GAAP were expensed as incurred, but that upon adoption of Topic 606 in 2018 were capitalized. In 2018, both amounts capitalized upon adoption of Topic 606 and franchisee incentive payments capitalized thereafter are being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payments relate.

We invested $25 million in the year ended December 31, 2018 related to the Transformation Agreement, primarily consisting of capital investments and franchisee incentive payments that were capitalized.

Due to their unique and long-term brand-building nature as well as their non-recurring impact on Pizza Hut's Division results, the financial impact of operating investments that are part of the Transformation Agreement are not being considered by our CODM when assessing segment performance in 2017 or 2018. For the same reasons, franchisee incentive payments in 2017 that were expensed as incurred under Legacy GAAP were not considered in assessing segment performance in 2017. As such, these amounts were not allocated to the Pizza Hut Division operating segment results for performance reporting purposes. Depreciation on capital investments made as part of the Transformation Agreement is being allocated to Pizza Hut segment results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. For the same reasons, the amortization related to franchisee incentive payments that were capitalized upon the adoption of Topic 606 and amortization related to franchisee incentive payments that are being capitalized going forward are being allocated to Pizza Hut Division operating segment results starting in 2016.

In addition to the investments above, we agreed to fund $37.5 million of incremental system advertising dollars from the second half of 2017 through 2018. During the year ended December 31, 2018, we incurred $12.5 million in related incremental system advertising expense, fulfilling our advertising spend obligation. We funded approximately $25 million of such advertising during 2017, which was expensed in the third and fourth quarters of 2017. These advertising amounts were recorded primarily in Franchise and property expenses and are included in Pizza Hut's segment operating results.

## KFC U.S. Acceleration Agreement

During 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we are investing approximately $130 million from 2015 through 2019 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. Under Legacy GAAP these amounts were expensed as incurred including $17 million and $26 million during the years ended December 31, 2017 and 2016, respectively. We recorded total pre-tax charges for such amounts of $115 million, primarily as Franchise and property expenses, during the three year period ended December 31, 2017. Due to their size and unique and long-term brand building nature, as well as their non-recurring impact on KFC Division's results when expensed upfront, our CODM did not consider the impact of these investments when assessing segment performance from 2015 through 2017. As such, prior to 2018 the investments were not allocated to the KFC Division segment operating results for performance reporting purposes.

Upon adoption of Topic 606 in 2018, approximately $100 million of these incentives paid to franchisees from 2015 through 2017 were capitalized, which was net of amortization of $19 million. These capitalized amounts are now being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates. Amortization related to both franchise incentive payments that were capitalized upon the adoption of Topic 606 and franchise incentive payments that will be capitalized going forward will be allocated to KFC segment operating results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period.

In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During the years ended December 31, 2018, 2017 and 2016, we incurred $10 million, $20 million and $20 million, respectively, in incremental system advertising expense. As $10 million in incremental system advertising expense was incurred in 2015, we have now fulfilled our advertising spend obligation. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the KFC Division segment operating results.



## Impact of Adopting New Revenue Recognition Standards

As discussed in Note 2, we adopted Topic 606 at the beginning of the year ended December 31, 2018, using the modified retrospective method. Topic 606 was applied to all contracts with customers as of January 1, 2018 and the cumulative effective of this transition was recorded as an adjustment to Accumulated deficit as of this date. As a result, the following adjustments were made to the Consolidated Balance Sheet as of January 1, 2018:

## Consolidated Balance Sheet

<table><tr><td></td><td>As Reported 12/31/2017</td><td>Adjustments</td><td>Balances with Adoption of Topic 606 1/1/2018</td></tr><tr><td>ASSETS</td><td></td><td></td><td></td></tr><tr><td>Current Assets</td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 1,522</td><td>$ 11</td><td>$ 1,533</td></tr><tr><td>Accounts and notes receivable, net</td><td>400</td><td>112</td><td>512</td></tr><tr><td>Prepaid expenses and other current assets</td><td>384</td><td>76(a)</td><td>460</td></tr><tr><td>Advertising cooperative assets, restricted</td><td>201</td><td>(201)</td><td>—</td></tr><tr><td>Total Current Assets</td><td>2,507</td><td>(2)</td><td>2,505</td></tr><tr><td>Property, plant and equipment, net</td><td>1,594</td><td>2</td><td>1,596</td></tr><tr><td>Goodwill</td><td>512</td><td>—</td><td>512</td></tr><tr><td>Intangible assets, net</td><td>214</td><td>9</td><td>223</td></tr><tr><td>Other assets</td><td>345</td><td>118</td><td>463</td></tr><tr><td>Deferred income taxes</td><td>139</td><td>26</td><td>165</td></tr><tr><td>Total Assets</td><td>$ 5,311</td><td>$ 153</td><td>$ 5,464</td></tr><tr><td>LIABILITIES AND SHAREHOLDERS&#x27; DEFICIT</td><td></td><td></td><td></td></tr><tr><td>Current Liabilities</td><td></td><td></td><td></td></tr><tr><td>Accounts payable and other current liabilities</td><td>$ 813</td><td>$ 220</td><td>$ 1,033</td></tr><tr><td>Income taxes payable</td><td>123</td><td>—</td><td>123</td></tr><tr><td>Short-term borrowings</td><td>375</td><td>—</td><td>375</td></tr><tr><td>Advertising cooperative liabilities</td><td>201</td><td>(201)</td><td>—</td></tr><tr><td>Total Current Liabilities</td><td>1,512</td><td>19</td><td>1,531</td></tr><tr><td>Long-term debt</td><td>9,429</td><td>—</td><td>9,429</td></tr><tr><td>Other liabilities and deferred credits</td><td>704</td><td>353</td><td>1,057</td></tr><tr><td>Total Liabilities</td><td>11,645</td><td>372</td><td>12,017</td></tr><tr><td>Shareholders&#x27; Deficit</td><td></td><td></td><td></td></tr><tr><td>Accumulated deficit</td><td>(6,063)</td><td>(240)</td><td>(6,303)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(271)</td><td>21</td><td>(250)</td></tr><tr><td>Total Shareholders&#x27; Deficit</td><td>(6,334)</td><td>(219)</td><td>(6,553)</td></tr><tr><td>Total Liabilities and Shareholders&#x27; Deficit</td><td>$ 5,311</td><td>$ 153</td><td>$ 5,464</td></tr></table>

(a) Includes $58 million of restricted cash related to advertising cooperatives. These balances can only be used to settle obligations of the respective cooperatives.

We recorded an increase in Accounts payable and other current liabilities and Other liabilities and deferred credits of $57 million and $335 million, respectively, as part of our cumulative adjustment related to unamortized upfront franchise fees, with a corresponding $392 million increase in Accumulated deficit. We recorded increases in Prepaid expenses and other current assets and Other assets of $18 million and $118 million, respectively, as part of our cumulative adjustment related to unamortized franchise incentives, with a corresponding $136 million decrease in Accumulated deficit.

Deferred income taxes increased $26 million as a result of recording the tax effects of the two adjustments noted above, with a corresponding decrease to Accumulated deficit. Accumulated other comprehensive loss decreased $21 million as a result of recognizing the impact of foreign currency translation related to the three adjustments noted above, with a corresponding increase in Accumulated deficit.



The remaining adjustments to our December 31, 2017 Consolidated Balance Sheet are primarily a result of reclassifying the assets and liabilities of our consolidated advertising cooperates from Advertising cooperative assets, restricted and Advertising cooperative liabilities to the respective balance sheet caption to which the assets and liabilities relate.

The following tables reflect the impact of the adoption of Topic 606 on our Consolidated Statement of Income for the year ended December 31, 2018 and our Consolidated Balance Sheet as of December 31, 2018.

## Consolidated Statement of Income

<table><tr><td rowspan="2"></td><td colspan="3">Year ended 12/31/2018</td></tr><tr><td>As Reported</td><td>Impact</td><td>Balances under Legacy GAAP</td></tr><tr><td>Revenues</td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 2,000</td><td>$ —</td><td>$ 2,000</td></tr><tr><td>Franchise and property revenues</td><td>2,482</td><td>43</td><td>2,525</td></tr><tr><td>Franchise contributions for advertising and other services</td><td>1,206</td><td>(1,206)</td><td>—</td></tr><tr><td>Total revenues</td><td>5,688</td><td>(1,163)</td><td>4,525</td></tr><tr><td>Costs and Expenses, Net</td><td></td><td></td><td></td></tr><tr><td>Company restaurant expenses</td><td>1,634</td><td>—</td><td>1,634</td></tr><tr><td>General and administrative expenses</td><td>895</td><td>—</td><td>895</td></tr><tr><td>Franchise and property expenses</td><td>188</td><td>27</td><td>215</td></tr><tr><td>Franchise advertising and other services expense</td><td>1,208</td><td>(1,208)</td><td>—</td></tr><tr><td>Refranchising (gain) loss</td><td>(540)</td><td>4</td><td>(536)</td></tr><tr><td>Other (income) expense</td><td>7</td><td>—</td><td>7</td></tr><tr><td>Total costs and expenses, net</td><td>3,392</td><td>(1,177)</td><td>2,215</td></tr><tr><td>Operating Profit</td><td>2,296</td><td>14(a)</td><td>2,310</td></tr><tr><td>Investment (income) expense, net</td><td>(9)</td><td>—</td><td>(9)</td></tr><tr><td>Other pension (income) expense</td><td>14</td><td>—</td><td>14</td></tr><tr><td>Interest expense, net</td><td>452</td><td>—</td><td>452</td></tr><tr><td>Income from continuing operations before income taxes</td><td>1,839</td><td>14</td><td>1,853</td></tr><tr><td>Income tax provision (benefit)</td><td>297</td><td>3</td><td>300</td></tr><tr><td>Net Income</td><td>$ 1,542</td><td>$ 11</td><td>$ 1,553</td></tr><tr><td>Basic Earnings Per Common Share</td><td>$ 4.80</td><td>$ 0.03</td><td>$ 4.83</td></tr><tr><td>Diluted Earnings Per Common Share</td><td>$ 4.69</td><td>$ 0.03</td><td>$ 4.72</td></tr></table>

(a) Includes $23 million of franchise 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 not have allocated their impact to our Divisional results. Upon the adoption of Topic 606, these payments have been capitalized as assets.

Upon the adoption of Topic 606, the timing and amount of revenue recognized for upfront franchise fees and franchise incentives changed from upfront recognition under Legacy GAAP to recognition over the term of the franchise agreement to which the fees and incentives relate. Also, under Legacy GAAP, amounts reported as Franchise contributions for advertising and other services and Franchise advertising and other services expense were presented on a net basis. Upon the adoption of Topic 606, these amounts require gross presentation in our Consolidated Statements of Income. Lastly, Legacy GAAP required that certain value-added taxes withheld and remitted on our behalf by our franchisees be reported as revenue and corresponding expense in our Consolidated Statements of Income. Upon adoption of Topic 606, these taxes are reported on a net basis as a reduction in Franchise and property revenues.



## Consolidated Balance Sheet

<table><tr><td></td><td>As Reported 12/31/2018</td><td>Impact</td><td>Balances under Legacy GAAP 12/31/2018</td></tr><tr><td>ASSETS</td><td></td><td></td><td></td></tr><tr><td>Current Assets</td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 292</td><td>$ (13)</td><td>$ 279</td></tr><tr><td>Accounts and notes receivable, net</td><td>561</td><td>(120)</td><td>441</td></tr><tr><td>Prepaid expenses and other current assets</td><td>354</td><td>(107)</td><td>247</td></tr><tr><td>Advertising cooperative assets, restricted</td><td>—</td><td>241</td><td>241</td></tr><tr><td>Total Current Assets</td><td>1,207</td><td>1</td><td>1,208</td></tr><tr><td>Property, plant and equipment, net</td><td>1,237</td><td>(2)</td><td>1,235</td></tr><tr><td>Goodwill</td><td>525</td><td>—</td><td>525</td></tr><tr><td>Intangible assets, net</td><td>242</td><td>(16)</td><td>226</td></tr><tr><td>Other assets</td><td>724</td><td>(127)</td><td>597</td></tr><tr><td>Deferred income taxes</td><td>195</td><td>(25)</td><td>170</td></tr><tr><td>Total Assets</td><td>$ 4,130</td><td>$ (169)</td><td>$ 3,961</td></tr><tr><td>LIABILITIES AND SHAREHOLDERS&#x27; DEFICIT</td><td></td><td></td><td></td></tr><tr><td>Current Liabilities</td><td></td><td></td><td></td></tr><tr><td>Accounts payable and other current liabilities</td><td>$ 911</td><td>$ (287)</td><td>$ 624</td></tr><tr><td>Income taxes payable</td><td>69</td><td>—</td><td>69</td></tr><tr><td>Short-term borrowings</td><td>321</td><td>—</td><td>321</td></tr><tr><td>Advertising cooperative liabilities</td><td>—</td><td>241</td><td>241</td></tr><tr><td>Total Current Liabilities</td><td>1,301</td><td>(46)</td><td>1,255</td></tr><tr><td>Long-term debt</td><td>9,751</td><td>—</td><td>9,751</td></tr><tr><td>Other liabilities and deferred credits</td><td>1,004</td><td>(354)</td><td>650</td></tr><tr><td>Total Liabilities</td><td>12,056</td><td>(400)</td><td>11,656</td></tr><tr><td>Shareholders&#x27; Deficit</td><td></td><td></td><td></td></tr><tr><td>Accumulated deficit</td><td>(7,592)</td><td>251</td><td>(7,341)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(334)</td><td>(20)</td><td>(354)</td></tr><tr><td>Total Shareholders&#x27; Deficit</td><td>(7,926)</td><td>231</td><td>(7,695)</td></tr><tr><td>Total Liabilities and Shareholders&#x27; Deficit</td><td>$ 4,130</td><td>$ (169)</td><td>$ 3,961</td></tr></table>

The significant impacts resulting from the adoption of Topic 606 on our Consolidated Balance Sheet as of December 31, 2018, are consistent with those recorded as of January 1, 2018 as described previously.

Under Legacy GAAP, Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents pertaining to advertising cooperatives that we were required to consolidate were classified within Advertising cooperative assets, restricted. Upon adoption of Topic 606, these amounts are reflected on our Consolidated Balance Sheet and changes in these balances are reported within our Consolidated Statement of Cash Flows.

## Investment in Grubhub

On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub, the leading online and mobile takeout food-ordering company in the U.S., which is intended to provide dedicated support for the KFC and Taco Bell branded online delivery channels in the U.S. through Grubhub's online ordering platform, logistics and last-mile support for delivery orders, as well as point-of-sale integration to streamline operations. Concurrently with the master services agreement, one of our subsidiaries entered into an investment agreement with Grubhub to invest $200 million in exchange for approximately 2.8 million shares of Grubhub common stock. In April 2018, all necessary regulatory approvals were obtained and the purchase of Grubhub shares was consummated. Shares acquired as part of this purchase are restricted from being transferred until the earlier of the two-year anniversary of closing the investment agreement or 30 days following the termination of our master services agreement with Grubhub. In the year ended December 31, 2018 we recognized pre-tax income of $14 million, which includes the appreciation in the market price of Grubhub common stock less valuation adjustments related to the transfer restrictions. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Consolidated Statements of Income.



## Items Impacting Other Pension (Income) Expense

During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of $22 million to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM does not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost is not being allocated to any of our segment operating results for performance reporting purposes. See Note 14 for further discussion of our pension plans.

During the fourth quarter of 2016, the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan (“the Plan”) an opportunity to voluntarily elect an early payout of their pension benefits. As a result of settlement payments made of approximately $205 million related to this program, all of which were funded from existing Plan assets, we recorded a settlement charge of $24 million to Other pension (income) expense. Due to the size and non-recurring nature of the program, our CODM does not consider the impact of these charges when assessing performance so they were not allocated to any of our segment operating results for performance reporting purposes.

## Impact of Change in Reporting Calendar

As discussed in Note 2, we have changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year commencing with the year ending December 31, 2017. We also removed the monthly or period reporting lags certain of our international subsidiaries historically used to report results. The impacts on our Consolidated Financial Statements of retrospectively applying these changes are included below:

<table><tr><td rowspan="2"></td><td colspan="4">2016</td></tr><tr><td>As Previously Reported</td><td>Adjustments</td><td colspan="2">After Change in Reporting Calendar</td></tr><tr><td>Total revenues</td><td>$ 6,366</td><td>$ (10)</td><td>$ 6,356</td><td></td></tr><tr><td>Operating Profit</td><td>1,625</td><td>25(a)</td><td>1,650(b)</td><td></td></tr><tr><td>Income from continuing operations</td><td>994</td><td>24</td><td>1,018</td><td></td></tr><tr><td>Income from discontinued operations, net of tax</td><td>625</td><td>—</td><td>625</td><td></td></tr><tr><td>Net Income</td><td>$ 1,619</td><td>$ 24</td><td>$ 1,643</td><td></td></tr><tr><td>Diluted EPS from continuing operations</td><td>$ 2.48</td><td>$ 0.06</td><td>$ 2.54</td><td></td></tr><tr><td>Diluted EPS from discontinued operations</td><td>1.56</td><td>—</td><td>1.56</td><td></td></tr><tr><td>Diluted EPS</td><td>$ 4.04</td><td>$ 0.06</td><td>$ 4.10</td><td></td></tr></table>

(a) Primarily represents gains of $24 million related to the refranchising of certain international restaurants which occurred in December 2016.

(b) Amount does not reconcile to our Consolidated Statements of Income for the year ended December 31, 2016 due to the impact of retrospectively adopting a new accounting standard on Benefit Costs of $32 million.

In 2016, the impact on our Consolidated Statement of Cash Flows was a decrease in cash provided by operating activities of $39 million, a decrease in cash used in investing activities of $20 million and a decrease in cash used in financing activities of $16 million.

## NOTE 6 Supplemental Cash Flow Data

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Cash Paid For:</td><td></td><td></td><td></td></tr><tr><td>Interest</td><td>$ 455</td><td>$ 442</td><td>$ 297</td></tr><tr><td>Income taxes</td><td>279</td><td>346</td><td>314</td></tr><tr><td>Significant Non-Cash Investing and Financing Activities:</td><td></td><td></td><td></td></tr><tr><td>Capital lease obligations incurred</td><td>$ 4</td><td>$ 8</td><td>$ 10</td></tr><tr><td>Capital lease and other debt obligations transferred through refranchising</td><td>(24)</td><td>(35)</td><td>(1)</td></tr><tr><td>Reconciliation of Cash and cash equivalents to Consolidated Statements of Cash Flows:</td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents as presented in Consolidated Balance Sheets</td><td>$ 292</td><td>$ 1,522</td><td>$ 725</td></tr><tr><td>Restricted cash included in Prepaid expenses and other current assets(a)</td><td>151</td><td>60</td><td>55</td></tr><tr><td>Restricted cash and restricted cash equivalents included in Other assets(b)</td><td>31</td><td>17</td><td>51</td></tr><tr><td>Cash, Cash Equivalents and Restricted Cash as presented in Consolidated Statements of Cash Flows(c)</td><td>$ 474</td><td>$ 1,599</td><td>$ 831</td></tr></table>

(a) Restricted cash within Prepaid expenses and other current assets reflects the cash related to advertising cooperatives that we consolidate that can only be used to settle obligations of the respective cooperatives and Taco Bell Securitization interest reserves. See Note 10.



(b) Primarily trust accounts related to our self-insurance program. 2016 also includes cash balances required, to the extent necessary, to meet statutory minimum net worth requirements for legal entities which enter into U.S. franchise agreements.

(c) Upon adoption of Topic 606 we reclassified cash of $51 million and restricted cash of $58 million, respectively, from Advertising cooperative assets, restricted to Cash and cash equivalents and Prepaid expenses and other current assets. These amounts are included in the Beginning of Period balance of Cash, Cash Equivalents, Restricted Cash and Restricted Cash equivalents in our Consolidated Statement of Cash Flows for the year ended December 31, 2018.

## NOTE 7 Other (Income) Expense

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Foreign exchange net (gain) loss and other</td><td>$ 1</td><td>$ 5</td><td>$ (6)</td></tr><tr><td>Loss associated with corporate aircraft \( ^{(a)} \)</td><td>—</td><td>2</td><td>9</td></tr><tr><td>Closure and impairment expense</td><td>6</td><td>3</td><td>15</td></tr><tr><td>Other (income) expense</td><td>$ 7</td><td>$ 10</td><td>$ 18</td></tr></table>

(a) During 2016, we made the decision to no longer operate a corporate aircraft fleet and offered our owned aircraft for sale, one of which was sold during 2016 and one that was sold in 2017. The losses associated with these sales reflect the shortfall of the proceeds, including estimated proceeds in held-for-sale impairment evaluations, less any selling costs, over the carrying value of the aircraft.

## NOTE 8 Supplemental Balance Sheet Information

<table><tr><td>Prepaid Expenses and Other Current Assets</td><td>2018</td><td>2017</td></tr><tr><td>Income tax receivable</td><td>$ 36</td><td>$ 175</td></tr><tr><td>Restricted cash \( ^{(a)} \)</td><td>151</td><td>60</td></tr><tr><td>Assets held for sale \( ^{(b)} \)</td><td>24</td><td>37</td></tr><tr><td>Other prepaid expenses and current assets</td><td>143</td><td>112</td></tr><tr><td>Prepaid expenses and other current assets</td><td>$ 354</td><td>$ 384</td></tr><tr><td>Property, Plant and Equipment</td><td>2018</td><td>2017</td></tr><tr><td>Land</td><td>$ 422</td><td>$ 452</td></tr><tr><td>Buildings and improvements</td><td>1,349</td><td>1,661</td></tr><tr><td>Capital leases, primarily buildings</td><td>59</td><td>123</td></tr><tr><td>Machinery and equipment</td><td>523</td><td>700</td></tr><tr><td>Property, plant and equipment, gross</td><td>2,353</td><td>2,936</td></tr><tr><td>Accumulated depreciation and amortization</td><td>(1,116)</td><td>(1,342)</td></tr><tr><td>Property, plant and equipment, net</td><td>$ 1,237</td><td>$ 1,594</td></tr></table>

Depreciation and amortization expense related to PP&E was $146 million, $215 million and $276 million in 2018, 2017 and 2016, respectively.

<table><tr><td>Other Assets</td><td>2018</td><td>2017</td></tr><tr><td>Investment in Grubhub common stock \( ^{(c)} \)</td><td>$ 214</td><td>$ —</td></tr><tr><td>Franchise incentives \( ^{(a)} \)</td><td>141</td><td>—</td></tr><tr><td>Other</td><td>369</td><td>345</td></tr><tr><td>Other assets</td><td>$ 724</td><td>$ 345</td></tr><tr><td>Accounts Payable and Other Current Liabilities</td><td>2018</td><td>2017</td></tr><tr><td>Accounts payable \( ^{(a)} \)</td><td>$ 202</td><td>$ 119</td></tr><tr><td>Accrued compensation and benefits</td><td>206</td><td>252</td></tr><tr><td>Accrued advertising \( ^{(a)} \)</td><td>108</td><td>9</td></tr><tr><td>Accrued taxes, other than income taxes</td><td>48</td><td>90</td></tr><tr><td>Other current liabilities</td><td>347</td><td>343</td></tr><tr><td>Accounts payable and other current liabilities</td><td>$ 911</td><td>$ 813</td></tr></table>

(a) Increase from 2017 primarily due to the adoption of Topic 606 beginning with the year ended December 31, 2018. See Note 2.



(b) Reflects the carrying value of restaurants we have offered for sale to franchisees and excess properties that we do not intend to use for restaurant operations in the future.

(c) Refer to Note 5 for additional discussion regarding our investment in Grubhub.

## NOTE 9 Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are as follows:

<table><tr><td></td><td>KFC</td><td>Pizza Hut</td><td>Taco Bell</td><td>Worldwide</td></tr><tr><td>Goodwill, net as of December 31, 2016 \( ^{(a)} \)</td><td>$ 268</td><td>$ 157</td><td>$ 111</td><td>$ 536</td></tr><tr><td>Disposals and other, net \( ^{(b)} \)</td><td>(21)</td><td>5</td><td>(8)</td><td>(24)</td></tr><tr><td>Goodwill, net as of December 31, 2017 \( ^{(a)} \)</td><td>247</td><td>162</td><td>103</td><td>512</td></tr><tr><td>Disposal and other, net \( ^{(b)} \)</td><td>(17)</td><td>(5)</td><td>(4)</td><td>(26)</td></tr><tr><td>QuikOrder acquisition (See Note 5)</td><td>—</td><td>39</td><td>—</td><td>39</td></tr><tr><td>Goodwill, net as of December 31, 2018 \( ^{(a)} \)</td><td>$ 230</td><td>$ 196</td><td>$ 99</td><td>$ 525</td></tr></table>

(a) Goodwill, net includes $17 million of accumulated impairment losses for each year presented related to our Pizza Hut segment.

(b) Disposals and other, net includes the impact of foreign currency translation on existing balances and goodwill write-offs associated with refranchising.

Intangible assets, net for the years ended 2018 and 2017 are as follows:

<table><tr><td rowspan="2"></td><td colspan="3">2018</td><td colspan="3">2017</td></tr><tr><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td></td><td></td></tr><tr><td>Definite-lived intangible assets</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Capitalized software costs</td><td>$ 319</td><td>$ (156)</td><td>$ 243</td><td>$ (139)</td><td></td><td></td></tr><tr><td>Reacquired franchise rights</td><td>37</td><td>(30)</td><td>60</td><td>(42)</td><td></td><td></td></tr><tr><td>Franchise contract rights</td><td>99</td><td>(79)</td><td>100</td><td>(77)</td><td></td><td></td></tr><tr><td>Lease tenancy rights</td><td>11</td><td>(1)</td><td>32</td><td>(6)</td><td></td><td></td></tr><tr><td>Other</td><td>38</td><td>(27)</td><td>37</td><td>(25)</td><td></td><td></td></tr><tr><td></td><td>$ 504</td><td>$ (293)</td><td>$ 472</td><td>$ (289)</td><td></td><td></td></tr><tr><td>Indefinite-lived intangible assets</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>KFC trademark</td><td>$ 31</td><td></td><td>$ 31</td><td></td><td></td><td></td></tr></table>

Amortization expense for all definite-lived intangible assets was $37 million in 2018, $33 million in 2017 and $31 million in 2016. Amortization expense for definite-lived intangible assets is expected to approximate $47 million in 2019, $44 million in 2020, $34 million in 2021, $19 million in 2022 and $16 million in 2023.



NOTE 10 Short-term Borrowings and Long-term Debt

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Short-term Borrowings</td><td></td><td></td></tr><tr><td>Current maturities of long-term debt</td><td>$ 331</td><td>$ 386</td></tr><tr><td>Less current portion of debt issuance costs and discounts</td><td>(10)</td><td>(11)</td></tr><tr><td>Short-term borrowings</td><td>$ 321</td><td>$ 375</td></tr><tr><td>Long-term Debt</td><td></td><td></td></tr><tr><td>Securitization Notes</td><td>$ 2,928</td><td>$ 2,271</td></tr><tr><td>Subsidiary Senior Unsecured Notes</td><td>2,850</td><td>2,850</td></tr><tr><td>Term Loan A Facility</td><td>488</td><td>500</td></tr><tr><td>Term Loan B Facility</td><td>1,955</td><td>1,975</td></tr><tr><td>YUM Senior Unsecured Notes</td><td>1,875</td><td>2,200</td></tr><tr><td>Capital lease obligations (See Note 11)</td><td>71</td><td>105</td></tr><tr><td></td><td>$ 10,167</td><td>$ 9,901</td></tr><tr><td>Less debt issuance costs and discounts</td><td>(85)</td><td>(86)</td></tr><tr><td>Less current maturities of long-term debt</td><td>(331)</td><td>(386)</td></tr><tr><td>Long-term debt</td><td>$ 9,751</td><td>$ 9,429</td></tr></table>

## Securitization Notes

On May 11, 2016, Taco Bell Funding, LLC (the "Issuer"), a newly formed, special purpose limited liability company and a direct, wholly-owned subsidiary of Taco Bell Corp. ("TBC") completed a securitization transaction and issued $800 million of its Series 2016-1 3.832% Fixed Rate Senior Secured Notes, Class A-2-I (the "2016 Class A-2-I Notes"), $500 million of its Series 2016-1 4.377% Fixed Rate Senior Secured Notes, Class A-2-II (the "2016 Class A-2-II Notes") and $1.0 billion of its Series 2016-1 4.970% Fixed Rate Senior Secured Notes, Class A-2-III (the "2016 Class A-2-III Notes" and, together with the 2016 Class A-2-I Notes and the 2016 Class A-2-II Notes, the "2016 Class A-2 Notes"). In connection with the issuance of the 2016 Class A-2 Notes, the Issuer also entered into a revolving financing facility of Series 2016-1 Senior Notes, Class A-1 (the "Variable Funding Notes"), which allowed for the borrowing of up to $100 million and the issuance of up to $50 million in letters of credit. The 2016 Class A-2 Notes were issued under a Base Indenture, dated as of May 11, 2016 (the "Base Indenture"), and the related Series 2016-1 Supplement thereto, dated as of May 11, 2016 (the "Series 2016-1 Supplement"). The Base Indenture and the Series 2016-1 Supplement (collectively, the "Indenture") allow the Issuer to issue additional series of notes. On October 16, 2017, the Issuer terminated the Variable Funding Notes.

On November 28, 2018, the Issuer completed a refinancing transaction and issued $825 million of its Series 2018-1 4.318% Fixed Rate Senior Secured Notes, Class A-2-I (the "2018 Class A-2-I Notes") and $625 million of its Series 2018-1 4.940% Fixed Rate Senior Secured Notes, Class A-2-II (the "2018 Class A-2-II Notes" and, together with the Series 2018-1 Class A-2-I Notes, the "2018 Class A-2 Notes"). The net proceeds from the issuance of the 2018 Class A-2 Notes were used to repay in full the 2016 Class A-2-I Notes, to repay $273 million of borrowings that were outstanding under the Revolving Facility (see below) and for general corporate purposes, including capital return to shareholders. The 2016 Class A-2 Notes and the 2018 Class A-2 Notes are referred to collectively as the "Securitization Notes".

The Securitization Notes were issued in a transaction pursuant to which certain of TBC’s domestic assets, consisting principally of franchise-related agreements and domestic intellectual property, were contributed to the Issuer and the Issuer’s special purpose, wholly-owned subsidiaries (the “Guarantors”, and collectively with the Issuer, the “Securitization Entities”) to secure the Securitization Notes. The Securitization Notes are secured by substantially all of the assets of the Securitization Entities, and include a lien on all existing and future U.S. Taco Bell franchise and license agreements and the royalties payable thereunder, existing and future U.S. Taco Bell intellectual property, certain transaction accounts and a pledge of the equity interests in asset-owning Securitization Entities. The remaining U.S. Taco Bell assets that were excluded from the transfers to the Securitization Entities continue to be held by Taco Bell of America, LLC, a limited liability company (“TBA”) and TBC. The Securitization Notes are not guaranteed by the remaining U.S. Taco Bell assets, the Company, or any other subsidiary of the Company.

Payments of interest and principal on the Securitization Notes are made from the royalty fees paid pursuant to the franchise and license agreements with all U.S. Taco Bell restaurants, including both company and franchise operated restaurants. Interest on and principal payments of the Securitization Notes are due on a quarterly basis. In general, no amortization of principal of the Securitization Notes is required prior to their anticipated repayment dates unless as of any quarterly measurement date the consolidated leverage ratio (the ratio of total debt to Net Cash Flow (as defined in the Indenture)) for the preceding four fiscal quarters of either the Company and its subsidiaries or the Issuer and its subsidiaries exceeds 5.0:1, in which case amortization payments of 1% per year of the outstanding principal as of the closing of the Securitization Notes is required. As of the most recent quarterly measurement date the consolidated leverage ratio exceeded 5.0:1 and, as a result, amortization payments are required. The legal final maturity dates of the 2016 Class A-2 Notes and the 2018 Class A-2 Notes are May 2046 and November 2048, respectively. However, the anticipated repayment dates of the the 2016 Class A-2-II Notes, the 2016 Class A-2-III Notes, the 2018 Class A-2-I Notes and the 2018 Class A-2-II Notes are 7, 10, 5 and 10 years (the “Anticipated Repayment Dates”), respectively, from the date of issuance. If the Issuer has not repaid or refinanced a series of Securitization Notes prior to its respective Anticipated Repayment Dates, rapid amortization of principal on all



Securitization Notes will occur and additional interest will accrue on the Securitization Notes, as stated in the Indenture.

The Company paid debt issuance costs of $13 million and $31 million in connection with the 2018 and 2016 issuances of the Securitization Notes, respectively. The debt issuance costs are being amortized to Interest expense, net through the Anticipated Repayment Dates of the Securitization Notes utilizing the effective interest rate method. As of December 31, 2018, the effective interest rates, including the amortization of debt issuance costs, were 4.59%, 5.14%, 4.53% and 5.06% for the 2016 Class A-2-II Notes, 2016 Class A-2-III Notes, 2018 Class A-2-I Notes and 2018 Class A-2-II Notes, respectively. During 2018 and 2017, $4 million and $2 million, respectively, of unamortized debt issuance costs were recognized within Interest expense, net due to the extinguishment of the 2016 Class A-2-I Notes and the termination of the Variable Funding Notes.

The Securitization Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Issuer maintains specified reserve accounts to be available to make required interest payments in respect of the Securitization Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Seuritization Notes under certain circumstances, (iii) certain indemnification payments relating to taxes, enforcement costs and other customary items and (iv) covenants relating to recordkeeping, access to information and similar matters. The Securitization Notes are also subject to rapid amortization events provided for in the Indenture, including events tied to failure to maintain a stated debt service coverage ratio (as defined in the Indenture) of at least 1.1:1, gross domestic sales for branded restaurants being below certain levels on certain measurement dates, a manager termination event, an event of default and the failure to repay or refinance the Securitization Notes on the Anticipated Repayment Date (subject to limited cure rights). The Securitization Notes are also subject to certain customary events of default, including events relating to non-payment of required interest or principal due on the Securitization Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, certain judgments and failure of the Securitization Entities to maintain a stated debt service coverage ratio. As of December 31, 2018, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.

In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders, and are restricted in their use. The Indenture requires a certain amount of securitization cash flow collections to be allocated on a weekly basis and maintained in a cash reserve account. As of December 31, 2018, the Company had restricted cash of $82 million primarily related to required interest reserves included in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the Securitization Entities.

Additional cash reserves are required if any of the rapid amortization events occur, as noted above, or in the event that as of any quarterly measurement date the Securitization Entities fail to maintain a debt service coverage ratio (or the ratio of Net Cash Flow to all debt service payments for the preceding four fiscal quarters) of at least 1.75:1. The amount of weekly securitization cash flow collections that exceed the required weekly allocations is generally remitted to the Company. During the quarter ended December 31, 2018, the Securitization Entities maintained a debt service coverage ratio significantly in excess of the 1.75:1 requirement.

## Credit Facilities and Subsidiary Senior Unsecured Notes

On June 16, 2016, KFC Holding Co., Pizza Hut Holdings, LLC, a limited liability company, and TBA, each of which is a wholly-owned subsidiary of the Company, as co-borrowers (the "Borrowers"), entered into a credit agreement providing for senior secured credit facilities consisting of a $500 million Term Loan A facility (the "Term Loan A Facility"), a $2.0 billion Term Loan B facility (the "Term Loan B Facility") and a $1.0 billion revolving facility (the "Revolving Facility"), each of which may be increased subject to certain conditions. The Term Loan A Facility, the Term Loan B Facility, and the Revolving Facility are collectively referred to as the "Credit Agreement". There are no outstanding borrowings under the Revolving Facility and $7 million of letters of credit outstanding as of December 31, 2018.

The Term Loan A Facility was originally subject to quarterly amortization payments beginning one full fiscal quarter after the first anniversary of the closing date, in an amount equal to 1.25% of the initial principal amount of the facility, in each of the second and third years of the facility; in an amount equal to 1.875% of the initial principal amount of the facility, in the fourth year of the facility; and in an amount equal to 3.75% of the initial principal amount of the facility, in the fifth year of the facility, with the balance payable at maturity on the fifth anniversary of the closing date. Subsequently, this amortization schedule was delayed by approximately one year and the maturity date was extended to June 7, 2022 as a result of the Term Loan A repricing in 2017 (see below). The Term Loan B Facility is subject to quarterly amortization payments in an amount equal to 0.25% of the initial principal amount of the facility, with the balance payable at maturity on the seventh anniversary of the closing date.

On March 21, 2017, the Borrowers completed the repricing of the then existing $1.99 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 75 basis points to LIBOR plus 2.00% or Base Rate plus1.00%, at the Borrower's election, with an additional rate stepdown to LIBOR plus 1.75% or Base Rate plus 0.75% in the event the secured net leverage ratio (as defined in the Credit Agreement) is less than 1 to 1. As a result of repricing the Term Loan B Facility, $192 million in principal was assigned to new lenders or existing lenders electing to increase their holdings in the loan. The maturity date and all other material provisions under the Credit Agreement remained unchanged as a result of this amendment.

On June 7, 2017, the Borrowers completed the repricing of the existing $500 million under the Term Loan A Facility and $1 billion under the Revolving Facility pursuant to an amendment to the Credit Agreement. The amendment reduced the interest rate applicable to the Term Loan A Facility and for borrowings under the Revolving Facility by 75 basis points. Subsequent to the repricing the interest rate ranges from 1.25% to 1.75% plus LIBOR or from 0.25% to 0.75% plus the Base Rate, at the Borrower's election, based upon the total net leverage ratio of the Borrowers and the Specified Guarantors (as defined in the Credit Agreement). As a result of repricing the Term Loan A Facility, $146 million in principal was assigned to new lenders or existing lenders electing to increase their holdings in the loan. There was no change in lender participation in the Revolving Facility. The maturity date for the Term Loan A Facility and the Revolving Facility has been extended to June 7, 2022. Amortization payments on the Term Loan A Facility will begin one full fiscal quarter after the first anniversary of the amendment effective date, which delays the original amortization schedule by approximately one year. All other material provisions under the Credit Agreement remained unchanged.



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.

The Credit Agreement is unconditionally guaranteed by the Company and certain of the Borrowers' principal domestic subsidiaries and excludes Taco Bell Funding LLC and its special purpose, wholly-owned subsidiaries (see above). The Credit Agreement is also secured by first priority liens on substantially all assets of the Borrowers and each subsidiary guarantor, excluding the stock of certain subsidiaries and certain real property, and subject to other customary exceptions.

The Credit Agreement is subject to certain mandatory prepayments, including an amount equal to 50% of excess cash flow (as defined in the Credit Agreement) on an annual basis and the proceeds of certain asset sales, casualty events and issuances of indebtedness, subject to customary exceptions and reinvestment rights.

The Credit Agreement includes two financial maintenance covenants which require the Borrowers to maintain a total leverage ratio (defined as the ratio of Consolidated Total Debt to Consolidated EBITDA (as these terms are defined in the Credit Agreement)) of 5.0:1 or less and a fixed charge coverage ratio (defined as the ratio of EBITDA minus capital expenditures to fixed charges (inclusive of rental expense and scheduled amortization)) of at least 1.5:1, each as of the last day of each fiscal quarter. The Credit Agreement includes other affirmative and negative covenants and events of default that are customary for facilities of this type. The Credit Agreement contains, among other things, limitations on certain additional indebtedness and liens, and certain other transactions specified in the agreement. We were in compliance with all debt covenants as of December 31, 2018.

On June 16, 2016, the Borrowers issued $1.05 billion aggregate principal amount of 5.00% Senior Unsecured Notes due 2024 and $1.05 billion aggregate principal amount of 5.25% Senior Unsecured Notes due 2026 and on June 15, 2017, the Borrowers issued $750 million aggregate principal amount of 4.75% Senior Notes due June 1, 2027 (the "2027 Notes" and collectively the "Subsidiary Senior Unsecured Notes"). Interest on the Subsidiary Senior Unsecured Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Subsidiary Senior Unsecured Notes are guaranteed on a senior unsecured basis by (i) the Company, (ii) the Specified Guarantors and (iii) by each of the Borrower's and the Specified Guarantors' domestic subsidiaries that guarantees the Borrower's obligations under the Credit Agreement, except for any of the Company's foreign subsidiaries. The indenture governing the Subsidiary Senior Unsecured Notes contains covenants and events of default that are customary for debt securities of this type. We were in compliance with all debt covenants as of December 31, 2018.

During 2016, the Company paid debt issuance costs of $56 million in connection with the issuance of the Credit Agreement and the Subsidiary Senior Unsecured Notes. During 2017, $32 million of fees related to the repricing of the Term Loan A, Term Loan B and Revolving Facilities and the issuance of the 2027 Notes were capitalized as debt issuance costs. The debt issuance costs are being amortized to Interest expense, net through the contractual maturity of the agreements utilizing the effective interest rate method. We classify these deferred costs on our Consolidated Balance Sheet as a reduction in the related debt when borrowings are outstanding or within Other assets if borrowings are not outstanding. Additionally, $5 million and $8 million of fees and unamortized debt issuance costs were recognized within Interest expense, net due to the repricings in the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, the effective interest rates, including the amortization of debt issuance costs and the impact of the interest rate swaps on Term Loan B Facility (See Note 12), were 5.16%, 5.39%, 4.90%, 3.43%, and 3.74% for the Subsidiary Senior Unsecured Notes due 2024, the Subsidiary Senior Unsecured Notes due 2026, the Subsidiary Senior Unsecured Notes due 2027, the Term Loan A Facility, and the Term Loan B Facility, respectively.

## YUM Senior Unsecured Notes

The majority of our remaining long-term debt primarily comprises YUM Senior Unsecured Notes with varying maturity dates from 2020 through 2043 and stated interest rates ranging from 3.75% to 6.88%. The YUM Senior Unsecured Notes represent senior, unsecured obligations and rank equally in right of payment with all of our existing and future unsecured unsubordinated indebtedness. 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 all YUM Senior Unsecured Notes issued that remain outstanding at December 31, 2018:

<table><tr><td rowspan="2">Issuance Date(a)</td><td rowspan="2">Maturity Date</td><td rowspan="2">Principal Amount (in millions)</td><td colspan="2">Interest Rate</td></tr><tr><td>Stated</td><td>Effective(b)</td></tr><tr><td>October 2007</td><td>November 2037</td><td>325</td><td>6.88%</td><td>7.45%</td></tr><tr><td>August 2009</td><td>September 2019</td><td>250</td><td>5.30%</td><td>5.59%</td></tr><tr><td>August 2010</td><td>November 2020</td><td>350</td><td>3.88%</td><td>4.01%</td></tr><tr><td>August 2011</td><td>November 2021</td><td>350</td><td>3.75%</td><td>3.88%</td></tr><tr><td>October 2013</td><td>November 2023</td><td>325</td><td>3.88%</td><td>4.01%</td></tr><tr><td>October 2013</td><td>November 2043</td><td>275</td><td>5.35%</td><td>5.42%</td></tr></table>

(a) Interest payments commenced approximately six months after issuance date and are payable semi-annually thereafter.

(b) Includes the effects of the amortization of any (1) premium or discount; (2) debt issuance costs; and (3) gain or loss upon settlement of related treasury locks and forward starting interest rate swaps utilized to hedge the interest rate risk prior to debt issuance.



The annual maturities of short-term borrowings and long-term debt as of December 31, 2018, excluding capital lease obligations of $71 million are as follows:

<table><tr><td colspan="2">Year ended:</td></tr><tr><td>2019</td><td>$ 324</td></tr><tr><td>2020</td><td>430</td></tr><tr><td>2021</td><td>455</td></tr><tr><td>2022</td><td>424</td></tr><tr><td>2023</td><td>1,626</td></tr><tr><td>Thereafter</td><td>6,837</td></tr><tr><td>Total</td><td>$ 10,096</td></tr></table>

Interest expense on short-term borrowings and long-term debt was $496 million, $473 million and $331 million in 2018, 2017 and 2016, respectively.

## NOTE 11 Leases

At December 31, 2018, we operated 856 restaurants, leasing the underlying land and/or building in 517 of those restaurants with the vast majority of our commitments expiring within 20 years from the inception of the lease. In addition, the Company leases or subleases 1,020 units to franchisees, principally in the U.S., United Kingdom, Australia, Germany and France.
We also lease office space for headquarters and support functions, as well as certain office and restaurant equipment. We do not consider any of these individual leases material to our operations. Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance.

Future minimum commitments and amounts to be received as lessor or sublessor under non cancellable leases are set forth below:

<table><tr><td rowspan="2"></td><td colspan="2">Commitments</td><td colspan="3">Lease Receivables</td></tr><tr><td>Capital</td><td>Operating</td><td>Direct Financing</td><td>Operating</td><td></td></tr><tr><td>2019</td><td>$ 10</td><td>$ 103</td><td>$ 6</td><td>$ 89</td><td></td></tr><tr><td>2020</td><td>10</td><td>89</td><td>5</td><td>79</td><td></td></tr><tr><td>2021</td><td>9</td><td>78</td><td>4</td><td>74</td><td></td></tr><tr><td>2022</td><td>8</td><td>71</td><td>4</td><td>69</td><td></td></tr><tr><td>2023</td><td>8</td><td>61</td><td>3</td><td>67</td><td></td></tr><tr><td>Thereafter</td><td>58</td><td>384</td><td>30</td><td>638</td><td></td></tr><tr><td></td><td>$ 103</td><td>$ 786</td><td>$ 52</td><td>$ 1,016</td><td></td></tr></table>

At December 31, 2018 and December 31, 2017, the present value of minimum payments under capital leases was $71 million and $105 million, respectively. At December 31, 2018, unearned income associated with direct financing lease receivables was $19 million.

Upon adoption of the new lease accounting standards at the beginning of the first quarter of 2019 we currently expect to recognize additional lease liabilities of approximately $750 million, with corresponding right-of-use assets of approximately $675 million based on the present value of the remaining operating lease payments that include scheduled rent increases. These remaining lease payments include both future minimum commitments under non cancellable leases as set forth above as well as approximately $50 million of nominal operating lease payments pertaining to renewal options that, at lease inception, we determined were reasonably assured of being exercised.

The details of rental expense and income are set forth below:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Rental expense</td><td></td><td></td><td></td></tr><tr><td>Minimum</td><td>$ 142</td><td>$ 193</td><td>$ 208</td></tr><tr><td>Contingent</td><td>9</td><td>21</td><td>26</td></tr><tr><td></td><td>$ 151</td><td>$ 214</td><td>$ 234</td></tr><tr><td>Rental income</td><td>$ 131</td><td>$ 86</td><td>$ 73</td></tr></table>



## NOTE 12 Derivative Instruments

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

## Interest Rate Swaps

We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments. On July 25, 2016, we agreed with multiple counterparties to swap the variable LIBOR-based component of the interest payments related to $1.55 billion of borrowings under our Term Loan B Facility resulting in a fixed rate of 3.92% on the swapped portion of the Term Loan B Facility. These interest rate swaps will expire in July 2021. Further, on May 14, 2018 we entered into forward-starting interest rate swaps to fix the interest rate on $1.5 billion of borrowings under our Term Loan B Facility from the date the July 2016 swaps expire through March 2025. The interest rate swaps executed in May 2018 will result in a fixed rate of 4.81% on the swapped portion of the Term Loan B Facility from July 2021 through March 2025. These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps and are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of December 31, 2018.

Gains or losses on the interest rate swaps are reported as a component of AOCI and reclassified into Interest expense, net in our Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Through December 31, 2018, the swaps were highly effective cash flow hedges.

## Foreign Currency Contracts

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

Gains or losses on the foreign currency contracts are reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Through December 31, 2018, all foreign currency forward and swap contracts related to intercompany receivables and payables were highly effective cash flow hedges.

As of December 31, 2018 and December 31, 2017, foreign currency forward and swap contracts outstanding related to intercompany receivables and payables had total notional amounts of $459 million and $456 million, respectively. As of December 31, 2018, we have foreign currency forward and swap contracts with durations expiring as early as February 2019 and as late as June 2020.

As a result of the use of interest rate swaps and foreign currency contracts, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with major financial institutions carefully selected based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At December 31, 2018, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. To date, all counterparties have performed in accordance with their contractual obligations.

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

<table><tr><td rowspan="2"></td><td colspan="2">Gains/(Losses) Recognized in OCI</td><td colspan="2">(Gains)/Losses Reclassified from AOCI into Net Income</td></tr><tr><td>2018</td><td>2017</td><td>2018</td><td>2017</td></tr><tr><td>Interest rate swaps</td><td>$ (3)</td><td>$ 4</td><td>$ (19)</td><td>$ 2</td></tr><tr><td>Foreign currency contracts</td><td>22</td><td>(56)</td><td>(20)</td><td>56</td></tr><tr><td>Income tax benefit/(expense)</td><td>1</td><td>1</td><td>5</td><td>(3)</td></tr></table>

As of December 31, 2018, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $26 million, based on current LIBOR interest rates.

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



## NOTE 13 Fair Value Disclosures

As of December 31, 2018 the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, short-term borrowings and accounts payable approximated their fair values because of the short-term nature of these instruments. The fair value of notes receivable net of allowances and lease guarantees less subsequent amortization approximates their carrying value. The following table presents the carrying value and estimated fair value of the Company’s debt obligations:

<table><tr><td rowspan="2"></td><td colspan="3">12/31/2018</td><td colspan="3">12/31/2017</td></tr><tr><td>Carrying Value</td><td>Fair Value (Level 2)</td><td>Carrying Value</td><td>Fair Value (Level 2)</td><td></td><td></td></tr><tr><td>Securitization Notes(a)</td><td>$ 2,928</td><td>$ 2,967</td><td>$ 2,271</td><td>$ 2,367</td><td></td><td></td></tr><tr><td>Subsidiary Senior Unsecured Notes(b)</td><td>2,850</td><td>2,733</td><td>2,850</td><td>2,983</td><td></td><td></td></tr><tr><td>Term Loan A Facility(b)</td><td>488</td><td>479</td><td>500</td><td>503</td><td></td><td></td></tr><tr><td>Term Loan B Facility(b)</td><td>1,955</td><td>1,915</td><td>1,975</td><td>1,990</td><td></td><td></td></tr><tr><td>YUM Senior Unsecured Notes(b)</td><td>1,875</td><td>1,798</td><td>2,200</td><td>2,277</td><td></td><td></td></tr></table>

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

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

## Recurring Fair Value Measurements

The Company has interest rate swaps, foreign currency contracts, an investment in Grubhub common stock and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 12 for discussion regarding derivative instruments and Note 5 for discussion regarding our investment in Grubhub common stock). The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall.

<table><tr><td rowspan="2"></td><td colspan="3">Fair Value</td><td rowspan="2">Consolidated Balance Sheet</td></tr><tr><td>Level</td><td>2018</td><td>2017</td></tr><tr><td>Interest Rate Swaps—Asset</td><td>2</td><td>$ 21</td><td>$ 9</td><td>Prepaid expenses and other current assets</td></tr><tr><td>Interest Rate Swaps—Asset</td><td>2</td><td>29</td><td>40</td><td>Other assets</td></tr><tr><td>Interest Rate Swaps—Liability</td><td>2</td><td>23</td><td>—</td><td>Accounts payable and other current liabilities</td></tr><tr><td>Foreign Currency Contracts—Asset</td><td>2</td><td>5</td><td>5</td><td>Prepaid expenses and other current assets</td></tr><tr><td>Foreign Currency Contracts—Liability</td><td>2</td><td>24</td><td>46</td><td>Other Liabilities and deferred credits</td></tr><tr><td>Investment in Grubhub Common Stock</td><td>1</td><td>214</td><td>—</td><td>Other assets</td></tr><tr><td>Other Investments</td><td>1</td><td>27</td><td>29</td><td>Other assets</td></tr></table>

The fair value of the Company’s foreign currency contracts and interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration based on observable inputs. The fair value of the investment in Grubhub common stock was determined primarily based on closing market prices for the shares. The other investments include investments in mutual funds, which are used to offset fluctuations for a portion of our deferred compensation liabilities. The other investments’ fair value is determined based on the closing market prices of the respective mutual funds as of December 31, 2018 and December 31, 2017.

## Non-Recurring Fair Value Measurements

During the years ended December 31, 2018 and December 31, 2017, we recognized non-recurring fair value measurements of $1 million and $2 million, respectively, related to restaurant-level impairment. Restaurant-level impairment charges are recorded in Other (income) expense and resulted primarily from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3). These amounts exclude fair value measurements made for assets that were subsequently disposed of prior to those respective year end dates. The remaining net book value of restaurant assets measured at fair value during the years ended December 31, 2018 and December 31, 2017 is insignificant.



## NOTE 14 Pension, Retiree Medical and Retiree Savings Plans

## U.S. Pension Plans

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit plans covering certain full-time salaried and hourly U.S. employees. The qualified plan meets the requirements of certain sections of the Internal Revenue Code and provides benefits to a broad group of employees with restrictions on discriminating in favor of highly compensated employees with regard to coverage, benefits and contributions. The supplemental plans provide additional benefits to certain employees. We fund our supplemental plans as benefits are paid.

The most significant of our U.S. plans is the YUM Retirement Plan (the "Plan"), which is a qualified plan. Our funding policy with respect to the Plan is to contribute amounts necessary to satisfy minimum pension funding requirements, including requirements of the Pension Protection Act of 2006, plus additional amounts from time-to-time as are determined to be necessary to improve the Plan's funded status. We do not expect to make any significant contributions to the Plan in 2019. Our two significant U.S. plans were previously amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in those plans.

During the fourth quarter of 2016, the Company allowed certain former employees with deferred vested balances in the Plan an opportunity to voluntarily elect an early payout of their benefits. See Note 5 for details.

We do not anticipate any plan assets being returned to the Company during 2019 for any U.S. plans.

Obligation and Funded Status at Measurement Date:

The following chart summarizes the balance sheet impact, as well as benefit obligations, assets, and funded status associated with our two significant U.S. pension plans. The actuarial valuations for all plans reflect measurement dates coinciding with our fiscal year end.

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Change in benefit obligation:</td><td></td><td></td></tr><tr><td>Benefit obligation at beginning of year</td><td>$ 1,007</td><td>$ 993</td></tr><tr><td>Service cost</td><td>8</td><td>10</td></tr><tr><td>Interest cost</td><td>38</td><td>41</td></tr><tr><td>Plan amendments</td><td>1</td><td>2</td></tr><tr><td>Curtailments</td><td>—</td><td>(2)</td></tr><tr><td>Special termination benefits</td><td>1</td><td>2</td></tr><tr><td>Benefits paid</td><td>(73)</td><td>(76)</td></tr><tr><td>Settlement payments</td><td>—</td><td>(73)</td></tr><tr><td>Actuarial (gain) loss</td><td>(109)</td><td>115</td></tr><tr><td>Administrative expense</td><td>—</td><td>(5)</td></tr><tr><td>Benefit obligation at end of year</td><td>$ 873</td><td>$ 1,007</td></tr></table>

A significant component of the overall decrease in the Company’s benefit obligation for the year ended December 31, 2018 was due to the change in discount rates used to measure our benefit obligation, which increased from 3.90% at December 31, 2017 to 4.60% at December 31, 2018. A significant component of the overall increase in the Company’s benefit obligation for the year ended December 31, 2017 was also due to the change in discount rates used to measure our benefit obligation, which decreased from 4.60% at December 31, 2016 to 3.90% at December 31, 2017.

<table><tr><td colspan="3">Change in plan assets:</td></tr><tr><td>Fair value of plan assets at beginning of year</td><td>$ 864</td><td>$ 837</td></tr><tr><td>Actual return on plan assets</td><td>(49)</td><td>129</td></tr><tr><td>Employer contributions</td><td>13</td><td>52</td></tr><tr><td>Settlement payments</td><td>—</td><td>(73)</td></tr><tr><td>Benefits paid</td><td>(73)</td><td>(76)</td></tr><tr><td>Administrative expenses</td><td>—</td><td>(5)</td></tr><tr><td>Fair value of plan assets at end of year</td><td>$ 755</td><td>$ 864</td></tr><tr><td>Funded status at end of year</td><td>$ (118)</td><td>$ (143)</td></tr></table>

Amounts recognized in the Consolidated Balance Sheet:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Accrued benefit liability - current</td><td>$ (5)</td><td>$ (8)</td></tr><tr><td>Accrued benefit liability - non-current</td><td>(113)</td><td>(135)</td></tr><tr><td></td><td>$ (118)</td><td>$ (143)</td></tr></table>



The accumulated benefit obligation was $849 million and $976 million at December 31, 2018 and December 31, 2017, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Projected benefit obligation</td><td>$ 873</td><td>$ 1,007</td></tr><tr><td>Accumulated benefit obligation</td><td>849</td><td>976</td></tr><tr><td>Fair value of plan assets</td><td>755</td><td>864</td></tr></table>

Information for pension plans with a projected benefit obligation in excess of plan assets:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Projected benefit obligation</td><td>$ 873</td><td>$ 1,007</td></tr><tr><td>Accumulated benefit obligation</td><td>849</td><td>976</td></tr><tr><td>Fair value of plan assets</td><td>755</td><td>864</td></tr></table>

Components of net periodic benefit cost:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Service cost</td><td>$ 8</td><td>$ 10</td><td>$ 17</td></tr><tr><td>Interest cost</td><td>38</td><td>41</td><td>54</td></tr><tr><td>Amortization of prior service cost \( ^{(a)} \)</td><td>5</td><td>6</td><td>6</td></tr><tr><td>Expected return on plan assets</td><td>(44)</td><td>(45)</td><td>(65)</td></tr><tr><td>Amortization of net loss</td><td>16</td><td>5</td><td>6</td></tr><tr><td>Net periodic benefit cost</td><td>$ 23</td><td>$ 17</td><td>$ 18</td></tr><tr><td>Additional (gain) loss recognized due to:</td><td></td><td></td><td></td></tr><tr><td>Settlement charges \( ^{(b)} \)</td><td>$ —</td><td>$ 19</td><td>$ 32</td></tr><tr><td>Special termination benefits</td><td>$ 1</td><td>$ 2</td><td>$ 3</td></tr><tr><td>Pension data adjustment \( ^{(c)} \)</td><td>$ —</td><td>$ 22</td><td>$ —</td></tr></table>

(a) Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.

(b) Settlement losses result when benefit payments exceed the sum of the service cost and interest cost within a plan during the year. These losses were recorded in Other pension (income) expense.

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

Pension gains (losses) in AOCI:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Beginning of year</td><td>$ (160)</td><td>$ (180)</td></tr><tr><td>Net actuarial gain (loss)</td><td>17</td><td>(10)</td></tr><tr><td>Curtailments</td><td>—</td><td>2</td></tr><tr><td>Amortization of net loss</td><td>16</td><td>5</td></tr><tr><td>Amortization of prior service cost</td><td>5</td><td>6</td></tr><tr><td>Prior service cost</td><td>(1)</td><td>(2)</td></tr><tr><td>Settlement charges</td><td>—</td><td>19</td></tr><tr><td>End of year</td><td>$ (123)</td><td>$ (160)</td></tr></table>

Accumulated pre-tax losses recognized within AOCI:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Actuarial net loss</td><td>$ (101)</td><td>$ (134)</td></tr><tr><td>Prior service cost</td><td>(22)</td><td>(26)</td></tr><tr><td></td><td>$ (123)</td><td>$ (160)</td></tr></table>



Weighted-average assumptions used to determine benefit obligations at the measurement dates:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Discount rate</td><td>4.60%</td><td>3.90%</td></tr><tr><td>Rate of compensation increase</td><td>3.00%</td><td>3.75%</td></tr></table>

Weighted-average assumptions used to determine the net periodic benefit cost for fiscal years:

<table><tr><td></td><td>2018</td><td>2017(a)</td><td>2016</td></tr><tr><td>Discount rate</td><td>3.90%</td><td>4.53%</td><td>4.90%</td></tr><tr><td>Long-term rate of return on plan assets</td><td>5.65%</td><td>6.06%</td><td>6.75%</td></tr><tr><td>Rate of compensation increase</td><td>3.75%</td><td>3.75%</td><td>3.75%</td></tr></table>

(a) Reflects a weighted average due to interim re-measurements in 2017.

Our estimated long-term rate of return on plan assets represents the weighted-average of expected future returns on the asset categories included in our target investment allocation based primarily on the historical returns for each asset category and future growth expectations.

## Plan Assets

The fair values of our pension plan assets at December 31, 2018 and December 31, 2017 by asset category and level within the fair value hierarchy are as follows:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Level 1:</td><td></td><td></td></tr><tr><td>Cash</td><td>$ 3</td><td>$ 3</td></tr><tr><td>Cash Equivalents \( ^{(a)} \)</td><td>10</td><td>12</td></tr><tr><td>Fixed Income Securities - U.S. Corporate \( ^{(b)} \)</td><td>140</td><td>177</td></tr><tr><td>Equity Securities - U.S. Large cap \( ^{(b)} \)</td><td>215</td><td>257</td></tr><tr><td>Equity Securities - U.S. Mid cap \( ^{(b)} \)</td><td>35</td><td>43</td></tr><tr><td>Equity Securities - U.S. Small cap \( ^{(b)} \)</td><td>34</td><td>43</td></tr><tr><td>Equity Securities - Non-U.S. \( ^{(b)} \)</td><td>74</td><td>87</td></tr><tr><td>Level 2:</td><td></td><td></td></tr><tr><td>Fixed Income Securities - U.S. Corporate \( ^{(c)} \)</td><td>106</td><td>86</td></tr><tr><td>Fixed Income Securities - U.S. Government and Government Agencies \( ^{(d)} \)</td><td>161</td><td>177</td></tr><tr><td>Fixed Income Securities - Other \( ^{(d)} \)</td><td>18</td><td>35</td></tr><tr><td>Total fair value of plan assets \( ^{(e)} \)</td><td>$ 796</td><td>$ 920</td></tr></table>

(a) Short-term investments in money market funds.

(b) Securities held in common trusts.

(c) Investments held directly by the Plan.

(d) Includes securities held in common trusts and investments held directly by the Plan.

(e) 2018 and 2017 exclude net unsettled trade payables of $41 million and $56 million, respectively.

Our primary objectives regarding the investment strategy for the Plan’s assets are to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future payment requirements. To achieve these objectives, we are using a combination of active and passive investment strategies. The Plan’s equity securities, currently targeted to be 50% of our investment mix, consist primarily of low-cost index funds focused on achieving long-term capital appreciation. The Plan diversifies its equity risk by investing in several different U.S. and foreign market index funds. Investing in these index funds provides the Plan with the adequate liquidity required to fund benefit payments and plan expenses. The fixed income asset allocation, currently targeted to be 50% of our mix, is actively managed and consists of long-duration fixed income securities that help to reduce exposure to interest rate variation and to better correlate asset maturities with obligations. The fair values of all pension plan assets are determined based on closing market prices or net asset values.

A mutual fund held as an investment by the Plan includes shares of Common Stock valued at $0.3 million at both December 31, 2018 and December 31, 2017 (less than 1% of total plan assets in each instance).



## Benefit Payments

The benefits expected to be paid in each of the next five years and in the aggregate for the five years thereafter are set forth below:

<table><tr><td colspan="2">Year ended:</td></tr><tr><td>2019</td><td>39</td></tr><tr><td>2020</td><td>40</td></tr><tr><td>2021</td><td>43</td></tr><tr><td>2022</td><td>45</td></tr><tr><td>2023</td><td>48</td></tr><tr><td>2024 - 2028</td><td>269</td></tr></table>

Expected benefit payments are estimated based on the same assumptions used to measure our benefit obligation on the measurement date and include benefits attributable to estimated future employee service.

## International Pension Plans

We also sponsor various defined benefit plans covering certain of our non-U.S. employees, the most significant of which are in the UK. Both of our UK plans have previously been frozen such that they are closed to new participants and existing participants can no longer earn future service credits.

At the end of 2018 and 2017, the projected benefit obligations of these UK plans totaled $233 million and $287 million, respectively and plan assets totaled $319 million and $358 million, respectively. These plans were both in a net overfunded position at the end of 2018 and 2017 and related expense amounts recorded in each of 2018, 2017 and 2016 were not significant.

The funding rules for our pension plans outside of the U.S. vary from country to country and depend on many factors including discount rates, performance of plan assets, local laws and regulations. We do not plan to make significant contributions to either of our UK plans in 2019.

## NOTE 15 Share-based and Deferred Compensation Plans

## Overview

At year end 2018, we had one stock award plan in effect: the YUM! Brands, Inc. Long-Term Incentive Plan (the "LTIP"). Under the LTIP, the exercise price of stock options and SARs granted must be equal to or greater than the average market price or the ending market price of the Company's stock on the date of grant.

Potential awards to employees and non-employee directors under the LTIP include stock options, incentive stock options, SARs, restricted stock, restricted stock units ("RSUs"), performance restricted stock units, performance share units ("PSUs") and performance units. We have issued only stock options, SARs, RSUs and PSUs under the LTIP. While awards under the LTIP can have varying vesting provisions and exercise periods, outstanding awards under the LTIP vest in periods ranging from immediate to five years. Stock options and SARs generally expire ten years after grant.

At year end 2018, approximately 28 million shares were available for future share-based compensation grants under the LTIP.

Our EID Plan allows participants to defer receipt of a portion of their annual salary and all or a portion of their incentive compensation. As defined by the EID Plan, we credit the amounts deferred with

## Retiree Medical Benefits

Our post-retirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents, and includes retiree cost-sharing provisions. This plan was previously amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in this plan. Employees hired prior to September 30, 2001 are eligible for benefits if they meet age and service requirements and qualify for retirement benefits. We fund our post-retirement plan as benefits are paid.

At the end of 2018 and 2017, the accumulated post-retirement benefit obligation was $45 million and $55 million, respectively. Actuarial pre-tax gains of $13 million and $8 million were recognized in AOCI at the end of 2018 and 2017, respectively. The net periodic benefit cost recorded was $2 million in 2018, $2 million in 2017 and $3 million in 2016, the majority of which is interest cost on the accumulated post-retirement benefit obligation. The weighted-average assumptions used to determine benefit obligations and net periodic benefit cost for the post-retirement medical plan are identical to those as shown for the U.S. pension plans.

There is a cap on our medical liability for all retirees at the end of 2018 and certain retirees at the end of 2017. The benefits expected to be paid in each of the next five years are approximately $4 million and in aggregate for the five years thereafter are $16 million.

## Retiree Savings Plan

We sponsor a contributory plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for eligible U.S. salaried and hourly employees. Participants are able to elect to contribute up to 75% of eligible compensation on a pre-tax basis. Participants may allocate their contributions to one or any combination of multiple investment options or a self-managed account within the 401(k) Plan. We match 100% of the participant’s contribution to the 401(k) Plan up to 6% of eligible compensation. We recognized as compensation expense our total matching contribution of $12 million in 2018, $13 million in 2017 and $14 million in 2016.

earnings based on the investment options selected by the participants. These investment options are limited to cash, phantom shares of our Common Stock, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund. Investments in cash and phantom shares of both index funds will be distributed in cash at a date as elected by the employee and therefore are classified as a liability on our Consolidated Balance Sheets. We recognize compensation expense for the appreciation or the depreciation, if any, of investments in cash and both of the index funds. Deferrals into the phantom shares of our Common Stock will be distributed in shares of our Common Stock, under the LTIP, at a date as elected by the employee and therefore are classified in Common Stock on our Consolidated Balance Sheets. We do not recognize compensation expense for the appreciation or the depreciation, if any, of investments in phantom shares of our Common Stock. Our EID plan also allows certain participants to defer incentive compensation to purchase phantom shares of our Common Stock and receive a 33% Company match on the amount deferred. Deferrals receiving a match are similar to a RSU award in that participants will generally forfeit both the match and incentive compensation amounts deferred if they voluntarily separate from employment during a vesting period that is two years from the date of deferral. We expense the intrinsic value of the match and the



incentive compensation amount over the requisite service period which includes the vesting period.

Historically, the Company has repurchased shares on the open market in excess of the amount necessary to satisfy award exercises and expects to continue to do so in 2019.

In connection with the Separation of our China business in the prior year, under the provisions of our LTIP, employee stock options, SARs, RSUs and PSUs were adjusted to maintain the pre-spin intrinsic value of the awards. Depending on the tax laws of the country of employment, awards were modified using either the shareholder method or the employer method. The modifications to the outstanding equity awards resulted in an insignificant amount of additional compensation expense in the year ended December 31, 2016. Share-based compensation as recorded in Income from continuing operations is based on the amortization of the fair value for both YUM and Yum China awards held by YUM employees. Share issuances for Yum China awards held by YUM employees will be satisfied by Yum China. Share issuances for YUM awards held by Yum China employees are being satisfied by YUM.

Under the shareholder method, investments in phantom shares of our Common Stock held within our EID Plan were partially converted into phantom investments in Yum China. Through October 31, 2018, distributions of investments in phantom shares of Yum China could be settled in cash, as opposed to stock, at a date as elected by the employee and, therefore, were classified as a liability and remeasured to fair value at each reporting period in our Consolidated Balance Sheet. During 2018, 2017 and 2016, we recorded a $3 million credit, a $18 million charge and a $30 million charge, respectively, within G&A related to these awards (See Note 5).

As of October 31, 2018, deferrals in phantom shares of Yum China common stock are no longer an investment option within our EID Plan and any balances relating to these shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund remained classified as a liability and any appreciation or depreciation in these investments from the transfer date forward will be recognized as compensation expense. Any amounts directed into phantom shares of YUM Common Stock were reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock.

## Award Valuation

We estimated the fair value of each stock option and SAR award as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Risk-free interest rate</td><td>2.5%</td><td>1.9%</td><td>1.4%</td></tr><tr><td>Expected term (years)</td><td>6.5 years</td><td>6.4 years</td><td>6.4 years</td></tr><tr><td>Expected volatility</td><td>22.0%</td><td>22.9%</td><td>27.0%</td></tr><tr><td>Expected dividend yield</td><td>1.8%</td><td>1.8%</td><td>2.6%</td></tr></table>

We believe it is appropriate to group our stock option and SAR awards into two homogeneous groups when estimating expected term. These groups consist of grants made primarily to restaurant-level employees, which cliff-vest after 4 years and expire 10 years after grant, and grants made to executives, which typically have a graded vesting schedule of 25% per year over 4 years and expire 10 years after grant. We use a single weighted-average term for our awards that have a graded vesting schedule. Based on analysis of our historical exercise and post-vesting termination behavior, we have determined that our restaurant-level employees and our executives exercised the awards on average after 5 years and 6.5 years, respectively.

When determining expected volatility, we consider both historical volatility of our stock as well as implied volatility associated with our publicly traded options. The expected dividend yield is based on the annual dividend yield at the time of grant.

The fair values of RSU and PSU awards are based on the closing price of our Common Stock on the date of grant.

## Award Activity

## Stock Options and SARs

<table><tr><td></td><td>Shares (in thousands)</td><td>Weighted-Average Exercise Price</td><td>Weighted-Average Remaining Contractual Term (years)</td><td>Aggregate Intrinsic Value (in millions)</td></tr><tr><td>Outstanding at the beginning of the year</td><td>18,285</td><td>$ 44.85</td><td></td><td></td></tr><tr><td>Granted</td><td>2,580</td><td>78.35</td><td></td><td></td></tr><tr><td>Exercised</td><td>(3,832)</td><td>34.05</td><td></td><td></td></tr><tr><td>Forfeited or expired</td><td>(842)</td><td>71.72</td><td></td><td></td></tr><tr><td>Outstanding at the end of the year</td><td>16,191 \( ^{(a)} \)</td><td>51.84</td><td>5.50</td><td>$ 626</td></tr><tr><td>Exercisable at the end of the year</td><td>10,297</td><td>$ 43.23</td><td>4.02</td><td>$ 501</td></tr></table>

(a) Outstanding awards include 753 options and 15,438 SARs with weighted average exercise prices of $42.40 and $52.30, respectively. Outstanding awards represent YUM awards held by employees of both YUM and Yum China.

The weighted-average grant-date fair value of stock options and SARs granted during 2018, 2017 and 2016 was $16.45, $14.08 and $14.40, respectively. The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2018, December 31, 2017 and December 31, 2016, was $195 million, $154 million and $263 million, respectively.
As of December 31, 2018, $48 million of unrecognized compensation cost related to unvested stock options and SARs, which will be reduced by any forfeitures that occur, is expected to be recognized over a remaining weighted-average period of approximately 1.6 years. This reflects unrecognized cost for both YUM and Yum China awards held by YUM employees. The total fair



value at grant date of awards for both YUM and Yum China awards held by YUM employees that vested during 2018, 2017 and 2016 was $28 million, $33 million and $41 million, respectively.

## RSUs and PSUs

As of December 31, 2018, there was $21 million of unrecognized compensation cost related to 1.0 million unvested RSUs and PSUs, none of which related to Yum China common stock. The total fair value at grant date of awards that vested during 2018, 2017 and 2016 was $16 million, $10 million and $7 million, respectively.

## Impact on Net Income

The components of share-based compensation expense and the related income tax benefits are shown in the following table:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>Options and SARs</td><td>$ 37</td><td>$ 30</td><td>$ 38</td></tr><tr><td>Restricted Stock Units</td><td>6</td><td>26</td><td>38</td></tr><tr><td>Performance Share Units</td><td>7</td><td>9</td><td>4</td></tr><tr><td>Total Share-based Compensation Expense</td><td>$ 50(a)</td><td>$ 65(a)</td><td>$ 80(b)</td></tr><tr><td>Deferred Tax Benefit recognized</td><td>$ 9</td><td>$ 22(c)</td><td>$ 26(c)</td></tr><tr><td>EID compensation expense not share-based</td><td>$ (2)</td><td>$ 12</td><td>$ 5</td></tr></table>

(a) Includes $3 million of appreciation and $18 million of depreciation in the market price of Yum China’s stock in 2018 and 2017, respectively. See Note 5.

(b) Includes $30 million due to modifications of awards in connection with the Separation that was not allocated to any of our operating segments for performance purposes. See Note 5.

(c) Deferred tax benefit recognized does not reflect the impact of the Tax Act. See Note 17.

Cash received from stock option exercises for 2018, 2017 and 2016, was $5.5 million, $12 million and $5 million, respectively. Tax benefits realized on our tax returns from tax deductions associated with share-based compensation for 2018, 2017 and 2016 totaled $60 million, $153 million and $109 million, respectively.

## NOTE 16 Shareholders' Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during 2018, 2017 and 2016. All amounts exclude applicable transaction fees.

<table><tr><td rowspan="2">Authorization Date</td><td colspan="3">Shares Repurchased (thousands)</td><td colspan="3">Dollar Value of Shares Repurchased</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>August 2018</td><td>10,003</td><td>—</td><td>—</td><td>$ 894</td><td>$ —</td><td>$ —</td></tr><tr><td>November 2017</td><td>18,240</td><td>—</td><td>—</td><td>1,500</td><td>—</td><td>—</td></tr><tr><td>November 2016</td><td>—</td><td>26,561</td><td>1,337</td><td>—</td><td>1,915</td><td>85</td></tr><tr><td>May 2016</td><td>—</td><td>—</td><td>50,435</td><td>—</td><td>—</td><td>4,200</td></tr><tr><td>March 2016</td><td>—</td><td>—</td><td>2,823</td><td>—</td><td>—</td><td>229</td></tr><tr><td>December 2015</td><td>—</td><td>—</td><td>13,368</td><td>—</td><td>—</td><td>933</td></tr><tr><td>Total</td><td>28,243(a)</td><td>26,561(b)</td><td>67,963(b)</td><td>$ 2,394(a)</td><td>$ 1,915(b)</td><td>$ 5,447(b)</td></tr></table>

(a) Includes the effect of $5 million in share repurchases (0.1 million shares) with trade dates on, or prior to, December 31, 2018 but settlement dates subsequent to December 31, 2018.

(b) 2017 amount excludes and 2016 amount includes the effect of $45 million in share repurchases (0.7 million shares) with trade dates prior to December 31, 2016 but settlement dates subsequent to December 31, 2016.

On August 10, 2018, our Board of Directors authorized share repurchases through December 2019 of up to $2 billion (excluding applicable transaction fees) of our outstanding Common Stock. As of December 31, 2018, we have remaining capacity to repurchase up to $1.1 billion of Common Stock under this authorization.



Changes in AOCI are presented below.

<table><tr><td>Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature \( ^{(a)} \)</td><td>Pension and Post-Retirement Benefits \( ^{(b)} \)</td><td>Derivative Instruments \( ^{(c)} \)</td><td>Total</td></tr><tr><td>Balance at December 31, 2016, net of tax</td><td>(336)</td><td>(127)</td><td>5</td></tr><tr><td>OCI, net of tax</td><td></td><td></td><td></td></tr><tr><td>Gains (losses) arising during the year classified into AOCI, net of tax</td><td>107</td><td>(13)</td><td>(51)</td></tr><tr><td>(Gains) losses reclassified from AOCI, net of tax</td><td>55</td><td>34</td><td>55</td></tr><tr><td></td><td>162</td><td>21</td><td>4</td></tr><tr><td>Balance at December 31, 2017, net of tax</td><td>(174)</td><td>(106)</td><td>9</td></tr><tr><td>Adoption of accounting standards</td><td>21 \( ^{(d)} \)</td><td>(17) \( ^{(e)} \)</td><td>(2) \( ^{(e)} \)</td></tr><tr><td>OCI, net of tax</td><td></td><td></td><td></td></tr><tr><td>Gains (losses) arising during the year classified into AOCI, net of tax</td><td>(88)</td><td>24</td><td>20</td></tr><tr><td>(Gains) losses reclassified from AOCI, net of tax</td><td>(4)</td><td>17</td><td>(34)</td></tr><tr><td></td><td>(92)</td><td>41</td><td>(14)</td></tr><tr><td>Balance at December 31, 2018, net of tax</td><td>(245)</td><td>(82)</td><td>(7)</td></tr></table>

(a) Amounts reclassified from AOCI are due to substantially complete liquidations of foreign entities related to the KFC and Pizza Hut Brazil refranchising transactions during 2018 and KFC Turkey, Pizza Hut Turkey, Pizza Hut Thailand and Pizza Hut Korea refranchising transactions during 2017.

(b) Amounts reclassified from AOCI for pension and post-retirement benefit plan losses during 2018 include amortization of net losses of $17 million, amortization of prior service cost of $5 million and related income tax benefit of $5 million. Amounts reclassified from AOCI for pension and post-retirement benefit plan losses during 2017 include amortization of net losses of $5 million, historical pension data adjustment of $22 million, settlement charges of $20 million, amortization of prior service cost of $5 million and related income tax benefit of $18 million. See Note 14.

(c) See Note 12 for details on amounts reclassified from AOCI.

(d) Represents the impact of foreign currency translation from the adoption of Topic 606. See Notes 2 and 5.

(e) During the quarter ended March 31, 2018, we adopted a standard that allows for the reclassification from AOCI to Accumulated deficit for stranded tax effects resulting from the Tax Act. See Note 2.

## NOTE 17 Income Taxes

U.S. and foreign income before taxes are set forth below:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>U.S.</td><td>$ 726</td><td>$ 662</td><td>$ 366</td></tr><tr><td>Foreign</td><td>1,113</td><td>1,612</td><td>979</td></tr><tr><td></td><td>$ 1,839</td><td>$ 2,274</td><td>$ 1,345</td></tr></table>

The details of our income tax provision (benefit) are set forth below:

<table><tr><td></td><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td rowspan="3">Current:</td><td>Federal</td><td>$ 102</td><td>$ (2)</td><td>$ 126</td></tr><tr><td>Foreign</td><td>181</td><td>290</td><td>160</td></tr><tr><td>State</td><td>25</td><td>12</td><td>13</td></tr><tr><td></td><td></td><td>$ 308</td><td>$ 300</td><td>$ 299</td></tr><tr><td rowspan="3">Deferred:</td><td>Federal</td><td>$ (24)</td><td>$ 603</td><td>$ 19</td></tr><tr><td>Foreign</td><td>5</td><td>19</td><td>3</td></tr><tr><td>State</td><td>8</td><td>12</td><td>6</td></tr><tr><td></td><td></td><td>$ (11)</td><td>$ 634</td><td>$ 28</td></tr><tr><td></td><td></td><td>$ 297</td><td>$ 934</td><td>$ 327</td></tr></table>



The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:

<table><tr><td></td><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>U.S. federal statutory rate</td><td>21.0%</td><td>35.0%</td><td>35.0%</td></tr><tr><td>State income tax, net of federal tax</td><td>1.0</td><td>0.5</td><td>1.1</td></tr><tr><td>Statutory rate differential attributable to foreign operations</td><td>(12.3)</td><td>(9.3)</td><td>(10.5)</td></tr><tr><td>Adjustments to reserves and prior years</td><td>2.8</td><td>0.5</td><td>(0.8)</td></tr><tr><td>Share-based compensation</td><td>(2.5)</td><td>(5.1)</td><td>—</td></tr><tr><td>Change in valuation allowances</td><td>8.5</td><td>1.5</td><td>(0.2)</td></tr><tr><td>Other, net</td><td>(0.4)</td><td>(1.1)</td><td>(0.3)</td></tr><tr><td>Tax Act Enactment</td><td>(1.9)</td><td>19.1</td><td>—</td></tr><tr><td>Effective income tax rate</td><td>16.2%</td><td>41.1%</td><td>24.3%</td></tr></table>

Statutory rate differential attributable to foreign operations. This item includes local taxes, withholding taxes, and shareholder-level taxes, net of foreign tax credits. In 2018, this benefit was positively impacted by approximately 8 percentage points due to a transaction resulting in the recognition of excess foreign tax credits that were fully offset by expense included in change in valuation allowances. 2016 and 2017 is favorably impacted by a majority of our income being earned outside of the U.S. where tax rates were generally lower than the U.S. rate.

Adjustments to reserves and prior years. This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. The impact of certain effects or changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line. In 2018, this item was unfavorably impacted by a $20 million reserve related to a current year uncertain tax position related to a dispute concerning the income tax rate to be applied to our 2018 income in a foreign market and a $19 million charge for the correction of an error associated with the tax recorded on a prior year divestiture. In 2016, this item was favorably impacted by the resolution of uncertain tax positions in the U.S.

Share-based compensation. 2018 and 2017 includes $47 million and $117 million, respectively, of excess tax benefit related to share-based compensation. The 2017 excess tax benefits were largely associated with deferred compensation payouts to recently retired employees.

Change in valuation allowances. This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year. The impact of certain changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line. In 2018, $156 million of net tax expense was driven by valuation allowances recorded against deferred tax assets generated in the current year. This amount excludes a valuation allowance release of $78 million, which is included in the "Tax Act Enactment" line. In 2017, $34 million of net tax expense was driven by valuation allowances recorded against deferred tax assets generated in the current year. This amount excludes a valuation allowance of $189 million, which is included in the "Tax Act Enactment" line. In 2016, $3 million of net tax benefit was driven by $14 million in net tax expense for valuation allowances recorded against deferred tax assets generated in the current year and $17 million in net tax benefit for valuation allowances resulting from a change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year.

Other. This item primarily includes the net impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions. In 2018 and 2017, this item was primarily driven by the favorable impact of certain international refranchising gains.

Tax Act Enactment. On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). 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%, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, 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 subject to U.S. tax.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 which allowed us to record provisional amounts related to the impacts of the Tax Act during a measurement period not to extend beyond one year of the enactment date. As a result, we recorded a $434 million provisional estimate of the effect of the Tax Act in 2017. This expense was comprised of an estimate of our deemed repatriation tax, the remeasurement of net deferred tax assets resulting from the permanent reduction in the U.S. tax rate to 21%, and establishment of a valuation allowance on foreign tax credit carryforwards which are unlikely to be realized under the U.S. territorial tax system.

In 2018, we completed the accounting for the tax effects of the enactment of the Tax Act. As a result of the Tax Act, we recorded cumulative net tax expense of $399 million ($35 million benefit in 2018 and $434 million expense in 2017). This net expense was comprised of $241 million for our deemed repatriation tax liability, $47 million related to the remeasurement of our net deferred tax assets to the 21% U.S. tax rate and $111 million to establish a valuation allowance on foreign tax credits that are unlikely to be realized under the U.S. territorial tax system.

Companies subject to the Global Intangible Low-Taxed Income provision (GLITI) have the option to account for the GLITI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GLITI. The Company has elected to account for GLITI as a period cost.



The details of 2018 and 2017 deferred tax assets (liabilities) are set forth below:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Operating losses</td><td>$ 180</td><td>$ 216</td></tr><tr><td>Capital losses</td><td>3</td><td>4</td></tr><tr><td>Tax credit carryforwards</td><td>266</td><td>311</td></tr><tr><td>Employee benefits</td><td>72</td><td>94</td></tr><tr><td>Share-based compensation</td><td>62</td><td>58</td></tr><tr><td>Self-insured casualty claims</td><td>7</td><td>7</td></tr><tr><td>Lease-related liabilities</td><td>43</td><td>51</td></tr><tr><td>Various liabilities</td><td>43</td><td>51</td></tr><tr><td>Property, plant and equipment</td><td>19</td><td>24</td></tr><tr><td>Deferred income and other</td><td>53</td><td>31</td></tr><tr><td>Gross deferred tax assets</td><td>748</td><td>847</td></tr><tr><td>Deferred tax asset valuation allowances</td><td>(454)</td><td>(421)</td></tr><tr><td>Net deferred tax assets</td><td>$ 294</td><td>$ 426</td></tr><tr><td>Intangible assets, including goodwill</td><td>$ (42)</td><td>$ (69)</td></tr><tr><td>Property, plant and equipment</td><td>(33)</td><td>(18)</td></tr><tr><td>Deemed repatriation tax</td><td>—</td><td>(170)</td></tr><tr><td>Other</td><td>(31)</td><td>(36)</td></tr><tr><td>Gross deferred tax liabilities</td><td>$ (106)</td><td>$ (293)</td></tr><tr><td>Net deferred tax assets (liabilities)</td><td>$ 188</td><td>$ 133</td></tr><tr><td>Reported in Consolidated Balance Sheets as:</td><td></td><td></td></tr><tr><td>Deferred income taxes</td><td>$ 195</td><td>$ 139</td></tr><tr><td>Other liabilities and deferred credits</td><td>(7)</td><td>(6)</td></tr><tr><td></td><td>$ 188</td><td>$ 133</td></tr></table>

As of December 31, 2018, we had approximately $3.6 billion of unremitted foreign retained earnings. The Tax Act imposed U.S. federal tax on all post-1986 foreign Earnings and Profits accumulated through December 31, 2017. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction and, therefore, exempt from U.S. tax. All undistributed earnings may still be subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. Our intent is to indefinitely reinvest our unremitted earnings outside the U.S. and our current plans do not demonstrate a need to repatriate these amounts to fund our U.S. operations. Thus, we have not provided taxes, including U.S. state income, foreign income, or foreign withholding taxes, for the unremitted earnings that we believe are permanently invested. However, if these funds were repatriated in taxable transactions, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes. A determination of the deferred tax liability on this amount is not practicable due to the complexities, variables and assumptions inherent in the hypothetical calculations.

At December 31, 2018, the Company has foreign operating and capital loss carryforwards of $0.4 billion, U.S. state operating loss and tax credit carryforwards of $1.0 billion, and U.S. federal tax credit carryforwards of $0.3 billion. The tax losses are being carried forward in jurisdictions where we are permitted to use losses from prior periods to reduce future taxable income. The losses and tax credits will expire as follows:

<table><tr><td rowspan="2"></td><td colspan="6">Year of Expiration</td></tr><tr><td>2019</td><td>2020-2023</td><td>2024-2037</td><td>Indefinitely</td><td>Total</td><td></td></tr><tr><td>Foreign</td><td>$ 2</td><td>$ 22</td><td>$ 46</td><td>$ 346</td><td>$ 416</td><td></td></tr><tr><td>U.S. state</td><td>—</td><td>78</td><td>941</td><td>—</td><td>1,019</td><td></td></tr><tr><td>U.S. federal</td><td>—</td><td>49</td><td>207</td><td>—</td><td>256</td><td></td></tr><tr><td></td><td>$ 2</td><td>$ 149</td><td>$ 1,194</td><td>$ 346</td><td>$ 1,691</td><td></td></tr></table>

Valuation allowances of $0.1 billion, $0.1 billion and $0.3 billion have been recorded against the foreign operating loss and capital loss carryforwards, the U.S. state operating loss and tax credit carryforwards, and the U.S. federal tax credit carryforwards, respectively, that are not likely to be realized.
We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.



The Company had $113 million and $100 million of unrecognized tax benefits at December 31, 2018 and December 31, 2017, respectively, $10 million of which, for both years, are temporary in nature and if recognized, would not impact the effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

<table><tr><td></td><td>2018</td><td>2017</td></tr><tr><td>Beginning of Year</td><td>$ 100</td><td>$ 91</td></tr><tr><td>Additions on tax positions - current year</td><td>19</td><td>3</td></tr><tr><td>Additions for tax positions - prior years</td><td>—</td><td>8</td></tr><tr><td>Reductions for tax positions - prior years</td><td>(5)</td><td>—</td></tr><tr><td>Reductions for settlements</td><td>—</td><td>(1)</td></tr><tr><td>Reductions due to statute expiration</td><td>(1)</td><td>(1)</td></tr><tr><td>Foreign currency translation adjustment</td><td>—</td><td>—</td></tr><tr><td>End of Year</td><td>$ 113</td><td>$ 100</td></tr></table>

The Company believes it is reasonably possible that its unrecognized tax benefits as of December 31, 2018 may decrease by approximately $22 million in the next 12 months due to settlements or statute of limitations expirations.

The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions.

The Company has settled audits with the IRS through fiscal year 2010 and is currently under IRS examination for 2011-2015. Our operations in certain foreign jurisdictions remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities.

The accrued interest and penalties related to income taxes at December 31, 2018 and December 31, 2017 were $12 million and $14 million, respectively.

During 2018, 2017 and 2016, a net benefit of $2 million, a net expense of $5 million and a net benefit of $4 million, respectively, for interest and penalties was recognized in our Consolidated Statements of Income as components of its Income tax provision.

## NOTE 18 Reportable Operating Segments

See Note 1 for a description of our operating segments.

<table><tr><td rowspan="2"></td><td colspan="3">Revenues</td></tr><tr><td>2018</td><td>2017</td><td>2016</td></tr><tr><td>KFC Division \( ^{(a)} \)</td><td>$ 2,644</td><td>$ 3,110</td><td>$ 3,225</td></tr><tr><td>Pizza Hut Division \) ^{(a)}</td><td>988</td><td>893</td><td>1,108</td></tr><tr><td>Taco Bell Division \( ^{(a)} \)</td><td>2,056</td><td>1,880</td><td>2,025</td></tr><tr><td>Unallocated \( ^{(b)(f)} \)</td><td>—</td><td>(5)</td><td>(2)</td></tr><tr><td></td><td>$ 5,688</td><td>$ 5,878</td><td>$ 6,356</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="4">Operating Profit; Interest Expense, Net; and Income Before Income Taxes</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>KFC Division</td><td>$ 959</td><td>$ 981</td><td>$ 871</td><td></td></tr><tr><td>Pizza Hut Division</td><td>348</td><td>341</td><td>367</td><td></td></tr><tr><td>Taco Bell Division</td><td>633</td><td>619</td><td>595</td><td></td></tr><tr><td>Corporate and unallocated G&amp;A expenses \( ^{(b)(g)} \)</td><td>(171)</td><td>(230)</td><td>(280)</td><td></td></tr><tr><td>Unallocated restaurant costs \( ^{(b)(i)} \)</td><td>3</td><td>10</td><td>—</td><td></td></tr><tr><td>Unallocated Franchise and property revenues \( ^{(b)(j)} \)</td><td>—</td><td>(5)</td><td>(2)</td><td></td></tr><tr><td>Unallocated Franchise and property expenses \( ^{(b)(j)} \)</td><td>(8)</td><td>(30)</td><td>(24)</td><td></td></tr><tr><td>Unallocated Refranchising gain (loss) \( ^{(b)} \)</td><td>540</td><td>1,083</td><td>163</td><td></td></tr><tr><td>Unallocated Other income (expense) \( ^{(b)(h)} \)</td><td>(8)</td><td>(8)</td><td>(8)</td><td></td></tr><tr><td>Operating Profit</td><td>2,296</td><td>2,761</td><td>1,682</td><td></td></tr><tr><td>Investment income (expense), net \( ^{(b)} \)</td><td>9</td><td>5</td><td>2</td><td></td></tr><tr><td>Other pension income (expense) \( ^{(b)(i)} \)</td><td>(14)</td><td>(47)</td><td>(32)</td><td></td></tr><tr><td>Interest expense, net \( ^{(b)} \)</td><td>(452)</td><td>(445)</td><td>(307)</td><td></td></tr><tr><td>Income from continuing operations before income taxes</td><td>$ 1,839</td><td>$ 2,274</td><td>$ 1,345</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="4">Depreciation and Amortization</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>KFC Division</td><td>$ 58</td><td>$ 138</td><td>$ 172</td><td></td></tr><tr><td>Pizza Hut Division</td><td>10</td><td>26</td><td>36</td><td></td></tr><tr><td>Taco Bell Division</td><td>61</td><td>82</td><td>90</td><td></td></tr><tr><td>Corporate</td><td>8</td><td>7</td><td>12</td><td></td></tr><tr><td></td><td>$ 137</td><td>$ 253</td><td>$ 310</td><td></td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="4">Capital Spending</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td></td></tr><tr><td>KFC Division</td><td>$ 105</td><td>$ 176</td><td>$ 216</td><td></td></tr><tr><td>Pizza Hut Division</td><td>38</td><td>42</td><td>69</td><td></td></tr><tr><td>Taco Bell Division</td><td>85</td><td>95</td><td>132</td><td></td></tr><tr><td>Corporate</td><td>6</td><td>5</td><td>10</td><td></td></tr><tr><td></td><td>$ 234</td><td>$ 318</td><td>$ 427</td><td></td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="2">Identifiable Assets \( ^{(e)} \)</td></tr><tr><td>2018</td><td>2017</td></tr><tr><td>KFC Division</td><td>$ 1,481</td><td>$ 1,791</td></tr><tr><td>Pizza Hut Division</td><td>701</td><td>628</td></tr><tr><td>Taco Bell Division</td><td>1,074</td><td>1,086</td></tr><tr><td>Corporate \( ^{(c)} \)</td><td>874</td><td>1,806</td></tr><tr><td></td><td>$ 4,130</td><td>$ 5,311</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="2">Long-Lived Assets \( ^{(d)} \)</td></tr><tr><td>2018</td><td>2017</td></tr><tr><td>KFC Division</td><td>$ 868</td><td>$ 1,200</td></tr><tr><td>Pizza Hut Division</td><td>384</td><td>311</td></tr><tr><td>Taco Bell Division</td><td>720</td><td>778</td></tr><tr><td>Corporate</td><td>32</td><td>31</td></tr><tr><td></td><td>$ 2,004</td><td>$ 2,320</td></tr></table>

(a) U.S. revenues included in the combined KFC, Pizza Hut and Taco Bell Divisions totaled $2.9 billion in 2018, $2.8 billion in 2017 and $3.1 billion in 2016.

(b) Amounts have not been allocated to any segment for performance reporting purposes.

(c) Primarily includes cash, our Grubhub investment and deferred tax assets.

(d) Includes PP&E, goodwill, and intangible assets, net.

(e) U.S. identifiable assets included in the combined Corporate and KFC, Pizza Hut and Taco Bell Divisions totaled $2.0 billion and $3.0 billion in 2018 and 2017, respectively.

(f) Represents costs associated with the KFC U.S. Acceleration Agreement and Pizza Hut U.S. Transformation Agreement. See Note 5.

(g) Amounts in 2018 include costs related to YUM's Strategic Transformation Initiatives of $8 million, partially offset by non-cash credits associated with modifications of share-based compensation awards of $3 million. Amounts in 2017 include costs related to YUM's Strategic Transformation Initiatives of $21 million, non-cash charges associated with modifications of share-based compensation awards of $18 million and costs associated with the Pizza Hut U.S. Transformation Agreement of $13 million. See Note 5.

(h) Amounts include losses associated with the sale of corporate aircraft related to YUM's Strategic Transformation Initiatives of $2 million in 2017. See Note 7.

(i) Represents depreciation reductions arising primarily from KFC restaurants that were held-for-sale. See Note 5.

(j) Amounts in 2017 include a non-cash charge of $22 million related to the adjustment of certain historical deferred vested liability balances in our qualified U.S. plan. See Note 5.



## NOTE 19 Contingencies

## Lease Guarantees

As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of December 31, 2018, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $525 million. The present value of these potential payments discounted at our pre-tax cost of debt at December 31, 2018 was approximately $425 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our probable exposure under such leases at December 31, 2018 and December 31, 2017 was not material.

## Franchise Loan Pool and Equipment Guarantees

We have agreed to provide financial support, if required, to a variable interest entity that operates a franchisee lending program used primarily to assist franchisees in the development of new restaurants or the upgrade of existing restaurants and, to a lesser extent, in connection with the Company’s refranchising programs in the U.S. We have determined that we are not required to consolidate this entity as we share the power to direct this entity’s lending activity with other parties. We have provided guarantees of 20% of the outstanding loans of the franchisee loan program. As such, at December 31, 2018 our guarantee exposure under this program is $2 million based on total loans outstanding of $9 million.

In addition to the guarantees described above, YUM has agreed to provide guarantees of up to $26 million on behalf of franchisees for several financing programs related to equipment purchases and refranchising. At December 31, 2018, our guarantee exposure under these financing programs is $10 million based on total loans outstanding of $50 million.

## Insurance Programs

We are self-insured for a substantial portion of our current and prior years' coverage including property and casualty losses. To mitigate the cost of our exposures for certain property and casualty losses, we self-insure the risks of loss up to defined maximum per occurrence retentions on a line-by-line basis. The Company then purchases insurance coverage, up to a certain limit, for losses that exceed the self-insurance per occurrence retention. The insurers' maximum aggregate loss limits are significantly above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers' maximum aggregate loss limits is remote.
The following table summarizes the 2018 and 2017 activity related to our net self-insured property and casualty reserves as of December 31, 2018.

<table><tr><td></td><td>Beginning Balance</td><td>Expense</td><td>Payments</td><td>Ending Balance</td></tr><tr><td>2018 Activity</td><td>$ 84</td><td>11</td><td>(29)</td><td>$ 66</td></tr><tr><td>2017 Activity</td><td>$ 98</td><td>27</td><td>(41)</td><td>$ 84</td></tr></table>

Due to the inherent volatility of actuarially determined property and casualty loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to our growth in quarterly and annual Net Income. We believe that we have recorded reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility.

In the U.S. and in certain other countries, we are also self-insured for healthcare claims and long-term disability for eligible participating employees subject to certain deductibles and limitations. We have accounted for our retained liabilities for property and casualty losses, healthcare and long-term disability claims, including reported and incurred but not reported claims, based on information provided by independent actuaries.

## Legal Proceedings

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

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



## NOTE 20 Selected Quarterly Financial Data (Unaudited)

<table><tr><td rowspan="2"></td><td colspan="6">2018</td></tr><tr><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td><td>Total</td><td></td></tr><tr><td>Revenues:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 512</td><td>$ 512</td><td>$ 499</td><td>$ 477</td><td>$ 2,000</td><td></td></tr><tr><td>Franchise and property revenues</td><td>584</td><td>584</td><td>605</td><td>709</td><td>2,482</td><td></td></tr><tr><td>Franchise contributions for advertising and other services</td><td>275</td><td>272</td><td>287</td><td>372</td><td>1,206</td><td></td></tr><tr><td>Total revenues</td><td>1,371</td><td>1,368</td><td>1,391</td><td>1,558</td><td>5,688</td><td></td></tr><tr><td>Restaurant profit</td><td>74</td><td>91</td><td>100</td><td>101</td><td>366</td><td></td></tr><tr><td>Operating Profit(a)</td><td>553</td><td>449</td><td>553</td><td>741</td><td>2,296</td><td></td></tr><tr><td>Net Income</td><td>433</td><td>321</td><td>454</td><td>334</td><td>1,542</td><td></td></tr><tr><td>Basic earnings per common share from continuing operations</td><td>1.30</td><td>0.99</td><td>1.43</td><td>1.07</td><td>4.80</td><td></td></tr><tr><td>Diluted earnings per common share from continuing operations</td><td>1.27</td><td>0.97</td><td>1.40</td><td>1.04</td><td>4.69</td><td></td></tr><tr><td>Dividends declared per common share</td><td>0.36</td><td>0.36</td><td>0.36</td><td>0.36</td><td>1.44</td><td></td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="6">2017</td></tr><tr><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td><td>Total</td><td></td></tr><tr><td>Revenues:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Company sales</td><td>$ 902</td><td>$ 909</td><td>$ 871</td><td>$ 890</td><td>$ 3,572</td><td></td></tr><tr><td>Franchise and property revenues</td><td>515</td><td>539</td><td>565</td><td>687</td><td>2,306</td><td></td></tr><tr><td>Total revenues</td><td>1,417</td><td>1,448</td><td>1,436</td><td>1,577</td><td>5,878</td><td></td></tr><tr><td>Restaurant profit</td><td>144</td><td>161</td><td>154</td><td>159</td><td>618</td><td></td></tr><tr><td>Operating Profit(b)</td><td>484</td><td>419</td><td>643</td><td>1,215</td><td>2,761</td><td></td></tr><tr><td>Net Income</td><td>280</td><td>206</td><td>418</td><td>436</td><td>1,340</td><td></td></tr><tr><td>Basic earnings per common share from continuing operations</td><td>0.78</td><td>0.59</td><td>1.21</td><td>1.29</td><td>3.86</td><td></td></tr><tr><td>Diluted earnings per common share from continuing operations</td><td>0.77</td><td>0.58</td><td>1.18</td><td>1.26</td><td>3.77</td><td></td></tr><tr><td>Dividends declared per common share</td><td>0.30</td><td>0.30</td><td>—</td><td>0.30</td><td>0.90</td><td></td></tr></table>

(a) Includes net gains from refranchising initiatives of $156 million, $29 million, $100 million and $255 million in the first, second, third and fourth quarters, respectively.

(b) Includes net gains from refranchising initiatives of $111 million, $19 million, $201 million and $752 million in the first, second, third and fourth quarters, respectively.



# ITEM 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

## ITEM 9A Controls and Procedures

## Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

## Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.

KPMG LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and the effectiveness of our internal control over financial reporting and has issued their report, included herein.

## Changes in Internal Control

There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended December 31, 2018.

## ITEM 9B Other Information

None.



## PART III

## ITEM 10 Directors, Executive Officers and Corporate Governance

Information regarding Section 16(a) compliance, the Audit Committee and the Audit Committee financial expert, the Company’s code of ethics and background of the directors appearing under the captions “Stock Ownership Information,” “Governance of the Company,” “Executive Compensation” and “Item 1: Election of Directors and Director biographies” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018.

Information regarding executive officers of the Company is included in Part I.

## ITEM 11 Executive Compensation

Information regarding executive and director compensation and the Compensation Committee appearing under the captions “Governance of the Company” and “Executive Compensation” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018.

## ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding equity compensation plans and security ownership of certain beneficial owners and management appearing under the captions “Executive Compensation” and “Stock Ownership Information” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018.

## ITEM 13 Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions and information regarding director independence appearing under the caption “Governance of the Company” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018.

## ITEM 14 Principal Accountant Fees and Services

Information regarding principal accountant fees and services and audit committee pre-approval policies and procedures appearing under the caption “Item 2: Ratification of Independent Auditors” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018.



## PART IV

## ITEM 15 Exhibits and Financial Statement Schedules

(a) (1) Financial Statements: Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.

(2) Financial Statement Schedules: No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements thereto filed as a part of this Form 10-K.

(3) Exhibits: The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-K. The Index to Exhibits specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Form 10-K.



## Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 20, 2019

YUM! BRANDS, INC.

By: /s/ Greg Creed

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

<table><tr><td>Signature</td><td>Title</td><td>Date</td></tr><tr><td>/s/ Greg Creed</td><td></td><td></td></tr><tr><td>Greg Creed</td><td>Chief Executive Officer (principal executive officer)</td><td>February 20, 2019</td></tr><tr><td>/s/ David W. Gibbs</td><td>President, Chief Operating Officer and Chief Financial Officer (principal financial officer)</td><td>February 20, 2019</td></tr><tr><td>David W. Gibbs</td><td></td><td></td></tr><tr><td>/s/ David E. Russell</td><td>Senior Vice President, Finance and Corporate Controller (principal accounting officer)</td><td>February 20, 2019</td></tr><tr><td>/s/ Paget L. Alves</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>/s/ Michael J. Cavanagh</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Michael J. Cavanagh</td><td></td><td></td></tr><tr><td>/s/ Christopher M. Connor</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Christopher M. Connor</td><td></td><td></td></tr><tr><td>/s/ Brian C. Cornell</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Brian C. Cornell</td><td></td><td></td></tr><tr><td>/s/ Tanya L. Domier</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Tanya L. Domier</td><td></td><td></td></tr><tr><td>/s/ Mirian M. Graddick-Weir</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Mirian M. Graddick-Weir</td><td></td><td></td></tr><tr><td>/s/ Thomas C. Nelson</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Thomas C. Nelson</td><td></td><td></td></tr><tr><td>/s/ P. Justin Skala</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>P. Justin Skala</td><td></td><td></td></tr><tr><td>/s/ Elane B. Stock</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Elane B. Stock</td><td></td><td></td></tr><tr><td>/s/ Robert D. Walter</td><td>Director</td><td>February 20, 2019</td></tr><tr><td>Robert D. Walter</td><td></td><td></td></tr></table>



## YUM! Brands, Inc.
Exhibit Index (Item 15)

<table><tr><td>Exhibit Number</td><td>Description of Exhibits</td></tr><tr><td>2.1</td><td>Separation and Distribution Agreement, dated as of October 31, 2016, by and among YUM, Yum Restaurants Consulting (Shanghai) Company Limited and Yum China Holdings, Inc., which is incorporated herein by reference from Exhibit 2.1 to YUM&#x27;s Report on Form 8-K filed on November 3, 2016.</td></tr><tr><td>3.1</td><td>Restated Articles of Incorporation of YUM, effective May 26, 2011, which is incorporated herein by reference from Exhibit 3.1 to YUM&#x27;s Report on Form 8-K filed on May 31, 2011.</td></tr><tr><td>3.2</td><td>Amended and restated Bylaws of YUM, effective July 15, 2016, which are incorporated herein by reference from Exhibit 3.1 to YUM&#x27;s Report on Form 8-K filed on July 19, 2016.</td></tr><tr><td>4.1</td><td>Indenture, dated as of May 1, 1998, between YUM and The Bank of New York Mellon Trust Company, N.A., successor in interest to The First National Bank of Chicago, which is incorporated herein by reference from Exhibit 4.1 to YUM&#x27;s Report on Form 8-K filed on May 13, 1998.</td></tr><tr><td></td><td>(i) 6.875% Senior Notes due November 15, 2037 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.3 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed on October 22, 2007.</td></tr><tr><td></td><td>(ii) 5.30% Senior Notes due September 15, 2019 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.3 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed on August 25, 2009.</td></tr><tr><td></td><td>(iii) 3.875% Senior Notes due November 1, 2020 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed on August 31, 2010.</td></tr><tr><td></td><td>(iv) 3.750% Senior Notes due November 1, 2021 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed August 29, 2011.</td></tr><tr><td></td><td>(v) 3.875% Senior Notes due November 1, 2023 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed October 31, 2013.</td></tr><tr><td></td><td>(vi) 5.350% Senior Notes due November 1, 2043 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.3 (included in Exhibit 4.1) to YUM&#x27;s Report on Form 8-K filed October 31, 2013.</td></tr><tr><td>10.1</td><td>Credit Agreement, dated as of June 16, 2016, by and among Pizza Hut Holdings, LLC, KFC Holding Co., and Taco Bell of America, LLC, as the borrowers, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, JPMorgan Chase Bank, N.A., Goldman Sachs Bank USA, Wells Fargo Securities, LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &amp; Smith Incorporated, Morgan Stanley Senior Funding, Inc., Fifth Third Bank and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Joint Lead Arrangers and Joint Bookrunners, Barclays Bank PLC, The Bank of Nova Scotia, Cooperative Rabobank U.A., New York Branch, and Industrial and Commercial Bank of China Limited, New York Branch, as Co-Documentation Agents and Co-Managers, which is incorporated herein by reference from Exhibit 4.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended June 11, 2016.</td></tr><tr><td>10.1.1</td><td>Refinancing Amendment, dated as of March 21, 2017, to Credit Agreement dated as of June 16, 2016 among Pizza Hut Holdings, LLC, KFC Holding Co. and Taco Bell of America, LLC, as borrowers, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Collateral Agent, Swing Line Lender, an L/C Issuer and Administrative Agent for the Lenders, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K as filed on March 23, 2017.</td></tr><tr><td>10.1.2</td><td>Refinancing Amendment No. 2, dated as of June 7, 2017, to Credit Agreement dated as of June 16, 2016, as amended, among Pizza Hut Holdings, LLC, KFC Holding Co. and Taco Bell of America, LLC, as borrowers, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Collateral Agent, Swing Line Lender, an L/C Issuer and Administrative Agent for the Lenders, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K as filed on June 8, 2017.</td></tr><tr><td>10.1.3</td><td>Refinancing Amendment, dated as of April 3, 2018, to Credit Agreement dated as of June 16, 2016 among Pizza Hut Holdings, LLC, KFC Holding Co. and Taco Bell of America, LLC, as borrowers, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Collateral Agent, Swing Line Lender, an L/C Issuer and Administrative Agent for the Lenders, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K as filed on April 9, 2018.</td></tr><tr><td>10.2†</td><td>YUM Director Deferred Compensation Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.7 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.</td></tr></table>



<table><tr><td>Exhibit Number</td><td>Description of Exhibits</td></tr><tr><td>10.2.1†</td><td>YUM Director Deferred Compensation Plan, Plan Document for the 409A Program, as effective January 1, 2005, and as Amended through November 14, 2008, which is incorporated by reference from Exhibit 10.7.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended June 13, 2009.</td></tr><tr><td>10.3†</td><td>YUM Executive Incentive Compensation Plan, as effective May 20, 2004, and as Amended through the Second Amendment, as effective May 21, 2009, which is incorporated herein by reference from Exhibit A of YUM&#x27;s Definitive Proxy Statement on Form DEF 14A for the Annual Meeting of Shareholders held on May 21, 2009.</td></tr><tr><td>10.4†</td><td>YUM Executive Income Deferral Program, as effective October 7, 1997, and as amended through May 16, 2002, which is incorporated herein by reference from Exhibit 10.10 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.</td></tr><tr><td>10.4.1†</td><td>YUM! Brands Executive Income Deferral Program, Plan Document for the 409A Program, as effective January 1, 2005, and as Amended through June 30, 2009, which is incorporated by reference from Exhibit 10.10.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended June 13, 2009.</td></tr><tr><td>10.5†</td><td>YUM! Brands Pension Equalization Plan, Plan Document for the Pre-409A Program, as effective January 1, 2005, and as Amended through December 31, 2010, which is incorporated by reference from Exhibit 10.7 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended March 19, 2011.</td></tr><tr><td>10.5.1†</td><td>The Yum! Brands, Inc. Pension Equalization Plan, Restated Plan Document for the 409A Program effective January 1, 2005, as amended through January 1, 2017 as filed herewith.</td></tr><tr><td>10.6†</td><td>Form of Directors&#x27; Indemnification Agreement, which is incorporated herein by reference from Exhibit 10.17 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.</td></tr><tr><td>10.7†</td><td>Form of YUM! Brands, Inc. Change in Control Severance Agreement, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K filed on March 21, 2013.</td></tr><tr><td>10.8†</td><td>YUM! Long Term Incentive Plan, as Amended and Restated effective as of May 20, 2016 as incorporated by reference from Form DEF 14A filed on April 8, 2016.</td></tr><tr><td>10.9†</td><td>YUM SharePower Plan, as effective October 7, 1997, and as amended through June 23, 2003, which is incorporated herein by reference from Exhibit 10.23 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.</td></tr><tr><td>10.10†</td><td>Form of YUM Director Stock Option Award Agreement, which is incorporated herein by reference from Exhibit 10.25 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004.</td></tr><tr><td>10.11†</td><td>Form of YUM 1999 Long Term Incentive Plan Award Agreement, which is incorporated herein by reference from Exhibit 10.26 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004.</td></tr><tr><td>10.11.1†</td><td>Form of YUM 1999 Long Term Incentive Plan Award Agreement (2013) (Stock Options), which is incorporated herein by reference from Exhibit 10.15.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended March 23, 2013.</td></tr><tr><td>10.11.2†</td><td>Form of YUM 1999 Long Term Incentive Plan Award Agreement (2015) (Stock Options), which is incorporated herein by reference from Exhibit 10.15.2 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.</td></tr><tr><td>10.12†</td><td>YUM! Brands, Inc. International Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.27 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 25, 2004.</td></tr><tr><td>10.13†</td><td>Form of 1999 Long Term Incentive Plan Award Agreement (Stock Appreciation Rights) which is incorporated by reference from Exhibit 99.1 to YUM&#x27;s Report on Form 8-K as filed on January 30, 2006.</td></tr><tr><td>10.13.1†</td><td>Form of YUM 1999 Long Term Incentive Plan Award Agreement (2013) (Stock Appreciation Rights), which is incorporated by reference from Exhibit 10.18.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended March 23, 2013.</td></tr><tr><td>10.13.2†</td><td>Form of YUM 1999 Long Term Incentive Plan Award Agreement (2015) (Stock Appreciation Rights), which is incorporated herein by reference from Exhibit 10.18.2 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.</td></tr><tr><td>10.14†</td><td>YUM! Brands Leadership Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.32 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended March 24, 2007.</td></tr><tr><td>10.14.1†</td><td>YUM! Brands Leadership Retirement Plan, Plan Document for the 409A Program, as effective January 1, 2005, and as Amended through December, 2009, which is incorporated by reference from Exhibit 10.21.1 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 26, 2009.</td></tr><tr><td>10.15†</td><td>YUM! Performance Share Plan, as amended and restated January 1, 2013, which is incorporated by reference from Exhibit 10.1 to YUM&#x27;s Quarterly Report on Form 10-Q for the quarter ended June 13, 2015.</td></tr><tr><td>10.16†</td><td>YUM! Brands Third Country National Retirement Plan, as effective January 1, 2009, which is incorporated by reference from Exhibit 10.25 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 26, 2009.</td></tr><tr><td>10.17†</td><td>2010 YUM! Brands Supplemental Long Term Disability Coverage Summary, as effective January 1, 2010, which is incorporated by reference from Exhibit 10.26 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 26, 2009.</td></tr></table>



<table><tr><td>Exhibit Number</td><td>Description of Exhibits</td></tr><tr><td>10.18†</td><td>1999 Long Term Incentive Plan Award (Stock Appreciation Rights) by and between the Company and David C. Novak, dated as of February 6, 2015, which is incorporated herein by reference from Exhibit 10.27 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.</td></tr><tr><td>10.19†</td><td>YUM! Brands, Inc. Compensation Recovery Policy, Amended and Restated January 1, 2015, which is incorporated herein by reference from Exhibit 10.28 to YUM&#x27;s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.</td></tr><tr><td>10.20</td><td>Indenture, dated as of June 16, 2016, by and among KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, as issuers, the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, which is incorporated herein by reference from Exhibit 4.1 to YUM&#x27;s Report on Form 8-K filed on June 21, 2016.</td></tr><tr><td>10.21</td><td>Indenture, dated as of June 15, 2017, by and among KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, as issuers, the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, which is incorporated herein by reference from Exhibit 4.1 to YUM&#x27;s Report on Form 8-K filed on June 16, 2017.</td></tr><tr><td>10.22</td><td>Base Indenture, dated as of May 11, 2016, between Taco Bell Funding, LLC, as issuer and Citibank, N.A., as trustee and securities intermediary, which is incorporated herein by reference from Exhibit 4.1 to YUM&#x27;s Report on Form 8-K filed on May 16, 2016.</td></tr><tr><td>10.22.1</td><td>Series 2016-1 Supplement to Base Indenture dated as of May 11, 2016, by and between Taco Bell Funding, LLC, as issuer and Citibank, N.A. as Trustee and Series 2016-1 securities intermediary, which is incorporated herein by reference from Exhibit 4.2 to YUM&#x27;s Report on Form 8-K filed on May 16, 2016.</td></tr><tr><td>10.22.2</td><td>Series 2018-1 Supplement to Base Indenture, dated as of November 28, 2018, by and between the Issuer and Citibank, N.A. as Trustee and Series 2018-1 securities intermediary, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K filed on December 3, 2018.</td></tr><tr><td>10.22.3</td><td>Amendment No. 1 to Base Indenture, dated as of August 23, 2016, by and between the Issuer and Citibank, N.A. as Trustee and Series 2016-1 securities intermediary as filed herein.</td></tr><tr><td>10.22.4</td><td>Amendment No. 2 to Base Indenture, dated as of November 28, 2018, by and between the Issuer and Citibank, N.A. as Trustee and the Series 2018-1 securities intermediary, which is incorporated herein by reference from Exhibit 10.2 to YUM&#x27;s Report on Form 8-K filed on December 3, 2018.</td></tr><tr><td>10.24</td><td>Guarantee and Collateral Agreement, dated as of May 11, 2016, by Taco Bell Franchise Holder 1, LLC, Taco Bell Franchisor, LLC, Taco Bell IP Holder, LLC and Taco Bell Franchisor Holdings, LLC in favor of Citibank, N.A., which is incorporated herein by reference from Exhibit 10.2 to YUM&#x27;s Report on Form 8-K filed on May 16, 2016.</td></tr><tr><td>10.25</td><td>Management Agreement, dated as of May 11, 2016, among Taco Bell Funding, LLC, as issuer, Taco Bell Franchise Holder 1, LLC, Taco Bell Franchisor, LLC, Taco Bell IP Holder, LLC, Taco Bell Franchisor Holdings, LLC, Citibank, N.A. and Taco Bell Corp., as manager, which is incorporated herein by reference from Exhibit 10.3 to YUM&#x27;s Report on Form 8-K filed on May 16, 2016.</td></tr><tr><td>10.25.1</td><td>Amendment No.1 to Management Agreement, dated as of August 24, 2016, among Taco Bell Funding, LLC, as issuer, Taco Bell Franchise Holder 1, LLC, Taco Bell Franchisor, LLC, Taco Bell IP Holder, LLC, Taco Bell Franchisor Holdings, LLC and Taco Bell Corp., as manager as filed herein.</td></tr><tr><td>10.25.2</td><td>Amendment No. 2 to Management Agreement, dated as of November 28, 2018, among Taco Bell Funding, LLC, as issuer, Taco Bell Franchise Holder 1, LLC, Taco Bell Franchisor, LLC, Taco Bell IP Holder, LLC, Taco Bell Franchisor Holdings, LLC, Citibank, N.A. and Taco Bell Corp., as manager as filed herein.</td></tr><tr><td>10.26</td><td>Master License Agreement, dated as of October 31, 2016, by and between Yum! Restaurants Asia Pte. Ltd. and Yum Restaurants Consulting (Shanghai) Company Limited, which is incorporated herein by reference from Exhibit 10.1 to YUM&#x27;s Report on Form 8-K filed on November 3, 2016.</td></tr><tr><td>10.27</td><td>Tax Matters Agreement, dated as of October 31, 2016, by and among YUM, Yum China Holdings, Inc. and Yum Restaurants Consulting (Shanghai) Company Limited, which is incorporated herein by reference from Exhibit 10.2 to YUM&#x27;s Report on Form 8-K filed on November 3, 2016.</td></tr><tr><td>21.1</td><td>Active Subsidiaries of YUM.</td></tr><tr><td>23.1</td><td>Consent of KPMG LLP.</td></tr><tr><td>31.1</td><td>Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.</td></tr><tr><td>31.2</td><td>Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.</td></tr><tr><td>32.1</td><td>Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.</td></tr></table>



<table><tr><td>Exhibit Number</td><td>Description of Exhibits</td></tr><tr><td>32.2</td><td>Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.</td></tr><tr><td>101.INS</td><td>Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document</td></tr><tr><td>101.SCH</td><td>XBRL Taxonomy Extension Schema Document</td></tr><tr><td>101.CAL</td><td>XBRL Taxonomy Extension Calculation Linkbase Document</td></tr><tr><td>101.LAB</td><td>XBRL Taxonomy Extension Label Linkbase Document</td></tr><tr><td>101.PRE</td><td>XBRL Taxonomy Extension Presentation Linkbase Document</td></tr><tr><td>101.DEF</td><td>XBRL Taxonomy Extension Definition Linkbase Document</td></tr></table>

† Indicates a management contract or compensatory plan.






# Cautionary Language Regarding
Forward-Looking Statements

Forward-Looking Statements. This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “seek,” “project,” “model,” “ongoing,” “will,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on and reflect our current expectations, estimates, assumptions and/or projections, our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those indicated by those statements. There can be no assurance that our expectations, estimates, assumptions and/or projections, including with respect to the future earnings and performance or capital structure of Yum! Brands, will prove to be correct or that any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: food safety and food borne-illness issues; health concerns arising from outbreaks of viruses or other diseases; the success of our franchisees and licensees, and the success of our transformation initiatives, including our refranchising strategy; our significant exposure to the Chinese market; changes in economic and political conditions in countries and territories outside of the U.S. where we operate; our ability to protect the integrity and security of individually identifiable data of our customers and employees; our increasing dependence on digital commerce platforms and information technology systems; the impact of social media; our ability to secure and maintain distribution and adequate supply to our restaurants; the success of our development strategy in emerging markets; changes in commodity, labor and other operating costs; pending or future litigation and legal claims or proceedings; changes in or noncompliance with government regulations, including labor standards and anti-bribery or anti-corruption laws; recent changes in U.S. tax law and other tax matters, including disagreements with taxing authorities; consumer preferences and perceptions of our brands; changes in consumer discretionary spending and general economic conditions; competition within the retail food industry; and risks relating to our significant amount of indebtedness. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are only made as of the date of this report and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Risk Factors” and “Forward-Looking Statements” in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q) for additional detail about factors that could affect our financial and other results.

Trademarks and Brands. We use “Yum! Brands” and the Yum! logo as our trademarks. Product names and services appearing in this report are trademarks of Yum! Brands, Inc. or its subsidiaries. This report also may refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.

Market and Industry Data. Unless we indicate otherwise, we base the information concerning our industry contained in this report on our general knowledge of and expectations concerning the industry. Our market position and market share is based on our estimates using data from various industry sources and assumptions that we believe to be reasonable based on our knowledge of the industry. We have not independently verified the data obtained from these sources and cannot assure you of the data’s accuracy or completeness.

Non-GAAP Measures. This report includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are included on our website at http://www.investors.yum.com Investors are urged to consider carefully the comparable GAAP measures and reconciliations.



# Shareholder Information

## Inquiries Regarding Your YUM Holdings

REGISTERED SHAREHOLDERS (those who hold YUM shares in their own names) should address communications concerning statements, address changes, lost certificates and other administrative matters to:

Computershare, Inc.
462 South 4 \( ^{th} \)  Street, Suite 1600
Louisville, KY 40202
Phone: (888) 439-4986
International: 1+ (781) 575-3100
www.computershare.com

In all correspondence or phone inquiries, please provide your name and your YUM account number if you know it.

REGISTERED SHAREHOLDERS can access their accounts and complete the following functions online at the website of Computershare, Inc. ("Computershare"): www.computershare.com

• Access account balance and other general account information

• Change an account’s mailing address

• View a detailed list of holdings represented by certificates and the identifying certificate numbers

• Request a certificate for shares held at Computershare

• Replace a lost or stolen certificate

• Retrieve a duplicate Form 1099-B, Form 1099-DIV

• Purchase shares of YUM through the Company’s Direct Stock Purchase Plan

• Sell shares held at Computershare

Access accounts online at the following URL:

https://secure.amstock.com/Shareholder/sh_login.asp. Your account number and social security number are required. If you do not know your account number, please call Computershare at (888) 439-4986.
BENEFICIAL SHAREHOLDERS (those who hold YUM shares in the name of a bank or broker) should direct communications about all administrative matters related to their accounts to their stockbroker.

LONG TERM INCENTIVE PLAN (LTIP) PARTICIPANTS (employees with rights to LTIP and YUMBUCKS stock appreciation rights grants) should address all questions regarding their accounts, outstanding stock appreciation rights grants or shares received through stock appreciation right exercises to:

Merrill Lynch

Equity Award Services

1400 American Blvd.

Mail Stop # NJ2-140-03-40

Pennington, NJ 08534

Phone: (888) 986-4321 (U.S., Puerto Rico and Canada) (609) 818-8156 (all other locations)

In all correspondence, please provide the last 4 digits of your account number, your address, your telephone number and indicate that your inquiry relates to YUM holdings. For telephone inquiries, please have a copy of your most recent statement available.

## EMPLOYEE BENEFIT PLAN PARTICIPANTS

Capital Stock Purchase Program (888) 439-4986

YUM Savings Center (888) 875-4015

YUM Savings Center (904) 791-2005 (outside U.S.)
P.O. Box 5166
Boston, MA 02206-5166

Please have a copy of your most recent statement available when calling. Press 0#0# for a customer service representative and give the representative the name of the plan.



## Shareholder Services

## DIRECT STOCK PURCHASE PLAN

A prospectus and a brochure explaining this convenient plan are available from our transfer agent:

Computershare, Inc.
462 South 4 \( ^{th} \)  Street, Suite 1600
Louisville, KY 40202
Phone: (888) 439-4986
International: 1+ (781) 575-3100

## FINANCIAL AND OTHER INFORMATION

Securities analysts, portfolio managers, representatives of financial institutions and other individuals with questions regarding YUM's performance are invited to contact:

Mr. Keith Siegner
Vice President, Investor Relations,
Corporate Strategy & Treasurer
Yum! Brands, Inc.
1900 Colonel Sanders Lane
Louisville, KY 40213
Phone: (888) 298-6986

## INDEPENDENT AUDITORS

KPMG, LLC
400 West Market Street, Suite 2600
Louisville, Kentucky 40202
Phone: (502) 587-0535

## STOCK TRADING SYMBOL – YUM

The New York Stock Exchange is the principal market for YUM Common Stock, which trades under the symbol YUM.

YUM
LISTED
NYSE

## Franchise Inquiries

## ONLINE FRANCHISE INFORMATION

Information about potential franchise opportunities is available at www.yum.com/wps/portal/yumbrands/Yumbrands/company/our-brands/franchising-and-real-estate

YUM's Annual Report contains many of the valuable trademarks owned and used by YUM and its subsidiaries and affiliates in the United States and worldwide.



## BOARD OF DIRECTORS

Greg Creed 61
Chief Executive Officer,
Yum! Brands, Inc.

Paget L. Alves 64
Former Chief Sales Officer,
Sprint Corporation

Michael J. Cavanagh 53
Senior Executive Vice President and Chief Financial Officer,
Comcast Corporation

Christopher M. Connor 63
Former Chairman and Chief Executive Officer,
Sherwin-Williams Company

Brian C. Cornell 60
Chairman and Chief Executive Officer,
Target Corporation

Tanya L. Domier 53
Chief Executive Officer,
Advantage Solutions, Inc.

Mirian M. Graddick-Weir 64
Retired Executive Vice President Human Resources,
Merck & Co., Inc.

Thomas C. Nelson 56
Chairman, Chief Executive Officer and President,
National Gypsum Company

P. Justin Skala 59
Executive Vice President, Chief Growth & Strategy Officer,
Colgate-Palmolive Company

Elane B. Stock 54
Former Group President,
Kimberly-Clark International

Robert D. Walter 73
Founder and Retired Chairman/CEO,
Cardinal Health, Inc.

## SENIOR OFFICERS

Greg Creed 61
Chief Executive Officer,
Yum! Brands, Inc.

Scott A. Catlett 43
General Counsel and Corporate Secretary,
Yum! Brands, Inc.

David W. Gibbs 56
President and Chief Financial Officer, and Chief Operating Officer,
Yum! Brands, Inc.

David E. Russell 49
Senior Vice President, Finance and Corporate Controller,
Yum! Brands, Inc.

Keith Siegner 44
Vice President, Investor Relations, Corporate Strategy and Treasurer,
Yum! Brands, Inc.

Tracy Skeans 46
Chief Transformation and People Officer,
Yum! Brands, Inc.