Greg Creed, Chief Executive Officer Yum! Brands Inc. Celebrating Milestones AND PROGRESSING ON OUR TRANSFORMATION JOURNEY Dear Fellow Stakeholders: 2017 was a year of celebrating and achieving milestones while making solid progress in the first full year of our transformation journey. First, we celebrated our 20th anniversary as an independent company following our spin-off from Pepsico in October 1997. Since the spin, Yum! has more than doubled its system sales, grown operating profit more than six times over and developed into a global powerhouse, going from 30% of restaurants outside the U.S. to nearly 60% of restaurants outside the U.S. Our exceptional results over the last 20 years are a testament to the unmatched power of our brands and the extraordinary talent which is the backbone of our organization. Next, October 31 marked the one-year anniversary of our spin-off of the China business into an independent company. China’s success over the past year reaffirmed our decision to separate this powerful business. Our collaboration with Yum! China is as strong as ever and we continue to be impressed with their ability to make Yum!’s brands distinctive, relevant, and easy. Our future together is bright and by working together we can fully exploit the power of our brands. Finally, 2017 represented the first full year of our transformation journey. We made significant progress on our path to becoming a company that is more focused, more franchised, and more efficient. In fact, we ended 2017 with 97% of our restaurants being franchised and are well on our way towards being at least 98% franchised by the end of 2018. Our four key growth capabilities are the foundation upon 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 and 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. 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! and am committed to ensuring this is the case not only today, but in the future. Leading and investing in our culture is the best way to fuel better business results and I’m excited to see our people and our franchisees energized as they grow our iconic brands. With culture as the driving force behind our results, I’m pleased to share the following highlights from 2017: n Worldwide system sales growth of 5%, excluding the impact of the 53rd week and foreign currency translation. This was led by 7% growth at Taco Bell, followed by 6% at KFC and 2% at Pizza Hut. n Same-store sales growth of 2%, led by 4% growth at Taco Bell and followed by 3% at KFC with Pizza Hut even for the year. n Net-new unit growth of 3%, including 2,632 gross unit openings, which is more than 300 gross unit openings than in 2016. n Reached a significant milestone in 2017 as we ended the year with over 45,000 global restaurants in 139 countries and territories. n Increased core operating profit 9%, excluding the impact of the 53rd week. n Returned $2.4 billion of capital to shareholders through share repurchases and dividends and remain committed to returning between $6.5 and $7.0 billion from 2017 to 2019 through both share repurchases and dividends. Our three iconic brands continue to focus on our four key growth capabilities which are the catalysts behind our successful results. n KFC is “Southern Inspired”. With innovative new products such as the Dirty Louisiana burger and the Chizza, a unique marriage of chicken and pizza, KFC continues to demonstrate success with our “Always Original” brand positioning. The team remains dedicated to addressing unmet consumer occasions through enhanced asset formats and elevated consumer experiences by leveraging the brand’s strengths and delivering sustained momentum globally. n Pizza Hut is committed to ensuring every customer has a Hot, Fast and Reliable experience around the world. In the U.S. we are aligning the system through the Transformation Agreement and building momentum in the business by enhancing our digital and delivery experiences, investing in loyalty through our Hut Rewards program and optimizing our asset base. Internationally, we continue to align our delivery-centric asset strategy to meet the growing global demand for fast casual pizza. n Taco Bell truly is a Category of One. The team delivered another solid year of operating results driven by innovative new products and unparalleled value. I am particularly excited about the new products and unique and compelling marketing calendar the team has planned for 2018. Internationally, Taco Bell continues to build momentum as we entered five new countries and ended the year with over 400 Taco Bell restaurants outside the U.S. In closing, we are confident we are making the right changes to our business to build an enduring foundation for long-term growth that results in increased returns for our stakeholders. In 2018 and beyond, I look forward to updating you on our brands’ bold moves in delivery, digital and new restaurant development as they make our brands ‘Easy’ to order, ‘Easy’ to afford and ‘Easy’ to access. Most importantly, our three global iconic brands, bold growth agenda and world-class culture will continue to serve as our guiding light in our journey towards sustained momentum in our business now and in the future. Together we are building a world with more Yum! Greg Creed, CEO YUM! Brands, Inc. 1441 Gardiner Lane Louisville, Kentucky 40213 April 6, 2018 Dear Fellow Shareholders: On behalf of your Board of Directors, we are pleased to invite you to attend the 2018 Annual Meeting of Shareholders of YUM! Brands, Inc. The Annual Meeting will be held Thursday, May 17, 2018, at 9:00 a.m., local time, in the YUM! Brands Center of Restaurant Excellence at 7100 Corporate Drive in Plano, Texas. 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 are contained on the notice or proxy card. P r o x y S t a t e m e n t 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 19, 2018 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 17, 2018— this notice and the proxy statement are available at www.yum.com/investors/corporate-governance/proxy-statement. The Annual Report on Form 10-K is available at www.yum.com/annualreport. YUM! Brands, Inc. 1441 Gardiner Lane Louisville, Kentucky 40213 Notice of Annual Meeting of Shareholders Thursday, May 17, 2018 9:00 a.m. YUM! Brands Center of Restaurant Excellence, 7100 Corporate Drive, Plano, Texas 75024 ITEMS OF BUSINESS: (1) To elect eleven (11) directors to serve until the 2019 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, 2018. (3) To consider and hold an advisory vote on executive compensation. (4) 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 19, 2018. ANNUAL REPORT: A copy of our 2017 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.yum.com/annualreport. DATE OF MAILING: This Notice, the proxy statement and the form of proxy are first being mailed to shareholders on or about April 6, 2018. By Order of the Board of Directors P r o x y S t a t e m e n t Marc L. Kesselman General Counsel, Corporate Secretary and Chief Government Affairs Officer 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 6, 2018, 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 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING GOVERNANCE OF THE COMPANY 1 1 6 Director Biographies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 MATTERS REQUIRING SHAREHOLDER ACTION 26 ITEM 1 Election of Directors (Item 1 on the Proxy Card) ITEM 2 Ratification of Independent Auditors (Item 2 on the Proxy Card) ITEM 3 Advisory Vote on Executive Compensation (Item 3 on the Proxy Card) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 . . . . . . . . . . . . . . . . . . . . . . . . . 28 t n e m e t a t S y x o r P STOCK OWNERSHIP INFORMATION SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE EXECUTIVE COMPENSATION 30 32 32 Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 All Other Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Outstanding Equity Awards at Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Potential Payments Upon Termination or Change in Control CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 EQUITY COMPENSATION PLAN INFORMATION AUDIT COMMITTEE REPORT ADDITIONAL INFORMATION APPENDIX A: Reconciliation of Adjusted Operating Profit Growth 69 71 74 A-1 YUM! Brands, Inc. 1441 Gardiner Lane Louisville, Kentucky 40213 PROXY STATEMENT For Annual Meeting of Shareholders To Be Held On May 17, 2018 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. (Central Time), on Thursday, May 17, 2018, in the YUM! Brands Center of Restaurant Excellence, at 7100 Corporate Drive, Plano, Texas. 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. P r o x y S t a t e m e n t 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 6, 2018, 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. YUM! BRANDS, INC. - 2018 Proxy Statement 1 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING Who may attend the Annual Meeting? The Annual Meeting is open to all shareholders of record as of close of business on March 19, 2018, 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 May shareholders ask questions? t n e m e t a t S y x o r P 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 large bags, briefcases and packages will not be allowed in the meeting room. similar devices, and other 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 19, 2018. Each share of YUM common stock is entitled to one vote. As of March 19, 2018, YUM had 328.4 million shares of common stock outstanding. What am I voting on? You will be voting on the following three (3) items of business at the Annual Meeting: (cid:129) 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; (cid:129) The ratification of the selection of KPMG LLP as our the fiscal year ending independent auditors for December 31, 2018; and 2 YUM! BRANDS, INC. - 2018 Proxy Statement (cid:129) An advisory vote on executive compensation. We will also consider other business that properly comes before the meeting. QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING How does the Board of Directors recommend that I vote? Our Board of Directors recommends that you vote your shares: (cid:129) FOR the ratification of the selection of KPMG LLP as our independent auditors; and (cid:129) FOR each of the nominees named in this proxy (cid:129) FOR the proposal regarding an advisory vote on statement for election to the Board; executive compensation. How do I vote before the Annual Meeting? There are three ways to vote before the meeting: (cid:129) 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; (cid:129) 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 (cid:129) 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 16, 2018. Proxies submitted by mail must be received prior to the meeting. Directions 401(k) Plan participants must be received by 12:00 p.m., Eastern Daylight Saving Time, on May 15, 2018. submitted by 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 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 16, 2018. (www.proxyvote.com). Votes P r o x y S t a t e m e n t 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. YUM! BRANDS, INC. - 2018 Proxy Statement 3 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING 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: (cid:129) Giving written notice to the Secretary of the Company prior to the Annual Meeting; or (cid:129) Signing another proxy card with a later date and returning it to us prior to the Annual Meeting; (cid:129) Voting again by telephone or through the Internet prior to 11:59 p.m., Eastern Daylight Saving Time, on May 16, 2018; (cid:129) 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 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? t n e m e t a t S y x o r P 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: (cid:129) FOR the election of the eleven (11) nominees for director named in this proxy statement (Item 1); (cid:129) FOR the ratification of the selection of KPMG LLP as our independent auditors for the fiscal year 2018 (Item 2); and (cid:129) FOR the proposal regarding an advisory vote on executive compensation (Item 3). 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 to consolidate as many and/or our transfer agent 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 fiscal year 2018 is considered a routine matter for which brokerage firms independent auditors for 4 YUM! BRANDS, INC. - 2018 Proxy Statement 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.” QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING 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 19, 2018, 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.yum.com/ investors/corporate-governance/governance-principals/ and at page 19 under significant Board practices does the Company have? — Majority Voting Policy.” “What other How many votes are needed to approve the other proposals? the The other proposals must receive the “FOR” vote of a in person or majority of shares, present the represented by proxy, and entitled to vote at 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 to the present and entitled to vote with respect particular matter on which the broker has not voted. Thus, broker non-votes will not affect the outcome of any of these proposals. P r o x y S t a t e m e n t 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. YUM! BRANDS, INC. - 2018 Proxy Statement 5 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”. t n e m e t a t S y x o r P 6 YUM! BRANDS, INC. - 2018 Proxy Statement GOVERNANCE OF THE COMPANY 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 3.36 years, with our longest- and shortest-tenured directors having served for 12 years (Mr. Nelson) and for 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”). P r o x y S t a t e m e n t How often did the Board meet in fiscal 2017? The Board of Directors met 5 times during fiscal 2017. Each of the directors who served in 2017 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 9 of the 10 persons then serving as directors attended the 2017 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 YUM! BRANDS, INC. - 2018 Proxy Statement 7 known as our “Recipe for Growth.” Four growth drivers form the basis of this strategy to accelerate same-store sales growth and net-new restaurant development at KFC, Pizza Hut and Taco Bell around the world. The Company is focused on building the world’s most loved, trusted and fastest growing restaurant brands by: (cid:129) Building Distinctive, Relevant and Easy Brands, by increasing investment insights, core product innovation, digital excellence and initiatives that strengthen the quality, convenience and appeal of the customer experience; in consumer (cid:129) Developing Franchise Unmatched Operating Capability, strengthening how we equip and recruit the best restaurant operators to deliver great customer experiences, and build and protect our brands; (cid:129) Driving Bold Restaurant Development through partnerships with growth-minded franchisees who can expand and penetrate markets with modern restaurants, strong economics and value; and (cid:129) 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. GOVERNANCE OF THE COMPANY the person’s judgment, 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 experience, review of 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 including the current composition of the Board, the balance of management the need for Audit and independent directors, Committee expertise and the evaluations of other prospective nominees, if any. it deems appropriate, t n e m e t a t S y x o r P 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 2016 we launched several initiatives to transform the Company, centering on a new multi-year strategy to accelerate growth, reduce volatility and increase capital returns to shareholders. This transformation strategy is 8 YUM! BRANDS, INC. - 2018 Proxy Statement 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: GOVERNANCE OF THE COMPANY We believe that each of our directors has met the guidelines set forth in the Governance Principles. As noted in the director biographies that follow in this section, our directors have experience, qualifications and skills across a wide range of public and private companies, possessing a broad spectrum of experience both individually and collectively. In addition to the information provided in the director biographies, our director nominees’ qualifications, experiences and skills are summarized in the following matrix. This matrix is intended to provide a summary of our directors’ qualifications and should not be considered to be a complete list of each nominee’s strengths and contributions to the Board. P r o x y S t a t e m e n t 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 75. YUM! BRANDS, INC. - 2018 Proxy Statement 9 GOVERNANCE OF THE COMPANY Director Biographies 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 since 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: finance, brand Mr. Alves brings to the Board significant corporate leadership, global business, large management, and technology experience, drawing from his various executive roles at 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. Paget L. Alves Age 63 Director since 2016 (cid:129) Independent of Company Former Chief Sales Officer of Sprint Corporation t n e m e t a t S y x o r P Michael J. Cavanagh Age 52 Director since 2012 Senior Executive Vice President and Chief Financial Officer Comcast Corporation 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. (cid:129) Independent of Company 10 YUM! BRANDS, INC. - 2018 Proxy Statement GOVERNANCE OF THE COMPANY Christopher M. Connor served as Executive Chairman 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, Chairman from 2000 to 2015, and served as Executive Chairman during 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 Executive 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, marketing and brand management, and talent development. Mr. Connor also brings with him significant experience in public company board committee membership. (cid:129) Independent of Company Christopher M. Connor Age 62 Director since 2017 Former Executive Chairman of The Sherwin-Williams Company Brian C. 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. Brian C. Cornell Age 59 Director since 2015 Chairman and Chief Executive Officer Target Corporation 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 and marketing and brand management experience. Mr. Cornell also provides our Board with expertise in strategic planning. (cid:129) Independent of Company P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 11 GOVERNANCE OF THE COMPANY 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 through 2014. SPECIFIC QUALIFICATIONS, EXPERIENCE, SKILLS AND EXPERTISE: Mr. Creed has served as the Company’s Chief Executive Officer since 2015 and he brings significant industry and operations and marketing and brand corporate leadership, global business, 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. Greg Creed Age 60 Director since 2014 Chief Executive Officer, YUM 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. (cid:129) Independent of Company Age 52 Director since 2018 Chief Executive Officer, Advantage Solutions, Inc. t n e m e t a t S y x o r P 12 YUM! BRANDS, INC. - 2018 Proxy Statement GOVERNANCE OF THE COMPANY Mirian M. Graddick-Weir is Executive Vice President of Human Resources for Merck & Co., Inc., a pharmaceutical company. She has held this 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. (cid:129) 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 Carolinas Healthcare System 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. P r o x y S t a t e m e n t (cid:129) Independent of Company Mirian M. Graddick-Weir Age 63 Director since 2012 Executive Vice President Human Resources, Merck & Co., Inc. Thomas C. Nelson Age 55 Director since 2006 Chairman, Chief Executive Officer and President, National Gypsum Company YUM! BRANDS, INC. - 2018 Proxy Statement 13 GOVERNANCE OF THE COMPANY P. Justin Skala is Chief Operating Officer, North America, Europe, Africa/Eurasia and Global Sustainability, of the Colgate-Palmolive Company, a consumer products company. He has held this position since 2016. 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. (cid:129) 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 from 2010, when she first joined Kimberly-Clark, to 2012. Ms. Stock was the National Vice President of Strategy for the American Cancer Society from 2008 to 2010. Ms. Stock serves on the Board of Equifax Inc. 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 marketing and brand management and her significant experience in public company directorship and committee membership. (cid:129) Independent of Company P. Justin Skala Age 58 Director since 2016 Chief Operating Officer of North America, Europe, Africa/Eurasia and Global Sustainability for Colgate - Palmolive Company Elane B. Stock Age 53 Director since 2014 Former Group President Kimberly-Clark International t n e m e t a t S y x o r P 14 YUM! BRANDS, INC. - 2018 Proxy Statement GOVERNANCE OF THE COMPANY Robert D. 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 serves as a director of American Express Company and Nordstrom, 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. (cid:129) Independent of Company Robert D. Walter Age 72 Director since 2008 Non-Executive Chairman, Founder and Retired Chairman/ CEO Cardinal Health, Inc. If elected, we expect that all of the aforementioned nominees will serve as directors and hold office until the 2019 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 director who is not an employee of YUM is summarized in the table below and discussed in detail below. In on serve the Board. The Company primarily uses stock-based incentive compensation to attract and retain qualified candidates to 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. setting the Management Planning and In November 2017, 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 48 as well as published survey data from the National Association of industry Corporate Directors for retailers in several P r o x y S t a t e m e n t segments. 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 at the 50th percentile measured against both benchmarks, 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 and the Planning and Development Committee, Nominating and Governance Committee were consistent with market practice. Based on this data, the Committee did not recommend a change to the annual amount paid to the directors, Committee Chairpersons and to the Non-Executive Chairman. annual compensation of $240,000 is paid entirely as a stock retainer and beginning in 2017, no portion is paid in SARs. Upon request, up to 50% can be paid in cash. Chairpersons of the Audit, Management Planning and Development, and Governance Committees are paid additional stock retainers of $25,000, $20,000 and $15,000, respectively. Our Non-Executive Chairman also receives an additional stock retainer of $150,000 for performance of his duties. and Nominating directors’ The YUM! BRANDS, INC. - 2018 Proxy Statement 15 GOVERNANCE OF THE COMPANY Name (a) Alves, Paget L. Cavanagh, Michael J. Connor, Christopher M. Cornell, Brian C. Dorman, David W(4) Graddick-Weir, Mirian M. Meister, Keith(4) Nelson, Thomas C. Ryan, Thomas M.(4) Skala, P. Justin Stock, Elane B. Walter, Robert D. Fees Earned or Paid in Cash ($) (b) — — — — — — — — — — — — Stock Awards ($)(1) (c) 220,000 240,000 125,000 253,333 240,000 240,000 240,000 265,000 245,000 240,000 253,333 400,000 Option/SAR Awards ($)(2) (d) — — — — — — — — — — — — All Other Compensation ($)(3) (e) — — — — 10,000 — — — — — — 10,000 Total ($) (f) 220,000 240,000 125,000 253,333 250,000 240,000 240,000 265,000 245,000 240,000 253,333 410,000 (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 2017. Retainer awards are pro-rated for partial years of service. For 2017, Messrs. Cornell and Walter received pro-rated stock retainer awards for serving as the Chairs of the Management Planning and Development Committee ($13,333) and the Nominating and Governance Committee ($10,000), respectively, because they each served in those roles for less than the entire year. Ms. Domier is not included in the table because she did not join the Board until January 1, 2018. (2) At December 31, 2017, the aggregate number of SARs awards outstanding for each non-management director was: t n e m e t a t S y x o r P Name Alves, Paget L. Cavanagh, Michael J. Connor, Christopher M. Cornell, Brian C. Dorman, David W. Graddick-Weir, Mirian M. Meister, Keith Nelson, Thomas C. Ryan, Thomas M. Skala, P. Justin Stock, Elane B. Walter, Robert D. SARs — 18,531 — 6,491 35,252 22,752 — 38,208 45,877 4,646 10,003 49,047 (3) Represents amount of matching charitable contributions made on behalf of the director under the Company’s matching gift program and/or the amount of charitable contribution made in the director’s name. (4) Messrs. Dorman, Meister and Ryan are former members of the Board of Directors, each of whom resigned from their position during 2017. Non-Employee Directors Annual Compensation for 2017. Each director who was not an employee of YUM 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. the Chairman of the Board (Mr. Walter in 2017) receives an their added duties, In recognition of 16 YUM! BRANDS, INC. - 2018 Proxy Statement additional $150,000 stock retainer annually and the Chairs of the Audit Committee (Mr. Nelson in 2017) Management Planning and Development Committee in 2017) and the Nominating and (Mr. Cornell Governance Committee (Mr. Walter in 2017) each receive an additional $25,000, $20,000 and $15,000 annual stock retainer, respectively. These committee chairperson retainers were paid in February of 2017. 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. Stock Ownership Requirements. Similar to executive to share ownership officers, directors are subject GOVERNANCE OF THE COMPANY requirements. The directors’ requirements provide that directors will not sell any of the Company’s common stock received as compensation for service on the Board until the director has ceased being a member of the Board for one year (sales are permitted to the extent necessary to pay income taxes attributable to any stock retainer payment or exercise of a stock option or SAR). 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 YUM’s employees. 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 above as it is not considered compensation to the directors. What are the Company’s policies and procedures with respect to related person transactions? and the Company. they are in the best 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 interests of our determine if Transactions, shareholders 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 siblings, stepchildren, family members are spouses, parents, stepparents, daughters-in-law, children, 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. and that provide its review, procedures After the Nominating and Governance Committee may approve or ratify the transaction. The certain policies transactions are deemed to be pre-approved even if they will exceed $100,000. These transactions include employment director executive 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 company’s total revenues and the related person is not an executive officer of the other company. officers, of P r o x y S t a t e m e n t Does the Company require stock ownership by directors? The Board Directors the Company requires stock ownership by Yes, directors. expects of non-management directors to hold a meaningful number of shares of Company common stock and expects non-management directors to retain shares acquired as compensation as a director until at least 12 months following their departure from the Board. YUM directors receive a significant portion of their annual compensation in stock. The Company believes that the emphasis on the equity component of director compensation serves to further align the interests of directors with those of our shareholders. YUM! BRANDS, INC. - 2018 Proxy Statement 17 GOVERNANCE OF THE COMPANY How much YUM stock do the directors own? Stock ownership information for each director is shown in the table on page 31. 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 50. The Company has maintained an ownership culture among its executive and senior managers since its formation. Substantially all executive officers and in members of senior management hold stock well excess of the guidelines. How Can Shareholders Nominate for the Board? t n e m e t a t S y x o r P 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 2019 Annual Meeting of Shareholders must be received by us no earlier than November 7, 2018, and no later than December 7, 2018. Director nominations to be brought before the 2019 Annual Meeting of Shareholders. Director nominations that a shareholder intends to present at the 2019 Annual Meeting of Shareholders, other than through the proxy access procedures described above, must have been than February 16, 2019. These received no later nominations must be submitted by a shareholder in accordance with the requirements specified in YUM’s bylaws. Where to send director nominations for the 2019 Annual Meeting of Shareholders. Director nominations brought by shareholders must be delivered to YUM’s Secretary by mail at YUM! Brands, Inc., 1441 Gardiner Lane, Louisville, Kentucky 40213 and received by YUM’s Secretary by the dates set forth above. What is the Board’s leadership structure? On May 20, 2016, Robert D. Walter assumed the the Board. position of Non-Executive Chairman of Applying our Corporate Governance Principles, the Board determined that based on Mr. Walter’s independence, it would not appoint a Lead Director when Mr. Walter became Non-Executive Chairman. The Nominating and Governance Committee annually reviews the Board’s leadership structure and evaluates the Board of the performance and effectiveness 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 18 YUM! BRANDS, INC. - 2018 Proxy Statement 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 2017, our CEO did not serve as Chairman. Board independence and oversight of management are effectively maintained through a strong independent Chairman or Lead Director and through the Board’s believes Board that Our GOVERNANCE OF THE COMPANY 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. Walter is responsible for supporting the CEO on corporate strategy along with leadership development. Mr. Walter 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. leading the As CEO, Mr. Creed is responsible for 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? (cid:129) Board The Charters. Committee Audit, and Management Planning and Development, the Nominating and Governance Committees of YUM Board of Directors operate pursuant to written charters. These charters were approved by the Board of Directors 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.yum.com/investors/corporate-governance/ committee-composition-and-charters/. and reflect (cid:129) 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.yum.com/investors/ corporate-governance/governance-principles/. (cid:129) 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 they have read and understand the Code of that Conduct. The Code of Conduct is available on the Company’s website at www.yum.com/investors/ corporate-governance/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. P r o x y S t a t e m e n t What other significant Board practices does the Company have? (cid:129) 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 the Lead Director or our presided over by Non-Executive Chairman, applicable. Our independent directors meet in executive session at least once per year. as (cid:129) 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. Walter as Non-Executive Chairman. Since Mr. Walter is independent, the Board determined that it would not appoint a separate Lead Director upon Mr. Walter’s appointment as Non-Executive Chairman. The Lead Director position is structured so that one is empowered with independent Board member 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, has determined that the Lead Director, when appointed, is responsible for: the Board (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 YUM! BRANDS, INC. - 2018 Proxy Statement 19 GOVERNANCE OF THE COMPANY Chairman and CEO of any decisions reached or suggestions made at any executive session, (b) Approving in advance agendas and schedules for is Board meetings and the information that 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. (cid:129) 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 to the meeting. review prior (cid:129) 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 an this process, each Board made. As a part of member written individual completes 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. (cid:129) 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 through a process managed by the Board will, Nominating and and Governance Committee excluding the nominee in question, accept or reject the resignation within 90 days after the Board the Board rejects the receives the resignation. resignation, the reason for the Board’s decision will be publicly disclosed. If What access do the Board and Board committees have to management and to outside advisors? t n e m e t a t S y x o r P (cid:129) 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 the results, plans and present operations of the business within their areas of responsibility. information about (cid:129) 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. and Development Committee has the sole authority to retain compensation consultants for advice on executive compensation matters. The Management Planning What is the Board’s role in risk oversight? The Board maintains overall responsibility for overseeing the Company’s risk management, including succession planning and cybersecurity. its responsibility, the Board has delegated specific risk- related responsibilities to the Audit Committee and to the Management Planning and Development Committee. In furtherance of 20 YUM! BRANDS, INC. - 2018 Proxy Statement engages in risk management at substantive The Audit Committee regular its discussions of committee meetings held during the year. At these meetings, risk review reports covering significant areas of risk from senior managers these functional areas, as well as responsible for receives functional it 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 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 in separate and meets GOVERNANCE OF THE COMPANY Board meeting of the risk area reviewed together with any other risk related subjects discussed at the Audit Committee meeting. addition, and our Management In 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. Planning Has the Company conducted a risk assessment of its compensation policies and practices? at page 32, As stated in the Compensation Discussion and Analysis the philosophy of our compensation programs is to reward performance by designing pay programs that incorporate team and return; and individual emphasize long-term incentives; drive ownership mentality; and require executives to personally invest in Company stock. performance, shareholder 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: (cid:129) Our Compensation system is balanced, rewarding both short term and long term performance (cid:129) 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 (cid:129) Strong stock ownership guidelines in place for approximately 175 senior employees are enforced (cid:129) The annual incentive and performance share plans both have caps on the level of performance over which no additional thereby mitigating any incentive to take unreasonable risk rewards are paid, (cid:129) 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 P r o x y S t a t e m e n t (cid:129) With 97% of our franchised, our franchisee performance overwhelmingly drives YUM performance — mitigating risk of the Company manipulating results restaurants (cid:129) Compensation performance measures set for each Division are transparent and tied to multiple measurable factors, none of which exceed a 50% weighting. The measures are both apparent to shareholders and drivers of returns (cid:129) The performance which determines employee rewards is closely monitored by the Audit Committee and the full Board (cid:129) The Company has a recoupment (clawback) policy YUM! BRANDS, INC. - 2018 Proxy Statement 21 GOVERNANCE OF THE COMPANY 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 (http://www.yum.com/ investors/corporate-governance/governance-principles/). Pursuant the Board to the Governance Principles, 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. this review, As a result of 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. relationship with the Company, In determining that the other directors did not have a the Board material determined that Messrs. Alves, Cavanagh, Connor, Dorman, Meister, Nelson, Ryan, Skala, and Walter and Mmes. Domier, Graddick-Weir and Stock had no other t n e m e t a t S y x o r P the next paragraph than their relationship with the Company other relationship as a director. The Board did note as discussed in Target Corporation, which employs Mr. Cornell, has a business relationship with the Company; however, as noted below, this relationship was not material to the director or Target Corporation, and therefore determined Mr. Cornell was independent. the Board determined that that is the Chairman and Chief Executive Brian C. Cornell Officer of Target Corporation. During 2017, the Company received approximately $11.3 million in license fees from Target Corporation in the normal course of business. Divisions of the Company paid Target Corporation approximately $2.2 million in these rebates in 2017. The Board determined that relationship payments did not create a material between the Company and Mr. Cornell or the Company and Target Corporation as the payments less than one-tenth of 1% of Target represent Corporation’s revenues. Furthermore, the arrangement 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. How do shareholders communicate with the Board? and parties in Shareholders interested other 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 that the Company process, and regularly reviews such correspondence forwards to a designated individual member of the Nominating and Governance Committee copies of all forward such correspondence (although we do not the Corporate Secretary of all the Board. Under the Board or 22 YUM! BRANDS, INC. - 2018 Proxy Statement 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 the Board and request addressed to members of correspondence. Written copies correspondence to internal controls or auditing matters accounting, are immediately brought the Company’s Audit Committee Chair and to the internal to the attention of from shareholders relating such any of and department accordance audit with procedures established by the Audit Committee to such matters (described below). with respect to Correspondence from shareholders handled relating in GOVERNANCE OF THE COMPANY 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 internal accounting controls respect or auditing matters, may, in a confidential or anonymous manner, communicate that concern to our General Counsel, Marc L. Kesselman. 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., to accounting, 1441 Gardiner Lane, Louisville, KY 40213. In addition, a person who has such a concern about the conduct the Company or any of our employees may of 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 the these issues and is authorized to contact 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.yum.com/investors/ corporate-governance/complaint-procedures/. P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 23 GOVERNANCE OF THE COMPANY What are the Committees of the Board? t n e m e t a t S y x o r P The Board of Directors has standing Audit, Management Planning and Development, Nominating and Governance and Executive/Finance Committees. Number of Meetings in Fiscal 2017 8 Name of Committee and Members Audit: Thomas C. Nelson, Chair Paget L. Alves Christopher M. Connor Tanya L. Domier* P. Justin Skala Functions of the Committee (cid:129) Possesses sole authority regarding the selection and retention of independent auditors (cid:129) Reviews and has oversight over the Company’s internal audit function (cid:129) Reviews and approves the cost and scope of audit and non-audit services provided by the independent auditors (cid:129) Reviews the independence, qualification and performance of the independent auditors (cid:129) Reviews the adequacy of the Company’s internal systems of accounting and financial control (cid:129) Reviews the annual audited financial statements and results of the audit with management and the independent auditors (cid:129) Reviews the Company’s accounting and financial reporting principles and practices including any significant changes (cid:129) Advises the Board with respect to Company policies and procedures regarding compliance with applicable laws and regulations and the Company’s Worldwide Code of Conduct and Policy on Conflicts of Interest (cid:129) Discusses with management the Company’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 “What is the Board’s role in risk oversight?” set forth on page 20. 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. * Tanya L. Domier was appointed to the Audit Committee effective January 26, 2018. Name of Committee and Members Management Planning and Development: Brian C. Cornell, Chair Michael J. Cavanagh Mirian M. Graddick-Weir Robert D. Walter Elane B. Stock Functions of the Committee (cid:129) Oversees the Company’s executive compensation plans and programs and reviews and recommends changes to these plans and programs (cid:129) Monitors the performance of the chief executive officer and other senior executives in light of corporate goals set by the Committee (cid:129) Reviews and approves the compensation of the chief executive officer and other senior executive officers (cid:129) Reviews management succession planning Number of Meetings in Fiscal 2017 4 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. 24 YUM! BRANDS, INC. - 2018 Proxy Statement GOVERNANCE OF THE COMPANY Name of Committee and Members Nominating and Governance: Robert D. Walter, Chair Michael J. Cavanagh Brian C. Cornell Mirian M. Graddick-Weir Thomas C. Nelson Functions of the Committee (cid:129) Identifies and proposes to the Board suitable candidates for Board membership (cid:129) Advises the Board on matters of corporate governance (cid:129) Reviews and reassesses from time to time the adequacy of the Company’s Corporate Governance Principles (cid:129) Receives comments from all directors and reports annually to the Board with assessment of the Board’s performance (cid:129) Prepares and supervises the Board’s annual review of director independence Number of Meetings in Fiscal 2017 5 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. Name of Committee and Members Executive/Finance: Robert D. Walter, Chair Greg Creed Brian C. Cornell Thomas C. Nelson Functions of the Committee (cid:129) 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 P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 25 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 2019 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. As noted above, Tanya Domier joined the Company’s Board, effective January 1, 2018 and she will stand for election to the Board by our shareholders for the first time. Ms. Domier is the Chief Executive Officer of Advantage Solutions, Inc., a North American provider of outsourced sales, marketing and business solutions to consumer goods manufacturers and retailers. Ms. Domier’s extensive sales and marketing background, along with her leadership experience and experience in developing digital technology solutions are strengths that the Board intends to leverage to help achieve the Company’s short- and long-term goals. Ms. Domier was recommended by our Non-Executive Chairman. t n e m e t a t S y x o r P 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. regarding the Our policy www.yum.com/investors/corporate-governance/governance-principles/ and at page 19 under significant Board practices does the Company have? — Majority Voting Policy.” election of directors can be found in our Governance Principles at “What other 26 YUM! BRANDS, INC. - 2018 Proxy Statement MATTERS REQUIRING SHAREHOLDER ACTION 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 2018. The Audit Committee of the Board of Directors has selected KPMG to audit our consolidated financial statements. During fiscal 2017, 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 2017 and 2016? The following table presents fees for professional services rendered by KPMG for the audit of the Company’s annual financial statements for 2017 and 2016, and fees billed for audit-related services, tax services and all other services rendered by KPMG for 2017 and 2016. P r o x y S t a t e m e n t Audit fees(1) Audit-related fees(2) Tax fees(3) All other fees(4) TOTAL FEES 2017 6,332,000 $ $ 326,000 482,000 — 2016 9,305,000 2,899,000 285,000 326,000 $ 7,140,000 $ 12,815,000 (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 the audit and reviews of carve-out financial statements of Yum China Holdings, Inc. (“Yum China”) for inclusion in the stand-alone SEC filings in connection with the separation of Yum China in 2016, as well as 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. (4) Other fees consist of fees for due diligence assistance services related to the planned sale of Company restaurants. YUM! BRANDS, INC. - 2018 Proxy Statement 27 MATTERS REQUIRING SHAREHOLDER ACTION 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 its delegate pre-approval independent members, and has currently delegated pre-approval authority up to certain amounts to its Chair. authority one to of Pre-approvals for services are granted at the January In considering Audit Committee meeting each year. the Audit Committee pre-approvals, a reviews the scope of services falling within description of specific pre-designated imposes services and budgetary guidelines. Pre-approvals of designated services are generally effective for the succeeding 12 months. Any incremental audit or permitted non-audit services which are expected to exceed the relevant budgetary guideline must be pre-approved. 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 the promptly pre-approval policy the Audit Committee. The complete policy is available on the Company’s website at www.yum.com/investors/ corporate-governance/audit-committee-policy/. non-compliance with to the Chair of report any t n e m e t a t S y x o r P 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 executive performance-based Our 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 32, 28 YUM! BRANDS, INC. - 2018 Proxy Statement which discusses in detail how our compensation policies and procedures operate and are designed to how our meet Management Planning and Development Committee makes compensation decisions under our programs. compensation goals and our 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. MATTERS REQUIRING SHAREHOLDER ACTION What vote is required to approve this proposal? Approval of this proposal requires the affirmative vote in person or of a majority of shares present 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 in their continuing evaluation of concerns 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 2019 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. P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 29 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, 2017, and is based on a stock ownership report on Schedule 13G filed by such shareholders with the SEC and provided to us. Name and Address of Beneficial Owner T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, MD 21202 Vanguard 100 Vanguard Blvd. Malvern, PA 19355 Blackrock Inc. 55 East 52nd Street New York, NY 10055 Number of Shares Beneficially Owned 33,033,765(1) Percent of Class 9.8% 23,125,244(2) 6.86% 20,321,150(3) 6% t n e m e t a t S y x o r P (1) The filing indicates sole voting power for 10,651,604 shares, shared voting power of 0 shares, sole dispositive power of 33,033,765 shares and shared dispositive power of 0 shares. (2) The filing indicates sole voting power for 478,213 shares, shared voting power for 88,916 shares, sole dispositive power for 22,565,214 shares and shared dispositive power for 560,030 shares. (3) The filing indicates sole voting power for 17,528,739 shares, shared voting power of 0 shares, sole dispositive power of 20,321,150 shares and shared dispositive power of 0 shares. How much YUM common stock is owned by our directors and executive officers? from stock appreciation the The table shows the number of shares of common stock and common stock equivalents beneficially owned as of December 31, 2017. Included are shares that could have been acquired within 60 days of December 31, 2017 through the exercise of stock or options, deferred distributions compensation 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. rights Company’s together with (“SARs”) plans, This table shows the beneficial ownership of YUM common stock as of December 31, 2017 by (cid:129) each of our directors, (cid:129) each of the executive officers named in the Summary Compensation Table on page 53, and (cid:129) 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 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 0.63%. 30 YUM! BRANDS, INC. - 2018 Proxy Statement STOCK OWNERSHIP INFORMATION Number of Shares Beneficially Owned(1) 82,535 3,235 10,000 — 196 — 10,506 2,150 4,019 108,301 32,761 5,837 8,839 113,375 Beneficial Ownership Options/ SARs Exercisable within 60 Days(2) 545,251 — 3,575 — 1,269 4,501 9,536 918 1,881 13,370 185,013 42,776 95,797 294,735 Deferral Plans Stock Units(3) 62,978 — — — — — — — — — 9,094 — 32,151 9,431 Total Beneficial Ownership 690,764 3,235 13,575 — 1,465 4,501 20,042 3,068 5,900 121,671 226,868 48,613 136,787 417,541 Additional Underlying Stock Units(4) 53,927 411 13,774 1,783 6,883 16,076 43,099 3,887 5,360 45,443 22,005 5,307 16,508 62,910 Total 744,691 3,646 27,349 1,783 8,348 20,577 63,141 6,955 11,260 167,114 248,873 53,920 153,295 480,451 395,924 1,276,842 118,929 1,791,695 311,101 2,102,796 Name Greg Creed Paget L. Alves Michael J. Cavanagh Christopher M. Connor Brian C. Cornell Mirian M. Graddick-Weir Thomas C. Nelson P. Justin Skala Elane B. Stock Robert D. Walter(5) David W. Gibbs Tracy Skeans Brian R. Niccol Roger G. Eaton All Directors and Executive Officers as a Group (16 persons) (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: (cid:129) Mr. Niccol, 6,679 and Ms. Skeans, 4,792 (cid:129) all executive officers as a group, 12,474 shares (cid:129) Ms. Domier is not included in the table because she did not join the Board until January 1, 2018. (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. 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) These shares are held in a trust. P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 31 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 2017. EXECUTIVE COMPENSATION Compensation Discussion and Analysis t n e m e t a t S y x o r P This Compensation Discussion and Analysis (“CD&A”) describes our executive compensation philosophy and the Management Planning and Development Committee (the program, “Committee”) for our named executive officers (“NEOs”) and factors considered in making those decisions. the compensation decisions of Table of Contents I. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 A. YUM 2017 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 B. Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 C. Compensation Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 D. Compensation Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 E. Relationship between Company Pay and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 II. Elements of Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 A. Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 B. Annual Performance-Based Cash Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 C. Long-Term Equity Performance-Based Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 III. 2017 Named Executive Officer Total Direct Compensation and Performance Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 IV. Retirement and Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 V. How Compensation Decisions Are Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 VI. Compensation Policies and Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 32 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION I. Executive Summary A. YUM 2017 Performance in 2019, expenditures 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 intend to own less than 1,000 restaurants (at least 98% intend to have reduced franchised) and, annual approximately capital $100 million and improved our efficiency by lowering general and administrative expenses as a percentage of system sales to 1.7%. The transformation strategy, our “Recipe for Growth”, requires that the Company be more focused, more franchised and more efficient as we strengthen and grow our KFC, Pizza Hut and Taco Bell brands around the world, creating significant long- term value for all of our stakeholders and creating a world with more Yum!. to Four growth drivers 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 is focused on building the world’s most loved, trusted and fastest growing restaurant brands by: (i) building Distinctive, Relevant and Easy Brands, by increasing core product investment that innovation, digital excellence and initiatives in consumer insights, the best experience; strengthen the quality, convenience and appeal of the customer (ii) developing Unmatched Franchise Operating Capability, strengthening how we restaurant operators to equip and recruit 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 to strengthen the customer experience and Talent franchise success with best-in-class people capability and culture. 2017 was an exceptional year for the Company and its progress towards the transformation initiative. YUM operating profit increased 64% during 2017 and our system restaurant count grew by 1,407 units. 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. Strong brands are critical in our being able to deliver sustained growth and in our ability to create long- term shareholder value. The following performance highlights illustrate just how successful 2017 was: P r o x y S t a t e m e n t (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 and the 53rd week. See the Non-GAAP Items section in Item 7 of YUM’s Form 10-K for the fiscal year ended on December 31, 2017 for a reconciliation of GAAP Company sales to System sales. (2) 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. (3) Total shareholder return is calculated as the growth in YUM share price from the beginning of 2017 until the year-end, and includes assumed reinvestment of dividends. YUM! BRANDS, INC. - 2018 Proxy Statement 33 EXECUTIVE COMPENSATION B. Named Executive Officers The Company’s NEOs for 2017 are as follows: Name Greg Creed David W. Gibbs Roger G. Eaton Brian R. Niccol(1) Tracy L. Skeans Title Chief Executive Officer President and Chief Financial Officer Chief Executive Officer of KFC Division Former Chief Executive Officer of Taco Bell Division Chief Transformation and People Officer (1) Mr. Niccol resigned from his position with the Company in February 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 t n e m e t a t S y x o r P Objective 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. 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. 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. Drive ownership mentality—We require executives to invest in the Company’s success by owning a substantial amount of Company stock. D. Compensation Overview 2017 Compensation Highlights (cid:129) In January of 2017, the Committee made the following decisions and took the following actions: (cid:129) The Committee set our CEO target compensation levels below the median of our Executive Peer Group (defined at page 48) for the CEO role; (cid:129) The Committee set the equity mix for our Global Leadership Team’s long-term incentive awards at 50% 50% stock performance share units (“PSUs”); and appreciation (“SARs”) rights and (cid:129) The Committee certified that our 2014 PSU awards under our Performance Share Plan paid out at 71% of in 2017 based on the Company’s Total target 34 YUM! BRANDS, INC. - 2018 Proxy Statement our executives accountable to achieve key annual results compensation philosophy for the NEOs is reviewed annually by the Committee and has the following objectives: YUM’s year. after year Base Salary ✓ Pay Element Annual Performance-Based Cash Bonuses Long-Term Equity Performance- Based Incentives ✓ ✓ ✓ ✓ ✓ ✓ Shareholder Return 2014-2016 (“TSR”) performance cycle. (see discussion of PSUs at page 40). the for (cid:129) At our May 2017 Annual Meeting of Shareholders, shareholders approved our “Say on Pay” proposal in support of our executive compensation program, with 89% of votes cast in favor of the proposal. (cid:129) We continued our shareholder outreach program to better understand our investors’ opinions on our compensation practices and respond to their questions. Committee team members from compensation, investor relations and legal continued to be directly involved in engagement efforts during 2017 that served to reinforce our open and management door policy. The efforts included contacting our largest 30 shareholders, representing ownership of approximately 45% of our shares, and meeting with shareholders representing approximately 13% of our shares (discussed further on page 46). 2017 Changes to Compensation Program 2016 Company’s Annual Meeting (cid:129) Long Term Incentive Equity Mix for 2017. Following of the Shareholders, significant shareholder engagement was undertaken by the Company in order to receive feedback on, among other things, the Company’s In equity mix for feedback, and in response to this shareholder and alignment with compensation Committee determined that beginning in 2017, the long-term award mix for members of the Global Leadership Team would be split 50% SARs and 50% PSUs. long-term incentive awards. philosophy, business strategy our the (cid:129) Change in PSU Metrics. In response to shareholder feedback, and consistent with the Company’s overall business strategy, beginning in 2017, PSU grants are earned based on the Company’s TSR relative to that EXECUTIVE COMPENSATION of the S&P 500 Consumer Discretionary Index and on compound annual growth of the Company’s Earnings Per Share (“EPS”), with each factor accounting for 50% of performance measurement. PSU grants were previously earned based on the Company’s TSR relative to that of the S&P 500. 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. In addition, the change to incorporate the S&P 500 Consumer Discretionary Index provides for a more direct comparison of the Company against a diverse group of consumer products companies that is smaller than the S&P 500 and reflects performance against a more relevant data set. (cid:129) Update to Executive Peer Group. The composition of the Executive Peer Group was updated to allow for more relevant comparisons following the separation in October 2016, of Yum China Holdings, recognizing the smaller size of the Company and the current complexities of its business (see page 48). Inc. 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, 2017 Named Executive Officer Total Direct Compensation and Performance Summary, found at pages 41 to 45 of this CD&A. YUM! BRANDS, INC. - 2018 Proxy Statement 35 P r o x y S t a t e m e n t EXECUTIVE COMPENSATION CEO Cash Compensation and Total Direct Compensation the CEO’s actual value at grant date) reflects the performance of the Company. For 2015, total direct compensation was below target, reflecting the below target performance of the CEO’s actual total direct compensation for 2016 and 2017 was above target, reflecting the Company’s above target performance. the Company. However, For 2017, 58% of our CEO’s pay was in the form of long-term equity incentive compensation. primary business Our CEO’s cash compensation (base salary and bonus) tracks Operating Profit (“OP”) growth, which is performance metric. As our demonstrated below, our OP growth was markedly increased from the prior year in 2017 and was significantly above the target set by the Committee, resulting in our CEO’s actual cash compensation being above target. Our CEO’s actual salary, bonus and annual total direct compensation (base long-term incentive award t n e m e t a t S y x o r P 36 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION P r o x y S t a t e m e n t (1) Operating Profit for 2016 and 2015 has been recast to present the change in our reporting calendar and retroactively adopting a new accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, “Benefit Costs”). See Notes 2 and 5 to the Consolidated Financial Statements in Item 8 of YUM’s Form 10-K for the fiscal year ended December 31, 2017 for a discussion related to adopting a new accounting standard on Benefit Costs and the change in our reporting calendar, respectively. (2) 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 includes adjustments for, among other things, Special Items, the impact of the 53rd week in 2016, the loss of Division Operating Profit due to refranchising, incremental system advertising expense related to the Pizza Hut U.S. Transformation Agreement, forecasted cost savings due to strategic G&A initiatives and the impact of foreign currency translation. Refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth, as shown above, to GAAP Operating Profit Growth. YUM! BRANDS, INC. - 2018 Proxy Statement 37 EXECUTIVE COMPENSATION 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. Element Base salary Annual Performance-Based Cash Bonuses Long-Term Equity Performance-Based Incentives Retirement and Additional Benefits Objective Attract and retain high-caliber talent and provide a fixed level of cash compensation. Motivate high performance and reward short-term Company, team and individual performance. Align the interests of executives with shareholders and emphasize long-term results. Provide for long-term retirement income and basic health and welfare coverage. Form Cash Cash SARs & PSUs Various 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 responsibility, varies based on the role, level of 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. t n e m e t a t S y x o r P B. Annual Performance-Based Cash Bonuses Our performance-based annual bonus program, the YUM Leaders’ Bonus Program, is a cash-based plan. the YUM Leaders’ Bonus The principal purpose of Program 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: Base Salary X Target Bonus Percentage X Team Performance (0 – 200%) X Individual Performance (0 – 150%) = Bonus Payout (0 – 300%) Team Performance In light of the Company’s transformation announced at the end of 2016, the Committee carefully considered our new strategic direction to become a pure-play franchisor and targets and established team performance measures, receiving input and weights in January 2017 after recommendations team The performance targets were also reviewed by the Board to ensure that the Company’s overall strategic objectives. from management. the goals support The performance targets were developed through the Company’s annual financial planning process, which takes historical into account Division growth strategies, 38 YUM! BRANDS, INC. - 2018 Proxy Statement and the operating performance, environment of each of KFC, Taco Bell and Pizza Hut (each, a “Division”). expected future 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 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. consistent with our EXECUTIVE COMPENSATION 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 the 2017 target-setting process, the Committee of decided to make certain adjustments to GAAP Operating Profit growth when determining performance targets. These adjustments against Operating Profit served to exclude YUM Special Items Income (which are not allocated to Division results), adjust for the loss of Division Operating Profit due to refranchising, include predetermined Division cost savings initiatives, exclude the impact of the 53rd week in 2016 and foreign currency translation. exclude the impact of Additionally, the end of the Committee decided at 2017 to adjust the Pizza Hut and YUM Operating Profit Growth and System Net Build targets to reflect the mid-year execution of YUM approved strategic decisions and investments. For further details, refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth. Detailed Breakdown of 2017 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. P r o x y S t a t e m e n t Team Performance NEO Measures Creed Adjusted Operating Profit Growth1, 2 Gibbs System Same-Store Sales Growth Skeans System Net Builds3,4 FINAL YUM TEAM FACTOR Eaton Adjusted Operating Profit Growth1 System Same-Store Sales Growth System Net Builds3 Total Weighted Team Performance — KFC (75%) Total Weighted Team Performance — YUM (25%) FINAL KFC TEAM FACTOR Niccol Adjusted Operating Profit Growth1 System Same-Store Sales Growth System Net Builds3 Total Weighted Team Performance — TACO BELL (75%) Total Weighted Team Performance — YUM (25%) FINAL TACO BELL TEAM FACTOR Target Actual 11% 15% 2.9% 2.4% 1,263 1,465 10% 14% 3.0% 3.1% 883 715 187 87 181 50% 25% 25% Earned Award as % of Target Weighting Final Team Performance 94 22 45 161 100 26 50 176 50% 25% 25% 200 104 200 7% 10% 3.5% 3.8% 244 235 170 115 120 50% 25% 25% 161 172 85 29 30 144 161 148 (1) Refer to Appendix A: Reconciliation of Adjusted Operating Profit Growth, as shown above, to GAAP Operating Profit Growth. YUM! BRANDS, INC. - 2018 Proxy Statement 39 EXECUTIVE COMPENSATION (2) Adjusted Operating Profit Growth target was modified to exclude $25 million of unplanned Pizza Hut expense related to mid-year execution of the U.S. Transformation Agreement with franchisees, which the Committee determined to be appropriate given the intent of the Agreement and its effect on YUM’s Operating Profit. This modification increased final YUM team performance by 18 points. (3) Effective January 1, 2017, YUM changed its fiscal year end from the last Saturday of December to a year beginning on January 1 and ending December 31 of each year. As part of this change we removed any reporting lags in our international businesses by shifting their fiscal year ends from on or near November 30 to on or near December 31. As a result of this change, System Net Build targets and actual results include fiscal 2017 net new unit openings of 1,407, plus 58 units in certain international businesses that had an extra period (i.e. December 2016) as a result of this calendar shift. (4) System Net Builds target was adjusted for the unplanned acceleration of Pizza Hut store closures during 2017 related to the mid-year execution of the U.S. Transformation Agreement with franchisees, which the Committee determined to be appropriate given the intent of the Agreement and its effect on YUM’s System Net Builds. This adjustment increased final YUM team performance by 9 points. Individual Performance Individual Performance Each NEO’s determined by subjective determination of is the Committee based upon its the NEO’s individual Factor 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 long-term performance. Performance-based long-term equity compensation also serves as a retention tool. short-term and between t n e m e t a t S y x o r P 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): (cid:129) Prior year individual and team performance (cid:129) Expected contribution in future years (cid:129) Consideration of the market value of the executive’s role compared with similar roles in our Executive Peer Group (cid:129) Achievement of stock ownership guidelines Equity Mix Each year, the Committee reviews the mix of long-term the Committee continued to incentives. For 2017, choose SARs and PSU awards because these equity vehicles focus and reward management for enhancing thereby aligning our long-term shareholder value, NEOs with the interests of our shareholders. At the beginning of 2017, the Committee determined a the Global target grant value for each member of 40 YUM! BRANDS, INC. - 2018 Proxy Statement Leadership Team and the split of that value between SARs and PSU grants. For each NEO, the target grant value was split 50% SARs and 50% PSUs. For each NEO, the breakdown between SARs award values and PSU award values can be found under the Summary Compensation Table, page 53 at columns e and f. Stock Appreciation Rights Awards The Committee believes that SARs reward value creation generated from sustained results and the favorable expectations of our shareholders. In 2017, we granted to each of our NEOs SARs which have ten-year terms and vest over at least 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 PSU awards in 2017. PSU awards are earned based on the Company’s 3-year average TSR relative in the S&P 500 Consumer to the companies 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 EXECUTIVE COMPENSATION pay-for-performance philosophy while diversifying performance criteria by using measures not used in the annual bonus plan and aligning our NEOs’ reward If TSR is with the creation of shareholder value. negative, payouts may not exceed the target irrespective of the actual TSR percentile ranking of the threshold and maximum Company. The target, number of shares that may be paid under these awards for each NEO are described at page 55. For the performance period covering 2017 – 2019, each NEO 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, as set forth in the table below: TSR Percentile Ranking Payout as % of Target EPS Growth (3-year CAGR, ex foreign currency translation) Payout as % of Target Threshold Target Maximum <30% 0% <9% 0% 30% 35% 9% 35% 50% 75% 100% 200% 15% 21% 100% 200% 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. 2017 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 their 2017 performance relative to our overview of annual and long-term incentive performance goals. The process the Committee used to determine each officer’s 2017 compensation is described more fully in “How Compensation Decisions Are Made” beginning on page 46. P r o x y S t a t e m e n t CEO Compensation Greg Creed Chief Executive Officer 2017 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 included business achievement of his goals that and development results, implementation and strategies, development of Company culture and talent. leadership of in Company the The Committee determined that Mr. Creed’s overall performance for 2017 merited an individual factor of 130. This individual factor was combined with YUM’s team factor of 161 (discussed at page 38) to calculate the Committee’s his annual cash bonus. This determination was based on of Mr. Creed’s performance against his goals which included the following items (without assigning a weight to any particular item): assessment subjective (cid:129) YUM Adjusted Operating Profit Growth of approximately 15% (cid:129) Worldwide system sales growth of 5%, excluding the impact of foreign currency translation and the 53rd week (cid:129) Net new restaurant openings of 1,407; net unit growth of 3% (cid:129) KFC’s and Taco Bell’s above target performance for Adjusted Operating Profit Growth YUM! BRANDS, INC. - 2018 Proxy Statement 41 EXECUTIVE COMPENSATION (cid:129) KFC’s, and Taco Bell’s above target performance for 2017 Committee Decisions System Net Builds, (cid:129) Management of the Company during the first full year of its transformation into a pure-play franchisor and in developing the transformation strategy. (cid:129) Development of leadership and leadership bench, and fostering customer-focused employee culture In January 2017, the Committee set Mr. Creed’s 2017 compensation. Mr. Creed’s annual cash bonus target was set at 150% of his base salary and was unchanged from 2016. His salary was increased 3% for 2017 and his total long-term incentive equity award grant value was increased 12%, to bring him closer to the median of the Company’s Executive Peer Group, recognizing his performance in leading the Company during the spin-off of the China business, time in role and impact on the business. These increases brought his total target compensation to $9,738,000 for 2017, which is below the 50th percentile of the Company’s Executive Peer Group. The graphics below illustrate Mr. Creed’s direct compensation: t n e m e t a t S y x o r P 2018 Changes to CEO Compensation In January 2018, the Committee made several changes to our CEO’s compensation in recognition of strong Company performance during 2017, our 3-year TSR performance, his time in the CEO role (beginning his 4th year) and the Company’s substantial progress towards its transformation into a pure-play franchisor. the Committee approved Based on these factors, moving Mr. Creed’s 2018 total target compensation to the median of the Company’s Executive Peer Group, setting his compensation as follows: (cid:129) Base Salary: $1,250,000 (cid:129) Target Bonus: 175% of Base Salary (cid:129) Long Term Incentive: $8,900,000 (economic value), with the following mix: 50% SARs; 50% PSUs (cid:129) Total target compensation: approximately $12,400,000 42 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION Other NEO 2017 Total Direct Compensation David W. Gibbs President and Chief Financial Officer 2017 Performance Summary 2017 Committee Decisions 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 15%, leading the effort to refranchise a significant number of Company-owned restaurants, and in leading the implementation of the Company’s strategy. Mr. Gibbs’ individual performance factor was combined with a team factor of 161 (discussed at page 38) to calculate his annual cash bonus. transformation In January, Mr. Gibbs’ compensation was adjusted as follows: (cid:129) Base salary was increased 5%; (cid:129) Annual cash bonus target remained at 105% of base salary; and (cid:129) Grant value of long-term incentive equity awards were increased by 47% to better align with market compensation norms and internal peer equity, as well as to reflect performance and time in role. These increases brought Mr. Gibbs’ compensation to around the 50th percentile of Executive Peer Group (defined at page 48) position. total direct the for his Roger G. Eaton Chief Executive Officer of KFC Division 2017 Performance Summary 2017 Committee Decisions The Committee determined Mr. Eaton’s performance as the CEO, KFC Division, merited a 140 individual performance factor. Under Mr. Eaton’s leadership, KFC achieved significantly above-target Adjusted Operating Profit Growth and net new unit growth, as well as on-target same-store sales growth. Mr. Eaton was also recognized for codifying repeatable operating system frameworks, 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 factor was individual performance combined with a team factor of 172 (discussed at page 38) to calculate his annual cash bonus. In January, Mr. Eaton’s compensation was adjusted as follows: (cid:129) Base salary was increased 3% percent for 2017; (cid:129) Annual cash bonus target remained at 100% of base salary; and (cid:129) Grant value of long-term incentive equity awards was increased by 33% to better align with market compensation norms and internal peer equity. These increases positioned Mr. Eaton’s total direct compensation at the 50th percentile of the Executive Peer Group (defined at page 48) for his position. P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 43 EXECUTIVE COMPENSATION Brian R. Niccol Former Chief Executive Officer of Taco Bell Division 2017 Performance Summary 2017 Committee Decisions The Committee determined Mr. Niccol’s performance as the CEO, Taco Bell Division, merited a 135 individual performance factor. Under Mr. Niccol’s leadership, Taco Bell Division’s operating performance was very strong with above-target Operating Profit Growth, same-store sales growth and net new unit expansion. Mr. Niccol was also recognized for providing leadership in implementing the refranchising plan for Taco Bell restaurants and for driving compliance with food safety and information security. factor was individual performance Mr. Niccol’s combined with a team factor of 148 (discussed at page 38) to calculate his annual cash bonus. In January, Mr. Niccol’s compensation was adjusted as follows: (cid:129) Base salary was increased 4% percent for 2017; (cid:129) Annual cash bonus target remained at 100% of base salary; (cid:129) Grant value of long-term incentive equity awards was increased by 33% to better align with market compensation norms and internal peer equity. These increases brought Mr. Niccol’s total direct compensation to between the 50th and 75th percentile of the Executive Peer Group (defined at page 48) for his position. Tracy L. Skeans Chief Transformation and People Officer 2017 Performance Summary 2017 Committee Decisions determined The Committee that Ms. Skeans’ performance merited a 130 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 talent. Ms. Skeans was also recognized for improving internal and external communication strategies and for driving compliance with food safety, information security and FCPA standards. Ms. Skeans’ factor was combined with a team factor of 161 (discussed at page 38) to calculate her annual cash bonus. the Company’s individual culture and In January, Ms. Skeans’ compensation was adjusted as follows: (cid:129) Base salary was increased 5% (cid:129) Annual cash bonus target increased to 85% of base salary (cid:129) Grant value of long-term incentive equity awards was increased by 47% to better align with market compensation norms and internal peer equity, as well as to reflect performance and her time in the role. These increases brought Ms. Skeans’ compensation to around the 50th percentile of Executive Peer Group (defined at page 48) position. total direct the for her t n e m e t a t S y x o r P 44 YUM! BRANDS, INC. - 2018 Proxy Statement The graphic below illustrates the 2017 total direct compensation of our Named Executive Officers, other than Mr. Creed: EXECUTIVE COMPENSATION P r o x y S t a t e m e n t 55. For 2017, Mr. Niccol was eligible for the LRP. Under the LRP, he received an annual allocation to his account equal to 9.5% of his base salary and target bonus and an annual earnings credit of 5% on the balance while he was employed by the Company. retirement account-based The Company provides retirement benefits for certain international employees through the Third Country National Plan (“TCN”). The TCN is an unfunded, that unsecured 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 plan YUM! BRANDS, INC. - 2018 Proxy Statement 45 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 and Ms. Skeans 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. the Company For executives hired or re-hired after September 30, 2001, 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 t n e m e t a t S y x o r P EXECUTIVE COMPENSATION contribution equal to 15% of his 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 60. 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 salaried eligible U.S.-based life, dependent life employees can purchase additional employees. 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. Perquisites very limited number of The company provides perquisites. The only perquisite provided to all NEOs is a paid physical examination of approximately $2,800. In addition, the CEO was required to use the Company aircraft for personal as well as business travel pursuant to security program established by the Board of Directors. In 2015, the Committee arrangements beginning in 2015 for Mr. Creed with respect to his personal use of aircraft. The arrangement provides that the Company’s timeshare approved executive upon the executive reaching $200,000 in incremental costs for his personal use, the executive’s timeshare agreements will be triggered and any incremental costs for personal use of corporate aircraft above $200,000 will be reimbursed to the Company in accordance with the requirements of the Federal Aviation Administration regulations and the time share agreements. We do not provide tax gross-ups on the personal use of the Company aircraft. V. How Compensation Decisions Are Made Shareholder Outreach, Engagement and 2017 Vote on NEO Compensation in of favor At our 2017 Annual Meeting of Shareholders, 89% of votes cast on our annual advisory vote on NEO compensation were our NEOs’ compensation program, as disclosed in our 2017 proxy statement. During 2017, 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 during 2017 that served to reinforce our open door policy. The efforts included: (cid:129) Contacting the top 30 shareholders, representing ownership of approximately 45% of our shares (cid:129) Meeting with shareholders representing 13% of our shares (cid:129) Dialogue with proxy advisory firms (cid:129) Investor road shows and conferences (cid:129) Presenting shareholder feedback to the Committee (cid:129) Considering letters from shareholders annual engagement Our allow many shareholders the opportunity to provide feedback. The Committee carefully considers shareholder and advisor efforts 46 YUM! BRANDS, INC. - 2018 Proxy Statement feedback, among other factors discussed in this CD&A, in making its compensation decisions. Shareholder feedback, including the 2017 voting results on NEO compensation, has influenced and reinforced a number the years, of compensation design changes over including: (cid:129) Continued benchmarking of CEO compensation at market median. (cid:129) 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. (cid:129) Moving to two performance metrics under our PSUs – TSR and EPS, beginning with PSU grants in 2017. (cid:129) 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. EXECUTIVE COMPENSATION 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 and the Company’s overall performance. The Committee considers the total compensation of each NEO and factors 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 P r o x y S t a t e m e n t 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: (cid:129) it is to act independently of management and at the direction of the Committee; (cid:129) 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: (cid:129) its ongoing engagement will be determined by the (cid:129) Meridian did not provide any services to the Committee; (cid:129) it is to inform the Committee of relevant trends and regulatory developments; (cid:129) it is to provide compensation comparisons based on information is derived from comparable businesses of a similar size to the Company for the NEOs; and that Company unrelated to executive compensation. (cid:129) Meridian has no business or personal relationship with any member of the Committee or management. (cid:129) Meridian’s partners and employees who provide services to the Committee are prohibited from owning YUM stock per Meridian’s firm policy. YUM! BRANDS, INC. - 2018 Proxy Statement 47 EXECUTIVE COMPENSATION Comparator Compensation Data situated executives Our Committee uses an evaluation of how our NEO target compensation levels compare to those of that similarly comprise our Executive Peer Group (defined below) as one of the factors in setting executive compensation. retail, The Executive Peer Group is made up of goods hospitality, service companies, consumer and quick nondurable eatery food, specialty companies at 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 in 2017. The composition of the Executive Peer Group was updated 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. The 2017 Executive Peer Group was comprised of the following companies: t n e m e t a t S y x o r P 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). organization and underlying operating divisions, our philosophy is to add 25% of franchisee and licensee sales to the Company’s sales to establish an appropriate revenue benchmark. The reason for this approach is twofold: (cid:129) Market-competitive compensation opportunities are related to scope of responsibility, often measured by company size, i.e., revenues; and (cid:129) Scope of responsibility for a franchising organization lies between corporate-reported revenues and system wide sales. approach We believe this approach is measured and reasoned in competitive its compensation opportunities without using organizations unduly larger than the Company. calibrating market to can be For companies with significant franchise operations, measuring size 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, new unit development, and customer satisfaction and overall operations improvements across the entire franchise in calibrating the size of our system. Accordingly, promoting 48 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION Competitive Positioning and Setting Compensation At the beginning of 2017, 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. 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 In making compensation decisions, 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. We Don’t Do Employment agreements Re-pricing of SARs Grants of SARs with exercise price less than fair market value of common stock on date of grant Permit executives to hedge or pledge Company stock P r o x y S t a t e m e n t Payment of dividends or dividend equivalents on PSUs unless or until they vest Excise tax gross-ups upon change in control Excessive executive perquisites, such as country club memberships ✗ ✗ ✗ ✗ ✗ ✗ ✗ We Do ✓ ✓ ✓ ✓ Have an independent compensation committee (Management Planning & Development Committee), which oversees the Company’s compensation policies and strategic direction Directly link Company performance to pay outcomes Have executive ownership guidelines that are reviewed annually against Company guidelines “Have a “clawback” policy under which the Company may recoup compensation if executive’s conduct results in significant financial or reputational harm to Company ✓ Make a substantial portion of NEO target pay “at risk” ✓ ✓ ✓ ✓ ✓ ✓ Have double-trigger vesting of equity awards upon a change in control Utilize an independent Compensation Consultant Incorporate comprehensive risk mitigation into plan design Periodically review our Executive Peer Group to align appropriately with Company size and complexity Evaluate CEO and executive succession plans Conduct annual shareholder engagement program to obtain feedback from shareholders for consideration in annual compensation program design YUM! BRANDS, INC. - 2018 Proxy Statement 49 EXECUTIVE COMPENSATION YUM’s Executive Stock Ownership Guidelines The Committee has established stock ownership guidelines for approximately 175 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 2017, all NEOs and all other employees subject to guidelines met or exceeded their ownership guidelines. NEO Creed Gibbs Eaton Niccol Skeans Ownership Guidelines Shares Owned(1) Value of Shares(2) Multiple of Salary 7x base salary 3x base salary 3x base salary 3x base salary 2x base salary 707,555 240,236 471,020 144,658 53,920 $57,743,564 $19,605,660 $38,439,942 $11,805,539 $ 4,400,411 47.5 23.3 46.6 14.1 7.3 (1) Calculated as of December 31, 2017 and represents shares 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 $81.61 as of December 30, 2017. t n e m e t a t S y x o r P 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 65. a NEO will result in the best net after-tax result, the full the NEO will be solely amount will be paid, but responsible for any potential excise tax payment. Also, the Company has implemented “double trigger” vesting to which outstanding for equity awards, pursuant the awards will 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. fully and immediately vest only if 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. 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 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 any potential excise tax the overall policy, compensation With respect to consideration of how these benefits fit into 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. 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 the same time other grants. We make grants at 50 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION recommends the awards be made Management 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 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. 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 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 in recognition of (subject superlative performance and extraordinary impact on business results. to Committee approval) 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 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. P r o x y S t a t e m e n t Compensation Recovery Policy Pursuant to the Company’s Compensation Recovery Policy (i.e., “clawback”), the Committee may require to return executive officers (including the NEOs) compensation paid or may cancel any award or the executive bonuses not yet vested or earned if violation of officers engaged in misconduct or Company policy that resulted in significant financial or reputational harm or violation of Company policy, or incentive compensation. Under inaccurate metrics in the contributed to the use of calculation of 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. 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 from, a decline in the Company stock price. profit Similarly, no employee or director may enter into hedging transactions in the Company’s stock. Such 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. YUM! BRANDS, INC. - 2018 Proxy Statement 51 EXECUTIVE COMPENSATION Deductibility of Executive Compensation tax the limit deduction the Internal The provisions of Section 162(m) of Revenue Code for compensation in excess of $1 million paid to certain NEOs. Performance-based compensation, if earned prior to 2018 or paid pursuant to a binding contract that was in place on November 2, 2017, is excluded from the limit, however, so long as it meets certain requirements. The Committee the pre-2018 annual bonus and SARs, RSU and PSU awards satisfy the requirements for exemption under Internal Revenue Code Section 162(m). intends that For 2017, the annual salary paid to Mr. Creed exceeded $1 million. The other NEOs were in each case paid salaries of $1 million or less. The 2017, annual bonuses were all paid pursuant to our annual bonus program and, therefore, we expect will be deductible. For 2017, the Committee set the maximum individual award opportunity based on a bonus pool for the CEO and the next three highest paid executive officers, other than Messrs. Creed and Gibbs. (Mr. Gibbs is not included for purposes of our pool since under IRS rules in effect prior to 2018, the CFO is not subject to these limits.) The bonus pool for 2017 was equal to 1.5% of Operating Profit (adjusted to exclude special items believed to be distortive of consolidated results on a year-over-year basis — these are the same items excluded in the Company’s annual earnings releases). The maximum payout opportunity for each executive was set at a fixed percentage of the pool. Based on the Company’s Operating Profit, before t n e m e t a t S y x o r P special items of $1.8 billion, the bonus pool was set at approximately $26 million and the maximum 2017 award opportunity for each NEO was based on their applicable percentage of the pool (Mr. Creed=30%, Mr. Niccol=20%, Mr. Eaton=20% and Ms. Skeans=10%) (Under the terms of the shareholder approved plan no executive may earn a bonus in excess of $10 million for any year). The Committee then exercised its discretion in determining actual incentive awards based on team performance and individual performance measures as described above. For 2018 and years thereafter, Section 162(m) limits the deductibility of all annual compensation in excess of $1 million paid to certain executive officers (the exception for performance-based compensation will 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 its discretion and flexibility in awarding served if restricted, even though some compensation is not in non-deductible compensation awards may result compensation expenses. Therefore, the Committee has approved salaries and other awards for executive fully deductible because of officers that were not the Section 162(m) and, performance-based to Section 162(m), expects in the future to approve is not deductible for additional compensation that income tax purposes. the repeal of exception in light of compensation Management Planning and Development Committee Report and Development Planning The Management Committee of the Board of Directors reports that it has reviewed and discussed with management the section of “Compensation Discussion and Analysis” and, on the basis of that statement proxy titled this 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 Brian C. Cornell, Chair Michael J. Cavanagh Mirian M. Graddick-Weir Robert D. Walter 52 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION The following tables provide information on the compensation of the Named Executive Officers (“NEOs”) for our 2017 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 2017 fiscal year determined in accordance with SEC rules. Summary Compensation Table Name and Principal Position (a) Greg Creed Chief Executive Officer of YUM David W. Gibbs Year (b) Salary ($)(1) (c) Bonus ($) (d) Stock Awards ($)(2) (e) Option/ SAR Awards ($)(3) (f) Non-Equity Incentive Plan Compensation ($)(4) (g) 2017 1,208,846 2016 1,188,942 2015 1,104,615 833,846 2017 — 3,350,020 3,350,007 — 5,500,066 4,500,008 — 1,075,016 3,108,013 — 1,100,036 1,100,003 President and Chief Financial Officer of YUM(7) 2016 792,115 — 1,875,052 1,625,020 Roger G. Eaton 2017 821,154 — 1,000,008 1,000,007 Chief Executive Officer of KFC Division(7) 2016 812,500 — 1,875,052 1,125,009 Brian R. Niccol Former Chief Executive Officer of Taco Bell Division 2017 2016 2015 829,615 803,846 697,688 — 1,000,008 1,000,007 — 1,875,052 1,625,013 250,031 2,091,503 Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(5) (h) 66,286 56,100 25,294 2,564,062 577,153 30,388 30,853 13,804 13,144 8,123 All Other Compensation ($)(6) (i) Total ($) 578,955 12,368,607 544,472 15,380,682 1,393,388 7,493,376 19,346 7,534,320 6,969 6,627,989 301,007 5,139,164 288,290 5,245,304 164,852 4,676,616 166,060 6,174,315 180,361 4,739,706 3,814,493 3,591,094 787,050 1,917,027 1,751,680 1,986,600 1,113,600 1,668,330 1,691,200 1,512,000 Tracy L. Skeans 2017 600,385 — 550,052 550,009 1,076,325 776,398 8,413 3,561,582 Chief Transformation and People Officer of YUM(7) (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 represent the grant date fair values for performance share units (PSUs) granted in 2017, 2016 and 2015. Further information regarding the 2017 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 2017 PSUs is 200% of target. For 2017, Mr. Creed’s PSU maximum value at grant date fair value would be $6,700,040; Mr. Gibbs’ PSU maximum value would be $2,200,072; Mr. Eaton’s PSU maximum value would be $2,000,016 Mr. Niccol’s PSU maximum value would be $2,000,016; and Ms. Skeans’ PSU maximum value would be $1,100,104. (3) The amounts shown in this column represent the grant date fair values of the stock appreciation rights (SARs) awarded in 2017, 2016 and 2015, 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 16 to the Consolidated Financial Statements in Item 8 of YUM’s Form 10-K for the fiscal year ended December 31, 2017. See the Grants of Plan-Based Awards table for details. (4) Amounts in this column reflect the annual incentive awards earned for the 2017, 2016 and 2015 fiscal year performance periods, which were awarded by our Management Planning and Development Committee (“Committee”) in January 2018, January 2017 and January 2016, respectively, under the Yum Leaders’ Bonus Program, which is described further in our Compensation Discussion and Analysis (“CD&A”) beginning at page 32 under the heading “Annual Performance-Based Cash Bonuses”. (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 LRP for Mr. Niccol and the Third Country National Plan (“TCN”) for Messrs. Creed and Eaton which are described in more detail beginning at page 62 under the heading “Nonqualified Deferred Compensation”. Also listed in this column for Messrs. Creed, Gibbs and Ms. Skeans are the amounts of aggregate change in actuarial present values of their accrued benefits under all actuarial pension plans during the 2017 fiscal year (using interest rate and YUM! BRANDS, INC. - 2018 Proxy Statement 53 P r o x y S t a t e m e n t EXECUTIVE COMPENSATION 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 2017 the increase in actuarial value was $25,780. For Mr. Gibbs and Ms. Skeans, the actuarial present value of their benefits under the pension plan increased $231,037 and $126,089, respectively, during the 2017 fiscal year. In addition, for Mr. Gibbs and Ms. Skeans the actuarial present value of their benefits under the Yum! Brands Pension Equalization Plan (“PEP”) increased $2,333,025 and $650,309, respectively, during the 2017 fiscal year. Messrs. Niccol and Eaton were hired after September 30, 2001, and are ineligible for the Company’s actuarial pension plans. See the Pension Benefits Table at page 60 for a detailed discussion of the Company’s pension benefits. (6) Amounts in this column are explained in the All Other Compensation Table and footnotes to that table, which follows. (7) Ms. Skeans became an NEO in 2017. No amounts are reported for her for 2016 and 2015 since she was not an NEO for those years. Mr. Gibbs and Mr. Eaton became NEOs in 2016. No amounts are reported for them for 2015 since they were not NEOs for that year. All Other Compensation Table The following table contains a breakdown of Compensation in the Summary Compensation Table above for 2017. the compensation and benefits included under All Other Name (a) Creed Gibbs Eaton Niccol Skeans t n e m e t a t S y x o r P Perquisites and other personal benefits ($)(1) (b) 96,331 12,645 27,294 2,200 5,792 Tax Reimbursements ($)(2) (c) — — 15,959 — — Insurance premiums ($)(3) (d) 26,999 6,701 10,254 4,002 2,621 LRP/TCN Contributions ($)(4) (e) 455,625 Total ($) (f) 578,955 — 19,346 301,007 164,852 8,413 247,500 158,650 — (1) Amounts in this column include personal use of Company aircraft, executive physical examinations, charitable matching gifts and tax preparation assistance, none of which 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 incremental cost for the personal use of Company aircraft by Mr. Creed ($83,608) – we calculate the incremental cost to the Company of any personal use of Company aircraft based on the cost of fuel, trip-related maintenance, crew travel, on board catering, landing and license fees, “dead head” costs of flying planes to and from locations for personal use, and contract labor. (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 $50,000. The Company provides every salaried employee with life insurance coverage up to one times the employee’s salary plus target bonus. (4) For Mr. Niccol this column represents the Company’s annual allocations to the LRP, an unfunded, unsecured account based retirement plan. For Mr. Creed and Mr. Eaton, this column represents the Company’s annual allocation to the TCN, an unfunded, unsecured account based retirement plan. 54 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION Grants of Plan-Based Awards The following table provides information on SARs, RSUs and PSUs granted in 2017 to each of the Company’s NEOs. The full grant date fair value of these awards is shown in the Summary Compensation Table at page 53. Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) Estimated Future Payouts Under Equity Incentive Plan Awards(2) Grant Date (b) Threshold ($) (c) Target ($) (d) Maximum ($) (e) Threshold (#) (f) Target (#) (g) Maximum (#) (h) All Other Stock Awards: Number of Shares of Stock Units (#) (i) All Other Option/ SAR Awards; Number of Securities Underlying Options (#)(3) (j) Exercise or Base Price of Option/ SAR Awards ($/Sh)(4) (k) Grant Date Fair Value ($)(5) (l) Name (a) Creed Gibbs Eaton Niccol 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/10/2017 0 1,822,500 5,467,500 0 882,000 2,646,000 0 825,000 2,475,000 0 835,000 2,505,000 Skeans 2/10/2017 0 514,250 1,542,750 2/10/2017 2/10/2017 — 49,265 98,530 235,916 68.00 3,350,007 3,350,020 — 16,177 32,354 — 14,706 29,412 — 14,706 29,412 — 8,089 16,178 77,465 68.00 1,100,003 1,100,036 70,423 68.00 1,000,007 1,000,008 70,423 68.00 1,000,007 1,000,008 38,733 68.00 550,009 550,052 P r o x y S t a t e m e n t (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 2017. The actual amount of annual incentive compensation awards are shown in column (g) of the Summary Compensation Table on page 53. The performance measurements, performance targets, and target bonus percentages are described in the CD&A beginning on page 32 under the discussion of annual incentive compensation. (2) Reflects grants of PSU awards subject to performance-based vesting conditions in 2017. The PSU awards granted February 10, 2017 vest on December 31, 2019 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, 2019. With respect to the 50% weighted on a TSR percentile ranking for the Company, 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; and (ii) 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 15% is achieved, this factor would provide for 100% weighting for the PSU payout with respect to this factor; if less than 9% 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 21% 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. YUM! BRANDS, INC. - 2018 Proxy Statement 55 EXECUTIVE COMPENSATION (3) Amounts in this column reflect the number of SARs granted to executives during the Company’s 2017 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 10, 2017. The SAR grants become exercisable in equal installments on the first, second, third and fourth anniversaries 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 terminate employment may exercise SARs that were vested on their date of termination through the expiration dates of the SARs (generally, the tenth anniversary following the SARs grant dates). Vested SARs of grantees who die may also be exercised by the grantee’s beneficiary through the expiration dates of the vested SARs and the grantee’s unvested SARs expire on the grantee’s date of death. If a grantee’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 2017 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 ($68.00) by the target number of units corresponding to the most probable outcome of performance conditions on the grant date. For SARs, fair value of $14.20 was calculated using the Black-Scholes method on the grant date. For additional information regarding valuation assumptions of SARs, see the discussion of stock awards and option awards contained at Note 16 to the Consolidated Financial Statements in Item 8 of YUM’s Form 10-K for the fiscal year ended December 31, 2017. t n e m e t a t S y x o r P 56 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION Outstanding Equity Awards at Year-End The following table shows the number of shares covered by exercisable and unexercisable SARs, and unvested RSUs and PSUs held by the Company’s NEOs on December 31, 2017. Option/SAR Awards(1) Stock Awards Name (a) Creed Gibbs Number of Securities Underlying Unexercised Options/ SARs (#) Exercisable (c) 166,849 169,793 120,564 81,670 89,755 57,768 — 96,298 77,877 — 169,875 120,562 81,771 89,779 57,860 — 96,328 77,956 Grant Date (b) 2/5/2009* 2/5/2010* 2/4/2011* 2/8/2012* 2/6/2013* 2/5/2014* 2/5/2014* 2/6/2015* 2/5/2016* 2/10/2017* 2/5/2010** 2/4/2011** 2/8/2012** 2/6/2013** 2/5/2014** 2/5/2014** 2/6/2015** 2/5/2016** Number of Securities Option/ Underlying Option/ SAR Unexercised SAR Exercise Options/ Expiration Price SARs (#) Date ($) Unexercisable (f) (d) (e) 2/5/2019 — $ 20.85 2/5/2020 — $ 23.48 2/4/2021 — $ 35.10 2/8/2022 — $ 45.88 2/6/2023 — $ 44.81 19,257(i) $ 50.22 2/5/2024 2/5/2024 67,864(ii) $ 50.22 96,299(iii) $ 52.64 2/6/2025 233,634(iv) $ 49.66 2/5/2026 235,916(v) $ 68.00 2/10/2027 2/5/2020 2/4/2021 2/8/2022 2/6/2023 2/5/2024 2/5/2024 2/6/2025 2/5/2026 — $ 9.96 — $ 14.88 — $ 19.46 — $ 19.00 19,287(i) $ 21.30 67,972(ii) $ 21.30 96,330(iii) $ 22.32 233,868(iv) $ 21.06 2/5/2009* 2/5/2009* 2/5/2010* 5/20/2010* 2/4/2011* 2/8/2012* 2/6/2013* 2/6/2013* 2/5/2014* 2/5/2014* 2/6/2015* 2/5/2016* 5/20/2016* 2/10/2017* 2/5/2009** 2/5/2009** 2/5/2010** 5/20/2010** 2/4/2011** 2/8/2012** 2/6/2013** 2/6/2013** 2/5/2014** 2/5/2014** 2/6/2015** 2/5/2016** 5/20/2016** 33,370 8,343 31,128 24,161 30,141 24,501 37,398 37,398 30,538 — 30,984 19,469 7,959 — 33,376 8,344 31,143 24,174 30,140 24,531 37,408 37,408 30,587 — 30,994 19,489 7,967 2/5/2019 — $ 20.85 2/5/2019 — $ 20.85 — $ 23.48 2/5/2020 — $ 28.22 5/20/2020 2/4/2021 — $ 35.10 2/8/2022 — $ 45.88 2/6/2023 — $ 44.81 2/6/2023 — $ 44.81 10,180(i) $ 50.22 2/5/2024 2/5/2024 33,932(ii) $ 50.22 30,984(iii) $ 52.64 2/6/2025 58,409(iv) $ 49.66 2/5/2026 23,879(vi) $ 56.67 5/20/2026 77,465(v) $ 68.00 2/10/2027 2/5/2019 — $ 8.84 2/5/2019 — $ 8.84 — $ 9.96 2/5/2020 — $ 11.97 5/20/2020 2/4/2021 — $ 14.88 2/8/2022 — $ 19.46 2/6/2023 — $ 19.00 2/6/2023 — $ 19.00 10,196(i) $ 21.30 2/5/2024 2/5/2024 33,986(ii) $ 21.30 30,994(iii) $ 22.32 2/6/2025 58,467(iv) $ 21.06 2/5/2026 23,904(vi) $ 24.03 5/20/2026 Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested(4) (i) Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested (j) Number of Shares or Units of Stock That Have Not Vested (#)(2) (g) Market Value of Shares or Units of Stock That Have Not Vested ($)(3) (h) P r o x y S t a t e m e n t — — 224,106 18,289,291 — — 71,812 5,860,577 YUM! BRANDS, INC. - 2018 Proxy Statement 57 EXECUTIVE COMPENSATION Option/SAR Awards(1) Stock Awards Name (a) Eaton Niccol Skeans t n e m e t a t S y x o r P Number of Securities Underlying Unexercised Options/ SARs (#) Exercisable (c) 141,493 120,564 73,503 67,317 48,099 33,834 19,469 — 141,562 120,562 73,593 67,335 48,174 33,844 19,489 Grant Date (b) 2/5/2010* 2/4/2011* 2/8/2012* 2/6/2013* 2/5/2014* 2/6/2015* 2/5/2016* 2/10/2017* 2/5/2010** 2/4/2011** 2/8/2012** 2/6/2013** 2/5/2014** 2/6/2015** 2/5/2016** Number of Securities Option/ Underlying Option/ SAR Unexercised SAR Exercise Options/ Expiration Price SARs (#) Date ($) Unexercisable (f) (d) (e) 2/5/2020 — $ 23.48 2/4/2021 — $ 35.10 2/8/2022 — $ 45.88 2/6/2023 — $ 44.81 16,033(i) $ 50.22 2/5/2024 33,835(iii) $ 52.64 2/6/2025 58,409(iv) $ 49.66 2/5/2026 70,423(v) $ 68.00 2/10/2027 2/5/2020 2/4/2021 2/8/2022 2/6/2023 2/5/2024 2/6/2025 2/5/2026 — $ 9.96 — $ 14.88 — $ 19.46 — $ 19.00 16,059(i) $ 21.30 33,846(iii) $ 22.32 58,467(iv) $ 21.06 2/4/2011* 2/8/2012* 2/6/2013* 5/15/2013* 2/5/2014* 2/6/2015* 2/6/2015* 2/5/2016* 2/5/2016* 2/10/2017* 5/20/2010** 2/4/2011** 2/8/2012** 2/6/2013** 5/15/2013** 2/5/2014** 2/6/2015** 2/6/2015** 2/5/2016** 2/5/2016** 2/5/2009* 2/5/2010* 2/5/2010* 2/4/2011* 2/8/2012* 2/6/2013* 2/5/2014* 2/5/2014* 2/6/2015* 2/5/2016* 2/5/2016* 2/10/2017* 2/5/2014** 2/5/2014** 2/6/2015** 2/5/2016** 2/5/2016** 23,443 32,668 37,398 — 30,538 30,984 — 19,469 — — 60,436 40,188 32,708 37,408 — 30,587 30,994 — 19,489 — 834 1,627 6,068 6,732 9,065 11,295 8,652 — 8,454 9,726 — — — — — — — — $ 35.10 — $ 45.88 — $ 44.81 2/4/2021 2/8/2022 2/6/2023 36,084(vii) $ 49.78 5/15/2023 10,180(i) $ 50.22 2/5/2024 30,984(iii) $ 52.64 2/6/2025 67,637(viii) $ 52.64 2/6/2025 58,409(iv) $ 49.66 2/5/2026 34,612(ix) $ 49.66 2/5/2026 70,423(v) $ 68.00 2/10/2027 — $ 11.97 5/20/2020 2/4/2021 — $ 14.88 2/8/2022 — $ 19.46 2/6/2023 — $ 19.00 36,114(vii) $ 21.11 5/15/2023 10,196(i) $ 21.30 2/5/2024 30,994(iii) $ 22.32 2/6/2025 67,658(viii) $ 22.32 2/6/2025 58,467(iv) $ 21.06 2/5/2026 34,647(ix) $ 21.06 2/5/2026 2/5/2019 — $ 20.85 2/5/2020 — $ 23.48 2/5/2020 — $ 23.48 2/4/2021 — $ 35.10 2/8/2022 — $ 45.88 2/6/2023 — $ 44.81 2,885(i) $ 50.22 2/5/2024 13,573(x) $ 50.22 2/5/2024 8,455(iii) $ 52.64 2/6/2025 29,178(iv) $ 49.66 2/5/2026 17,306(xi) $ 49.66 2/5/2026 38,733(v) $ 68.00 2/10/2027 2/5/2024 2/5/2024 2/6/2025 2/5/2026 2/5/2026 2,889(i) $ 21.30 13,595(x) $ 21.30 8,458(iii) $ 22.32 29,208(iv) $ 21.06 17,323(xi) $ 21.06 Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested(4) (i) Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested (j) Number of Shares or Units of Stock That Have Not Vested (#)(2) (g) Market Value of Shares or Units of Stock That Have Not Vested ($)(3) (h) — — 68,870 5,620,481 — — 68,870 5,620,481 4,160 339,498 39,959 3,261,054 YUM Awards YUM China Awards * ** (1) The actual vesting dates for unexercisable awards are as follows: (i) Remainder of unexercisable awards will vest on February 5, 2018. (ii) Unexercisable award will vest on February 5, 2019. (iii) One-half of the unexercisable award will vest on each of February 6, 2018 and 2019. 58 YUM! BRANDS, INC. - 2018 Proxy Statement EXECUTIVE COMPENSATION (iv) One-third of the unexercisable award will vest on each of February 5, 2018, 2019, and 2020. (v) One-fourth of the unexercisable award will vest on each of February 10, 2018, 2019, 2020 and 2021. (vi) One-third of the unexercisable award will vest on each of May 20, 2018, 2019, and 2020 (vii) Unexercisable award will vest on May 15, 2018. (viii) Unexercisable award will vest on February 6, 2020. (ix) Unexercisable award will vest on February 5, 2021. (x) Unexercisable award will vest on February 5, 2018. (xi) Unexercisable award will vest on February 5, 2020. (2) For Ms. Skeans, this amount represents deferrals of bonuses into the EID Program’s Matching Stock Fund. The amount represents the deferral of Ms. Skeans’ 2015 bonus (3) The market value of the YUM awards are calculated by multiplying the number of shares covered by the award by $81.61, the closing price of YUM stock on the NYSE on December 29, 2017. The market value of the Yum China awards are calculated by multiplying the number of shares covered by the award by $40.02, the closing price of Yum China stock on the NYSE on December 29, 2017. (4) The awards reflected in this column are unvested performance-based PSU awards with three-year performance periods that are scheduled to vest on December 31, 2018 or December 31, 2019 if the performance targets are met. Also reflected in this column are the unvested performance-based Launch Grant PSU awards, which are scheduled to vest on December 31, 2018 and December 31, 2019, if the performance targets are met. The Launch Grants will pay out at the close of the performance period (December 31, 2019) if specified General and Administrative Expense reductions are made by year-end 2019 and/or Company store ownership levels are reduced to meet applicable targets by year-end 2018. The terms of the launch grant PSU awards provide that if a Change in Control occurs during the performance period and the award recipient is involuntarily terminated upon or following the Change in Control and during the performance period, then the award recipient will receive the number of shares that would have been received if the target level of performance had been achieved for the entire performance period, subject to a pro rata reduction to reflect the portion of the performance period following such recipient’s post-change in control termination. In accordance with SEC rules, the PSU awards are reported at their maximum payout value. Option Exercises and Stock Vested The table below shows the number of shares of YUM common stock acquired during 2017 upon exercise of stock option and SAR awards and vesting of stock awards in the form of RSUs and PSUs, each including accumulated dividends and before payment of applicable withholding taxes and broker commissions. P r o x y S t a t e m e n t Name (a) Creed Gibbs Eaton Niccol Skeans Option/SAR Awards Number of Shares Acquired on Exercise (#) (b) 245,619 Value Realized on Exercise ($) (c) 9,782,649 58,775 3,059,186 — 45,106 32,950 — 3,222,782 1,276,522 Stock Awards Number of Shares Acquired on Vesting (#) (d) 37,136(1) 12,965(2) 9,431(1) Value realized on Vesting ($) (e) 3,030,669 991,812 769,664 20,713(2) 1,505,504 1,859(2) 123,252 (1) For each of Messrs. Creed and Eaton this amount represents PSUs that vested on December 31, 2017 with respect to the 2015-2017 performance period and were paid out in 2018. (2) For each of Messrs. Gibbs and Niccol, and Ms. Skeans, this amount represents the deferral of the 2014 cash incentive award, which was deferred into RSUs under the EID program in 2015 and vested in 2017. YUM! BRANDS, INC. - 2018 Proxy Statement 59 t n e m e t a t S y x o r P EXECUTIVE COMPENSATION Pension Benefits The table below shows the present value of accumulated benefits payable to each of the NEOs, including the number of years of service credited to each NEO, under the YUM! Brands Retirement Plan (“Retirement Plan”), and the YUM! Brands Pension Equalization Plan (“PEP”) determined using interest rate and mortality rate assumptions consistent with those used in the Company’s financial statements. Name (a) Creed(i) Gibbs Skeans Eaton(ii) Niccol(ii) Plan Name (b) Qualified Retirement Plan(1) PEP(2) Qualified Retirement Plan(1) PEP(2) Qualified Retirement Plan(1) PEP(2) — — Number of Years of Credited Service (#) (c) 2 — 29 29 17 17 — — Present Value of Accumulated Benefit(3) ($) (d) 200,306 — 1,124,232 5,302,792 476,806 1,095,143 — — Payments During Last Fiscal Year ($) (e) — — — — — — — — (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 45, Mr. Creed participates in the Third Country National plan, an unfunded, unsecured deferred account-based retirement plan. (ii) Messrs. Eaton and Niccol are not accruing benefits under these plans because each was hired after September 30, 2001 and is therefore ineligible for these benefits. As discussed at page 45, they each participate in the 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 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. replaces same level the 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 of employment, a participant’s normal retirement benefit from the plan is equal to plan. Upon termination under the A. B. C. 3% of Final Average Earnings times Projected Service up to 10 years of service, plus 1% of Final Average Earnings times Projected Service in excess of 10 years of service, minus 0.43% of Final Average Earnings up to Social Security covered compensation multiplied by Projected Service up to 35 years of service 60 YUM! BRANDS, INC. - 2018 Proxy Statement 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). leaves employment after becoming If a participant 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 the participant’s base pay and annual A participant’s final average earnings is determined based on his highest five consecutive years of pensionable earnings. Pensionable earnings is the sum of 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 EXECUTIVE COMPENSATION and lump sum payments made in connection with a participant’s termination of employment are not included. Normal Retirement Eligibility A participant is eligible for normal retirement following the later of age 65 or 5 years of vesting service. 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. 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, 2017 and received a lump sum payment. Name Greg Creed David W. Gibbs Tracy L. Skeans (1) The Retirement Plan (2) PEP Earliest Retirement Date January 1, 2018 $ April 1, 2018 $ Estimated Lump Sum from a Qualified Plan(1) 212,522 1,476,603 $ Estimated Lump Sum from a Non- Qualified Plan(2) Total Estimated Lump Sums 212,522 8,396,503 — $ 6,919,900 $ February 1, 2028 $ 1,459,393 $ 3,159,936 $ 4,619,329 P r o x y S t a t e m e n t 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, 2018. 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 is calculated based on actuarial from the plan, assumptions for lump sums required by Internal Revenue Code Section 417(e)(3). it (2) PEP tax federal law bars providing under The PEP is an unfunded, non-qualified plan that complements the Retirement Plan by providing benefits the that Retirement Plan. Benefits are generally determined and payable under the same terms and conditions as the Retirement Plan (except as noted below) without tax limitations on amounts of regard to federal 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 the Retirement Plan except that part C of the formula is calculated as follows: to the formula described above under 1-2/3% of an estimated primary Social Security amount multiplied by Projected Service up to 30 years YUM! BRANDS, INC. - 2018 Proxy Statement 61 EXECUTIVE COMPENSATION 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 life only annuity. the participant’s equivalent of 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 the Present Value of Accumulated For all plans, Benefits (determined as of December 31, 2017) 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 accounting in 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 each financial measurement date. calculations accounting financial used at Nonqualified Deferred Compensation t n e m e t a t S y x o r P Amounts reflected in the Nonqualified Deferred Compensation table below are provided for under the Company’s EID, LRP and TCN plans. These plans are account-based unfunded, unsecured deferred, 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, 2017, are shown in parentheses): (cid:129) YUM! Stock Fund (30.99%*) (cid:129) YUM! Matching Stock Fund (30.99%*) (cid:129) S&P 500 Index Fund (21.77%) (cid:129) Bond Market Index Fund (3.47%) (cid:129) Stable Value Fund (1.82%) (cid:129) YUM China Stock Fund (53.60%*) investments; All of the phantom investment alternatives offered under the EID Program are designed to match the performance of actual 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 that is, plans. compensation year, For 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. calendar each funds transfer between investment return of the Company’s common stock. Participants may 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 incentive into this fund acquire who defer their annual 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 2017). 62 YUM! BRANDS, INC. - 2018 Proxy Statement * Assumes dividends are reinvested. incentive award, Beginning with their 2009 annual 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 has been made available as 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 may be transferred out of this fund, but the fund does not allow for additional investment. The Yum China Stock Fund will cease to be available as an investment option in October of 2018. Fund Stock RSUs attributable to annual incentive deferrals into the and matching YUM! 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, fully vests in the the participant 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! immediately and RSUs Matching Stock Fund vest 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 Initial or annual 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 installments for up to 20 years. EXECUTIVE COMPENSATION 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: (cid:129) Distribution schedules cannot be accelerated (other than for a hardship) (cid:129) 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 the it would have begun without years after election to re-defer. P r o x y S t a t e m e n t 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. Niccol received an annual earnings credit equal to 5% while he was employed with the Company. The Company’s contribution for 2017 was equal to 9.5% of (“Employer Credit”) salary plus target bonus for Mr. Niccol. 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 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 YUM! BRANDS, INC. - 2018 Proxy Statement 63 EXECUTIVE COMPENSATION for Messrs. Creed and Eaton, 2017 was equal to 15% of their salaries plus target bonuses. the Employer Credit Distributions under TCN. Under the TCN, participants age 55 or older with a balance of $15,000 or more, are entitled to a lump sum distribution of their account balance in the quarter following their separation of employment. Participants under age 55 who separate employment with the Company will receive interest annually and their account balance will be distributed in the quarter following their 55th birthday. Name (a) Creed Gibbs Eaton Niccol Skeans Executive Contributions in Last FY ($) (b) — — — — — — — — — — — — — Registrant Contributions in Last FY ($)(1) (c) — 455,625 455,625 — — — 247,500 247,500 — 158,650 158,650 — — Aggregate Earnings in Last FY ($)(2) (d) 2,951,628 110,071 3,061,699 863,223 863,223 2,211,083 82,576 2,293,659 1,407,745 37,511 1,445,256 180,125 180,125 Aggregate Withdrawals/ Distributions ($)(3) (e) 202,364 17,727 220,091 51,132 51,132 — 9,630 9,630 160,754 7,431 168,185 174,678 174,678 Aggregate Balance at Last FYE ($)(4) (f) 12,477,599 2,749,384 15,226,983 3,712,099 3,712,099 8,700,577 1,971,960 10,672,537 5,170,049 938,943 6,108,992 665,880 665,880 Plan Name EID TCN Total EID Total EID TCN Total EID LRP Total EID Total (1) Amounts in column (c) reflect Company contributions for LRP and/or TCN allocation. See footnote 5 of the Summary Compensation Table for more detail. (2) 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. Niccol, of his earnings reflected in this column, $13,804 was deemed above market earnings accruing to his account under the LRP. For Messrs. Creed and Eaton, of their earnings reflected in this column, $40,506 and $30,388, 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. (3) 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 2017. Creed Gibbs Eaton Niccol Skeans 17,727 11,100 9,630 40,210 7,640 (4) 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 2017 and prior years. t n e m e t a t S y x o r P Creed Gibbs Eaton Niccol Skeans 64 YUM! BRANDS, INC. - 2018 Proxy Statement 5,674,993 — 548,741 1,364,911 — Potential Payments Upon Termination or Change in Control EXECUTIVE COMPENSATION 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, 2017, 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, following a change in control as of disability or December 31, 2017, they could exercise the SARs that were exercisable on that date as shown at the Outstanding Equity Awards at Year-End table on page 57, 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, 2017, 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 62, the NEOs participate in the EID Program, which permits the deferral of salary and incentive compensation. The last column of the annual Nonqualified Deferred Compensation Table on page 64 includes each NEO’s aggregate balance at December 31, 2017. 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 64. In the case of an involuntary termination of employment as of December 31, 2017, each NEO would receive the following: Mr. Creed $12,477,599, Mr. Gibbs $3,712,099, Mr. Eaton $ 8,700,577, Mr. Niccol $5,170,049, and Ms. Skeans $665,880. As discussed at page 62, these amounts reflect bonuses previously deferred by the executive and appreciation on these deferred amounts (see page 62 for discussion of investment alternatives available under the EID). Thus, the NEOs’ 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. the LRP, Leadership Retirement Plan. Under 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 55th birthday. In case of termination of employment as of December 31, 2017, Mr. Niccol would receive $938,943 when he attains age 55. Third Country National Plan. Under the TCN, participants age 55 or older are entitled to a lump sum distribution of following their their account balance in the quarter 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 55th birthday. In case of termination of employment as of December 31, 2017, Mr. Creed would have received $2,749,384 and Mr. Eaton would have received $1,971,960. P r o x y S t a t e m e n t for any reason other Performance Share Unit Awards. If one or more NEOs terminated employment than retirement or death or following a change in control and the performance criteria and prior to achievement of vesting period, then the award would be cancelled and forfeited. the NEO had retired, or died as of December 31, 2017, 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 terminations had occurred on December 31, 2017, If YUM! BRANDS, INC. - 2018 Proxy Statement 65 t n e m e t a t S y x o r P EXECUTIVE COMPENSATION Messrs. Creed, Gibbs, Eaton, Niccol, and Ms. Skeans, would have been entitled to $7,159,368, $2,196,790, $2,156,295, $2,156,295, and $1,249,836, respectively, assuming target performance. Pension Benefits. The Pension Benefits Table on page 60 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, 2017. The table on page 61 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. If life insurance plans the Life Insurance Benefits. For a description of supplemental that provide coverage to the NEOs, see the All Other Compensation Table on page 54. the NEOs had died on December 31, 2017, the survivors of Messrs. Creed, Gibbs, Eaton, Niccol, and Ms. Skeans would have received Company-paid life insurance of $3,000,000, $1,722,000, and this arrangement. $1,120,000, Executives and all other salaried employees can life insurance benefits up to a purchase additional 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. $1,650,000, respectively, under $1,670,000, Change in Control. Change in control severance agreements are in effect between YUM and certain key executives (including Messrs. Creed, Gibbs, Niccol, Eaton and Ms. Skeans). These agreements are general if, obligations of YUM, and provide, generally, within two years subsequent to a change in control of YUM, the employment of the executive is terminated (other for other limited reasons severance specified in 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: than for cause, or the change control that in (cid:129) 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, 66 YUM! BRANDS, INC. - 2018 Proxy Statement (cid:129) 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 (cid:129) 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 50 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 the change in control severance payments under severance agreements. Generally, pursuant to the agreements, a change in control is deemed to occur: (i) (ii) if any person acquires 20% or more of the Company’s voting securities (other than securities acquired directly its affiliates); from the Company or 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 before change the Company or any subsidiary of the Company other than (a) a merger where the Company’s directors control the immediately constitute a majority 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. the directors of in In addition to the payments described above, upon a change in control: (cid:129) All outstanding SARs held by the executive and not otherwise exercisable will fully and immediately vest the executive is following a change in control 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 32 for more detail. if (cid:129) All RSUs under the Company’s EID Program held by the executive will automatically vest. EXECUTIVE COMPENSATION (cid:129) 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 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 the portion of 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 In all cases, the change in control. period after 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 32 for more detail. If a change in control and each NEO’s involuntary termination had occurred as of December 31, 2017, the following payments or other benefits would have been made or become available. Severance Payment Annual Incentive Accelerated Vesting of SARs Accelerated Vesting of RSUs Acceleration of PSU Performance/Vesting Outplacement TOTAL CEO Pay Ratio Creed $ 9,612,188 3,814,493 23,972,600 — Gibbs $ 5,183,360 1,917,027 8,664,731 — Niccol Eaton $ $ 5,052,400 3,877,200 1,668,330 1,986,600 6,316,333 12,640,999 — — Skeans $ 3,309,440 1,076,325 4,114,393 350,688 7,159,368 25,000 1,249,836 25,000 44,583,649 17,986,908 14,361,429 21,543,024 10,125,683 2,156,295 25,000 2,156,295 25,000 2,196,790 25,000 P r o x y S t a t e m e n t 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. A majority of our Company workforce is located outside the U.S. 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 income. the 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 and more than half are 22 years old or younger. household American average 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”). employed To identify the median employee, we used the 2017 information for all base wages or base salary employees who were on December 31, 2017, 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 2017. We believe the use of base wages or base salary for all employees is a consistently applied compensation measure. by us As of December 31, 2017, our global workforce used for determining the pay ratio was estimated to be 50,354 employees (22,832 in the U.S. and 27,522 internationally). SEC rules permit the exclusion of a de minimis number of non-U.S. employees. The excluded employees are located in the following countries: France (1,388 employees), Brazil (506 employees) and Canada (168 employees). In total, we excluded 2,062 international employees, or approximately 4%, of our total workforce from the identification of the median employee as permitted by SEC rules. After exclusions, our global workforce for purposes of calculating the pay ratio was estimated to be 48,292 employees (22,832 in the U.S. and 25,460 internationally). YUM! BRANDS, INC. - 2018 Proxy Statement 67 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 to apply certain exclusions, and to methodologies, 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. EXECUTIVE COMPENSATION employee calculating compensation and After excluding the employees listed above, our median employee was identified as a part-time Taco Bell restaurant employee in the U.S. who was employed by the Company for three months. After identifying the median annual compensation in accordance with the requirements of the Summary Compensation Table. employee, we calculated total For 2017, the total compensation of our CEO, as reported in the Summary Compensation Table at page 53, was $12,368,607. The total compensation of our median employee was estimated to be $9,111. As a result, we estimate that our CEO to median employee pay ratio is 1,358:1. t n e m e t a t S y x o r P 68 YUM! BRANDS, INC. - 2018 Proxy Statement EQUITY COMPENSATION PLAN INFORMATION The following table summarizes, as of December 31, 2017, the equity compensation plans under which we may issue shares of stock to our directors, officers and employees. Those plans include the Long Term Incentive Plan (the “LTIP”) and the Restaurant General Manager Stock Option Plan (“RGM Plan”). Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders TOTAL Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) 10,251,599(1) 44.48(2) 27,803,612(3) 215,636(4) 10,467,235(1) 49.80(2) 44.66(2) — 27,803,612(3) Includes 2,443,719 shares issuable in respect of RSUs, performance units and deferred units. (1) (2) Weighted average exercise price of outstanding Options and SARs only. (3) Includes 13,901,806 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? P r o x y S t a t e m e n t units, stock performance The LTIP provides for the issuance of up to 92,600,000 shares of stock as non-qualified stock options, restricted stock, incentive stock options, SARs, restricted or shares performance units. Only our employees and directors are eligible to receive awards under the LTIP. The the LTIP is to motivate participants to purpose of 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 shares approximately necessary to satisfy then outstanding awards. No future awards will be made under the RGM Plan. The 220,000 the for 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, YUM! BRANDS, INC. - 2018 Proxy Statement 69 EQUITY COMPENSATION PLAN INFORMATION 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 support RGMs and have profit and loss that 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. t n e m e t a t S y x o r P 70 YUM! BRANDS, INC. - 2018 Proxy Statement AUDIT COMMITTEE REPORT Who serves on the Audit Committee of the Board of Directors? The members of the Audit Committee are Paget L. Alves, Christopher M. Connor, Tanya L. Domier, P. Justin Skala, Elane B. Stock and Thomas C. Nelson, Chair. The Board of Directors has determined that all of the the Audit Committee are independent members of 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 is standards of financially literate within the meaning of the NYSE listing standards. the NYSE and that each member 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. least The charter is reviewed by management at and any recommended changes annually, are review and presented to the Audit Committee for approval. The charter is available on our Web site at www.yum.com/investors/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 internal controls and the Company’s system of 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 2017. 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 in management deems advisable or appropriate, connection with issues or concerns that arise throughout the year. YUM! BRANDS, INC. - 2018 Proxy Statement 71 P r o x y S t a t e m e n t AUDIT COMMITTEE REPORT is responsible for reporting process, the Company’s Management financial 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 It that is not without financial reporting. verification, the the control over Committee’s duty or responsibility to conduct audits or accounting reviews or procedures. The Committee has on independent relied, management’s financial representations 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 regarding the Company’s report included in their financial statements and effectiveness of internal control over financial reporting. What matters have members of the Audit Committee discussed with management and the independent auditors? t n e m e t a t S y x o r P accordance with 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 2017 fiscal reporting period, management advised the Committee financial statements reviewed had that each set of been prepared in 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 non-audit The Committee received from KPMG LLP required by applicable requirements of the PCAOB regarding KPMG LLP’s communications with the Committee concerning considered independence. the services whether independent the are 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. by compatible with also provided auditors internal this process, and disclosure In addition, the Committee reviewed key initiatives and programs aimed at strengthening the effectiveness of the Company’s control the Committee structure. As part of continued to monitor the scope and adequacy of the Company’s reviewing to implement staffing recommended improvements in internal procedures and controls. The Committee also reviews and compliance matters with discusses the management, and, as necessary or advisable, Company’s independent auditors. auditing program, and steps internal taken levels legal and Has the Audit Committee made a recommendation regarding the audited financial statements for fiscal 2017? Based discussions with management and the independent auditors and the the Committee’s on 72 YUM! BRANDS, INC. - 2018 Proxy Statement Committee’s management and the report of review of the representations of the independent AUDIT COMMITTEE REPORT 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 include the audited the Board of Directors that consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for filing with the SEC. it Who prepared this report? This report has been furnished by the members of the Audit Committee: Thomas C. Nelson, Chairperson Paget L. Alves Christopher M. Connor Tanya L. Domier P. Justin Skala Elane B. Stock P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement 73 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 In by mail, by telephone and through the Internet. 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? t n e m e t a t S y x o r P 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 impact and to reduce Annual Report environmental 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 is withdrawn by writing our Transfer Agent, it Computershare, Inc., 462 South 4th 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 Investor to YUM! Brands, written request 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. Inc., 74 YUM! BRANDS, INC. - 2018 Proxy Statement May I propose actions for consideration at next year’s Annual Meeting of Shareholders or nominate individuals to serve as directors? ADDITIONAL INFORMATION 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 2019 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, 2018. 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 2019 Annual Meeting no later than the date specified in our bylaws. the 2019 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 2019 Annual Meeting is held within 30 days of this Annual Meeting, we must the anniversary of receive notice of your intention to introduce a nomination or other item of business at that meeting by February 16, 2019. If In addition, we recently amended our bylaws to 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 the requirements in YUM’s bylaws. Notice of proxy access director nominees must be received no earlier than November 7, 2018, and no later than December 7, 2018. shareholder(s) nominee(s) satisfy and The Board is not aware of any matters that are expected to come before the 2018 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 to acknowledge the nomination of any person, not made in compliance with the foregoing procedures. any business, or transaction of P r o x y S t a t e m e n t Bylaw Provisions. You may contact YUM’s Corporate Secretary at the address mentioned above for a copy of regarding the requirements for making shareholder proposals and nominating director candidates. the relevant bylaw provisions YUM! BRANDS, INC. - 2018 Proxy Statement 75 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 non-GAAP Adjusted Base Operating Profit to the current fiscal year’s non-GAAP Core Operating Profit. Adjusted Base Operating Profit includes adjustments to our prior year GAAP Operating Profit that we believe are necessary to ensure that growth rates for bonus purposes are indicative of underlying business performance. Core Operating Profit excludes Special Items and the impact of foreign currency translation and we use Core Operating Profit for the purposes of evaluating performance internally. Refer to page 25 of YUM’s Form 10-K for the fiscal year ended December 31, 2017 for further details related to Core Operating Profit. Reconciliation of GAAP Operating Profit to Adjusted Base Operating Profit and Core Operating Profit KFC Taco Bell YUM t n e m e t a t S y x o r P 2016 GAAP Operating Profit Special Items (Income) Expense — Operating Profit(a) Impact of 53rd Week in 2016(b) Impact of Pizza Hut U.S. Transformation Agreement(c) Impact of G&A Initiatives(d) Impact of Refranchising (e) Other Adjusted Base Operating Profit 2017 GAAP Operating Profit Special Items (Income) Expense — Operating Profit(a) Foreign Currency Impact on Reported Operating Profit(f) Core Operating Profit Adjusted Operating Profit Growth $871 $595 (11) (12) 20 (42) 4 $565 $619 25 (29) 1 $857 $981 (4) $977 $ 1,682 (35) (25) (85) (1) $ 1,536 $ 2,761 (1,001) $619 $ 1,760 14% 10% 15% 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 from continuing operations excluding Special Items provides additional information to investors related to our internal performance metrics and 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 our Divisions. Refer to page 29 of YUM’s Form 10-K for further details related to these Special Items. b) Fiscal 2016 included a 53rd week for all of our U.S. businesses and certain of our non-U.S. businesses that report 13 four- week periods versus 12 months. We exclude the 53rd week to further enhance the comparability of fiscal 2017 with fiscal 2016 when determining Adjusted Operating Profit Growth for our Divisions. The impact of the 53rd week was incorporated into our target for YUM and, thus, it is not necessary to include as an adjustment when determining Adjusted Base Operating Profit for YUM. Refer to page 25 of YUM’s Form 10-K for further details related to the 53rd week in 2016. 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 $25 million of incremental system advertising expense which was excluded when determining Adjusted Base Operating Profit for Pizza Hut and YUM. c) A-1 YUM! BRANDS, INC. - 2018 Proxy Statement APPENDIX A d) As part of our plans to become more efficient, we intend to reduce G&A to 1.7% of system sales in 2019. The impact of these forecasted strategic cost savings reductions for 2017 versus 2016 was excluded when determining Adjusted Operating Profit Growth for our Divisions. The impact of these cost savings reductions was incorporated into our target for YUM and, thus, it is not necessary to include as an adjustment when determining Adjusted Base Operating Profit for YUM. 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 Operating Profit due to refranchising includes the loss of restaurant profit, which reflects the decrease in Company sales, and the increase in franchise fees from restaurants that have been refranchised. The Company excludes the actual for 2017 versus 2016 due to loss of Operating Profit refranchising when determining Adjusted Base Operating Profit for YUM and our Divisions. f) The Company excludes the impact of foreign currency translation from the calculation of Core Operating Profit. The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. P r o x y S t a t e m e n t YUM! BRANDS, INC. - 2018 Proxy Statement A-2 [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION 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, 2017 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-13163 YUM! BRANDS, INC. (Exact name of registrant as specified in its charter) North Carolina (State or other jurisdiction of incorporation or organization) 1441 Gardiner Lane, Louisville, Kentucky (Address of principal executive offices) 13-3951308 (I.R.S. Employer Identification No.) 40213 (Zip Code) (502) 874-8300 Registrant’s telephone number, including area code SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT Title of Each Class Common Stock, no par value Name of Each Exchange on Which Registered New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark Yes No (cid:129) if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:129) if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:129) 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. (cid:129) whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). (cid:129) 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’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:129) 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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one): Large Smaller Emerging accelerated filer: Accelerated filer: Non-accelerated filer: reporting company: growth company: (cid:129) 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. (cid:129) whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 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, 2017 computed by reference to the closing price of the registrant’s Common Stock on the New York Stock Exchange Composite Tape on such date was approximately $25.4 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 14, 2018 was 332,513,103 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 17, 2018 are incorporated by reference into Part III. [THIS PAGE INTENTIONALLY LEFT BLANK] Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART I ITEM 1 ITEM 1A ITEM 1B ITEM 2 ITEM 3 ITEM 4 PART II ITEM 5 ITEM 6 ITEM 7 ITEM 7A ITEM 8 ITEM 9 ITEM 9A ITEM 9B PART III ITEM 10 ITEM 11 ITEM 12 ITEM 13 ITEM 14 PART IV ITEM 15 Exhibits and Financial Statement Schedules 2 2 5 13 13 14 14 15 15 17 18 37 38 79 79 79 80 80 80 80 80 80 81 81 [THIS PAGE INTENTIONALLY LEFT BLANK] 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 hereof. 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. YUM! BRANDS, INC. - 2017 Form 10-K 1 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://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 the terms “restaurants,” this Form 10-K, “stores” and “units” are used interchangeably. While YUM! Brands, Inc., referred to as the Company, does not directly own or operate any restaurants, to restaurants that are owned or operated by our subsidiaries as being Company-owned. this document we may refer throughout Financial Information about Operating Segments and General Development of the Business As of December 31, 2017, YUM consists of three operating segments: (cid:129) The KFC Division which includes the worldwide operations of the KFC concept (cid:129) The Pizza Hut Division which includes the worldwide operations of the Pizza Hut concept (cid:129) The Taco Bell Division which includes the worldwide operations of the Taco Bell concept record as of 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 the close of business on October 19, 2016 (the “Record Date”) one share of Yum China common stock for each share of our Common Stock held as of the Record Date. The distribution was structured to be a tax free distribution to our U.S. shareholders for federal income tax purposes in the United States. Yum China’s common stock trades on the New York Stock Exchange under the distribution, we do not beneficially own any shares of Yum China common stock. “YUMC.” After the symbol K - 0 1 m r o F the Company Concurrent with the Separation, a subsidiary of entered into a Master License Agreement with a subsidiary of Yum to use and sublicense the use of China for the exclusive right intellectual property owned by YUM and its affiliates for the development and operation of KFC, Pizza Hut and Taco Bell to the Separation, our operations in restaurants in China. Prior 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 Income and Consolidated Statements of Cash Flows for periods presented prior to the Separation. See additional information related to the impact of the Separation in Item 8, Note 4 to the Consolidated Financial Statements. in our Consolidated Statements of Operating segment information for the years ended December 31, 2017, 2016 and 2015 for the Company is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and in the related Consolidated Financial Statements in Part II, Item 8. Narrative Description of Business General YUM has over 45,000 restaurants in more than 135 countries and territories. The Company’s three concepts of KFC, Pizza Hut and Taco Bell franchise a (the “Concepts”), develop, operate or worldwide system of restaurants which prepare, package and sell a menu of competitively priced food items. Units are operated by the franchisees or licensees under the Concepts or by independent terms of franchise or license agreements, which typically require an initial non-refundable fee upon an individual store opening and the payment of sales-based fees for use of our Concepts’ brands. 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. Franchisees can range in size from individuals owning just one restaurant to large publicly-traded companies. 2 YUM! BRANDS, INC. - 2017 Form 10-K Restaurant Concepts Most restaurants in each Concept offer consumers the ability to dine in and/or carry out 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. In February 2018, we entered into an agreement with GrubHub, Inc., (“Grubhub”) the leading online and mobile take out food-ordering company in the U.S. Under the agreement, Grubhub will provide support in the U.S. for the KFC and Taco Bell branded online delivery channels, along with access to Grubhub’s online ordering platform, logistics and last- mile support for delivery orders, and point-of-sale integration to streamline operations. Each Concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients, as well as unique recipes and special seasonings to provide appealing, tasty and convenient food at competitive prices. The franchise programs of the Company are designed to promote consistency and quality, and the Company is selective in granting franchises. The Company utilizes both store-level franchise and master franchise programs to grow its businesses. Under store-level franchise agreements, franchisees supply capital – initially by paying a franchise fee to YUM, 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 refranchising transactions the Company may retain ownership of land and building and lease them to the franchisee. Franchisees contribute to the fees at Company’s revenues by paying non-refundable upfront inception of the franchise agreement and on an ongoing basis through the payment of royalties based on a percentage of sales (usually 4% - 6%). Under master the Company enters into agreements that allow master franchisees to operate restaurants as well as sub-franchise within certain franchisees are responsible for geographic territories. Master overseeing development within their territories and collect initial fees and royalties from sub-franchisees. Master franchisees generally pay upfront fees and ongoing royalties at a reduced rate to the Company. Our largest master franchisee, Yum China, pays a 3% license fee on system sales of our Concepts in mainland China to the Company. franchise arrangements, 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 including products, equipment, on key aspects of the business, operational and management techniques. and standards improvements Following is a brief description of each Concept: KFC (cid:129) KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early developer of the quick service food business and franchise concept. The Colonel a pioneer of perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952. the restaurant (cid:129) KFC operates in 131 countries and territories throughout the world. As of year end 2017, KFC had 21,487 units, 97 percent of which are franchised. (cid:129) 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. PART I ITEM 1 Business KFC restaurants also offer a variety of entrees and side items suited to local preferences and tastes. Restaurant decor throughout the world is characterized by the image of the Colonel. Pizza Hut (cid:129) 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. (cid:129) Pizza Hut operates in 106 countries and territories throughout the world. As of year end 2017, Pizza Hut had 16,748 units, 99 percent of which are franchised. (cid:129) Pizza Hut operates in the delivery, carryout and casual dining segments around the world. Outside of the U.S., Pizza Hut often uses unique branding to differentiate these segments. Additionally, a growing percentage of Pizza Hut’s customer orders are being generated digitally. (cid:129) Pizza Hut features a variety of pizzas which are marketed under varying names. Each of these pizzas is offered with a variety of different toppings suited to local preferences and tastes. Many Pizza Huts also offer pasta and chicken wings, including approximately 5,900 stores offering wings under the WingStreet brand in the U.S. Outside the U.S., Pizza Hut casual dining restaurants offer a variety of core menu products other than pizza, which are typically suited to local preferences and tastes. Pizza Hut units feature a distinctive red roof logo on their signage. Taco Bell (cid:129) 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. (cid:129) Taco Bell operates in 27 countries and territories throughout the world. As of year end 2017, there were 6,849 Taco Bell units, primarily in the U.S., 90 percent of which are franchised. (cid:129) Taco Bell specializes in Mexican-style food products, including various types of tacos, burritos, quesadillas, salads, nachos and other related items. Taco Bell offers breakfast items in its U.S. stores. Taco Bell units feature a distinctive bell logo on their signage. 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 which 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. F o r m 1 0 - K 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 regulations and customs. These manuals set forth standards and requirements for all aspects of food restaurant operations, including food safety and quality, local YUM! BRANDS, INC. - 2017 Form 10-K 3 PART I ITEM 1 Business and product procedures, teams are responsible for equipment preparation handling maintenance, facility standards and accounting control procedures. The restaurant management 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. including CHAMPS performance measures, are RGMs’ efforts, 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. The Company has not experienced any significant continuous shortages of supplies, and alternative sources for most of these products are generally available. 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. 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 interests and a believes that RSCS fosters closer alignment of stronger relationship with its franchisee community. Most food products, paper and packaging supplies, and equipment used in restaurant operations are distributed to individual restaurant In the U.S., McLane units by third-party distribution companies. 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 6,400 food and paper suppliers, including U.S.-based suppliers that export to many countries. 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. these marks by franchisees has been The use of certain of 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. 4 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F Working Capital Information about is included in MD&A in Part II, Item 7 and the Consolidated Statements of Cash Flows in Part II, Item 8. the Company’s working capital Seasonal Operations The Company does not consider its operations to be seasonal to any material degree. restaurant to price and quality of 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 the QSR segment), and is intensely competitive with respect food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service reputation, 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 industry is often affected by changes in consumer tastes; national, regional or fluctuations; local economic conditions; currency demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Each of the 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. Research and Development (“R&D”) The Company operates R&D facilities in Plano, Texas (KFC and Pizza Hut Divisions); Irvine, California (Taco Bell Division); Louisville, Kentucky (KFC U.S.) and several other locations outside the U.S. In addition to Company R&D, we regularly also engage independent suppliers to conduct research and development activities for the benefit of the YUM system. The Company expensed $22 million, $24 million and $25 million in 2017, 2016 and 2015, respectively, for R&D activities. Environmental Matters local The Company is not aware of any federal, state or its laws or environmental earnings or competitive position, or in material capital expenditures. However, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. During 2017, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated. regulations that will materially affect result 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 and PART I ITEM 1A Risk Factors regulation by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or In addition, each municipality in which the restaurant is located. 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 and regulation 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 to those affecting U.S. and regulations which are similar 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 2017, the Company and its subsidiaries employed approximately 60,000 persons. The Company believes that it provides working conditions and compensation that compare 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 cultures in which the Company operates. The Company and its Concepts consider their employee relations to be good. Financial Information about Geographic Areas Financial Statements in Part II, Item 8. information about our significant geographic areas is incorporated herein by reference from the related Consolidated Financial 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. These reports may also be obtained by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1 (800) SEC-0330. ITEM 1A Risk Factors You should carefully review the risks described below as they identify important results to differ materially from our forward-looking statements and historical trends. factors that could cause our actual trichinosis, In addition, Food safety and food-borne illness concerns may have an adverse effect on our business. Food-borne illnesses, such as E. coli, listeria and salmonella, occur or may occur within our system from time to time. 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 our 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 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, 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. F o r m 1 0 - K food safety issues, food-borne illness or financial condition and results of operations. In addition, instances or allegations of 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 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 YUM! BRANDS, INC. - 2017 Form 10-K 5 PART I ITEM 1A Risk Factors temporary closure of restaurants, which would 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 our profit margins and revenues. restaurant guest 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 the ability to adequately staff restaurants. We could also be adversely affected if government authorities impose mandatory closures, seek voluntary closures or restaurants. Even if such impose restrictions on operations of 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. traffic or K - 0 1 m r o F 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’ In 2016, we announced our plan to become at least 98% franchised by the end of 2018. Our refranchising efforts have increased, and will continue to increase, our dependence on the financial success and cooperation of our Concepts’ long-term system sales In addition, our 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 growth targets. franchisees. franchisees. 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 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 If a significant franchisee of one of our insolvency or bankruptcy. 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 lease contingently liable on certain of our Concepts’ 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. franchisees’ 6 YUM! BRANDS, INC. - 2017 Form 10-K franchisees to implement major Our success also depends on the willingness and ability of our Concepts’ 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 successfully implement our transformation initiatives or fully realize the anticipated benefits from the transformation. We are in the process of implementing our strategic transformation plans to drive global expansion of our KFC, Pizza Hut and Taco Bell brands. Among other things, this transformation includes a plan to become at least 98% franchised by the end of 2018 and to significantly reduce annual capital expenditures and our general and administrative costs, each 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. there can be no if properly executed, will result in our assurance that our efforts, desired outcome of improved financial performance. In addition, 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 Separation, we entered into a Master License Agreement with Yum China pursuant to which Yum China is the exclusive licensee of the KFC, Pizza Hut and Taco Bell Concepts and their related 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, and the regulatory environment, as well as increased media scrutiny of our Concepts and industry, fluctuations in foreign exchange rates 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 to income from the Yum China business is therefore subject numerous uncertainties based on the policies of the Chinese government, as they may change from time to time. Our relationship with Yum China is governed 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 is increasingly exposed to risks in international operations. These risks, which can vary inherent 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, consumer preferences and the laws and policies that govern foreign investment in countries where our restaurants are operated. In addition, our franchisees do business in to trade or economic sanction jurisdictions that may be subject 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 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 Chinese government restricts the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. 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 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. the U.S. dollar value of PART I ITEM 1A Risk Factors 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. financial and other We receive and maintain certain personal, 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 it could result persons or used inappropriately, in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and result in a loss of customer confidence, which results of operations and financial could adversely affect our 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 becomes effective in May 2018, The General Data Protection Regulation (“GDPR”), which requires companies to meet new requirements regarding the handling of personal data. Our failure to adhere to or successfully implement appropriate processes to adhere to the requirements of GDPR and other laws and regulations in this area could result in financial penalties, legal liability and could damage our and our Concepts’ brands’ reputations. There are risks associated with our increasing dependence on digital commerce platforms to maintain and grow sales. In addition, aspects of our information technology systems may experience disruptions, which could harm our ability to compete and conduct our business. Customers are increasingly using e-commerce websites and apps, both domestically and internationally, like pizzahut.com, Pizza Hut, KFC and Taco Bell apps, as well as apps owned by third-party delivery aggregators such as Grubhub and third-party mobile payment processors, to order and pay for our Concepts’ products. As a result, our Concepts and our Concepts’ franchisees are increasingly reliant on digital ordering and payment as a sales channel. These digital ordering and payment platforms could be damaged or interrupted by power loss, technological failures, user errors, cyber-attacks, other forms of sabotage or acts of God. In particular, Pizza Hut relies on digital orders for a significant portion of its digital ordering its sales and could experience interruptions of 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. YUM! BRANDS, INC. - 2017 Form 10-K 7 F o r m 1 0 - K PART I ITEM 1A Risk Factors if Pizza Hut’s digital ordering platforms do not meet In addition, customers’ expectations in terms of security, speed, attractiveness, or ease of use, customers may be less inclined to return to such digital ordering platforms, which could negatively impact our sales, results of operations and financial condition. In addition, Yum China, our largest franchisee, relies heavily on third- party mobile payment apps such as Alipay and WeChat as a means through which to generate sales and process payments. Should customers become unable to access mobile payment apps in China, or should the relationship between Yum China and one or more third-party mobile payment processors become interrupted, our results of operations could be negatively impacted. 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 interests and/or may be inaccurate. The dissemination of our information via social media could harm our business, reputation, financial condition, and results of operations, the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction. regardless of 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. Such shortages or disruptions could be caused by 8 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F the financial inaccurate forecasting of inclement weather, natural disasters, customer demand, problems in production or distribution, restrictions on imports or exports, the inability of vendors to obtain instability in the countries in which suppliers and credit, political distributors are located, instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food advisories safety warnings such pronouncements, supply or distribution cancellation of 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. In the U.S., the Company, along with representatives of the Company’s KFC, Pizza Hut and Taco Bell franchisee groups, are members of Restaurant Supply Chain Solutions, LLC (“RSCS”), which is for purchasing certain restaurant products and responsible 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. prospect or the the or of 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. 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 our net restaurant count in markets around the world, especially in emerging markets. 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 restaurant crews and meet construction schedules. Expansion into target markets could also be affected by our Concepts’ franchisees’ ability to obtain financing to construct and open new restaurants. it becomes more difficult or more expensive for our Concepts’ franchisees to obtain financing to develop new restaurants, the expected growth of our system could slow and our future revenues and operating cash flows could be adversely impacted. If 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. 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 restaurant managers and other crew members. industry is very The market 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 rate in existing restaurants or increases in employee turnover widespread employee dissatisfaction could have a material adverse effect on our and our Concepts’ franchisees’ business and results of operations. for qualified employees in our 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. The standard for determining joint employer status could adversely affect our business operations and increase our liabilities resulting from actions by our Concepts’ franchisees. The National Labor Relations Board’s (the “NLRB”) 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 is uncertain and subject to change. In addition, the NLRB has issued complaints naming McDonald’s Corporation as a joint employer of workers at its franchisees for alleged violations of the U.S. Fair Labor Standards Act. The NLRB’s joint employer liability standard could cause us or our Concepts to be liable or held responsible for unfair labor practices, violations of wage and hour laws, and other violations and could also require our Concepts to conduct collective the general counsel’s office of PART I ITEM 1A Risk Factors bargaining negotiations regarding employees of our Concepts’ franchisees. Further, there is no assurance that we or our Concepts will not receive similar complaints as McDonald’s Corporation in the future, which could result in legal proceedings based on the actions of our Concepts’ In such events, 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. franchisees. large quantities of (including potatoes 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 raw materials such as proteins (including poultry, pork, beef and seafood), cheese, oil, flour and vegetables 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. 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 limited 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 dilution. Any reduction of our Concepts’ brands’ goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and results of operations. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 9 PART I ITEM 1A Risk Factors isolated or 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 recurring, and whether originating from us, franchisees, competitors, 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 20 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Plaintiffs in lawsuits often seek recovery of very large or these types of indeterminate amounts, and the magnitude of 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 reputation, which in turn could adversely affect our results of operations. the potential K - 0 1 m r o F the restaurant to claims that relate to the nutritional content of industry around the world has been In addition, food subject the menus and practices of products, as well as claims that 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 reputation and adversely affect our business, financial condition and results of operations. 10 YUM! BRANDS, INC. - 2017 Form 10-K 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: (cid:129) 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. (cid:129) 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. (cid:129) Laws and regulations in government-mandated health care benefits such as the Patient Protection and Affordable Care Act. (cid:129) Laws and regulations relating to nutritional content, nutritional labeling, product safety, product marketing and menu labeling. (cid:129) Laws relating to state and local licensing. (cid:129) Laws relating to the relationship between franchisors and franchisees. (cid:129) Laws and regulations relating to health, sanitation, food, workplace safety, child labor, including laws prohibiting the use of certain “hazardous equipment” by employees younger than the age of 18 years of age, and fire safety and prevention. (cid:129) Laws and regulations relating to union organizing rights and activities. (cid:129) Laws relating to information security, privacy (including the European Union’s GDPR, which will become effective in May 2018), cashless payments, and consumer protection. (cid:129) Laws relating to currency conversion or exchange. (cid:129) Laws relating to international trade and sanctions. (cid:129) Tax laws and regulations. (cid:129) Anti-bribery and anti-corruption laws. (cid:129) Environmental laws and regulations. (cid:129) 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 internal of things, required investigations, proceedings, investigations administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could also harm our reputation and adversely affect our revenues. revocation governmental licenses, or litigation, 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. Although we have implemented policies and procedures designed to promote compliance with these laws, 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 reputation and adversely affect our revenues and results of operations. taxing authorities with respect 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 to such income and non-income based taxes inside and outside of the U.S. In connection with the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, companies are now required to disclose more information to tax authorities on their global operations, which may lead to greater audit scrutiny of profits earned in various countries. Our accruals for tax liabilities are based on past experience, interpretations of applicable law, and judgments about potential actions by tax authorities, but because such accruals require significant judgment the ultimate resolution of any tax matters may result in payments greater than the amounts accrued. 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. 22, 2017, the U.S. government enacted On December comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which significantly modifies the U.S. corporate income tax system. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of its effects and recorded provisional amounts for the year ended December 31, 2017, consistent with applicable SEC guidance. (See details of the charge we recorded upon enactment of the Tax Act in Note 18 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.) These provisional amounts include a one-time mandatory deemed repatriation tax on accumulated foreign earnings, the remeasurement of certain net deferred tax assets and liabilities and the establishment of a valuation allowance on our foreign tax credits. We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our ongoing PART I ITEM 1A Risk Factors impacts of the Tax Act may differ from effective tax rate. The final current estimates and provisional amounts recorded, possibly materially, due to, among other things, changes in interpretations of the Tax Act, changes in accounting standards for income taxes or related accounting interpretations in response to the Tax Act, or updates or changes to estimates the Company has utilized to calculate the provisional impacts. 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 income tax purposes, the Yum China spin-off that, for U.S. federal 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 representations or undertakings are these facts, assumptions, 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. the Yum China spin-off was taxable, If, notwithstanding receipt of any opinion, the IRS were to conclude that 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. transfer” of Chinese taxable assets, The Yum China spin-off may be subject to China indirect transfer tax. the Chinese State Administration of Taxation In February 2015, (“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 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. YUM! BRANDS, INC. - 2017 Form 10-K 11 F o r m 1 0 - K PART I ITEM 1A Risk Factors 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. 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. are there significant uncertainties However, 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 intend to 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. restaurants are discretionary for Purchases at our Concepts’ consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions. Our 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 K - 0 1 m r o F 12 YUM! BRANDS, INC. - 2017 Form 10-K restaurant reputation, to price and quality of The retail food industry in which we operate is highly competitive. The retail food industry in which we operate is highly competitive with respect food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service, 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 business 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 our sales, profitability or development plans, which could harm our 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. In connection with the announcement of our strategic transformation indebtedness from approximately plans, we have increased our $4 billion to approximately $10 billion. The proceeds from the debt were primarily used to return capital to shareholders through share repurchases and dividends. Subject to the limits contained in the agreements governing our indebtedness, we may be able to incur additional debt from time to time, which would intensify the risks related to our high level of indebtedness. Specifically, our high level of potential consequences, including, but not limited to: indebtedness could have important (cid:129) 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; (cid:129) 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; (cid:129) increasing our vulnerability to a further downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets; (cid:129) restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; PART I (cid:129) placing us at a disadvantage compared to other less leveraged competitors or competitors with comparable debt at more favorable interest rates; (cid:129) 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 denominated in U.S. dollars. (cid:129) increasing our exposure to the risk of increased interest rates insofar as current and future borrowings are subject to variable rates of interest; (cid:129) making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt; (cid:129) limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; (cid:129) 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 the applicable debt, and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies; and in the acceleration of 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 operation 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 2017 fiscal year and that remain unresolved. ITEM 2 Properties As of year end 2017, the Company’s Concepts owned land, building or both for 580 units and leased land, building or both for 901 properties worldwide in connection with the operation of Company- owned restaurants. These units are further detailed as follows: (cid:129) The KFC Division owned land, building or both for 184 units and leased land, building or both for 484 units. (cid:129) The Pizza Hut Division owned land, building or both for 9 units and leased land, building or both for 151 units. (cid:129) The Taco Bell Division owned land, building or both for 387 units and leased land, building or both for 266 units. The Company currently owns or leases land, building or both related to approximately 900 units, not included in the property counts above, that it leases or subleases to franchisees, principally in the U.S., United Kingdom, Germany, Australia 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. F o r m 1 0 - K The Company believes that its properties are generally in good operating condition and are suitable for the purposes for which they are being used. YUM! BRANDS, INC. - 2017 Form 10-K 13 PART I ITEM 4 Mine Safety Disclosures 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, in Note 20, Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, which is incorporated by reference into this item. if any, appear ITEM 4 Mine Safety Disclosures Not applicable. as Chief Government Affairs Officer since November 2016. Mr. Kesselman joined YUM from Dean Foods where he held the position of Executive Vice President, General Counsel, Corporate Secretary & Government Affairs from January 2015 to January 2016. Prior to this position, he worked at PepsiCo from January 2009 to January 2015, most recently serving as Senior Vice President and General Counsel of PepsiCo Americas Foods & Frito Lay North America. From May 2006 to December 2008 he served as General Counsel of the United States Department of Agriculture. David Russell, 48, 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, 45, 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 June 2006 to September 2011, she served as Director of Human Resources for Pizza Hut U.S. Executive officers are elected by and serve at the discretion of the Board of Directors. K - 0 1 m r o F Executive Officers of the Registrant The executive officers of the Company as of February 21, 2018, and their ages and current positions as of that date are as follows: Greg Creed, 60, 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. is Chief Executive Officer of KFC Division, a Roger Eaton, 57, position he has held since August 2015. Prior to that, he served as President of KFC Division from January 2014 to August 2015 and as Chief Operations Officer of YUM from November 2011 to August 2015. Prior to these positions, Mr. Eaton served as Chief Executive Officer of KFC U.S. and YUM Operational Excellence Officer from February 2011 to November 2011. David Gibbs, 54, is President and Chief Financial Officer of YUM. He has served in this position since May 2016. Prior to this position, 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, 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. (“YRI”) Inc. Marc Kesselman, 46, is General Counsel, Corporate Secretary and Chief Government Affairs Officer of YUM. He has served as General Counsel and Corporate Secretary of YUM since February 2016 and 14 YUM! BRANDS, INC. - 2017 Form 10-K PART II 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 high and low NYSE composite closing sale prices by quarter for the Company’s Common Stock and dividends per common share. 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 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. Stock prices prior to November 1, 2016, do not reflect any adjustment for the impact of the Separation. Quarter First Second Third Fourth Quarter First Second Third Fourth (to October 31) Fourth (from November 1) 2017 2016 (As Restated)(a) High Low Dividends Declared $ 68.65 $ 63.18 $ 0.30 74.82 77.80 83.47 63.55 72.65 73.75 0.30 — 0.30 High Low Dividends Declared $ 82.25 $ 65.24 $ 0.46 85.90 91.26 90.92 64.74 79.33 83.04 85.36 59.70 0.46 0.51 — 0.30 F o r m 1 0 - K In 2017, the Company paid four cash dividends of $0.30 per share. This included a dividend distributed February 3, 2017, that had been declared on December 21, 2016, which was the first dividend declared subsequent to the Separation of the Company’s China business. 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 14, 2018, there were 49,843 registered holders of record of the Company’s Common Stock. (a) Stock price information presented for 2016 is now reflective of our current reporting calendar. See Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K for discussion of the change in our reporting calendar. YUM! BRANDS, INC. - 2017 Form 10-K 15 PART II ITEM 5 Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Issuer Purchases of Equity Securities The following table provides information as of December 31, 2017, with respect to shares of Common Stock repurchased by the Company during the quarter then ended. Fiscal Periods 10/1/17 – 10/31/17 11/1/17 – 11/30/17 12/1/17 – 12/31/17 Total Total number of shares purchased (thousands) Average price paid per share Total number of shares purchased as part of publicly announced plans or programs (thousands) Approximate dollar value of shares that may yet be purchased under the plans or programs (millions) 2,686 3,162 1,603 7,451 $ 75.47 $ 79.68 $ 82.95 $ 78.87 2,686 3,162 1,603 7,451 $ 385 $ 1,633 $ 1,500 $ 1,500 On November 16, 2017, our Board of Directors authorized share repurchases through December 2018 of up to $1.5 billion (excluding applicable transaction fees) of our outstanding Common Stock. As of December 31, 2017, we have remaining capacity to repurchase up to $1.5 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, 2012 to December 29, 2017, the last trading day of our 2017 fiscal year. The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 31, 2012 and that all cash dividends were reinvested. In $ 250.00 200.00 150.00 100.00 50.00 K - 0 1 m r o F 2012 YUM! 2013 2014 2015 2016 2017 S&P 500 S&P 500 Consumer Discretionary YUM S&P 500 S&P Consumer Discretionary Source: Bloomberg 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/30/2016 12/29/2017 $ 100 $ 100 $ 100 $ 116 $ 132 $ 143 $ 114 $ 150 $ 157 $ 117 $ 153 $ 173 $ 145 $ 171 $ 183 $ 190 $ 208 $ 225 16 YUM! BRANDS, INC. - 2017 Form 10-K ITEM 6 Selected Financial Data PART II SELECTED FINANCIAL DATA YUM! BRANDS, INC. AND SUBSIDIARIES (in millions, except per share and unit amounts) Income Statement Data Revenues Company sales Franchise and license fees and income Total Refranchising (gain) loss(b) Operating Profit(b) Other pension (income) expense(b) Interest expense, net(b) Income from continuing operations before income taxes(b) Income from continuing operations(b) Income from discontinued operations, net of tax Net Income(b) Basic earnings per common share from continuing operations(b) Basic earnings per common share from discontinued operations Basic earnings per common share(b) Diluted earnings per common share from continuing operations(b) Diluted earnings per common share from discontinued operations Diluted earnings per common share(b) Diluted earnings per common share from continuing operations excluding Special Items(c) Cash Flow Data Provided by operating activities Capital spending Proceeds from refranchising of restaurants Repurchase shares of Common Stock Dividends paid on Common Stock Balance Sheet Data Total assets Long-term debt Total debt Other Data Number of stores at year end Franchise Company System System Sales(c) KFC Division system sales Reported growth Growth in local currency Pizza Hut Division system sales Reported growth Growth in local currency Taco Bell Division system sales Reported growth Growth in local currency Shares outstanding at year end Cash dividends declared per Common Share Market price per share at year end(e) 2017 2016(a)(d) Fiscal Year 2015(a) 2014(a) 2013(a) $ 3,572 2,306 5,878 (1,083) 2,761 47 440 2,274 1,340 N/A 1,340 3.86 N/A 3.86 3.77 N/A 3.77 2.96 $ 1,030 318 1,773 1,960 416 $ 5,311 9,429 9,804 $ 4,189 2,167 $ 4,336 2,082 $ 4,503 2,084 $ 4,384 2,033 6,356 (163) 1,682 32 305 1,345 1,018 625 1,643 2.58 1.59 4.17 2.54 1.56 4.10 2.46 6,418 23 1,434 40 141 1,253 926 357 1,283 2.13 0.82 2.95 2.09 0.81 2.90 2.31 6,587 (16) 1,517 N/A 143 1,374 1,006 45 1,051 2.27 0.10 2.37 2.22 0.10 2.32 2.20 6,417 (95) 1,530 N/A 251 1,279 922 169 1,091 2.04 0.37 2.41 2.00 0.36 2.36 2.04 $ 1,248 427 370 5,403 744 $ 5,453 9,059 9,125 $ 1,260 442 213 1,200 730 $ 4,939 2,988 3,908 $ 1,217 508 83 820 669 $ 5,073 3,003 3,268 $ 1,289 481 250 770 615 $ 4,975 2,888 2,958 F o r m 1 0 - K 43,603 1,481 45,084 40,834 2,841 43,675 39,320 3,163 42,483 37,959 3,279 41,238 36,746 3,071 39,817 24,515 23,242 22,628 23,458 23,147 5% 6% 3% 7% (3)% 5 % 1% 4% (2)% —% 12,034 12,019 11,999 12,106 11,948 —% 1% —% 2% (1)% 3 % 1% 2% 3% 4% 10,145 9,660 9,102 8,459 8,107 5% 5% 6% 6% 8% 8% 4% 4% 4% 4% 332 0.90 $ 355 1.73 $ 420 1.74 $ 434 1.56 $ 443 1.41 $ $ 81.61 $ 63.33 $ 73.05 $ 73.14 $ 73.87 YUM! BRANDS, INC. - 2017 Form 10-K 17 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (a) Selected financial data for years 2016 and 2015 has been recast to present the change in our reporting calendar and retroactively adopting a new accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively,“Benefit Costs”). See Notes 2 and 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K for discussion related to adopting a new accounting standard on Benefit Costs and the change in our reporting calendar, respectively. 2014 reflects our Balance Sheet and store count data that were recast for purposes of presenting 2015 Consolidated Statement of Cash Flows and unit growth. No other data presented in 2014 or 2013 has been recast. Includes amounts deemed as Special Items for some or all years presented. See discussion of our 2017, 2016 and 2015 Special Items in our Management’s Discussion and Analysis (“MD&A”). Special Items in 2014 positively impacted Operating Profit by $16 million, primarily due to Refranchising gains. Special Items in 2013 positively impacted Operating Profit by $73 million, primarily due to Refranchising gains, partially offset by $10 million in pension settlement charges and $5 million of expense related to U.S. productivity initiatives and realignment of resources. Additionally, in 2013, we incurred $118 million of premiums paid and other costs related to the extinguishment of debt that were considered Special Items and were recorded in Interest expense, net. Special Items resulted in cumulative net tax benefits of $23 million 2013. (b) (c) These non-GAAP measures are discussed in further detail in our MD&A. (d) Fiscal years for our U.S. and certain international subsidiaries that operate on a weekly periodic calendar include 52 weeks in 2017, 2015, 2014 and 2013 and 53 weeks in 2016. Refer to Note 2 for additional details related to our fiscal calendar. (e) Historical stock prices prior to November 1, 2016, do not reflect any adjustment for the impact of the Separation. 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 K - 0 1 m r o F Introduction and Overview The following Management’s Discussion and Analysis (“MD&A”), should be read in conjunction with the Consolidated Financial Statements (“Financial Statements”) in Item 8 and the Forward- Looking Statements and the Risk Factors set forth in Item 1A. All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Unless otherwise stated, financial results herein reflect continuing operations of the Company. Percentages may not recompute due to rounding. YUM! Brands, Inc. (“YUM” or the “Company”) operates or franchises a worldwide system of over 45,000 restaurants in more than 135 countries and territories, under the concepts of KFC, Pizza Hut and Taco Bell (collectively, the “Concepts”). These three Concepts are the chicken, pizza and Mexican-style food global categories, respectively. Of the over 45,000 restaurants, 3% are operated by the Company and its subsidiaries and 97% are operated by franchisees. leaders of As of December 31, 2017, YUM consists of three operating segments: (cid:129) The KFC Division which includes our worldwide operations of the KFC concept (cid:129) The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept (cid:129) The Taco Bell Division which includes our worldwide operations of the Taco Bell concept On October 31, 2016 (the “Distribution Date”), we completed the spin-off of our China business (the “Separation”) into an independent, publicly-traded company under the name of Yum China Holdings, Inc. (“Yum China”). Concurrent with the Separation, a subsidiary of the Company entered into a Master License Agreement with a subsidiary of Yum China for the exclusive right to use and sublicense 18 YUM! BRANDS, INC. - 2017 Form 10-K 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 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. in our Consolidated Statements of 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. (cid:129) More Focused. Four growth drivers form the basis of YUM’s to accelerate strategic plans and repeatable business model 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: (cid:129) Building Distinctive, Relevant and Easy Brands (cid:129) Developing Unmatched Franchise Operating Capability (cid:129) Driving Bold Restaurant Development (cid:129) Growing Unrivaled Culture and Talent (cid:129) More Franchised. YUM intends franchise restaurant ownership to be at least 98% by the end of 2018. (cid:129) More Efficient. The Company is revamping its financial profile, its organization and cost structure improving the efficiency of globally, by: PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (cid:129) Reducing annual capital expenditures to approximately $100 million in 2019; (cid:129) Lowering General and administrative expenses (“G&A”) to 1.7% of system sales in 2019; and (cid:129) Maintaining an optimized capital structure of ~5.0x Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) leverage. From 2017 through 2019, we intend to return an additional $6.5— $7.0 billion to shareholders through share repurchases and cash dividends. We intend to fund these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our five times EBITDA leverage. We anticipate generating proceeds in excess of $2 billion, net of tax, through our refranchising initiatives. Refer to the Liquidity and Capital Resources section of this MD&A for additional details. Beginning in 2017, we changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year. Concurrently, we removed the reporting lags from the fiscal calendars of our international subsidiaries. Our MD&A has been recast to reflect the change in our reporting calendar. See Notes 2 and 5 for additional details related to our fiscal calendar. in understanding our We intend for this MD&A to provide the reader with information that including will assist performance metrics that management uses to assess the Company’s performance. Throughout this MD&A, we commonly discuss the following performance metrics: results of operations, (cid:129) 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. (cid:129) Net new units represents new unit openings, offset by store closures. (cid:129) 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 impact of new unit openings, Actions represent 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. the net (cid:129) Operating margin is Operating Profit divided by Total revenues. Results of Operations Summary All comparisons within this summary are versus the same period a year ago and include the impact of lapping a 53rd week in 2016, unless otherwise noted. 2017 financial highlights: In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”), non-GAAP measurements. the Company provides following the (cid:129) 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. (cid:129) Diluted Earnings Per Share from Continuing Operations excluding Special Items (as defined below); (cid:129) Effective Tax Rate excluding Special Items; (cid:129) 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. financial the Company believes that These non-GAAP measurements are not intended to replace the results in accordance with GAAP. presentation of our Rather, these the presentation of non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations, excluding items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature. Special Items are not included in any of our Division segment results as our chief operating decision maker does not consider the impact of these items when assessing segment performance. Certain non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the year-to-year elimination of comparability without the distortion of foreign currency fluctuations. FX impact provides better the We provide Core Operating Profit excluding 53rd week and System sales excluding 53rd week to further enhance the comparability with the lapping of the 53rd week that was part of our fiscal calendar in 2016. For 2017, GAAP diluted EPS from continuing operations increased 48% to $3.77 per share, and diluted EPS from continuing operations excluding Special Items, increased 20% to $2.96 per share. F o r m 1 0 - K KFC Division Pizza Hut Division Taco Bell Division Worldwide System Sales, Ex FX Same-Store Sales % Change Net New Units GAAP Operating Profit Core Operating Profit +6 +1 +5 +4 +3 Even +4 +2 +4 +2 +4 +3 +13 (7) +4 +64 +12 (6) +4 +7 YUM! BRANDS, INC. - 2017 Form 10-K 19 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations KFC Division Pizza Hut Division Taco Bell Division Worldwide Additionally: Results Excluding 53rd Week in 2016 (% Change) Core Operating Profit System Sales, Ex FX +6 +2 +7 +5 +14 (5) +6 +9 (cid:129) During the year, we opened 1,407 net new units for 3% net new unit growth. (cid:129) 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. (cid:129) During the year, we repurchased 26.6 million shares totaling $1.9 billion at an average share price of $72. Worldwide GAAP Results 2017 Amount 2016 2015 2017 2016 % B/(W) Company sales $ 3,572 $ 4,189 $ 4,336 Franchise and license fees and income 2,306 2,167 2,082 17.3% 16.7% 16.3% 0.6 ppts. 0.4 ppts. Total revenues Restaurant profit Restaurant margin % G&A expenses Franchise and license expenses Closures and impairment expenses Refranchising (gain) loss Other (income) expense Operating Profit Other pension (income) expense Interest expense, net Income tax provision Income from continuing operations Income from discontinued operations, net of tax Net Income Diluted EPS from continuing operations(a) Diluted EPS from discontinued operations(a) Diluted EPS(a) K - 0 1 m r o F $ $ $ 5,878 $ 6,356 $ 6,418 618 $ 700 $ 709 999 237 3 (1,083) 7 $ 1,129 $ 1,058 201 15 (163) 3 240 16 23 20 $ 2,761 $ 1,682 $ 1,434 47 440 934 1,340 N/A 32 305 327 1,018 625 40 141 327 926 357 $ 1,340 $ 1,643 $ 1,283 $ $ 3.77 N/A 3.77 $ $ $ 2.54 1.56 4.10 $ $ $ 2.09 0.81 2.90 (15) 6 (8) (12) (3) 4 (1) (1) 12 (18) 82 NM (103) 64 (45) (44) NM 32 NM (18) 48 NM (8) (7) 16 8 NM 83 17 18 NM — 10 75 28 22 93 42 Effective tax rate – continuing operations 41.1% 24.3% 26.1% (16.8) ppts. 1.8 ppts. (a) See Note 3 for the number of shares used in these calculations. Performance Metrics Unit Count Franchise Company-owned 20 YUM! BRANDS, INC. - 2017 Form 10-K % Increase (Decrease) 2017 2016 2015 2017 2016 43,603 40,834 39,320 1,481 2,841 3,163 45,084 43,675 42,483 7 (48) 3 4 (10) 3 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations System Sales Growth, reported System Sales Growth, excluding FX System Sales Growth, excluding FX and 53rd week Same-Store Sales Growth Non-GAAP Items Core Operating Profit Growth Core Operating Profit Growth, excluding 53rd week Diluted EPS from Continuing Operations, excluding Special Items % B/(W) 2017 2016 4 4 5 2 7 9 20 3 5 4 1 11 9 7 Extra Week in 2016 (As Restated) Fiscal 2016 included a 53rd week for all of our U.S. businesses and certain of our non-U.S. businesses that report 13 four-week periods versus 12 months. See Notes 2 and 5 for additional details related to our fiscal calendar. The following table summarizes the estimated impact of the 53rd week on Revenues and Operating Profit for the year ended December 31, 2016: Revenues Company sales Franchise and license fees and income Total revenues Operating Profit Franchise and license fees and income Restaurant profit G&A expenses Operating Profit KFC Division Pizza Hut Division Taco Bell Division Total $ 26 8 $ 34 $ 8 6 (3) $ 11 $ 5 6 $ 24 $ 55 7 21 $ 11 $ 31 $ 76 $ $ 6 1 (2) 5 $ 7 7 (2) $ 21 14 (7) $ 12 $ 28 F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 21 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Items Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below. Detail of Special Items Refranchising gain (loss) (See Note 5) YUM’s Strategic Transformation Initiatives (See Note 5) Costs associated with Pizza Hut U.S. Transformation Agreement (See Note 5) Costs associated with KFC U.S. Acceleration Agreement (See Note 5) Non-cash charges associated with share-based compensation (See Note 5) Other Special Items Income (Expense) Special Items Income (Expense) – Operating Profit Special Items – Other Pension Income (Expense) (See Note 5) Special Items Income (Expense) from Continuing Operations before Income Taxes Tax Benefit (Expense) on Special Items(a) Tax (Expense) – U.S. Tax Act(a) Special Items Income (Expense), net of tax Average diluted shares outstanding Special Items diluted EPS Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding 53rd Week K - 0 1 m r o F Consolidated GAAP Operating Profit Special Items Income (Expense) – Operating Profit Foreign Currency Impact on Divisional Operating Profit(b) Core Operating Profit Impact of 53rd Week Core Operating Profit, excluding 53rd Week KFC Division GAAP Operating Profit Foreign Currency Impact on Divisional Operating Profit(b) Core Operating Profit Impact of 53rd Week Core Operating Profit, excluding 53rd Week Pizza Hut Division GAAP Operating Profit Foreign Currency Impact on Divisional Operating Profit(b) Core Operating Profit Impact of 53rd Week Core Operating Profit, excluding 53rd Week Taco Bell Division GAAP Operating Profit Foreign Currency Impact on Divisional Operating Profit(b) Core Operating Profit Impact of 53rd Week Core Operating Profit, excluding 53rd Week 22 YUM! BRANDS, INC. - 2017 Form 10-K Year 2017 2016 2015 $ 1,083 $ 163 $ (19) (23) (31) (17) (18) 7 1,001 (23) 978 (256) (434) 288 355 $ (67) — (26) (30) (5) 35 (26) 9 24 — 33 — — (72) — — (91) — (91) (4) — $ (95) 400 443 0.81 $ 0.08 $ (0.22) $ $ $ 2,761 $ 1,682 $ 1,434 1,001 — 35 (47) (91) N/A $ 1,760 $ 1,694 $ 1,525 N/A 28 N/A $ 1,760 $ 1,666 $ 1,525 $ 981 $ 871 $ 4 977 N/A 977 341 (4) 345 N/A 345 619 — 619 N/A 619 $ $ $ $ (41) 912 11 901 367 (7) 374 5 369 595 1 594 12 $ $ $ $ $ 582 $ $ $ $ $ $ 835 N/A 835 N/A 835 351 N/A 351 N/A 351 546 N/A 546 N/A 546 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Reconciliation of Diluted EPS from Continuing Operations to Diluted EPS from Continuing Operations, excluding Special Items Diluted EPS from Continuing Operations Special Items Diluted EPS Diluted EPS from Continuing Operations excluding Special Items Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate, excluding Special Items GAAP Effective Tax Rate Impact on Tax Rate as a result of Special Items(a) Effective Tax Rate excluding Special Items(c) Reconciliation of GAAP Company sales to System sales Consolidated GAAP Company sales(d) Franchise sales System sales Foreign Currency Impact on System sales(e) System sales, excluding FX Impact of 53rd week System sales, excluding FX and 53rd Week KFC Division GAAP Company sales(d) Franchise sales System sales Foreign Currency Impact on System sales(e) System sales, excluding FX Impact of 53rd week System sales, excluding FX and 53rd Week Pizza Hut Division GAAP Company sales(d) Franchise sales System sales Foreign Currency Impact on System sales(e) System sales, excluding FX Impact of 53rd week System sales, excluding FX and 53rd Week Taco Bell Division GAAP Company sales(d) Franchise sales System sales Foreign Currency Impact on System sales(e) System sales, excluding FX Impact of 53rd week Year 2017 3.77 0.81 2.96 $ $ 2016 2.54 0.08 2.46 $ $ 2015 2.09 (0.22) 2.31 $ $ 41.1% 22.3% 18.8% 24.3% (2.0)% 26.3% 26.1% 2.1% 24.0% $ 3,572 $ 4,189 $ 4,336 43,122 46,694 40,732 44,921 (90) (1,123) 39,393 43,729 N/A 46,784 46,044 43,729 N/A 434 N/A $ 46,784 $ 45,610 $ 43,729 $ 1,928 $ 2,156 $ 2,191 22,587 24,515 21,086 23,242 (28) (858) 20,437 22,628 N/A 24,543 24,100 22,628 N/A 165 N/A $ 24,543 $ 23,935 $ 22,628 $ 285 $ 493 $ 601 11,749 12,034 11,526 12,019 (66) (258) 11,398 11,999 N/A 12,100 12,277 11,999 N/A 113 N/A $ 12,100 $ 12,164 $ 11,999 $ 1,359 $ 1,540 $ 1,544 8,786 10,145 4 10,141 N/A 8,120 9,660 (7) 9,667 156 7,558 9,102 N/A 9,102 N/A F o r m 1 0 - K System sales, excluding FX and 53rd Week $ 10,141 $ 9,511 $ 9,102 (a) The tax benefit (expense) was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items. In 2016, our tax rate on Special Items was favorably impacted by the recognition of capital loss carryforwards in anticipation of U.S. refranchising gains. In 2015, our tax rate on Special Items was unfavorably impacted by the non-deductibility of certain losses associated with international refranchising. See Note 18. YUM! BRANDS, INC. - 2017 Form 10-K 23 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (b) The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit Growth percentages, the Core Operating Profit for the current year should be compared to the prior year Operating Profit, prior to adjustment for the prior year FX impact. (c) Our 2017 Effective Tax Rate excluding Special Items was lower than prior years due primarily to the inclusion of tax expense on the repatriation of certain foreign earnings in 2017 being included in the one-time Special Items charge referenced in (a) above. The majority of our foreign entities have a tax year-end of November 30. Amounts repatriated from these foreign entities after November 30, 2017, which were significant due to the timing of international refranchising proceeds, were required to be taxed as part of the mandatory deemed repatriation tax in connection with the Tax Act. See Note 18. (d) Company Sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income. (e) The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales prior to adjustment for the prior year FX impact. KFC Division The KFC Division has 21,487 units, 81% of which are located outside the U.S. The KFC Division has experienced significant unit growth in emerging markets, which comprised approximately 60% of both the Division’s units and profits, respectively, as of the end of 2017. Additionally, 97% of the KFC Division units were operated by franchisees as of the end of 2017. 2017 2016 2015 Reported Ex FX Ex FX and 53rd Week in 2016 Reported Ex FX Ex FX and 53rd Week in 2016 % B/(W) 2017 % B/(W) 2016 System Sales $ 24,515 $ 23,242 $ 22,628 Same-Store Sales Growth (Decline) 5 3 Company sales $ 1,928 $ 2,156 $ 2,191 (11) Franchise and license fees and income 1,182 1,069 1,031 Total revenues $ 3,110 $ 3,225 $ 3,222 $ 289 $ 317 $ 307 Restaurant profit Restaurant margin % 11 (4) (9) 6 6 N/A (12) 10 (4) (10) N/A (11) 11 (3) (8) 3 2 (2) 4 — 3 7 6 N/A N/A 4 7 5 9 3 7 4 7 15.0% 14.7% 14.0% 0.3 ppts. 0.3 ppts. 0.4 ppts. 0.7 ppts. 0.7 ppts. 0.6 ppts. K - 0 1 m r o F G&A expenses $ 370 $ 396 $ Operating Profit $ 981 $ 871 $ 395 835 7 13 7 12 7 14 — 4 (3) 9 (3) 8 Unit Count Franchise Company-owned Franchise Company-owned Total Franchise Company-owned Total 2017 20,819 668 21,487 2016 19,236 1,407 20,643 2015 18,473 1,513 19,986 % Increase (Decrease) 2017 2016 8 (53) 4 4 (7) 3 2016 New Builds Closures Refranchised Acquired Other 2017 19,236 1,407 20,643 1,169 102 1,271 (414) (13) (427) 828 (828) — — — — — — — 20,819 668 21,487 2015 New Builds Closures Refranchised Acquired Other 2016 18,473 1,513 19,986 994 114 1,108 (412) (39) (451) 180 (180) — — — — 1 (1) — 19,236 1,407 20,643 24 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Company Sales and Restaurant Profit The changes in Company sales and Restaurant profit were as follows: Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expenses Restaurant profit Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expenses Restaurant profit 2017 vs. 2016 Store Portfolio 2016 Actions Other FX 53rd Week 2017 $ 2,156 $ (286) $ 61 $ 23 $ (26) $ 1,928 (733) (507) (599) $ (1,839) $ 317 93 69 82 (22) (16) (7) (11) (3) (5) 9 6 5 (664) (451) (524) $ 244 $ (45) $ (19) $ 20 $ (1,639) $ (42) $ 16 $ 4 $ (6) $ 289 2016 vs. 2015 Store Portfolio 2015 Actions Other FX 53rd Week 2016 $ 2,191 $ 24 $ 39 $ (124) $ 26 $ 2,156 (751) (511) (622) $ (1,884) $ 307 (10) (3) 3 (7) (14) (10) 44 27 35 (9) (6) (5) (733) (507) (599) $ (10) $ (31) $ 106 $ (20) $ (1,839) $ 14 $ 8 $ (18) $ 6 $ 317 In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising, partially offset by international net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same- store sales growth of 4%, partially offset by higher commodity and labor costs. In 2016, the increase in Company sales associated with store portfolio actions was driven by international net new unit growth, partially offset by refranchising. The increase in Restaurant profit associated with store portfolio actions was driven by international net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 2%, partially offset by higher labor and commodity costs. Franchise and License Fees and Income In 2017, the increase in Franchise and license fees and income, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, was driven by international net new unit growth, franchise same-store sales growth of 3%, refranchising and higher renewal and transfer fees. In 2016, the increase in Franchise and license fees and income, excluding the impacts of foreign currency translation and the 53rd week, was driven by international net new unit growth, franchise same-store sales growth of 2% and refranchising. F o r m 1 0 - K G&A In 2017, the decrease in G&A, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, were driven by the positive impact of YUM’s Strategic Transformation Initiatives , including reductions in G&A directly attributable to refranchising, partially offset by higher incentive compensation. In 2016, the increase in G&A, excluding the impacts of foreign currency translation and 53rd week, were driven by the impact of higher compensation costs due to increased headcount and wage inflation in international markets and higher incentive compensation. Operating Profit In 2017, the increase in Operating Profit, excluding the impacts of foreign currency translation and lapping the 53rd week in 2016, was driven by same-store sales growth, international net new unit growth, lower G&A and higher renewal and transfer fees, partially offset by higher restaurant operating costs and refranchising. In 2016, the increase in Operating Profit, excluding the impacts of foreign currency translation and 53rd week, was driven by international net new unit growth and same-store sales growth, partially offset by higher restaurant operating costs and advertising contributions associated with the KFC U.S. Acceleration Agreement. YUM! BRANDS, INC. - 2017 Form 10-K 25 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Pizza Hut Division The Pizza Hut Division has 16,748 units, 55% of which are located outside the U.S. The Pizza Hut Division operates as one brand that uses multiple distribution channels including delivery, dine-in and express (e.g. airports). Emerging markets comprised approximately 35% of units and 40% of profits for the Division as of the end of 2017. Additionally, 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2017. 2017 2016 2015 Reported Ex FX Ex FX and 53rd Week in 2016 Reported Ex FX Ex FX and 53rd Week in 2016 % B/(W) 2017 % B/(W) 2016 System Sales $ 12,034 $ 12,019 $ 11,999 — 1 2 — 2 1 Even N/A $ 285 $ 493 $ 601 (42) (42) 608 615 604 Total revenues $ 893 $ 1,108 $ 1,205 $ 14 $ 41 $ 58 (1) (19) (63) (1) (19) (63) Same-Store Sales Growth (Decline) Company sales Franchise and license fees and income Restaurant profit Restaurant margin % N/A (41) — (18) (62) (2) N/A (18) (16) 2 (8) 4 (6) (31) (31) N/A (17) 3 (7) (31) 5.3% 8.3% 9.8% (3.0)ppts. (3.0)ppts. (2.9)ppts. (1.5)ppts. (1.7)ppts. (1.7)ppts. G&A expenses $ 211 $ 242 $ 262 Operating Profit $ 341 $ 367 $ 351 13 (7) 13 (6) 12 (5) 7 4 6 6 6 5 K - 0 1 m r o F Unit Count Franchise Company-owned Franchise Company-owned Total Franchise Company-owned Total 2017 16,588 160 16,748 2016 15,871 549 16,420 2015 15,334 750 16,084 % Increase (Decrease) 2017 2016 5 (71) 2 4 (27) 2 2016 New Builds Closures Refranchised Acquired Other 2017 15,871 549 16,420 1,035 12 1,047 (708) (12) (720) 389 (389) — — — — 1 — 1 16,588 160 16,748 2015 New Builds Closures Refranchised Acquired Other 2016 15,334 750 16,084 885 40 925 (554) (35) (589) 206 (206) — — — — — — — 15,871 549 16,420 26 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Company Sales and Restaurant Profit The changes in Company sales and Restaurant profit were as follows: Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expenses Restaurant profit Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expenses Restaurant profit 2017 vs. 2016 Store Portfolio Actions Other FX 53rd Week 2017 $ (193) $ (9) $ (1) $ (5) $ 285 56 61 61 (4) (1) 3 — 1 — 178 $ (2) $ 1 $ 2 1 1 4 (83) (94) (94) $ (271) (15) $ (11) $ — $ (1) $ 14 $ $ 2016 vs. 2015 Store Portfolio Actions Other FX 53rd Week 2016 $ (120) $ 16 $ (9) $ 5 $ 493 34 40 33 (5) (11) (5) 107 $ (21) $ 3 3 3 9 (2) (1) (1) (137) (156) (159) $ (4) $ (452) (13) $ (5) $ — $ 1 $ 41 $ $ 2016 $ 493 (137) (156) (159) $ (452) $ 41 2015 $ 601 (167) (187) (189) $ (543) $ 58 In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales declines of 3% and higher commodity and labor costs, partially offset by lower property and casualty losses. In 2016, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising. Significant other factors impacting Company sales and/or Restaurant profit were higher labor costs and increased advertising spend in the U.S., partially offset by company same-store sales growth of 2%. Franchise and License Fees and Income In 2017, Franchise and license fees income, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was even with prior year as the favorable impacts of refranchising and net new unit growth were offset by lower fees from expiring development agreements. Franchise same-store sales were even. In 2016, the increase in Franchise and license fees income, excluding the impacts of foreign currency translation and 53rd week, was driven by net new unit growth, refranchising and higher fees from expiring development agreements, partially offset by franchise same-store sales declines of 2%. G&A In 2017, the decrease in G&A, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was driven by the positive impact of YUM’s Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, partially offset by increased litigation costs. In 2016, the decrease in G&A, excluding the impacts of foreign currency translation and 53rd week, was driven by lower litigation settlement costs and legal fees and the positive impact of YUM’s Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, partially offset by higher incentive compensation costs. Operating Profit In 2017, the decrease in Operating Profit, excluding the impact of foreign currency translation and lapping the 53rd week in 2016, was driven by increased advertising costs associated with the Pizza Hut U.S. Transformation Agreement, partially offset by lower G&A. In 2016, the increase in Operating Profit, excluding the impacts of foreign currency translation and 53rd week, was driven by lower G&A and net new unit growth, partially offset by franchise same-store sales declines. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 27 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Taco Bell Division The Taco Bell Division has 6,849 units, 94% of which are in the U.S. As of the end of 2017, the Company owns 10% of the Taco Bell units in the U.S., where the brand has historically achieved high restaurant margins and returns. 2017 2016 2015 Reported Ex FX Ex FX and 53rd Week in 2016 Reported Ex FX Ex FX and 53rd Week in 2016 % B/(W) 2017 % B/(W) 2016 System Sales $ 10,145 $ 9,660 $ 9,102 Same-Store Sales Growth 5 4 Company sales $ 1,359 $ 1,540 $ 1,544 (12) 521 485 447 1,880 $ 2,025 $ 1,991 305 $ 342 $ 344 7 (7) (11) 5 N/A (12) 7 (7) (11) 7 N/A (10) 9 (6) (9) 6 2 — 9 2 — 6 N/A — 9 2 — 5 N/A (2) 7 — (3) 22.4% 22.2% 22.2% 0.2 ppts. 0.2 ppts. 0.3 ppts. — ppts. — ppts. (0.2) ppts. 188 $ 211 619 $ 595 $ $ 221 546 11 4 11 4 10 6 4 9 4 9 5 6 2017 6,196 653 6,849 2016 5,727 885 6,612 2015 5,513 900 6,413 % Increase (Decrease) 2017 2016 8 (26) 4 4 (2) 3 2016 New Builds Closures Refranchised Acquired Other 2017 5,727 885 6,612 293 21 314 (78) — (78) 253 (253) — — — — 1 — 1 6,196 653 6,849 2015 New Builds Closures Refranchised Acquired Other 2016 5,513 900 6,413 263 34 297 (95) (4) (99) 46 (46) — (1) 1 — 1 — 1 5,727 885 6,612 Franchise and license fees and income Total revenues Restaurant profit Restaurant margin % G&A expenses Operating Profit $ $ $ $ Unit Count Franchise Company-owned Franchise Company-owned Total Franchise Company-owned Total K - 0 1 m r o F Company Sales and Restaurant Profit The changes in Company sales and Restaurant profit were as follows: Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expense Restaurant profit 28 YUM! BRANDS, INC. - 2017 Form 10-K 2017 vs. 2016 Store Portfolio Actions Other 53rd Week 2017 $ (195) $ 38 $ (24) $ 1,359 50 55 44 (15) (13) 6 6 7 4 (356) (394) (304) $ $ 149 (46) $ (22) $ 16 $ $ 17 $ (1,054) (7) $ 305 2016 $ 1,540 (397) (443) (358) $ (1,198) $ 342 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Income / (Expense) Company sales Cost of sales Cost of labor Occupancy and other Company restaurant expense Restaurant profit 2015 $ 1,544 (422) (427) (351) $ (1,200) $ 344 2016 vs. 2015 Store Portfolio Actions Other 53rd Week 2016 $ (37) $ 11 10 7 28 $ $ 9 20 (19) (10) $ 24 $ 1,540 (6) (7) (4) (397) (443) (358) $ (9) $ (17) $ (1,198) (9) $ — $ 7 $ 342 In 2017, the decreases in Company sales and Restaurant profit associated with store portfolio actions were driven by refranchising, partially offset by net unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 3%, partially offset by higher labor costs, commodity cost inflation, and increased cost of sales associated with value offerings. In 2016, the decrease in Company sales and Restaurant profit associated with store portfolio actions was driven by refranchising, partially offset by net new unit growth. Significant other factors impacting Company sales and/or Restaurant profit were company same-store sales growth of 1% and favorable commodity costs, partially offset by higher labor costs and store-level investments. Franchise and License Fees and Income In 2017, the increase in Franchise and license fees and income, excluding the impact of lapping the 53rd week in 2016, was driven by refranchising, franchise same-store sales growth of 4%, and net new unit growth. In 2016, the increase in Franchise and license fees and income, excluding the impact of the 53rd week, was driven by net new unit growth, franchise same-store sales growth of 2% and refranchising. G&A In 2017, the decrease in G&A, excluding the impact of lapping the 53rd week in 2016, was driven by the positive impact of YUM’s Strategic Transformation Initiatives, including reductions in G&A directly attributable to refranchising, and lower litigation costs. In 2016, the decrease in G&A, excluding the impact of the 53rd week, was driven by lapping the Live Más Scholarship contribution and lower litigation costs. Operating Profit In 2017, the increase in Operating Profit, excluding the impact of lapping the 53rd week in 2016, was driven by same-store sales growth, lower G&A and net new unit growth, partially offset by refranchising and higher restaurant operating costs. In 2016, the increase in Operating Profit, excluding the impact of the 53rd week, was driven by same-store sales growth, net new unit growth and lower G&A, partially offset by higher restaurant operating costs and refranchising. Corporate & Unallocated Income/(Expense) Corporate and unallocated G&A Unallocated restaurant costs Unallocated Franchise and license fees and income Unallocated Franchise and license expenses Refranchising gain (loss) (See Note 5) Unallocated Other income (expense) Other pension income (expense) (See Note 15) Interest expense, net Income tax provision (See Note 18) Effective tax rate (See Note 18) 2017 2016 2015 2017 % B/(W) $ (230) $ (280) $ (180) 10 (5) (30) 1,083 (8) (47) (440) (934) — (2) (24) 163 (8) (32) (305) (327) — — (71) (23) (24) (40) (141) (327) 18 NM NM (26) NM 3 (45) (44) NM 2016 (56) NM NM 67 NM 65 18 (117) — 41.1% 24.3% 26.1% (16.8) ppts. 1.8 ppts. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 29 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Corporate and unallocated G&A In 2017, the decrease in Corporate and unallocated G&A was driven by lower year-over-year spending associated with YUM’s Strategic Transformation Initiatives (See Note 5), current year G&A reductions due to the impact of YUM’s Strategic Transformation Initiatives and lower year-over-year non-cash charges associated with the modification of Executive Income Deferral (“EID”) share-based compensation awards (See Note 5), partially offset by charges related to the Pizza Hut U.S. Transformation Agreement (See Note 5). In 2016, the increase in Corporate and unallocated G&A was driven by costs associated with YUM’s Strategic Transformation Initiatives (See Note 5), non-cash charges associated with the modification of certain EID share-based compensation awards (See Note 5 ) and higher incentive compensation costs, partially offset by lower professional and legal fees. Unallocated restaurant costs In 2017, Unallocated restaurant costs represents depreciation reductions that were not allocated to the Division segments. See Note 5. Unallocated Franchise and license fees and income In 2017, Unallocated Franchise and license fees and income primarily reflects charges related to the Pizza Hut U.S. Transformation Agreement . See Note 5. In 2016, Unallocated Franchise and license fees and income reflects charges related to the KFC U.S. Acceleration Agreement. See Note 5. Unallocated Franchise and license expenses Unallocated Franchise and license expenses reflect charges related to the KFC U.S. Acceleration Agreement and/or Pizza Hut U.S. Transformation Agreement. See Note 5. Unallocated Other income (expense) In 2017, Unallocated Other income (expense) primarily includes foreign exchange gains (losses). See Note 8. In 2016, Unallocated Other income (expense) primarily includes write-downs related to our decision to dispose of our corporate aircraft and foreign exchange gains (losses). See Note 8. In 2015, Unallocated Other income (expense) primarily includes foreign exchange gains (losses). Interest expense, net The increases in Interest expense, net for 2017 and 2016 were driven by increased outstanding borrowings. See Note 11. Income from Discontinued Operations, Net of Tax The following table is a summary of the operating results of the China business which have been reflected in discontinued operations. See Note 4 for additional information. K - 0 1 m r o F Total revenues Total income from discontinued operations before income taxes(b) Income tax (benefit) provision(c) Income from discontinued operations, net of tax 2016(a) 2015 $ 5,776 $ 6,909 571 (65) 625 526 164 357 (a) (b) Includes Yum China financial results from January 1, 2016 to October 31, 2016. Includes costs incurred to execute the Separation of $68 million and $9 million for 2016 and 2015, respectively. Such costs primarily relate to transaction advisors, legal and other consulting fees. (c) During 2016, we recorded a tax benefit of $233 million related to previously recorded losses associated with our Little Sheep business. The tax benefit associated with these losses was able to be recognized as a result of legal entity restructuring completed in anticipation of the China spin-off. Significant Known Events, Trends or Uncertainties Expected to Impact Future Results Strategic Transformation Initiatives Impact We have refranchised a significant number of Company-owned restaurants since the announcement of YUM’s Strategic Transformation Initiatives in October 2016, and anticipate that additional, significant refranchising will occur in 2018. The impact on Operating profit due to refranchising includes the loss of restaurant profit, which reflects the decrease in Company sales, and the increase in franchise fees from restaurants that have been refranchised. We expect to reduce G&A, including reductions directly attributable to refranchising, such that upon completion of YUM’s Strategic Transformation Initiatives in 2019, on an annual basis, the impact of lost Operating profit from refranchising will be largely offset by G&A reductions we are making. However, we expect that Operating profit will be negatively impacted throughout 2018 as certain G&A reductions lag the loss of Operating profit due to refranchising. We expect the impact of refranchising, net of G&A reductions, to negatively impact Core Operating Profit growth for 2018 by 6 to 7 percentage points. 30 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations GAAP Required Change in Accounting for Revenue See “Recent Accounting Pronouncements” in Note 2 for discussion of the expected impact of changes in GAAP related to revenue recognition. Tax Cuts and Jobs Act of 2017 (“Tax Act”) The Tax Act was enacted on December 22, 2017 (see Note 18 for discussion of the charge recorded upon enactment). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from 35% to 21% beginning in 2018, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), imposing a mandatory one-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax. After considering the impacts of the Tax Act, we anticipate an ongoing effective tax rate of approximately 20-22% compared to our previous guidance of 26-27%. While we expect to benefit from the lower U.S. tax rate, we anticipate this benefit will be partially offset by the limitation on the deductibility of interest. The transition to a territorial tax system is expected to benefit our effective tax rate as a majority of our earnings are generated outside the U.S. However, this benefit is expected to be partially offset by taxes incurred under the Global Intangible Low-Taxed Income provisions of the Tax Act. We currently expect that our 2018 effective tax rate will be slightly below the ongoing anticipated range noted above due to a delay in the applicability of the Global Intangible Low-Taxed Income provision and increased 2018 EBITDA in the U.S. due to our planned U.S. refranchising gains, which will lead to higher interest deductibility. KFC United Kingdom (“UK”) Supply Availability Issues On February 14, 2018 we and our franchisees transitioned to a new distributor for the food sold in our approximately 900 KFCs in the United Kingdom and Ireland (those restaurants accounted for approximately 3% of YUM’s global system sales in the year ended December 31, 2017). In connection with this transition, certain of these restaurants have experienced supply availability issues which have resulted in store closures or stores operating under a limited menu. These supply availability issues continue through the date of this filing, and it is difficult to predict with certainty when such issues may be resolved and all KFCs in the UK and Ireland will be fully operational. While the impact of lost profits as a result of these closures and limited menus has not been material through the date of this filing, prolonged supply availability issues could have a material impact on our revenues. Additionally, should the supply availability issues persist, our franchisees, suppliers and the distributor, whose affiliates also service KFCs located in other countries within Europe, may experience financial distress or require credit support, which could further impact our results of operations. Consolidated Cash Flows Net cash provided by operating activities from continuing operations was $1,030 million in 2017 vs. $1,248 million in 2016. The decrease was primarily driven by an increase in interest payments and retirement and deferred compensation payouts to retirees, partially offset by an increase in Operating profit before Special Items. In 2016, net cash provided by operating activities from continuing operations was $1,248 million compared to $1,260 million in 2015. The decrease was primarily driven by an increase in interest payments, partially offset by a decrease in income tax payments. Net cash provided by investing activities from continuing operations was $1,472 million in 2017 versus net cash used in investing activities of $4 million in 2016. The increase was primarily driven by higher proceeds from refranchising of restaurants and lower capital spending. In 2016, net cash used in investing activities from continuing operations was $4 million compared to $199 million in 2015. The decrease was primarily driven by higher refranchising proceeds. Net cash used in financing activities from continuing operations was $1,795 million in 2017 compared to $744 million in 2016. The increase was primarily driven by lower net borrowings, partially offset by lower share repurchases. In 2016, net cash used in financing activities from continuing operations was $744 million compared to $1,089 million in 2015. The decrease was primarily driven by higher proceeds from net borrowings, partially offset by higher share repurchases. F o r m 1 0 - K Consolidated Financial Condition Cash and cash equivalents increased due to significant refranchising proceeds received late in the year ended December 31, 2017, as well as cash on hand to fund the March 2018 maturity of $325 million in YUM Senior Unsecured Notes. The refranchising of Company-operated stores drove decreases in restaurant-level assets and liabilities on our Consolidated Balance Sheet, including within Property, plant and equipment (“PP&E”). Deferred income taxes decreased in connection with the tax charge we recorded upon enactment of the Tax Act (see Note 18). Long-term debt increased during 2017 due to the issuance of $750 million of Subsidiary Senior Unsecured Notes, partially offset by the reclassification of $325 million of YUM Senior Unsecured Notes to Short-term borrowings due to their March 2018 maturity date. YUM! BRANDS, INC. - 2017 Form 10-K 31 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources In October 2016, we announced YUM’s Strategic Transformation Initiatives to drive global expansion of the KFC, Pizza Hut and Taco Bell brands following the Separation on October 31, 2016. As part of this transformation we intend to own less than 1,000 stores by the end of 2018 and, by 2019, 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%. reduce annual that any decrease in operating cash flows from the operation of fewer Company-owned stores due to refranchising will be offset with investment and G&A savings generated from decreased capital required to support company operations. To the extent operating cash flows plus other sources of cash such as refranchising proceeds do not cover our anticipated cash needs, we maintain $1 billion of undrawn capacity under our existing revolving credit facility. In 2017, we returned $2.4 billion to shareholders through share repurchases and cash dividends and we remain committed to returning between $6.5 and $7.0 billion from 2017 to 2019. We intend to fund these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of our five times EBITDA leverage. We anticipate generating total proceeds in excess of $2 billion, net of tax, in connection with our refranchising initiatives. We have historically generated substantial cash flows from the operations of our Company-owned stores and from our extensive franchise operations, which require a limited YUM investment. Our annual operating cash flows from continuing operations have historically been in excess of $1 billion. Going forward, we anticipate Our balance sheet often reflects a working capital deficit, which is not uncommon in our industry and is also historically common for YUM. Company sales are paid in cash or by credit card (which is quickly converted into cash) and our royalty receivables from franchisees are generally due within 30 days of the period in which the related sales occur. Substantial amounts of cash received have historically been either invested in new restaurant assets which are non-current in nature or returned to shareholders. As part of our working capital strategy, we negotiate favorable credit terms with vendors and, as a result, our on-hand inventory turns faster than the related short-term liabilities. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations. Our Term Loan A Facility and Term Loan B Facility contain cross- default provisions whereby the failure to pay principal of or otherwise perform any agreement or condition under indebtedness of certain subsidiaries with a principal amount in excess of $100 million will constitute an event of default under the Credit Agreement. Subsidiary Senior Unsecured Notes. On June 16, 2016, the Borrowers issued an aggregate of $1.05 billion Senior Unsecured Notes due 2024 and an aggregate of $1.05 billion Senior Unsecured Notes due 2026. On June 15, 2017, the Borrowers issued an aggregate of $750 million Senior Unsecured Notes due June 1, 2027 (together with the June 16, 2016 issuances, the “Subsidiary Senior Unsecured Notes”). Our Subsidiary Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of the indebtedness of certain subsidiaries with a principal amount in excess of $100 million or the failure to pay principal of such indebtedness will constitute an event of default under the Subsidiary Senior Unsecured Notes. unsecured unsubordinated 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 Amounts outstanding under YUM Senior Unsecured Notes were $2.2 billion at December 31, 2017. Our YUM Senior Unsecured Notes contain cross-default provisions whereby the acceleration of the maturity of any of our indebtedness in a principal amount in excess of $50 million will constitute a default under the YUM Senior Unsecured Notes unless such indebtedness is discharged, or the acceleration of the maturity of that indebtedness is annulled, within 30 days after notice. indebtedness. K - 0 1 m r o F Debt Instruments As of December 31, 2017, approximately 90%, including the impact of interest rate swaps, of our $9.8 billion of total debt outstanding is fixed with an effective overall interest rate of approximately 4.7%. We are managing a capital structure which is levered in-line with our target of approximately five times EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years. We have credit ratings of BB (Standard & Poor’s)/Ba3 (Moody’s) with a balance sheet more consistent with highly-levered peer restaurant franchise companies. See Note 11 for details of our financing activities supporting the return of capital initiative. the Company, Securitization Notes. In May 2016, Taco Bell Funding, LLC, a newly issued an formed special purpose subsidiary of aggregate of $2.3 billion of fixed rate senior secured notes (“Class A-2 Notes”). In connection with the issuance of the Class A-2 Notes, Taco Bell Funding, LLC also issued variable rate notes (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Securitization Notes”) pursuant to a new revolving financing facility, which allowed for the borrowing of up to $100 million including the issuance of letters of credit up to $50 million. On October 16, 2017, Taco Bell Funding, LLC terminated the Variable Funding Notes. The Securitization Notes contain cross-default provisions whereby the failure to pay principal on any outstanding Securitization Notes will constitute an event of default under any other Securitization Notes. Credit Agreement. On June 16, 2016, three wholly-owned subsidiaries of the Company, KFC Holding Co., Pizza Hut Holdings, LLC and Taco Bell of America, LLC, as co-borrowers (the (the “Credit “Borrowers”) entered into a new credit agreement Agreement”) providing for the following (each of which may be increased subject to certain conditions): (i) a $500 million Term Loan A facility (the “Term Loan A Facility”), (ii) a $2 billion Term Loan B facility (the “Term Loan B Facility”) and (iii) a $1 billion revolving facility (the “Revolving Facility”) which has no outstanding borrowings and has $4 million in letters of credit outstanding as of December 31, 2017, each of which may be increased subject to certain conditions. 32 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following table summarizes the future maturities of our outstanding long-term debt, excluding capital leases, as of December 31, 2017. 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2037 2043 Total Securitization Notes $ 23 $ 23 $ 789 $ 15 $ 15 $ 479 $ 10 $ 10 $ 907 Credit Agreement 32 45 51 76 395 1,876 1,050 1,050 750 $ 2,271 2,475 2,850 Subsidiary Senior setoNderucesnU YUM Senior Unsecured Notes 325 250 350 350 325 325 275 2,200 Total $ 380 $ 318 $ 1,190 $ 441 $ 410 $ 2,680 $ 1,060 $ 10 $ 1,957 $ 750 $ 325 $ 275 $ 9,796 See Note 11 for details on the the Securitization Notes, Subsidiary Senior Unsecured Notes, the Credit Agreement and YUM Senior Unsecured Notes. Contractual Obligations Our significant contractual obligations and payments as of December 31, 2017 included: Long-term debt obligations(a) $ 12,970 $ 801 $ 2,301 $ 1,538 $ 8,330 Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Capital leases(b) Operating leases(b) Purchase obligations(c) Benefit plans and other(d) Total contractual obligations 136 899 377 284 13 124 216 100 25 198 123 66 22 142 38 26 76 435 — 92 $ 14,666 $ 1,254 $ 2,713 $ 1,766 $ 8,933 (a) Amounts include maturities of debt outstanding as of December 31, 2017 and expected interest payments on those outstanding amounts on a nominal basis. See Note 11. (b) These obligations, which are shown on a nominal basis, relate primarily to approximately 900 Company-owned restaurants. See Note 12. (c) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancelable without penalty. Purchase obligations relate primarily to supply agreements, marketing, information technology, purchases of PP&E as well as consulting, maintenance and other agreements. Amounts include estimated payments for our incremental advertising contributions related to the KFC U.S. Acceleration Agreement and the Pizza Hut U.S. Transformation Agreement. See Note 5. Includes actuarially-determined timing of payments from our most significant unfunded pension plan as well as scheduled payments from our deferred compensation plan and other unfunded benefit plans where payment dates are determinable. This table excludes $39 million of future benefit payments for deferred compensation and other unfunded benefit plans to be paid upon separation of employee’s service or retirement from the company, as we cannot reasonably estimate the dates of these future cash payments. Other amounts include a cash tax obligation related to the mandatory deemed repatriation tax provisions of the Tax Act (see Note 18) and anticipated investments, other than incremental advertising, related to the KFC U.S. Acceleration Agreement and the Pizza Hut U.S. Transformation Agreement (see Note 5). (d) F o r m 1 0 - K We sponsor noncontributory defined benefit pension plans covering certain salaried and hourly employees, the most significant of which are in the U.S. and UK. The most significant of the U.S. plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from our other significant U.S. plan are paid by the Company as incurred (see footnote (d) above). Our funding policy for the Plan is to contribute annually amounts that will at least equal the minimum amounts required to comply with the Pension Protection Act of 2006. However, additional voluntary contributions are made from time- to-time to improve the Plan’s funded status. At December 31, 2017 the Plan was in a net underfunded position of $59 million. The UK pension plans were in a net overfunded position of $71 million at our 2017 measurement date. We do not anticipate making any significant contributions to the Plan in 2018. Investment performance and corporate bond rates have a significant effect on our net funding position as they drive our asset balances and discount rate assumptions. Future changes in investment performance and corporate bond rates could impact our funded status and the timing and amounts of required contributions in 2018 and beyond. Our post-retirement health care plan in the U.S. is not required to be funded in advance, but is pay as you go. We made post-retirement benefit payments of $5 million in 2017 and no future funding amounts are included in the contractual obligations table. See Note 15. We have excluded from the contractual obligations table payments we may make for exposures for which we are self-insured, including workers’ compensation, employment practices liability, general liability, automobile liability, product liability and property losses (collectively “property and casualty losses”) and employee healthcare and long-term disability claims. The majority of our recorded liability for self-insured property and casualty losses and employee healthcare and long-term disability claims represents estimated reserves for incurred claims that have yet to be filed or settled. included in the contractual obligations table We have not approximately $100 million of liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities. YUM! BRANDS, INC. - 2017 Form 10-K 33 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet Arrangements See the Lease Guarantees and Franchise Loan Pool and Equipment Guarantees sections of Note 20 for discussion of our off-balance sheet arrangements. New Accounting Pronouncements Not Yet Adopted The Financial Accounting Standards Board (“FASB”) has issued standards to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries. These standards are effective for the Company in our first quarter of 2018, and we will adopt the standards using the modified retrospective transition method. See “Recent Accounting information regarding our Pronouncements” in Note 2 for additional adoption of the new revenue recognition standards. In February 2016, the FASB issued a standard on the recognition and measurement of leases, which is intended to increase transparency and comparability among organizations by requiring that substantially all lease assets and liabilities be recognized on the balance sheet and by requiring the disclosure of key information about leasing arrangements. This standard is effective for the Company in our first quarter of 2019 with early adoption permitted. The standard must be adopted using a modified retrospective transition method. We currently plan to adopt this standard in the first quarter of 2019 and we are evaluating the impact the adoption of this standard will have on our Financial Statements. Based on our current volume of store leases and subleases to franchisees (see Note 12) we expect this adoption will result in a material increase in the assets and liabilities on our Consolidated Balance Sheets; however, we believe the impact will be less material over time as we execute our strategy to be at least 98% franchised by 2019 and thus are a party to fewer leases. Further, we do not anticipate adoption will have a significant impact on our Consolidated Statements of Income or Cash Flows. the FASB issued a standard that In June 2016, requires measurement and recognition of expected versus incurred credit losses for financial assets held. The standard is effective for the Company in our first quarter of fiscal 2020 with early adoption permitted beginning in the first quarter of 2019. We are currently evaluating the impact the adoption of this standard will have on our Financial Statements. In October 2016, the FASB issued a standard that requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance will require a modified retrospective application with a cumulative adjustment to opening retained earnings at the beginning of our first quarter of 2018. We anticipate a reduction in Other assets the of approximately $40 million upon adoption to write-off unamortized tax consequences of certain historical intra-entity transfers of assets with an offsetting increase to our Accumulated deficit. the FASB issued a standard that In August 2017, refines and expands existing hedge accounting guidance. The standard is effective for the Company in our first quarter of 2019 with early adoption permitted. We do not anticipate the impact of adopting this standard will be material to our Financial Statements. Critical Accounting Policies and Estimates K - 0 1 m r o F 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 financial condition. results of operations or 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 the carrying amount of a restaurant may not be indicate that 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 34 YUM! BRANDS, INC. - 2017 Form 10-K 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 if available, or anticipated bids given the bids from the buyer, 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 transactions and is returns for historical refranchising market commensurate with the risks and uncertainty inherent in the forecasted cash flows. PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations that change 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 impairment might is evaluated for impairment by determining whether exist. Goodwill 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. indicates 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 the reporting assume when determining a purchase price for unit. Any margin improvement assumptions that 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 to receive when return that a third-party buyer would expect 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. factor The fair values of all our reporting units with goodwill balances were substantially in excess of their respective carrying values as of the 2017 goodwill testing date. the portion of the reporting unit disposed of When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair in the values of 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 rates our primary is at prevailing market consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world. The Company believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties. the future cash flows expected to be The discounted value of 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 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. be written goodwill the to of refranchising activity completed by the Company During 2017, resulted in the write-off of $36 million in Goodwill within Refranchising (gain) loss, representing 7% of beginning-of-year Company goodwill. Of the $36 million, the most significant write-offs were recognized by KFC Turkey and Taco Bell U.S. Within KFC Turkey, all remaining company restaurants were refranchised and $13 million in goodwill (representing 33% of beginning-of-year goodwill). was written off Within Taco Bell U.S., 251 restaurants were refranchised (representing 29% of beginning-of-year company units) and $8 million 7% of beginning-of-year goodwill). goodwill was written (representing off in See Note 2 for a further discussion of our policies regarding goodwill. Self-Insured Property and Casualty Losses We record our best estimate of the remaining cost to settle incurred self-insured property and casualty losses. The estimate is based on the results of an independent actuarial study and considers historical claim frequency and severity as well as changes in factors such as levels, medical costs and the our business environment, benefit that could impact overall self-insurance regulatory environment costs. Additionally, our reserve includes a risk margin to cover unforeseen events that may occur over the several years required to settle claims, the recorded reserve is adequate. increasing our confidence level that See Note 20 for a further discussion of our insurance programs. Pension Plans Certain of our employees are covered under defined benefit pension plans. Our two most significant plans are in the U.S. and combined had a projected benefit obligation (“PBO”) of $1,007 million and a fair value of plan assets of $864 million at December 31, 2017. this discount those corporate debt The PBO reflects the actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBOs are highly sensitive to changes in discount rates. For our U.S. plans, we measured our PBOs using a discount rate of 3.90% at December 31, 2017. This discount rate was determined with the assistance of our independent actuary. The primary basis for 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 instruments flagged by from the model Moody’s or S&P for a potential downgrade (if the potential downgrade would result in a rating below Aa by both Moody’s and S&P) and bonds with yields that were two standard deviations or more above the mean. In considering possible bond portfolios, the model allows the bond cash flows for a particular year to exceed the expected benefit payment cash flows for that year. Such excesses are assumed to be reinvested at appropriate one-year forward rates and used to meet the benefit payment cash flows in a future year. The weighted-average yield of this hypothetical portfolio was used to arrive at an appropriate discount rate. We also ensure that changes in the discount rate as compared to the prior year are consistent with the overall change in prevailing market rates and make adjustments as necessary. A 50 basis-point increase in this discount rate would have decreased these U.S. plans’ PBOs by approximately $65 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased our U.S. plans’ PBOs by approximately $75 million at our measurement date. YUM! BRANDS, INC. - 2017 Form 10-K 35 F o r m 1 0 - K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations various jurisdictions as well as carryforward periods and restrictions on usage. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans. Thus, recorded valuation allowances may be subject to material future changes. As a matter of course, we are regularly audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income tax provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2017, we had $100 million of unrecognized tax benefits, $10 million if recognized, would not of which are temporary in nature and, impact the effective tax rate. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they including audit have been appropriately adjusted for events, settlements, which may impact our ultimate payment for such exposures. On December 22, 2017, the SEC staff issued SEC Staff Accounting Bulletin (“SAB”) 118 to address the accounting implications of the 2017 Tax Cuts and Jobs Act (“Tax Act”). SAB 118 permits a company to recognize provisional amounts for the one-time tax effects of the Tax Act upon enactment when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The measurement period to finalize our calculations cannot extend beyond one year of the enactment date. impact on our Financial Key provisions that have a significant Statements and where we have recognized estimated amounts include the recognition of liabilities for taxes on mandatory one-time deemed repatriation of accumulated earnings of foreign subsidiaries, the remeasurement of certain net deferred tax assets and liabilities, and establishment of a valuation allowance on our foreign tax credit carryforwards. includes a mandatory deemed repatriation tax on The Tax Act 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 taxes provided in connection with the mandatory deemed repatriation tax, as we believe they are indefinitely reinvested. See Note 18 for a further discussion of our Income taxes. foreign unremitted earnings, other than U.S. federal The net periodic benefit cost we will record in 2018 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date. We expect net periodic benefit cost for our U.S. plans to increase approximately $6 million in 2018. A 50 basis-point decrease in our discount rate assumption at our 2017 measurement date would further increase our 2018 U.S. net periodic benefit cost by approximately $9 million. A 50 basis-point increase in our discount rate assumption at our 2017 measurement date would decrease our 2018 U.S. net periodic benefit cost by approximately $8 million. The impacts of changes in net periodic benefit costs are reflected primarily in Other pension (income) expense. Our estimated long-term rate of return on U.S. plan assets is based upon the weighted-average of historical and expected future returns for each asset category. Our expected long-term rate of return on for purposes of determining 2018 pension U.S. plan assets, expense, at December 31, 2017 was 5.65%, net of administrative and investment fees paid from plan assets. We believe this rate is appropriate given the composition of our plan assets and historical market returns thereon. A 100 basis point change in our expected long-term rate of return on plan assets assumption would impact our 2018 U.S. net periodic benefit cost by approximately $8 million. Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 5.65% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million. The impacts of changes in net periodic benefit costs are recorded to Other pension (income) expense. A decrease in discount rates over time has largely contributed to an unrecognized pre-tax actuarial net loss of $134 million included in AOCI for these U.S. plans at December 31, 2017. We will recognize approximately $16 million of such loss in net periodic benefit cost in 2018 versus $5 million recognized in 2017. See Note 15. In the first quarter of 2017, we adopted FASB issued guidance related to the presentation of non-service components of net periodic pension cost. As a result, expense associated with changes in actuarial assumptions, settlement charges and other non-service related charges are primarily recorded to Other pension (income) expense. K - 0 1 m r o F Income Taxes At December 31, 2017, we had valuation allowances of approximately $421 million to reduce our $847 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to foreign tax credits and temporary differences in profitable U.S. federal, state and foreign jurisdictions and net operating losses in certain foreign jurisdictions, the majority of which do not expire. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the 36 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 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 and commodity prices. 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 risk exposure to changes in interest rates, We have a market principally in the U.S. Our outstanding Long-term debt of $9.8 billion includes 75% fixed-rate debt and 25% variable-rate debt. We have attempted to minimize the interest rate risk related to $1.55 billion of this variable-rate debt through the use of interest rate swaps. As a result, approximately 90% of our $9.8 billion of outstanding debt at December 31, 2017 is effectively fixed-rate debt. See Note 11 for details on these issuances and repayments and Note 13 for details related to interest rate swaps. As of December 31, 2017 and December 31, 2016 a hypothetical 100 basis-point increase in short-term interest rates would result, over the following twelve-month period after consideration of the aforementioned interest rate swaps, in an increase of approximately $9 million and $10 million, respectively, in Interest expense, net within our Consolidated Statements of Income. These estimated amounts are based upon the current level of variable-rate debt that has not been swapped to fixed and assume no changes in the volume or composition of from interest income related to cash and cash equivalents. that debt and exclude any impact The fair value of our cumulative fixed-rate debt of $7.3 billion as of December 31, 2017, would decrease approximately $400 million as a result of increase. At the same hypothetical 100 basis-point December 31, 2017, a hypothetical 100 basis-point decrease in short-term interest rates would decrease the fair value of our interest rate swaps approximately $50 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. We attempt to minimize the exposure related to investments in foreign operations by financing those our net investments with local currency denominated debt when practical. 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, 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. foreign currency denominated financial Commodity Price Risk 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 $2.0 billion as of December 31, 2017. 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, 2017 Operating Profit would have decreased approximately $180 million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices. F o r m 1 0 - K 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 environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors. YUM! BRANDS, INC. - 2017 Form 10-K 37 PART II ITEM 8 Financial Statements and Supplementary Data ITEM 8 Financial Statements and Supplementary Data Index to Financial Information Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Consolidated Balance Sheets Consolidated Statements of Shareholders’ Equity (Deficit) Notes to Consolidated Financial Statements Financial Statement Schedules Page Reference 39 40 41 42 43 44 45 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. K - 0 1 m r o F 38 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders YUM! Brands, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting the related consolidated statements of We have audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and Subsidiaries (YUM) as of December 31, 2017 and 2016, income, comprehensive income, cash flows and shareholders’ equity (deficit) the fiscal years in the three-year period ended for each of December 31, 2017, and the related notes collectively, the “consolidated financial statements.” We also have audited YUM’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework the Committee of Sponsoring Organizations of the Treadway Commission. issued by (2013) the consolidated financial statements referred to In our opinion, above present fairly, in all material respects, the financial position of YUM as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, YUM maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principle As discussed in notes 2 and 5 to the consolidated financial the comparative consolidated balance sheet as of statements, December 31, 2016, and the comparative consolidated statements of income, comprehensive income, cash flows and shareholders’ equity (deficit) for the fiscal years ended December 31, 2016 and 2015 have been restated for the effects of the change in accounting principle whereby YUM changed its fiscal year from a 52-53 week fiscal year to a fiscal year ending on December 31 of each year and eliminated any of the one-month or one-period reporting lags of its international subsidiaries. Basis for Opinions YUM’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on YUM’s consolidated financial statements and an opinion on YUM’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 YUM in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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. to obtain reasonable assurance about whether 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 the consolidated well as evaluating the overall presentation of financial statements. Our audit of 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. internal control over 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 financial principles. A company’s internal control over reporting (1) pertain to the includes those policies and procedures that 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. F o r m 1 0 - K limitations, its inherent Because of 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 YUM’s auditor since 1997. Louisville, Kentucky February 21, 2018 YUM! BRANDS, INC. - 2017 Form 10-K 39 PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Income YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (in millions, except per share data) Revenues Company sales Franchise and license fees and income Total revenues Costs and Expenses, Net Company restaurants Food and paper Payroll and employee benefits Occupancy and other operating expenses Company restaurant expenses General and administrative expenses Franchise and license expenses Closures and impairment (income) expenses Refranchising (gain) loss Other (income) expense Total costs and expenses, net Operating Profit Other pension (income) expense Interest expense, net Income from continuing operations before income taxes K - 0 1 m r o F Income tax provision Income from continuing operations Income from discontinued operations, net of tax 2017 2016 (As Restated) 2015 (As Restated) $ 3,572 $ 4,189 $ 4,336 2,306 5,878 1,103 939 912 2,954 999 237 3 (1,083) 7 3,117 2,761 47 440 2,274 934 1,340 N/A 2,167 6,356 1,267 1,106 1,116 3,489 1,129 201 15 (163) 3 4,674 1,682 32 305 1,345 327 1,018 625 2,082 6,418 1,340 1,125 1,162 3,627 1,058 240 16 23 20 4,984 1,434 40 141 1,253 327 926 357 Net Income $ 1,340 $ 1,643 $ 1,283 Basic Earnings per Common Share from continuing operations Basic Earnings per Common Share from discontinued operations Basic Earnings Per Common Share Diluted Earnings per Common Share from continuing operations Diluted Earnings per Common Share from discontinued operations Diluted Earnings Per Common Share Dividends Declared Per Common Share See accompanying Notes to Consolidated Financial Statements. $ $ $ $ $ 3.86 N/A 3.86 3.77 N/A 3.77 0.90 $ $ $ $ $ $ $ 2.58 1.59 4.17 2.54 1.56 4.10 1.73 $ $ $ $ $ $ $ 2.13 0.82 2.95 2.09 0.81 2.90 1.74 40 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Comprehensive Income YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (in millions) Net Income Other comprehensive income (loss), net of tax: Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature Adjustments and gains (losses) arising during the year Reclassifications of adjustments and (gains) losses into Net Income Tax (expense) benefit Changes in pension and post-retirement benefits Unrealized gains (losses) arising during the year Reclassification of (gains) losses into Net Income Tax (expense) benefit Changes in derivative instruments Unrealized gains (losses) arising during the year Reclassification of (gains) losses into Net Income Tax (expense) benefit 2017 2016 (As Restated) 2015 (As Restated) $ 1,340 $ 1,643 $ 1,283 115 55 170 (8) 162 (17) 52 35 (14) 21 (52) 58 6 (2) 4 (174) (11) (185) 21 (164) (62) 44 (18) 4 (14) 57 (22) 35 (16) 19 (231) 115 (116) — (116) 101 53 154 (57) 97 48 (53) (5) — (5) (24) F o r m 1 0 - K Other comprehensive income (loss), net of tax 187 (159) Comprehensive Income $ 1,527 $ 1,484 $ 1,259 See accompanying Notes to Consolidated Financial Statements. YUM! BRANDS, INC. - 2017 Form 10-K 41 PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Cash Flows YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (in millions) Cash Flows – Operating Activities from Continuing Operations Net Income Income from discontinued operations, net of tax Depreciation and amortization Closures and impairment (income) expenses Refranchising (gain) loss Contributions to defined benefit pension plans Deferred income taxes Share-based compensation expense Changes in accounts and notes receivable Changes in inventories Changes in prepaid expenses and other current assets Changes in accounts payable and other current liabilities Changes in income taxes payable Other, net 2017 2016 (As Restated) 2015 (As Restated) $ 1,340 $ 1,643 $ 1,283 — 253 3 (1,083) (55) 634 65 (19) 3 (13) (173) (55) 130 (625) 310 15 (163) (41) 28 80 (23) 1 (1) (40) 20 44 (357) 319 16 23 (98) (101) 46 (36) (4) (14) 55 53 75 Net Cash Provided by Operating Activities from Continuing Operations 1,030 1,248 1,260 Cash Flows – Investing Activities from Continuing Operations Capital spending Proceeds from refranchising of restaurants Other, net Net Cash Provided by (Used in) Investing Activities from Continuing Operations Cash Flows – Financing Activities from Continuing Operations K - 0 1 m r o F Proceeds from long-term debt Repayments of long-term debt Revolving credit facilities, three months or less, net Short-term borrowings, by original maturity More than three months – proceeds More than three months – payments Three months or less, net Repurchase shares of Common Stock Dividends paid on Common Stock Debt issuance costs Net transfers from discontinued operations Other, net Net Cash Used in Financing Activities from Continuing Operations Effect of Exchange Rate on Cash and Cash Equivalents Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents—Continuing Operations Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents – Beginning of Year Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents – End of Year Cash Provided by Operating Activities from Discontinued Operations Cash Used in Investing Activities from Discontinued Operations Cash Used in Financing Activities from Discontinued Operations See accompanying Notes to Consolidated Financial Statements. $ $ 42 YUM! BRANDS, INC. - 2017 Form 10-K (318) 1,773 17 1,472 1,088 (385) — — — — (1,960) (416) (32) — (90) (1,795) 61 768 831 1,599 — — — (427) 370 53 (4) 6,900 (323) (685) 1,400 (2,000) — (5,403) (744) (86) 289 (92) (744) (34) 466 365 831 829 (287) (292) $ $ (442) 213 30 (199) — (267) 303 609 — — (1,200) (730) — 235 (39) (1,089) — (28) 393 365 931 (493) (234) $ $ PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Balance Sheets YUM! BRANDS, INC. AND SUBSIDIARIES DECEMBER 31, 2017 AND 2016 (in millions) ASSETS Current Assets Cash and cash equivalents Accounts and notes receivable, net Inventories Prepaid expenses and other current assets Advertising cooperative assets, restricted Total Current Assets Property, plant and equipment, net Goodwill Intangible assets, net Other assets Deferred income taxes Total Assets LIABILITIES AND SHAREHOLDERS’ DEFICIT Current Liabilities Accounts payable and other current liabilities Income taxes payable Short-term borrowings Advertising cooperative liabilities Total Current Liabilities Long-term debt Other liabilities and deferred credits Total Liabilities Shareholders’ Deficit Common Stock, no par value, 750 shares authorized; 332 shares and 355 shares issued in 2017 and 2016, respectively Accumulated deficit Accumulated other comprehensive loss Total Shareholders’ Deficit Total Liabilities and Shareholders’ Deficit See accompanying Notes to Consolidated Financial Statements. 2017 2016 (As Restated) $ 1,522 $ 400 13 371 201 2,507 1,697 512 110 346 139 725 370 37 236 137 1,505 2,113 536 151 376 772 $ 5,311 $ 5,453 $ 813 123 375 201 1,512 9,429 704 $ 1,067 36 66 137 1,306 9,059 703 11,645 11,068 — (6,063) (271) (6,334) — (5,157) (458) (5,615) $ 5,311 $ 5,453 F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 43 PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Shareholders’ Equity (Deficit) YUM! BRANDS, INC. AND SUBSIDIARIES FISCAL YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (in millions) Yum! Brands, Inc. Issued Common Stock Shares Amount Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total Shareholders’ Equity (Deficit) Redeemable Noncontrolling Interest Balance at December 31, 2014 (As Restated) 434 $ — $ 1,784 $ (228) $ 57 $ 1,613 $ 9 Net Income (loss) Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $3 million) Reclassification of translation adjustments into income (net of tax impact of $3 million) Pension and post-retirement benefit plans (net of tax impact of $57 million) Net loss on derivative instruments (net of tax impact of $0 million) Comprehensive Income (loss) Dividends declared Acquisition of Little Sheep store-level noncontrolling interests Repurchase of shares of Common Stock Employee share-based award exercises (includes tax impact of $50 million) (16) 2 Share-based compensation events 1 (76) 7 68 1,283 (756) (1,124) (228) 112 97 (5) Balance at December 31, 2015 (As Restated) 420 $ — $ 1,187 $ (252) 6 (4) (1) 1,289 (232) 112 97 (5) 1,261 (756) — (1,200) 7 68 $ 58 18 $ 993 1,661 Net Income (loss) Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $21 million) Reclassification of translation adjustments into income Pension and post-retirement benefit plans (net of tax impact of $4 million) Net gain on derivative instruments (net of tax impact of $16 million) Comprehensive Income (loss) Dividends declared Separation of China business Repurchase of shares of Common Stock Employee share-based award exercises (includes tax impact of $85 million) Share-based compensation events K - 0 1 m r o F (68) 3 (49) (4) 53 1,643 (661) (1,927) (5,399) (153) (3) (11) (14) 19 (47) (6) (67) (156) (11) (14) 19 1,499 (667) (2,041) (5,448) (4) 53 (1) (2) (3) $ 6 (7) 1 (6) Balance at December 31, 2016 (As Restated) 355 $ — $ (5,157) $ (458) $ — $ (5,615) $ — Net Income Translation adjustments and gains (losses) from intra-entity transactions of a long-term investment nature (net of tax impact of $8 million) Reclassification of translation adjustments into income Pension and post-retirement benefit plans (net of tax impact of $14 million) Net gain on derivative instruments (net of tax impact of $2 million) Comprehensive Income Dividends declared Repurchase of shares of Common Stock Employee share-based award exercises Share-based compensation events 1,340 107 55 21 4 (27) 4 — — (58) 58 (311) (1,915) (20) — 1,340 107 55 21 4 1,527 (311) (1,915) (78) 58 Balance at December 31, 2017 332 $ — $ (6,063) $ (271) $ — $ (6,334) $ — See accompanying Notes to Consolidated Financial Statements. 44 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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 “YUM” or the “Company”) comprise the worldwide operations of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”). YUM has over 45,000 units of which 60% are located outside the U.S. in more than 135 countries and territories. YUM was created as an independent, publicly-owned company on October 6, 1997 via a tax- free distribution by our former parent, PepsiCo, Inc., of our Common Stock to its shareholders. References to YUM throughout these Consolidated Financial Statements are made using the first person notations of “we,” “us” or “our.” franchise or 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 license parties that operate units under either agreements. Each Concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients as well as unique recipes and special seasonings to provide appealing, tasty and attractive food at competitive prices. Our convenient, in some restaurants feature dine-in, carryout and, traditional 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 multibrand units, where two or more of our Concepts are operated in a single unit. As of December 31, 2017, YUM consisted of three operating segments: (cid:129) The KFC Division which includes our worldwide operations of the KFC concept (cid:129) The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept (cid:129) 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 the close of business on of our shareholders of 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. record as of Concurrent with the Separation, a subsidiary of the Company entered into a Master License Agreement with a subsidiary of Yum to use and sublicense the use of China for the exclusive right 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 Income and Consolidated Statements of Cash Flows for all periods presented. See additional information related to the impact of the Separation in Note 4. in our Consolidated Statements of NOTE 2 Summary of Significant Accounting Policies F o r m 1 0 - K 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 reporting period. Actual results could differ from these estimates. and expenses during the revenues 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 interest may be achieved interests, where the controlling financial 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. in any of our We do not have an equity interest 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 2017, YUM has future lease payments due from franchisees, on a nominal basis, of approximately $725 million, and we are contingently 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 20. As our franchise and license arrangements provide our franchisee entities YUM! BRANDS, INC. - 2017 Form 10-K 45 PART II ITEM 8 Financial Statements and Supplementary Data 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 20 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 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. Advertising cooperative assets, consisting primarily of cash received from the Company and franchisees and accounts receivable from franchisees, can only be used to settle obligations of the respective cooperative. the corresponding Advertising cooperative liabilities obligation arising from the receipt of the contributions to purchase advertising and promotional programs for which creditors do not have recourse to the general credit of the Company as the primary beneficiary. Therefore, we report all assets and liabilities of these that we consolidate as Advertising advertising cooperatives cooperative assets, restricted and Advertising cooperative liabilities in the Consolidated Balance Sheet. As the contributions to these cooperatives are designated and segregated for advertising, we act as an agent for the franchisees with regard to these contributions. to these Thus, we do not cooperatives in our Consolidated Statements of Income or Consolidated Statements of Cash Flows. franchisee contributions represent reflect K - 0 1 m r o F Fiscal Year. Our fiscal years have historically ended on the last Saturday in December and, as a result, a 53rd week was added every five or six years. The first three quarters of each fiscal year consisted of 12 weeks and the fourth quarter consisted of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks. Our U.S. subsidiaries and certain international subsidiaries operated on similar remaining international subsidiaries operated on a monthly calendar, and thus never had a 53rd week, with two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter. Certain international subsidiaries within our KFC, Pizza Hut and Taco Bell divisions have historically closed approximately one month or one period earlier to facilitate consolidated reporting. fiscal calendars. Our Fiscal year 2016 included 53 weeks for our U.S. businesses and for our international subsidiaries that reported on a period calendar. The 53rd 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. 46 YUM! BRANDS, INC. - 2017 Form 10-K 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 is effective in 2017. We have applied this change in accounting principle retrospectively to all prior financial periods presented and the impact of this change is summarized in Note 5. The impact of the change in accounting principle on the current period Consolidated Financial Statements is similar to the impact on the prior period results discussed in Note 5. 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 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, 2017, net cumulative translation adjustment losses of $174 million are recorded in Accumulated other comprehensive loss (“AOCI”) in the Consolidated Balance Sheet. that entity. 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 to be comparable with the classification for the fiscal year ended December 31, 2017. These reclassifications had no effect on previously reported Net Income, as restated. for prior periods Franchise Operations. We execute store-level franchise agreements for units operated by third parties which set out the terms of our arrangement with the franchisee. Our franchise agreements typically require the franchisee to pay an initial, non-refundable fee upon an individual store opening and continuing fees based upon a percentage of sales. Subject to our approval and their payment of a renewal fee, a franchisee may generally renew the franchise agreement upon its expiration. Additionally, we execute master franchise agreements in certain regions that transfer administrative and development obligations and sub-franchising rights to a franchisee in exchange for reduced franchise fees. The internal costs we incur to provide support services to our franchisees are charged to General and administrative expenses (“G&A”) as incurred. Certain direct costs of our franchise operations are charged to Franchise and license 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. fees, continuing fees, renewal Revenue Recognition. Revenues from Company-owned restaurants are recognized when payment is tendered at the time of sale. The Company presents sales net of sales-related taxes. Income from our franchisees includes initial fees and rental income from restaurants we lease or sublease to them. We recognize initial fees received from a franchisee as revenue when we initial services required by the have performed substantially all franchise agreement, which is generally upon the opening of a store. We recognize continuing fees, which are based upon a percentage of franchisee sales as those sales occur and rental income is recognized as it is earned. We recognize renewal fees when a renewal agreement with a franchisee becomes effective. While the majority of our franchise agreements are entered into with terms and conditions consistent with those at a prevailing market rate, there are instances when we enter into franchise agreements with terms that are not at market rates (for example, below-market for a specified period of time. We recognize the continuing fees) estimated value of terms in franchise agreements entered into concurrently with a refranchising transaction that are not consistent with market terms as part of the upfront Refranchising (gain) loss and amortize that amount into Franchise and license fees and income over the period such terms are in effect. The value of terms that are not considered to be at market within franchise agreements is estimated based upon the difference between the present value of the cash expected to be received under the franchise agreement and the present value of the cash that would have been expected to be received under a franchise agreement with terms substantially consistent with market. the year in which incurred and, 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. We charge direct marketing costs incurred outside of a cooperative to expense ratably in relation to revenues over 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 which will generally be used for the first time in the next fiscal year and have historically not been significant. Our advertising expenses were $245 million, $260 million and $253 million in 2017, 2016 and 2015, respectively. We report the majority of our direct marketing costs in Occupancy and other operating expenses as they are incurred as a percentage of sales by Company-owned restaurants. Advertising incurred on behalf of franchised restaurants is recorded within Franchise and license expenses, including $25 million related to the Pizza Hut U.S. Transformation Agreement and $20 million related to the KFC U.S. Acceleration Agreement in 2017. See Note 5 for further discussion of these agreements. Research and Development Expenses. Research and development expenses, which we expense as incurred, are reported in G&A. Research and development expenses were $22 million, $24 million and $23 million in 2017, 2016 and 2015, respectively. 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 PART II ITEM 8 Financial Statements and Supplementary Data is recognized over service period based on their fair value on the date of grant. This compensation cost the service period on a straight-line basis, net of an assumed forfeiture rate, for awards that actually vest. We present this compensation cost consistent with the other compensation costs for the employee recipient in either Payroll and employee benefits or G&A. See Note 16 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, liability and property general 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 20 for further discussion of our legal proceedings. liability, automobile liability, product 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 the assets are not deemed to be generate from such assets. recoverable, impairment is measured based on the excess of their carrying value over their fair value. If restaurant is the lowest impairment testing for our restaurants, we have For purposes of level of concluded that an individual 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 impairment, or assets subject to amortization) semi-annually for 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. 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 restaurant assets by comparing estimated sales proceeds plus holding period cash flows, the if any, 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 to the carrying value of YUM! BRANDS, INC. - 2017 Form 10-K 47 F o r m 1 0 - K PART II ITEM 8 Financial Statements and Supplementary Data 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. are generally closed stores 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 expensed as from previously 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 Closures and impairment (income) expenses. To the extent we sell assets, primarily land, associated with a closed store, any gain or loss upon that sale is also recorded in Closures and impairment (income) expenses. K - 0 1 m r o F 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 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 contingently 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 license expense. interest 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 levels of past taxable income and which it must be earned, actual 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 48 YUM! BRANDS, INC. - 2017 Form 10-K 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 recognition, result 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. in subsequent that We do not record a deferred tax liability for unremitted earnings of our foreign subsidiaries (except for the U.S. tax provided for as part of the Tax Act enacted on December 22, 2017, see Note 18) 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 18 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 those assets and transaction between market participants. For 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 the duration. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation. rates appropriate for Level 1 Level 2 Inputs based upon quoted prices in active markets for identical assets. Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. Level 3 Inputs that are unobservable for the asset. 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. Yum China is our largest franchisee and we recorded franchise fee revenues of approximately $260 million from Yum China in 2017. 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 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 $5 million, less than $1 million and $6 million in the balance due. Additionally, we monitor net provisions within Franchise and license expenses in 2017, 2016 and 2015, respectively, related to uncollectible franchise and license trade receivables. Trade 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. Accounts and notes receivable Allowance for doubtful accounts Accounts and notes receivable, net 2017 2016 $ $ 419 (19) 400 $ $ 384 (14) 370 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 risk characteristics and evaluate them as one to have similar 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 financing leases due within one year are receivable and direct included in Accounts and notes receivable, net while amounts due beyond one year are included in Other assets. Amounts included in Other assets totaled $38 million and $29 million (net of an allowance of $2 million) at December 31, 2017 and December 31, 2016, 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. Inventories. We value our inventories at the lower of cost (computed on the first-in, first-out method) or market. 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, 3 to 20 years for machinery and equipment and 3 to 7 years for capitalized software costs. 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 the lease. We recognition of rent expense over the duration of 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. is being constructed whether rent We expense rent associated with leased land or buildings while a restaurant is paid or we are subject to a rent holiday. Additionally, certain of the Company’s the operating leases contain predetermined fixed escalations of 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 PART II ITEM 8 Financial Statements and Supplementary Data 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). Internal Development Costs and Abandoned Site Costs. We capitalize direct costs associated with the site acquisition and construction of a Company unit on that site, including direct internal payroll and payroll-related costs. Only those site-specific costs the site acquisition is incurred subsequent considered probable are capitalized. If we subsequently make a determination that it is probable a site for which internal development costs have been capitalized will not be acquired or developed, any previously capitalized internal development costs are expensed and included in G&A. to the time that 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 indicate often if an event occurs or circumstances change that 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 rate is commensurate with the risks and believe the discount 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. the reporting unit to its acquisition, we include goodwill 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 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 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 YUM! BRANDS, INC. - 2017 Form 10-K 49 F o r m 1 0 - K PART II ITEM 8 Financial Statements and Supplementary Data 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. 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. fail to meet the counterparties will into contracts with carefully selected major As a result of the use of derivative instruments, the Company is their exposed to risk that contractual obligations. To mitigate the counterparty credit risk, we only enter financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At December 31, 2017 and December 31, 2016, all of the counterparties to our 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. rate swaps, interest 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 such as shares cancelled upon employee share-based award exercises, as an addition to Accumulated deficit. Due to the large number of share repurchases of our stock over the past several years, our Common the end of any period. Stock balance is frequently zero at Accordingly, $1,915 million, $5,399 million and $1,124 million in share repurchases in 2017, 2016 and 2015, respectively, and $20 million related to shares cancelled upon employee share-based award exercises in 2017 were recorded as an addition to 50 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F Accumulated deficit. See Note 17 for additional share repurchases. information on our 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 fiscal year end. The funded status Balance Sheet as of our 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, it 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. revenue recognition of Recent Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) has issued standards to provide principles within a single framework for transactions involving contracts with customers across all industries. These standards are effective for the Company in our first quarter of 2018 and we will adopt the standards using the modified retrospective method. Upon adoption, we will record an increase in Total Shareholders’ Deficit of approximately $230 million on our Consolidated Balance Sheet, which includes the impact to deferred taxes from adopting the standards. We expect the adoption of the standards to negatively impact 2018 Operating Profit by approximately $45 million. Significant changes to the Company’s accounting policies are summarized below. These standards require that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and the distinct performance obligation is performance obligations are satisfied. The services we provide related to upfront fees we receive from franchisees such as initial or renewal fees do not contain separate and distinct performance obligations from the franchise right and thus those upfront fees will then recognized as be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront franchise fees such as fees when the related services have been initial and renewal provided, which is when a store opens for initial fees and when renewal options become effective for renewal fees. These standards require any unamortized portion of fees received prior to adoption be presented in our Consolidated Balance Sheet as a contract liability. Upon adoption we expect the recognition of unamortized upfront fees to increase Total Liabilities by approximately $390 million. Similarly, the benefits we receive from incentive payments we may make to our franchisees (e.g. equipment funding provided under the KFC U.S. Acceleration Agreement, see Note 5) are not separate and distinct from the benefits we receive from the franchise right and thus those incentive payments will be amortized as a reduction of revenue over the period of expected cash flows from the franchise agreements to which the payment relates. Currently, we recognize any payments made to franchisees within our Consolidated Statements of Income when we are obligated to make the payment. These standards require any such unamortized portion of payments prior to adoption to be presented in our Consolidated Balance Sheet the recognition of as an asset. Upon adoption we expect unamortized incentive payments to increase Total Assets by approximately $140 million. These standards will also have an impact on transactions currently not included in our revenues and expenses such as franchisee contributions to and subsequent expenditures from advertising cooperatives that we are required to consolidate and other cost reimbursement arrangements we have with our franchisees. We do not currently include these contributions and expenditures in our Consolidated Statements of Income or Cash Flows. The new impact the principal/agent determinations in these standards will arrangements by superseding industry-specific guidance included in current GAAP. When we are the principal in these transactions we will include the related contributions and expenditures within our Consolidated Statements of Income and Cash Flows. As a result of this change, we expect the increase in both Total revenues and Total costs and expenses, net in 2018 will approximate $1.0 billion, with no significant impact to Net Income. The assets and liabilities held by advertising cooperatives, which have historically been reported as Advertising Advertising cooperative liabilities, respectively, will be included within the respective balance sheet caption to which the assets and liabilities relate. cooperative restricted assets, and These standards will not impact the recognition of our two largest sources of revenue, sales in company-owned restaurants and sales- the new based continuing fees from franchisees. Additionally, PART II ITEM 8 Financial Statements and Supplementary Data standards will not impact the recognition of refranchising gains and losses as these transactions are divestitures of businesses and thus outside the scope of the standards. We are evaluating the impact of the standards on our disclosures of the Company’s revenues. Further, we are currently implementing internal controls related to the recognition and presentation of the Company’s revenues under these new standards. In March 2016, the FASB issued guidance related to stock-based compensation which is intended to simplify several aspects of the transactions, accounting for employee share-based payment including their income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this standard beginning with the quarter ended March 31, 2017. The impact of adoption included the recognition of excess tax benefits within our income tax provision for share-based payments made of $117 million during the year ended December 31, 2017. Additionally, the standard requires these excess tax benefits be reported as operating activities in the Consolidated Statements of Cash Flows as opposed to within financing activities as they have been historically reported. We elected retrospective presentation of excess tax benefits as operating cash flows for prior years. As a result, $83 million and $46 million of excess tax benefits previously presented as a financing activity have been reclassified to operating the years ended December 31, 2016 and 2015, activities for in our Consolidated Statements of Cash Flows. No respectively, other provisions of impact on the Company’s Consolidated Financial Statements or disclosures. this standard had a material the standard requires that In March 2017, the FASB issued guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, “Benefit Costs”). The standard does not change the requirement that an employer report the service cost component of these Benefit Costs in the same line item or items as other compensation costs arising from services rendered by employees during the period. However, the non-service components of these Benefit Costs be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. We early adopted the standard beginning with the quarter ended March 31, 2017, on a retrospective basis. As a result, for 2016 and 2015, we have reclassified $32 million and $40 million, respectively, related to non-service components of Benefit Costs from their prior Financial Statement captions (Payroll and employee benefits and G&A) into a new Financial Statement caption titled Other pension (income) expense in our Consolidated Statements of Income. The adoption of this standard does not impact Net Income. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 51 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 3 Earnings Per Common Share (“EPS”) Income from continuing operations Income from discontinued operations Net Income Weighted-average common shares outstanding (for basic calculation) Effect of dilutive share-based employee compensation Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) Basic EPS from continuing operations Basic EPS from discontinued operations Basic EPS Diluted EPS from continuing operations Diluted EPS from discontinued operations Diluted EPS 2017 2016 2015 $ 1,340 $ 1,018 $ N/A 625 926 357 $ 1,340 $ 1,643 $ 1,283 347 8 355 394 6 400 $ $ $ $ 3.86 $ 2.58 $ N/A 3.86 3.77 N/A $ $ 1.59 4.17 2.54 1.56 3.77 $ 4.10 $ $ $ $ 435 8 443 2.13 0.82 2.95 2.09 0.81 2.90 Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a) 2.3 5.0 4.5 (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. results of Yum China presented in discontinued The financial operations reflect the former China Division, an operating segment of the Company until the Separation, adjusted for the results of K - 0 1 m r o F 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. 52 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data The following table presents the financial results of the Company’s discontinued operations: Company sales Franchise and license fees and income Company restaurant expenses G&A expenses(b) Franchise and license expenses Closures and impairment expenses Refranchising gain Other income(c) Interest income, net Income from discontinued operations before income taxes Income tax benefit (provision)(d) Income from discontinued operations—including noncontrolling interests (Income) loss from discontinued operations—noncontrolling interests 2016(a) 2015 $ 5,667 $ 6,789 109 120 (4,766) (5,913) (406) (405) (45) (57) 12 49 8 571 65 636 (11) (48) (64) 13 27 7 526 (164) 362 (5) Income from discontinued operations, net of tax $ 625 $ 357 (a) (b) Includes Yum China financial results from January 1, 2016 to October 31, 2016. Includes costs incurred to execute the Separation of $68 million and $9 million for 2016 and 2015, respectively. Such costs primarily relate to transaction advisors, legal and other consulting fees. (c) Primarily relates to 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 2017 and 2016, subsequent to the Separation, related to the Master License Agreement was $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 Tax Cuts and Jobs Act of 2017 (“Tax Act”) We recognized $434 million in our 2017 Income tax provision as a result of the December 22, 2017 enactment of the Tax Act. See Note 18 for a discussion of the charge. Refranchising (Gain) Loss The Refranchising (gain) loss by reportable segment is presented below. Given the size and volatility of refranchising initiatives, our chief operating decision maker (“CODM”) does not consider the impact of Refranchising (gain) loss when assessing segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes. F o r m 1 0 - K During the years ended December 31, 2017, 2016 and 2015, we refranchised 1,470, 432 and 270 restaurants, respectively. We received $1,773 million, $370 million and $213 million in pre-tax proceeds in 2017, 2016 and 2015, respectively, related to these transactions. A summary of Refranchising (gain) loss is as follows: KFC Division(a) Pizza Hut Division(a) Taco Bell Division Worldwide Refranchising (gain) loss 2017 2016 2015 $ (581) $ (16) (486) (44) (48) (71) $ 32 56 (65) $ (1,083) $ (163) $ 23 (a) In 2010, we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing it to the franchisee. During 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represented a substantial liquidation of our Mexican foreign entities under GAAP. As such, the accumulated translation losses associated with our Mexican business were included in our loss on the sale. We recorded charges of $80 million representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the sales price. Consistent with the classification of the original Mexico market-wide refranchising transaction, these charges were classified as Refranchising (gain) loss. Refranchising losses of $40 million were associated with both the KFC and Pizza Hut Divisions. We continue to earn U.S. dollar-denominated franchise fees, most of which are sales-based royalties, under our existing franchise contracts with our Mexico franchisee. YUM! BRANDS, INC. - 2017 Form 10-K 53 PART II ITEM 8 Financial Statements and Supplementary Data 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 $10 million during the year ended December 31, 2017. Our CODM does not consider the impact of these depreciation reductions, which were recorded within Occupancy and other operating 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. features of 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 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 $23 million and $67 million related to our Strategic Transformation Initiatives in 2017 and 2016, respectively. In 2017, these costs were primarily recorded in G&A and included contract termination costs and relocation and severance costs for restaurant-support center employees. In 2016, these costs were primarily recorded in G&A and 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. YUM’s Strategic Transformation Initiatives represent the continuation of YUM’s transformation of its operating model and capital structure following the Separation and recapitalization of YUM. 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. These Yum China awards may now 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 2017 and 2016, we recorded G&A charges related to these awards of $18 million and $30 million, respectively. Given these charges were a direct result of the Separation, our CODM does not consider their impact when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results for performance reporting purposes. 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 includes a permanent commitment to incremental advertising and digital and In connection with this technology contributions by franchisees. 54 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F restaurant equipment agreement, we anticipate investing approximately $90 million to to improve operations, upgrade fund improvements in restaurant technology and enhance digital and e-commerce capabilities. We currently expect the majority of this investment will be split between 2017 and 2018. During 2017, we recorded pre-tax charges of $31 million, primarily within Franchise and license expenses or G&A, and capitalized $8 million of costs primarily related to digital and e-commerce initiatives. Due to their unique and long-term brand-building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these investments are not being allocated to the Pizza Hut Division segment operating results for performance reporting purposes. In addition to the investments above, we have agreed to fund $37.5 million of incremental system advertising dollars from the second half of 2017 through 2018. During 2017, we incurred $25 million in related incremental system advertising expense. These advertising amounts were recorded primarily in Franchise and license 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 anticipate investing a total of approximately $130 million from 2015 through 2018 primarily to fund new back-of house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges for the portion of these investments made in 2017, 2016 and 2015 of $17 million, $26 million and $72 million, respectively. These amounts were recorded primarily as Franchise and license expenses. These payments constitute a significant portion of for incentive payments made to franchisees which we will establish upon adoption of the new revenue recognition standard in 2018 (see Note 2). Due to their size and unique long-term brand building nature, our CODM does not consider the impact of these investments when assessing segment performance. As such, these charges are not being allocated to the KFC Division segment operating results for performance reporting purposes. the approximately $140 million asset In addition to the investments above, we agreed to fund $60 million of incremental system advertising. During 2017, 2016 and 2015, we incurred $20 million, $20 million and $10 million in incremental system advertising expense, respectively, with the remaining funding of approximately $10 million to occur in 2018. The incremental system advertising amounts recorded were primarily in Franchise and license expenses and are included in the KFC Division segment operating results. Items Impacting Other Pension (Income) Expense 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. PART II ITEM 8 Financial Statements and Supplementary Data 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 15 for further discussion of our pension plans. Store Closure and Impairment Activity Store closure (income) costs and Store impairment charges by reportable segment are presented below. Store closure (income) costs(a) Store impairment charges Closure and impairment (income) expenses 2017 KFC Pizza Hut Taco Bell Worldwide $ — $ — $ (1) 2 2 $ 1 1 $ 1 $ — $ (1) 4 $ 3 2016 KFC Pizza Hut Taco Bell Worldwide Store closure (income) costs(a) Store impairment charges $ 3 8 Closure and impairment (income) expenses $ 11 $ $ (5) $ — $ (2) 6 1 3 3 $ 17 $ 15 Store closure (income) costs(a) Store impairment charges Closure and impairment (income) expenses 2015 KFC Pizza Hut Taco Bell Worldwide $ 1 8 $ 9 $ (1) $ (1) $ (1) 5 4 $ 4 3 $ 17 $ 16 (a) Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company-owned restaurant that was closed, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves and other facility-related expenses from previously closed stores. Remaining lease obligations for closed stores were not material at December 31, 2017 or December 31, 2016. 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: Total revenues Operating Profit Income from continuing operations Income from discontinued operations, net of tax Net Income Diluted EPS from continuing operations Diluted EPS from discontinued operations Diluted EPS 2016 As Previously Reported Adjustments After Change in Reporting Calendar $ $ $ $ 6,366 1,625 994 625 1,619 2.48 1.56 4.04 $ $ $ $ (10) 25(a) 24 — 24 0.06 — 0.06 $ 6,356 1,650(b) 1,018 625 1,643 2.54 1.56 4.10 $ $ YUM! BRANDS, INC. - 2017 Form 10-K 55 F o r m 1 0 - K PART II ITEM 8 Financial Statements and Supplementary Data Total revenues Operating Profit Income from continuing operations Income from discontinued operations, net of tax Net Income Diluted EPS from continuing operations Diluted EPS from discontinued operations Diluted EPS 2015 As Previously Reported Adjustments After Change in Reporting Calendar $ 6,440 $ 1,402 936 357 1,293 2.11 0.81 2.92 $ $ $ $ $ $ (22) (8) (10) — (10) (0.02) — (0.02) $ 6,418 1,394(b) 926 357 1,283 2.09 0.81 2.90 $ $ $ (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 and December 31, 2015 due to the impact of retrospectively adopting a new accounting standard on Benefit Costs of $32 million and $40 million, respectively. See Note 2. 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. In 2015, the impact on our Consolidated Statement of Cash Flows was an increase in cash used in investing activities of $10 million and a decrease in cash used in financing activities of $16 million. There was no impact to cash provided by operating activities. Our Shareholders’ Equity, as of December 31, 2014, increased $9 million as a result of the change in reporting calendar. NOTE 6 Supplemental Cash Flow Data Cash Paid For: Interest Income taxes Significant Non-Cash Investing and Financing Activities: Capital lease obligations incurred Capital lease and other debt obligations transferred through refranchising Reconciliation of Cash and cash equivalents to Consolidated Statements of Cash Flows: 2017 2016 2015 $ 442 $ 297 $ 346 314 $ 8 $ 10 $ (35) (1) 141 392 26 — K - 0 1 m r o F Cash and cash equivalents as presented in Consolidated Balance Sheets $ 1,522 $ 725 $ 345 Restricted cash included in Prepaid expenses and other current assets(a) Restricted cash included in Other assets(b) 60 17 55 51 — 20 Cash, Cash Equivalents and Restricted Cash as presented in Consolidated Statements of Cash Flows $ 1,599 $ 831 $ 365 (a) Restricted cash within Prepaid expenses and other current assets reflects the Taco Bell Securitization interest reserves. See Note 11. (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. NOTE 7 Franchise and License Fees and Income Initial fees, including renewal fees Continuing fees and rental income Franchise and license fees and income 56 YUM! BRANDS, INC. - 2017 Form 10-K 2017 2016 2015 $ 96 $ 72 $ 71 2,210 2,095 2,011 $ 2,306 $ 2,167 $ 2,082 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 8 Other (Income) Expense Foreign exchange net (gain) loss and other Loss associated with corporate aircraft(a) Other (income) expense 2017 2016 2015 $ 5 $ (6) $ 20 2 9 — $ 7 $ 3 $ 20 (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 9 Supplemental Balance Sheet Information Prepaid Expenses and Other Current Assets Income tax receivable Assets held for sale(a) Other prepaid expenses and current assets Prepaid expenses and other current assets 2017 2016 $ 175 $ 37 159 371 $ $ 44 57 135 236 (a) 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. 2016 amounts also include a corporate aircraft sold in 2017. Property, Plant and Equipment Land Buildings and improvements Capital leases, primarily buildings Machinery and equipment Property, plant and equipment, gross Accumulated depreciation and amortization Property, plant and equipment, net 2017 2016 $ 452 $ 438 1,661 123 941 3,177 (1,480) 2,149 141 1,380 4,108 (1,995) $ 1,697 $ 2,113 Depreciation and amortization expense related to PP&E was $238 million, $295 million and $302 million in 2017, 2016 and 2015, respectively. Accounts Payable and Other Current Liabilities 2017 2016 Accounts payable Accrued capital expenditures Accrued compensation and benefits Dividends payable Accrued taxes, other than income taxes Other current liabilities $ 119 $ 21 252 — 90 331 142 39 372 106 66 342 Accounts payable and other current liabilities $ 813 $ 1,067 F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 57 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 10 Goodwill and Intangible Assets The changes in the carrying amount of goodwill are as follows: Balance as of December 31, 2015 Goodwill, gross Accumulated impairment losses Goodwill, net Disposals and other, net(a) Balance as of December 31, 2016 Goodwill, gross Accumulated impairment losses Goodwill, net Disposals and other, net(a) Balance as of December 31, 2017 Goodwill, gross Accumulated impairment losses Goodwill, net KFC Pizza Hut Taco Bell Worldwide $ 266 $ 206 $ 113 $ 585 — 266 2 268 — 268 (21) 247 — (17) 189 (32) 174 (17) 157 5 179 (17) — 113 (2) 111 — 111 (8) 103 — (17) 568 (32) 553 (17) 536 (24) 529 (17) $ 247 $ 162 $ 103 $ 512 (a) 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 2017 and 2016 are as follows: Definite-lived intangible assets Reacquired franchise rights Franchise contract rights Lease tenancy rights Other Indefinite-lived intangible assets KFC trademark K - 0 1 m r o F 2017 2016 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ (42) (77) (6) (25) $ (150) $ $ $ 60 100 32 37 229 31 $ $ $ 83 99 56 36 $ (49) (73) (9) (23) 274 $ (154) 31 Amortization expense for all definite-lived intangible assets was $10 million in 2017, $12 million in 2016 and $13 million in 2015. Amortization expense for definite-lived intangible assets is expected to approximate $7 million in 2018, $7 million in 2019, $6 million in 2020, $6 million in 2021 and $6 million in 2022. 58 YUM! BRANDS, INC. - 2017 Form 10-K NOTE 11 Short-term Borrowings and Long-term Debt PART II ITEM 8 Financial Statements and Supplementary Data Short-term Borrowings Current maturities of long-term debt Other Less current portion of debt issuance costs and discounts Short-term borrowings Long-term Debt Securitization Notes Subsidiary Senior Unsecured Notes Term Loan A Facility Term Loan B Facility YUM Senior Unsecured Notes Capital lease obligations (See Note 12) Less debt issuance costs and discounts Less current maturities of long-term debt Long-term debt 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 (the 3.832% Fixed Rate Senior Secured Notes, Class A-2-I “Class A-2-I Notes”), $500 million of its Series 2016-1 4.377% Fixed Rate Senior Secured Notes, Class A-2-II (the “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 “Class A-2-III Notes” and, together with the Class A-2-I Notes and the Class A-2-II Notes, the “Class A-2 Notes”). In connection with the issuance of the 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 Class A-2 Notes and the Variable Funding Notes are referred to collectively as the “Securitization Notes”. The 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 the “Indenture”) allow the Issuer to issue additional series of notes. On October 16, 2017, the Issuer terminated the Variable Funding Notes. (collectively, the “Securitization Entities”) 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, 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 2017 2016 386 $ — 386 $ (11) 375 $ 66 8 74 (8) 66 2,271 $ 2,294 $ $ $ $ 2,850 500 1,975 2,200 105 9,901 (86) (386) 2,100 500 1,990 2,200 120 9,204 (79) (66) $ 9,429 $ 9,059 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. restaurants, fiscal quarters of either 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 including both company and franchise operated restaurants. Interest on and principal payments of the Class A-2 Notes are due on a quarterly basis. In general, no amortization of principal of the Class A-2 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 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 date of the Notes is in May 2046, but the anticipated repayment dates of the Class A-2-I Notes, the Class A-2-II Notes and the Class A-2-III Notes will be 4, 7 and 10 years, respectively (the “Anticipated Repayment Dates”) from the date of issuance. If the Issuer has not repaid or refinanced a series of Class A-2 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 Class A-2 Notes, as stated in the Indenture. The Company paid debt issuance costs of $31 million in connection with the 2016 issuance of the Securitization Notes. 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, 2017, the effective interest rates, including the amortization of debt issuance costs, were 4.18%, 4.59%, and 5.14% for the Class A-2-I Notes, YUM! BRANDS, INC. - 2017 Form 10-K 59 F o r m 1 0 - K PART II ITEM 8 Financial Statements and Supplementary Data Class A-2-II Notes and Class A-2-III Notes, respectively. During 2017, $2 million of unamortized debt issuance costs were recognized within Interest expense, net due to 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 Class A-2 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 Class A-2 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, failure of breaches of specified representations and warranties, 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, 2017, 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, 2017, the Company had restricted cash of $60 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, 2017, 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 60 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F Facility are collectively referred to as the “Credit Agreement”. There are no outstanding borrowings under the Revolving Facility and $4 million of letters of credit outstanding as of December 31, 2017. 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 plus 1.00%, 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. reduced the interest 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 rate Credit Agreement. The amendment 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. 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 the secured by first priority liens on substantially all assets of 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 this type. The Credit default limitations on certain Agreement contains, among other additional indebtedness and liens, and certain other transactions specified in the agreement. We were in compliance with all debt covenants as of December 31, 2017. that are customary for facilities of things, 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 (together, the “Subsidiary Senior Unsecured Notes”). Interest on each series of Subsidiary Senior Unsecured Notes is payable semi-annually in arrears on June 1 and December 1, beginning on December 1, 2016. Additionally, on June 15, 2017, the Borrowers issued $750 million aggregate principal amount of 4.75% Senior Notes due June 1, 2027 (the “2027 Notes”). Interest on the 2027 Notes is payable semi- annually in arrears on June 1 and December 1, beginning on December 1, 2017. 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, 2017. During 2016, the Company paid debt issuance costs of $56 million in the Credit Agreement and the connection with the issuance of PART II ITEM 8 Financial Statements and Supplementary Data 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, $8 million of fees and unamortized debt issuance costs were recognized within Interest expense, net due to the repricings in the year ended December 31, 2017. As of December 31, 2017, 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 13), were 5.16%, 5.39%, 4.90%, 3.24%, and 3.82% 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 2019 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, 2017: Issuance Date(a) October 2007 October 2007 August 2009 August 2010 August 2011 October 2013 October 2013 Maturity Date March 2018 November 2037 September 2019 November 2020 November 2021 November 2023 November 2043 Principal Amount (in millions) Interest Rate Stated Effective(b) $ $ $ $ $ $ $ 325 325 250 350 350 325 275 6.25% 6.88% 5.30% 3.88% 3.75% 3.88% 5.35% F o r m 1 0 - K 6.36% 7.45% 5.59% 4.01% 3.88% 4.01% 5.42% (a) (b) Interest payments commenced approximately six months after issuance date and are payable semi-annually thereafter. 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. YUM! BRANDS, INC. - 2017 Form 10-K 61 PART II ITEM 8 Financial Statements and Supplementary Data The annual maturities of short-term borrowings and long-term debt as of December 31, 2017, excluding capital lease obligations of $105 million are as follows: Year ended: 2018 2019 2020 2021 2022 Thereafter Total $ 380 318 1,190 441 410 7,057 $ 9,796 Interest expense on short-term borrowings and long-term debt was $473 million, $331 million and $153 million in 2017, 2016 and 2015, respectively. NOTE 12 Leases At December 31, 2017, we operated 1,481 restaurants, leasing the underlying land and/or building in approximately 900 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 approximately 900 units to franchisees, principally in the U.S., United Kingdom, Germany, Australia and France. We also lease office space for headquarters and support functions, as well as certain office and restaurant equipment. We do not consider our individual operations. Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance. leases material these any to of Future minimum commitments and amounts to be received as lessor or sublessor under non cancelable leases are set forth below: 2018 2019 2020 2021 2022 Thereafter Commitments Lease Receivables Capital Operating Direct Financing Operating $ $ 13 13 12 11 11 76 $ 136 $ 124 111 87 75 67 435 899 $ $ 5 4 4 3 3 24 43 $ $ 64 58 51 47 44 415 679 At December 31, 2017 and December 31, 2016, the present value of minimum payments under capital $120 million, respectively. At December 31, 2017, unearned income associated with direct financing lease receivables was $12 million. leases was $105 million and The details of rental expense and income are set forth below: K - 0 1 m r o F Rental expense Minimum Contingent Rental income 62 YUM! BRANDS, INC. - 2017 Form 10-K 2017 2016 2015 $ $ $ 193 $ 208 $ 225 21 214 86 $ $ 26 234 73 $ $ 29 254 73 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 13 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 have entered into interest rate swaps with the objective of reducing our exposure to interest rate risk for our variable-rate debt interest payments related to $1.55 billion of 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 and the notional amount, maturity date and variable rate of these swaps match those of the related debt. These interest rate swaps are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of December 31, 2017. The effective portion of gains or losses on the interest rate swaps is reported as a component of AOCI and reclassified into Interest expense, net in our Consolidated Statement of Income in the same period or periods during which the related hedged interest payments affect earnings. Gains or losses on the swaps representing hedge earnings. As of ineffectiveness December 31, 2017, the swaps were highly effective cash flow hedges and no ineffectiveness has been recorded. recognized in current are 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. to offset The effective portion of gains or losses on the foreign currency contracts is reported as a component of AOCI. Amounts are reclassified from AOCI each quarter 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. Gains or losses on the foreign currency contracts representing hedge ineffectiveness earnings. As of December 31, 2017, all foreign currency contracts outstanding have been highly effective cash flow hedges and no ineffectiveness has been recorded. recognized in current are As of December 31, 2017 and December 31, 2016, foreign currency forward and swap contracts outstanding had total notional amounts of $456 million and $437 million, respectively. As of December 31, 2017, we have foreign currency forward and swap contracts with durations expiring as early as February 2018 and as late as 2020. fail to meet the counterparties will into contracts with carefully selected major As a result of the use of derivative instruments, the Company is exposed to risk that their contractual obligations. To mitigate the counterparty credit risk, we financial only enter institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At December 31, 2017, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings ratings agencies. To date, all according to the three major counterparties have performed in accordance with their contractual obligations. Gains and losses on derivative instruments designated as cash flow hedges recognized in AOCI and reclassifications from AOCI Income: into Net Interest rate swaps Foreign currency contracts Income tax benefit/(expense) F o r m 1 0 - K Gains/(Losses) Recognized in AOCI (Gains)/Losses Reclassified from AOCI into Net Income 2017 2016 2017 2016 $ 4 $ (56) 1 $ 47 10 (20) 2 56 (3) $ (4) (18) 4 As of December 31, 2017, 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 $14 million, based on current LIBOR interest rates. See Note 14 for the fair value of our derivative assets and liabilities. YUM! BRANDS, INC. - 2017 Form 10-K 63 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 14 Fair Value Disclosures As of December 31, 2017 the carrying values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, 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: Debt obligations Securitization Notes(a) Subsidiary Senior Unsecured Notes(b) Term Loan A Facility(b) Term Loan B Facility(b) YUM Senior Unsecured Notes(b) 12/31/2017 12/31/2016 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) $ 2,271 $ 2,367 $ 2,294 $ 2,315 2,850 500 1,975 2,200 2,983 503 1,990 2,277 2,100 500 1,990 2,200 2,175 501 2,016 2,216 (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 forwards and swaps accounted for as cash flow hedges and other investments, all of which are required to be measured at fair value on a recurring basis (See Note 13 for discussion regarding derivative instruments). 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. No transfers among the levels within the fair value hierarchy occurred during the years ended December 31, 2017 or December 31, 2016. Interest Rate Swaps—Liability Interest Rate Swaps—Asset Interest Rate Swaps—Asset Foreign Currency Contracts—Liability Foreign Currency Contracts—Asset Foreign Currency Contracts—Asset Other Investments K - 0 1 m r o F Fair Value 2017 Level 2016 Consolidated Balance Sheet 2 2 2 2 2 2 1 $ — $ 3 Accounts payable and other current liabilities 9 40 46 5 — 29 — Prepaid expenses and other current assets 47 Other assets — Other Liabilities and deferred credits 6 Prepaid expenses and other current assets 10 Other assets 24 Other assets The fair value of the Company’s foreign currency forwards and swaps 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 upon observable inputs. The other investments include investments in mutual funds, which are used to offset fluctuations in deferred compensation liabilities that employees have chosen to invest in phantom shares of a Stock Index Fund or Bond Index Fund. The other investments are classified as trading securities in Other assets in our Consolidated Balance Sheet and their fair value is determined based on the closing market prices of the respective mutual funds as of December 31, 2017 and December 31, 2016. Non-Recurring Fair Value Measurements The recognized from all non-recurring fair value measurements during the years ended December 31, 2017 and December 31, 2016. These amounts following table presents expense Aircraft impairment(a) Restaurant-level impairment(b) Total 64 YUM! BRANDS, INC. - 2017 Form 10-K 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, 2017 and December 31, 2016 is insignificant. 2017 $ — 2 2 $ 2016 $ $ 3 9 12 PART II ITEM 8 Financial Statements and Supplementary Data (a) During 2016, we made the decision to dispose of a corporate aircraft. The loss associated with this then planned sale reflected the shortfall of the expected proceeds, less any selling costs, over the carrying value of the aircraft. The expected proceeds were based on actual bids received from potential buyers for similar assets (Level 2). (b) Restaurant-level impairment charges are recorded in Closures and impairment (income) expenses 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). NOTE 15 Pension, Retiree Medical and Retiree Savings Plans and sponsor qualified supplemental U.S. Pension Plans We (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. Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan amendments Curtailments Special termination benefits Benefits paid Settlement payments(a) Actuarial (gain) loss Administrative expense Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Settlement payments(a) Benefits paid Administrative expenses Fair value of plan assets at end of year Funded status at end of year We do not expect to make any significant contributions to the Plan in 2018. 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 2018 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. 2017 2016 $ 993 $ 1,134 10 41 2 (2) 2 (76) (73) 115 (5) 17 54 4 (4) 3 (26) (260) 77 (6) F o r m 1 0 - K $ 1,007 $ 993 $ $ $ 837 129 52 (73) (76) (5) 864 (143) $ 1,004 87 38 (260) (26) (6) 837 (156) $ $ (a) For discussion of the settlement payments made in connection with the deferred vested program in 2016, see Note 5. YUM! BRANDS, INC. - 2017 Form 10-K 65 PART II ITEM 8 Financial Statements and Supplementary Data Amounts recognized in the Consolidated Balance Sheet: Accrued benefit liability—current Accrued benefit liability—non-current 2017 2016 $ (8) $ (16) (135) (140) $ (143) $ (156) The accumulated benefit obligation was $976 million and $960 million at December 31, 2017 and December 31, 2016, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Information for pension plans with a projected benefit obligation in excess of plan assets: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Components of net periodic benefit cost: Service cost Interest cost Amortization of prior service cost(a) Expected return on plan assets Amortization of net loss Net periodic benefit cost Additional (gain) loss recognized due to: Settlement charges(b) Special termination benefits Pension data adjustment(c) 2017 2016 $ 1,007 $ 993 976 864 960 837 2017 2016 $ 1,007 $ 993 976 864 960 837 2017 $ 10 2016 $ 17 41 6 (45) 5 54 6 (65) 6 2015 $ 18 55 1 (62) 45 $ 17 $ 18 $ 57 $ 19 $ 2 $ 22 $ 32 $ 3 $ — $ $ 5 1 $ — (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. K - 0 1 m r o F Pension gains (losses) in AOCI: Beginning of year Net actuarial gain (loss) Curtailments Amortization of net loss Amortization of prior service cost Prior service cost Settlement charges End of year 66 YUM! BRANDS, INC. - 2017 Form 10-K 2017 2016 $ (180) $ (170) (10) 2 5 6 (2) 19 (54) 4 6 6 (4) 32 $ (160) $ (180) Accumulated pre-tax losses recognized within AOCI: Actuarial net loss Prior service cost PART II ITEM 8 Financial Statements and Supplementary Data 2017 2016 $ (134) $ (150) (26) (30) $ (160) $ (180) The estimated net loss that will be amortized from AOCI into net periodic pension cost in 2018 is $16 million. The estimated prior service cost that will be amortized from AOCI into net periodic pension cost in 2018 is $6 million. Weighted-average assumptions used to determine benefit obligations at the measurement dates: Discount rate Rate of compensation increase Weighted-average assumptions used to determine the net periodic benefit cost for fiscal years: Discount rate Long-term rate of return on plan assets Rate of compensation increase (a) Reflects a weighted average due to interim remeasurements in 2017. 2017 2016 3.90% 3.75% 4.60% 3.75% 2017(a) 2016 2015 4.53% 6.06% 3.75% 4.90% 6.75% 3.75% 4.30% 6.75% 3.75% 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, 2017 and December 31, 2016 by asset category and level within the fair value hierarchy are as follows: Level 1: Cash Cash Equivalents(a) Fixed Income Securities—U.S. Corporate(b) Equity Securities—U.S. Large cap(b) Equity Securities—U.S. Mid cap(b) Equity Securities—U.S. Small cap(b) Equity Securities—Non-U.S.(b) Level 2: Fixed Income Securities—U.S. Corporate(c) Fixed Income Securities—U.S. Government and Government Agencies(d) Fixed Income Securities—Other(d) Total fair value of plan assets(e) (a) Short-term investments in money market funds. (b) Securities held in common trusts. (c) (d) (e) 2017 and 2016 exclude net unsettled trade payables of $56 million and $19 million, respectively. Investments held directly by the Plan. Includes securities held in common trusts and investments held directly by the Plan. 2017 2016 $ 3 12 177 257 43 43 87 86 177 35 $ 2 12 172 244 41 43 83 76 152 31 $ 920 $ 856 F o r m 1 0 - K 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 YUM! BRANDS, INC. - 2017 Form 10-K 67 PART II ITEM 8 Financial Statements and Supplementary Data 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, 2017 and December 31, 2016 (less than 1% of total plan assets in each instance). 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. 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: Year ended: 2018 2019 2020 2021 2022 2023 - 2027 $ 65 37 39 42 44 257 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 2017 and 2016, the projected benefit obligations of these UK plans totaled $287 million and $261 million, respectively and plan assets totaled $358 million and $305 million, respectively. These plans were both in a net overfunded position at the end of 2017 and 2016 and related expense amounts recorded in each of 2017, 2016 and 2015 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 2018. K - 0 1 m r o F At the end of both 2017 and 2016, the accumulated post-retirement benefit obligation was $55 million. Actuarial gains of $8 million and $10 million were recognized in AOCI at the end of 2017 and 2016, respectively. The net periodic benefit cost recorded was $2 million in 2017 and $3 million in both 2016 and 2015, the majority of which is benefit accumulated interest obligation. The weighted-average assumptions used to determine benefit obligations and net periodic benefit cost the post- retirement medical plan are identical to those as shown for the U.S. pension plans. Our assumed heath care cost trend rates for the following year as of 2017 and 2016 are 6.3% and 6.6%, respectively, with expected ultimate trend rates of 4.5% reached in 2038. post-retirement cost the for on There is a cap on our medical liability for certain retirees. The cap for Medicare-eligible retirees was reached in 2000 and the cap for non-Medicare eligible retirees was reached in 2014; with the cap, our annual cost per retiree will not increase. A one-percentage-point increase or decrease in assumed health care cost trend rates would have no impact on total service and interest cost or on the post- retirement benefit obligation. The benefits expected to be paid in each of the next five years are approximately $5 million and in aggregate for the five years thereafter are $17 million. for eligible U.S. “401(k) Plan”) Retiree Savings Plan We sponsor a contributory plan to provide retirement benefits under the Internal Revenue Code the provisions of Section 401(k) of (the 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 $13 million in 2017, $14 million in 2016 and $13 million in 2015. salaried and NOTE 16 Share-based and Deferred Compensation Plans Overview At year end 2017, 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 expire ten years after grant. At year end 2017, 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 the amounts deferred with defined by the EID Plan, we credit 68 YUM! BRANDS, INC. - 2017 Form 10-K the appreciation or 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 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 depreciation, investments in phantom shares of our if any, of 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 over the requisite service period which includes the vesting period. the appreciation or 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 2018. 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. 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. 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. The shareholder method was based on the premise that employees holding YUM awards prior to the Separation should receive an equal number of awards of both YUM and Yum China. For stock options and SARs, exercise prices of these post-Separation YUM and Yum China awards were established that, on a combined basis, to the maintained the intrinsic value on the YUM award prior Separation. The exercise prices provided for an initial intrinsic value in each of the post-Separation YUM and YUM China awards that was the two companies on proportionate to the market value of November 1, 2016. For RSUs and PSUs modified under the shareholder method, each YUM award was modified into one YUM award and one Yum China award. Under the employer method, employees holding YUM awards prior to the Separation had their awards converted into awards of the company that they worked for subsequent to the Separation. For stock options and SARs modified under the employer method, the exercise prices of the awards were modified to maintain the pre-Separation intrinsic value of the awards in relation to the post- PART II ITEM 8 Financial Statements and Supplementary Data Separation stock price of the applicable company. For RSUs and PSUs modified under the employer method, the number of awards was modified to maintain the pre-Separation intrinsic value of the awards in relation to the post-Separation stock price of the applicable company. The modifications to the outstanding equity awards resulted in an insignificant amount of additional compensation expense in the year ended December 31, 2016. Investments in phantom shares of our Common Stock held within our EID Plan by employees that remained with YUM post-Separation that were converted into phantom investments in Yum China at Separation under the shareholder method are allowed to be transferred into cash, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund within the EID Plan. As such, distributions of current investments in phantom shares of Yum China may now be settled in cash, as opposed to stock, at a date as elected by the employee and, therefore, are classified as a liability and remeasured to fair value at each reporting period in our Consolidated Balance Sheet. During 2017 and 2016, we recorded $18 million and $30 million, respectively, within G&A related to these awards (See Note 5). 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: Risk-free interest rate Expected term (years) Expected volatility 2017 2016 2015 1.9% 1.4% 1.3% 6.4 6.4 6.4 22.9% 27.0% 26.9% Expected dividend yield 1.8% 2.6% 2.2% 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 restaurant-level employees and our have determined that 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 awards are based on the closing price of our Common Stock on the date of grant. The fair values of PSU awards with market-based conditions have been valued based on the outcome of a Monte Carlo simulation. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 69 PART II ITEM 8 Financial Statements and Supplementary Data Award Activity Stock Options and SARs Outstanding at the beginning of the year Granted Exercised Forfeited or expired Outstanding at the end of the year Exercisable at the end of the year Shares (in thousands) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in millions) 21,242 2,879 (4,269) (1,567) 18,285(a) 11,971 $ 40.78 67.93 36.45 54.98 44.85 $ 38.07 5.42 4.00 $ 672 $ 521 (a) Outstanding awards include 943 options and 17,342 SARs with weighted average exercise prices of $36.63 and $45.30, 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 2017, 2016 and 2015 was $14.08, $14.40 and $15.95, respectively. The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2017, December 31, 2016 and December 31, 2015, was $154 million, $263 million and $153 million, respectively. As of December 31, 2017, $55 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 of approximately 1.8 years. This reflects unrecognized cost for both YUM and Yum China awards held by YUM employees. The total fair remaining weighted-average period over a value at grant date of awards for both YUM and Yum China awards held by YUM employees that vested during 2017, 2016 and 2015 was $33 million, $41 million and $42 million, respectively. RSUs and PSUs As of December 31, 2017, there was $20 million of unrecognized compensation cost related to 1.0 million unvested RSUs and PSUs. The total fair value at grant date of awards that vested during 2017, 2016 and 2015 was $10 million, $7 million and $11 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: K - 0 1 m r o F Options and SARs Restricted Stock Units Performance Share Units Total Share-based Compensation Expense Deferred Tax Benefit recognized EID compensation expense not share-based 2017 $ 30 26 9 2016 2015 $ 38 $ 41 38 4 3 2 $ 65(a) $ 80(b) $ 46 $ 22(c) $ 12 $ 26 $ 5 $ 15 $ 1 (a) (b) Includes $18 million due to appreciation in the market price of Yum China’s stock. See Note 5. 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 18. Cash received from stock option exercises for 2017, 2016 and 2015, was $12 million, $5 million and $12 million, respectively. Tax benefits realized on our tax returns from tax deductions associated with share-based compensation for 2017, 2016 and 2015 totaled $153 million, $109 million and $62 million, respectively. 70 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 17 Shareholders’ Deficit Under the authority of our Board of Directors, we repurchased shares of our Common Stock during 2017, 2016 and 2015. All amounts exclude applicable transaction fees. Authorization Date November 2017 November 2016 May 2016 March 2016 December 2015 November 2014 November 2013 Total Shares Repurchased (thousands) 2016 2017 2015 Dollar Value of Shares Repurchased 2016 2017 2015 — — — $ — $ — $ 26,561 1,337 — 50,435 — 2,823 — — — — 13,368 932 — — — 13,231 — 1,779 1,915 — — — — — 85 4,200 229 933 — — — — — — 67 1,000 133 26,561(a) 67,963(a) 15,942 $ 1,915(a) $ 5,447(a) $ 1,200 (a) 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 November 16, 2017, our Board of Directors authorized share repurchases through December 2018 of up to $1.5 billion (excluding applicable transaction fees) of our outstanding Common Stock. As of December 31, 2017, we have remaining capacity to repurchase up to $1.5 billion of Common Stock under this authorization. Changes in AOCI are presented below. Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature(a) Pension and Post-Retirement Benefits(b) Derivative Instruments(c) Total Balance at December 31, 2015, net of tax $ (125) $ (113) $ (14) $ (252) Gains (losses) arising during the year classified into AOCI, net of tax (Gains) losses reclassified from AOCI, net of tax OCI, net of tax Separation of China business (153) (11) (164) (47) (41) 27 (14) — 37 (157) (18) 19 — (2) (159) (47) Balance at December 31, 2016, net of tax $ (336) $ (127) $ 5 $ (458) Gains (losses) arising during the year classified into AOCI, net of tax (Gains) losses reclassified from AOCI, net of tax OCI, net of tax 107 55 162 (13) 34 21 Balance at December 31, 2017, net of tax $ (174) $ (106) $ (51) 43 55 4 9 144 187 $ (271) (a) Amounts reclassified from AOCI are due to substantially complete liquidations of foreign entities related to KFC Turkey, Pizza Hut Turkey, Pizza Hut Thailand and Pizza Hut Korea refranchising transactions during 2017 and the Pizza Hut Australia refranchising transaction during 2016. (b) 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. Amounts reclassified from AOCI for pension and post-retirement benefit plan losses during 2016 include amortization of net losses of $6 million, settlement charges of $33 million, amortization of prior service cost of $5 million and related income tax benefit of $17 million. See Note 15. (c) See Note 13 for details on amounts reclassified from AOCI. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 71 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 18 Income Taxes U.S. and foreign income before taxes are set forth below: U.S. Foreign The details of our income tax provision (benefit) are set forth below: Current: Deferred: Federal Foreign State Federal Foreign State 2017 2016 2015 $ 662 $ 1,612 $ 366 979 480 773 $ 2,274 $ 1,345 $ 1,253 2017 2016 2015 $ (2) $ 126 $ 267 290 12 160 13 133 28 $ 300 $ 299 $ 428 $ 603 $ 19 (116) 19 12 3 6 15 — $ 634 $ 28 $ (101) $ 934 $ 327 $ 327 The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below: U.S. federal statutory rate State income tax, net of federal tax benefit 2017 2016 2015 $ 797 35.0% $ 473 35.0% $ 438 35.0% 11 0.5 15 1.1 12 0.9 Statutory rate differential attributable to foreign operations (212) (9.3) (143) (10.5) (175) (13.7) K - 0 1 m r o F Adjustments to reserves and prior years Share-based payments Change in valuation allowances Other, net Tax Act Enactment Effective income tax rate Statutory rate differential attributable to foreign operations. This item includes local taxes, withholding taxes, and shareholder-level taxes, is primarily net of attributable to a majority of our income being earned outside of the U.S. where tax rates are generally lower than the U.S. rate. foreign tax credits. The favorable impact In 2015, this benefit was positively impacted by the repatriation of current year foreign earnings as we recognized excess foreign tax credits, resulting from the related effective foreign tax rate being higher than the U.S. federal statutory 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 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. tax returns, In 2016, uncertain tax positions in the U.S. this item was favorably impacted by the resolution of Share-based payments. 2017 includes a $117 million tax benefit related to the excess tax benefits from share-based payments. These 72 YUM! BRANDS, INC. - 2017 Form 10-K 12 0.5 (117) (5.1) 34 1.5 (25) (1.1) 434 19.1 (11) — (3) (4) — (0.8) — (0.2) (0.3) — 13 — 41 (2) — 1.0 — 3.0 (0.1) — $ 934 41.1% $ 327 24.3% $ 327 26.1% excess benefits were largely associated with deferred compensation payouts to recently retired employees. See Note 2 for discussion related to the adoption of a new accounting standard for share based payments in 2017. 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 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 related to the Tax Act. 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. PART II ITEM 8 Financial Statements and Supplementary Data In 2015, $41 million of net tax expense was driven by $17 million for valuation allowances recorded against deferred tax assets generated in the current year and $24 million in net tax expense 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 impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions. In 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 future foreign earnings are subject to U.S. tax. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 that allows 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. We currently are analyzing the Tax Act and have the effects on our Consolidated made reasonable estimates of Financial Statements and tax disclosures, including the amount of the deemed repatriation tax and changes to our existing deferred tax balances. The deemed repatriation tax is based on our accumulated foreign earnings and profits that we previously deferred from U.S. income taxes. We recorded an estimated amount for our repatriation tax liability of $170 million as of December 31, 2017. In addition, we remeasured certain net deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The estimated amount recorded related to the remeasurement of these balances was a net expense of $75 million. Lastly, we recorded a valuation allowance of $189 million on our remaining foreign tax credit carryforwards which are unlikely to be realized under the U.S. territorial tax system. The estimated total impact upon enactment of the Tax Act is $434 million. We consider the key estimates on the deemed repatriation tax, net deferred tax remeasurement and the impact on our foreign tax credit carryforwards to be incomplete due to our continuing analysis of final year-end data and tax positions. Our analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the Tax Act was passed late in the fourth quarter of 2017, and further guidance and accounting interpretation is expected over the next 12 months, our review is still pending. We expect the amounts recorded upon enactment of the Tax Act within the measurement period of one year. to complete our analysis of The details of 2017 and 2016 deferred tax assets (liabilities) are set forth below: Operating losses Capital losses Tax credit carryforwards Employee benefits Share-based compensation Self-insured casualty claims Lease-related liabilities Various liabilities Property, plant and equipment Deferred income and other Gross deferred tax assets Deferred tax asset valuation allowances Net deferred tax assets Intangible assets, including goodwill Property, plant and equipment Deemed repatriation tax Other Gross deferred tax liabilities Net deferred tax assets (liabilities) Reported in Consolidated Balance Sheets as: Deferred income taxes Other liabilities and deferred credits F o r m 1 0 - K 2017 2016 $ 216 $ 4 311 94 58 7 51 51 24 31 172 184 284 185 100 32 65 56 37 32 847 (421) 1,147 (195) 426 $ 952 (69) $ (107) (18) (170) (36) (46) — (34) (293) $ (187) 133 $ 765 139 $ 772 (6) (7) 133 $ 765 $ $ $ $ $ $ YUM! BRANDS, INC. - 2017 Form 10-K 73 PART II ITEM 8 Financial Statements and Supplementary Data As of December 31, 2017, we had approximately $3.2 billion of unremitted foreign earnings. We have historically reinvested all the unremitted earnings of our foreign subsidiaries and affiliates, and therefore have not recognized any U.S. deferred tax liability on these earnings. However, upon the enactment of the unremitted earnings of our foreign subsidiaries and affiliates are subject to U.S. tax due to the mandatory deemed repatriation tax on accumulated foreign earnings provision. As a result, we recognized a one-time income tax expense of $170 million. Our 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, for our investments in foreign subsidiaries where the carrying values for financial reporting exceed the tax basis, we have not provided taxes, other than U.S. federal taxes, for the portion of the excess that we believe is permanently the Tax Act, intent Foreign U.S. state U.S. federal invested, as we have the ability and intent to indefinitely postpone these basis differences from reversing with a tax consequence. However, if these funds were repatriated, we would be required to accrue and pay applicable income taxes (if any) and withholding taxes payable to various countries. A determination of the deferred tax liability on this amount is not practicable. At December 31, 2017, the Company has foreign operating and capital loss carryforwards of $0.5 billion and U.S. state operating loss and tax credit carryforwards of $1.1 billion and U.S. federal tax credit carryforwards of $0.3 billion. A valuation allowance of $434 million has been recorded against the carryforwards that are not likely to be realized. These losses are being carried forward in jurisdictions where we are permitted to use tax losses from prior periods to reduce future taxable income and will expire as follows: 2018 $ $ 9 — — 9 Year of Expiration 2023-2036 2019-2022 Indefinitely Total $ 46 61 67 $ 85 $ 376 $ 516 1,012 238 — — 1,073 305 $ 174 $ 1,335 $ 376 $ 1,894 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 $100 million and $91 million of unrecognized tax benefits at December 31, 2017 and December 31, 2016, respectively, $10 million and $87 million of which 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: Beginning of Year Additions on tax positions – current year Additions for tax positions – prior years Reductions for tax positions – prior years Reductions for settlements Reductions due to statute expiration Foreign currency translation adjustment End of Year 2017 2016 $ 91 $ 98 3 8 — (1) (1) — — 1 (5) (1) (2) — $ 100 $ 91 The Company believes its unrecognized tax benefits will not materially increase or decrease in the next 12 months. The Company’s income tax returns are subject to examination in the U.S. jurisdiction and numerous U.S. state and foreign federal jurisdictions. The Company has settled audits with the IRS through fiscal year 2010. 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, 2017 and December 31, 2016 are set forth below: K - 0 1 m r o F Accrued interest and penalties During 2017, 2016 and 2015, a net expense of $5 million, a net benefit of $4 million and a net expense of $5 million, respectively, for interest and penalties was recognized in our Consolidated Statements of Income as components of its Income tax provision. its In October 2016, the Company completed the separation of China business into an independent publicly-traded company. The 74 YUM! BRANDS, INC. - 2017 Form 10-K 2017 2016 $ 14 $ 9 tax-free transaction has been treated as qualifying as the reorganization for U.S. Company considered the China indirect income tax on indirect transfers of assets by nonresident enterprises and concluded that it does not apply to the separation transaction. a In addition, income tax purposes. NOTE 19 Reportable Operating Segments See Note 1 for a description of our operating segments. KFC Division(a) Pizza Hut Division(a) Taco Bell Division(a) Unallocated(b)(f) KFC Division Pizza Hut Division Taco Bell Division Unallocated Franchise and license fees and income(b)(f) Unallocated restaurant costs(b)(i) Unallocated Franchise and license expenses(b)(f) Corporate and unallocated G&A expenses(b)(g) Unallocated Refranchising gain (loss)(b) Unallocated Other income (expense)(b)(h) Operating Profit Other pension income (expense)(b)(j) Interest expense, net(b) PART II ITEM 8 Financial Statements and Supplementary Data 2017 Revenues 2016 2015 $ 3,110 $ 3,225 $ 3,222 893 1,880 (5) 1,108 2,025 (2) 1,205 1,991 — $ 5,878 $ 6,356 $ 6,418 Operating Profit; Interest Expense, Net; and Income Before Income Taxes 2017 2016 2015 $ 981 341 619 (5) 10 (30) (230) 1,083 (8) 2,761 (47) (440) $ 871 367 595 (2) — (24) (280) 163 (8) 1,682 (32) (305) $ 835 351 546 — — (71) (180) (23) (24) 1,434 (40) (141) Income from continuing operations before income taxes $ 2,274 $ 1,345 $ 1,253 KFC Division Pizza Hut Division Taco Bell Division Corporate KFC Division Pizza Hut Division Taco Bell Division Corporate F o r m 1 0 - K Depreciation and Amortization 2017 2016 2015 $ 138 $ 172 $ 180 26 82 7 36 90 12 40 89 10 $ 253 $ 310 $ 319 Capital Spending 2017 2016 2015 $ 176 42 95 5 $ 318 $ $ 216 69 132 10 427 $ $ 260 54 116 12 442 YUM! BRANDS, INC. - 2017 Form 10-K 75 PART II ITEM 8 Financial Statements and Supplementary Data KFC Division(e) Pizza Hut Division(e) Taco Bell Division(e) Corporate(c)(e) KFC Division Pizza Hut Division Taco Bell Division Corporate Identifiable Assets 2017 2016 $ 1,791 $ 2,158 628 1,086 1,806 639 1,178 1,478 $ 5,311 $ 5,453 Long-Lived Assets(d) 2017 2016 $ 1,200 $ 1,537 310 778 31 372 859 32 $ 2,319 $ 2,800 (a) U.S. revenues included in the combined KFC, Pizza Hut and Taco Bell Divisions totaled $2.8 billion in 2017, $3.1 billion in 2016 and $3.1 billion in 2015. (b) Amounts have not been allocated to any segment for performance reporting purposes. (c) Primarily includes cash and deferred tax assets. (d) (e) U.S. identifiable assets included in the combined Corporate and KFC, Pizza Hut and Taco Bell Divisions totaled $3.0 billion and $3.1 billion in 2017 Includes PP&E, goodwill, and intangible assets, net. and 2016, 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 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. Amounts in 2016 included costs related to YUM’s Strategic Transformation Initiatives of $61 million and non-cash charges associated with the modifications of share-based compensation awards of $30 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 and $9 million in 2017 and 2016, respectively. See Note 8. (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. Amounts in 2016 include a settlement charge of $24 million related to the Company allowing certain former employees with deferred vested balances in the Yum Retirement Plan an opportunity to voluntarily elect early payout of their pension benefits. See Note 5. K - 0 1 m r o F NOTE 20 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 contingently liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of December 31, 2017, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $600 million. The present value of these potential payments discounted at our pre-tax cost of debt at December 31, 2017 was approximately $500 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 the liability recorded for our probable exposure under such leases at December 31, 2017 and December 31, 2016 was not material. these leases. Accordingly, 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, 2017 our guarantee exposure under this program is $3 million based on total loans outstanding of $15 million. In addition to the guarantees described above, YUM has agreed to provide guarantees of up to $43 million on behalf of franchisees for several financing programs related to equipment purchases and refranchising. At December 31, 2017, our guarantee exposure under loans these financing programs is $10 million based on total outstanding of $31 million. 76 YUM! BRANDS, INC. - 2017 Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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, loss up to defined maximum per we self-insure the risks of 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 2017 and 2016 activity related to our net self-insured property and casualty reserves as of December 31, 2017. 2017 Activity 2016 Activity Beginning Balance Expense Payments Ending Balance $ 98 $ 102 27 42 (41) (46) $ 84 $ 98 it Due to the inherent volatility of actuarially determined property and casualty loss estimates, 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 21 Selected Quarterly Financial Data (Unaudited) Revenues: Company sales Franchise and license fees and income Total revenues Restaurant profit Operating Profit(a) Net Income Basic earnings per common share from continuing operations Diluted earnings per common share from continuing operations Dividends declared per common share First Quarter Second Quarter Third Quarter Fourth Quarter Total 2017 $ 902 515 1,417 144 484 280 0.78 0.77 0.30 $ 909 539 1,448 161 419 206 0.59 0.58 0.30 $ 871 565 1,436 154 643 418 1.21 1.18 — $ 890 $ 3,572 687 1,577 159 1,215 436 2,306 5,878 618 2,761 1,340 1.29 3.86 1.26 0.30 3.77 0.90 F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 77 PART II ITEM 8 Financial Statements and Supplementary Data First Quarter Second Quarter Third Quarter Fourth Quarter Total 2016 Revenues: Company sales Franchise and license fees and income Total revenues Restaurant profit Operating Profit(b) Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net Income Basic earnings per common share from continuing operations Basic earnings (loss) per common share from discontinued operations Basic earnings per common share Diluted earnings per common share from continuing operations Diluted earnings (loss) per common share from discontinued operations Diluted earnings per common share Dividends declared per common share $ 953 490 1,443 148 349 226 138 364 0.55 0.33 0.88 0.54 0.33 0.87 0.46 $ 1,006 $ 503 1,509 167 415 266 70 336 0.65 0.17 0.82 0.64 0.17 0.81 0.46 992 526 1,518 161 398 218 422 640 0.56 1.09 1.65 0.55 1.07 1.62 0.51 $ 1,238 $ 4,189 648 1,886 224 520 308 (5) 303 0.84 (0.01) 0.83 0.83 (0.01) 0.82 0.30 2,167 6,356 700 1,682 1,018 625 1,643 2.58 1.59 4.17 2.54 1.56 4.10 1.73 (a) (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, costs associated with YUM’s Strategic Transformation Initiatives of $7 million, $4 million, $4 million and $8 million in the first, second, third and fourth quarters, respectively, costs associated with the Pizza Hut U.S. Transformation Agreement of $12 million, $8 million and $11 million in the second, third and fourth quarters, respectively, costs associated with the KFC U.S. Acceleration Agreement of $3 million, $5 million, $4 million and $5 million in the first, second, third and fourth quarters, respectively and non-cash charges associated with the modification of share-based compensation awards in connection with the Separation of $2 million and $16 million in the first and second quarters, respectively. Includes net gains from refranchising initiatives of $54 million, $21 million and $88 million in the second, third and fourth quarters, respectively, costs associated with YUM’s Strategic Transformation Initiatives of $4 million, $30 million and $33 million in the second, third and fourth quarters, respectively, a non-cash charge primarily associated with the modification of share-based compensation awards in connection with the Separation of $30 million in the fourth quarter and costs associated with KFC U.S. Acceleration Agreement of $9 million, $8 million and $9 million in the first, second and fourth quarters, respectively. See Note 5. K - 0 1 m r o F NOTE 22 Subsequent Events On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub Inc. (“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, subject to customary closing conditions. In connection with the closing of the investment, Grubhub has agreed to appoint a YUM representative to Grubhub’s Board of Directors. We expect the investment to occur prior to the end of the first quarter of 2018. the closing of 78 YUM! BRANDS, INC. - 2017 Form 10-K PART II 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 supervision and with the the evaluation, performed under including the Chief participation of the Company’s management, 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 issued by the Internal Control – Integrated Framework (2013) Treadway the Committee of Sponsoring Organizations of Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework (2013), our management concluded that our reporting was effective as of December 31, 2017. internal control over financial 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, 2017. F o r m 1 0 - K ITEM 9B Other Information None. YUM! BRANDS, INC. - 2017 Form 10-K 79 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, 2017. 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, 2017. 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, 2017. K - 0 1 m r o F 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, 2017. 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, 2017. 80 YUM! BRANDS, INC. - 2017 Form 10-K PART IV ITEM 15 Exhibits and Financial Statement Schedules (a) (1) (2) (3) Financial Statements: Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. 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. 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. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 81 PART IV 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 21, 2018 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. Signature Title Date /s/ Greg Creed Greg Creed /s/ David W. Gibbs David W. Gibbs Chief Executive Officer (principal executive officer) February 21, 2018 President and Chief Financial Officer (principal financial officer) February 21, 2018 /s/ David E. Russell David E. Russell Senior Vice President, Finance and Corporate Controller (principal accounting officer) /s/ Paget L. Alves Paget L. Alves Director /s/ Michael J. Cavanagh Michael J. Cavanagh Director /s/ Christopher M. Connor Christopher M. Connor Director /s/ Brian C. Cornell Brian C. Cornell /s/ Tanya L. Domier Tanya L. Domier Director Director /s/ Mirian M. Graddick-Weir Mirian M. Graddick-Weir Director /s/ Thomas C. Nelson Thomas C. Nelson /s/ P. Justin Skala P. Justin Skala /s/ Elane B. Stock Elane B. Stock /s/ Robert D. Walter Robert D. Walter Director Director Director Director K - 0 1 m r o F 82 YUM! BRANDS, INC. - 2017 Form 10-K February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 February 21, 2018 PART IV YUM! Brands, Inc. Exhibit Index (Item 15) Exhibit Number Description of Exhibits 2.1 3.1 3.2 4.1 Separation and Distribution Agreement, dated as of October 31, 2016, by and among YUM, Yum Restaurants Consulting (Shanghai) Company Limited and Yum China Holdings, Inc., which is incorporated herein by reference from Exhibit 2.1 to YUM’s Report on Form 8-K filed on November 3, 2016. Restated Articles of Incorporation of YUM, effective May 26, 2011, which is incorporated herein by reference from Exhibit 3.1 to YUM’s Report on Form 8-K filed on May 31, 2011. Amended and restated Bylaws of YUM, effective July 15, 2016, which are incorporated herein by reference from Exhibit 3.1 to YUM’s Report on Form 8-K filed on July 19, 2016. Indenture, dated as of May 1, 1998, between YUM and The Bank of New York Mellon Trust Company, N.A., successor in interest to The First National Bank of Chicago, which is incorporated herein by reference from Exhibit 4.1 to YUM’s Report on Form 8-K filed on May 13, 1998. (i) (ii) (iii) (iv) (v) (vi) (vii) 6.25% Senior Notes due March 15, 2018 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 (included in Exhibit 4.1) to YUM’s Report on Form 8-K filed on October 22, 2007. 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’s Report on Form 8-K filed on October 22, 2007. 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’s Report on Form 8-K filed on August 25, 2009. 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’s Report on Form 8-K filed on August 31, 2010. 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’s Report on Form 8-K filed August 29, 2011. 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’s Report on Form 8-K filed October 31, 2013. 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’s Report on Form 8-K filed October 31, 2013. 10.1 10.1.1 10.1.2 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 & 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, Cooperatieve 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’s Quarterly Report on Form 10-Q for the quarter ended June 11, 2016. 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’s Report on Form 8-K as filed on March 23, 2017. 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’s Report on Form 8-K as filed on June 8, 2017. 10.2† YUM Director Deferred Compensation Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.7 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 83 PART IV ITEM 15 Exhibit Index Exhibit Number Description of Exhibits 10.2.1† 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’s Quarterly Report on Form 10-Q for the quarter ended June 13, 2009. 10.3† 10.4† 10.4.1† 10.5† 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’s Definitive Proxy Statement on Form DEF 14A for the Annual Meeting of Shareholders held on May 21, 2009. 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’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. 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’s Quarterly Report on Form 10-Q for the quarter ended June 13, 2009. 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’s Quarterly Report on Form 10-Q for the quarter ended March 19, 2011. 10.5.1† 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. 10.6† 10.7† 10.8† 10.9† 10.10† 10.11† Form of Directors’ Indemnification Agreement, which is incorporated herein by reference from Exhibit 10.17 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997. Form of YUM! Brands, Inc. Change in Control Severance Agreement, which is incorporated herein by reference from Exhibit 10.1 to Yum’s Report on Form 8-K filed on March 21, 2013. 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. 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’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Form of YUM Director Stock Option Award Agreement, which is incorporated herein by reference from Exhibit 10.25 to YUM’s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004. Form of YUM 1999 Long Term Incentive Plan Award Agreement, which is incorporated herein by reference from Exhibit 10.26 to YUM’s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004. 10.11.1† 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’s Quarterly Report on Form 10-Q for the quarter ended March 23, 2013. 10.11.2† 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’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014. 10.12† 10.13† YUM! Brands, Inc. International Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.27 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004. Form of 1999 Long Term Incentive Plan Award Agreement (Stock Appreciation Rights) which is incorporated by reference from Exhibit 99.1 to YUM’s Report on Form 8-K as filed on January 30, 2006. 10.13.1† 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’s Quarterly Report on Form 10-Q for the quarter ended March 23, 2013. 10.13.2† 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’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014. 10.14† YUM! Brands Leadership Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.32 to YUM’s Quarterly Report on Form 10-Q for the quarter ended March 24, 2007. 10.14.1† 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’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009. 10.15† 10.16† 10.17† YUM! Performance Share Plan, as amended and restated January 1, 2013, which is incorporated by reference from Exhibit 10.1 to YUM’s Quarterly Report on Form 10-Q for the quarter ended June 13, 2015. YUM! Brands Third Country National Retirement Plan, as effective January 1, 2009, which is incorporated by reference from Exhibit 10.25 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009. 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’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009. 84 YUM! BRANDS, INC. - 2017 Form 10-K K - 0 1 m r o F PART IV ITEM 15 Exhibit Index Exhibit Number Description of Exhibits 10.18† 10.19† 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 12.1 21.1 23.1 31.1 31.2 32.1 32.2 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’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014. YUM! Brands, Inc. Compensation Recovery Policy, Amended and Restated January 1, 2015, which is incorporated herein by reference from Exhibit 10.28 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014. 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’s Report on Form 8-K filed on June 21, 2016. 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’s Report on Form 8-K filed on June 16, 2017. 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’s Report on Form 8-K filed on May 16, 2016. 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’s Report on Form 8-K filed on May 16, 2016. 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’s Report on Form 8-K filed on May 16, 2016. 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’s Report on Form 8-K filed on May 16, 2016. 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’s Report on Form 8-K filed on November 3, 2016. 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’s Report on Form 8-K filed on November 3, 2016. Computation of ratio of earnings to fixed charges. Active Subsidiaries of YUM. Consent of KPMG LLP. 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. 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. 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. 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. 101.INS Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document † Indicates a management contract or compensatory plan. F o r m 1 0 - K YUM! BRANDS, INC. - 2017 Form 10-K 85 [THIS PAGE INTENTIONALLY LEFT BLANK] Cautionary Language Regarding Forward-Looking Statements are “will,” “model,” “project,” “ongoing,” appropriate under are statements” within report may contain Forward-Looking Statements. This of the meaning “forward-looking 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,” “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 the believe reasonable and circumstances. neither Forward-looking statements predictions nor guarantees of future events, circumstances or to known and performance and are inherently subject 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 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 refranchising strategy generally; 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; labor and other operating costs; changes in commodity, 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, expectations, assumptions estimates, should statements including disagreements with taxing authorities; consumer preferences and perceptions of our brands; changes in consumer discretionary spending and general economic food industry; and conditions; competition within the retail 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 the understanding of inherent uncertainty. The forward- looking statements included in this report are only made as of this report and we disclaim any obligation to the date of 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” 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. evaluated with in our most their be 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 accuracy or and cannot completeness. the data’s you of assure 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.yum.com/ investors. 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, lost certificates and other administrative matters to: changes, address Computershare, Inc. 462 South 4th 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 (cid:129) Access account balance and other general account information (cid:129) Change an account’s mailing address (cid:129) View a detailed list of holdings represented by certificates and the identifying certificate numbers (cid:129) Request a certificate for shares held at Computershare (cid:129) Replace a lost or stolen certificate (cid:129) Retrieve a duplicate Form 1099-B (cid:129) Purchase shares of YUM through the Company’s Direct Stock Purchase Plan (cid:129) 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 INDEPENDENT AUDITORS A prospectus and a brochure explaining this convenient plan are available from our transfer agent: Computershare, Inc. 462 South 4th 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: 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. Mr. Keith Siegner Vice President, Investor Relations, Corporate Strategy & Treasurer Yum! Brands, Inc. 1900 Colonel Sanders Lane Louisville, KY 40213 Phone: (888) 298-6986 Franchise Inquiries ONLINE FRANCHISE INFORMATION Information about potential franchise opportunities is available at www.yumfranchises.com 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 SENIOR OFFICERS Greg Creed 60 Chief Executive Officer, Yum! Brands, Inc. Paget L. Alves 63 Former Chief Sales Officer, Sprint Corporation Michael J. Cavanagh 52 Senior Executive Vice President and Chief Financial Officer, Comcast Corporation Christopher M. Connor 62 Former Executive Chairman of the Sherwin-Williams Company Brian C. Cornell 59 Chairman and Chief Executive Officer, Target Corporation Tanya L. Domier 52 Chief Executive Officer, Advantage Solutions, Inc. Greg Creed 60 Chief Executive Officer, Yum! Brands, Inc. Roger Eaton 57 Chief Executive Officer, KFC David W. Gibbs 55 President and Chief Financial Officer, Yum! Brands, Inc. Marc L. Kesselman 46 General Counsel, Corporate Secretary and Chief Government Affairs Officer, Yum! Brands, Inc. David E. Russell 48 Senior Vice President, Finance and Corporate Controller, Yum! Brands, Inc. Keith Siegner 43 Vice President, Investor Relations, Corporate Strategy and Treasurer, Yum! Brands, Inc. Mirian M. Graddick-Weir 63 Executive Vice President Human Resources, Merck & Co., Inc. Tracy Skeans 45 Chief Transformation and People Officer, Yum! Brands, Inc. Thomas C. Nelson 55 Chairman, Chief Executive Officer and President, National Gypsum Company P. Justin Skala 58 Chief Operating Officer of North America, Europe, Africa/Eurasia and Global Sustainability, Colgate-Palmolive Company Elane B. Stock 53 Former Group President, Kimberly-Clark International Robert D. Walter 72 Non-Executive Chairman, Founder and Retired Chairman/CEO, Cardinal Health, Inc.