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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________

FORM 10-Q

(Mark One)
[Ÿ]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2018
 
 
 
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
 
13-3951308
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
1441 Gardiner Lane, Louisville, Kentucky
 
40213
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
Registrant’s telephone number, including area code:  (502) 874-8300

Indicate by check mark 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. Yes [ü]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ü] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer:
[ü]
 
Accelerated filer:
[  ]
 
 
 
 
 
Non-accelerated filer: 
[  ]
(Do not check if a smaller reporting company)
Smaller reporting company: 
[  ]
 
 
 
 
 
Emerging growth company: 
[  ]
 
 
 

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. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [ü]

The number of shares outstanding of the Registrant’s Common Stock as of May 2, 2018 was 323,217,129 shares.
 




YUM! BRANDS, INC.

INDEX
 
 
 
Page
 
 
No.
Part I.
Financial Information
 
 
 
 
 
Item 1 - Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Income
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2 - Management’s Discussion and Analysis of Financial Condition
              and Results of Operations
 
 
 
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
Item 4 – Controls and Procedures
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
Part II.
Other Information and Signatures
 
 
 
 
 
Item 1 – Legal Proceedings
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 6 – Exhibits
 
 
 
 
Signatures


2



PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements
 

3



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)
 
 
 
 
Quarter ended
Revenues
3/31/2018
 
3/31/2017
Company sales
$
512


$
902

Franchise and property revenues
584


515

Franchise contributions for advertising and other services
275

 

Total revenues
1,371

 
1,417

Costs and Expenses, Net
 
 
 
Company restaurant expenses
438

 
758

General and administrative expenses
219


237

Franchise and property expenses
47


46

Franchise advertising and other services expense
272

 

Refranchising (gain) loss
(156
)

(111
)
Other (income) expense
(2
)

3

Total costs and expenses, net
818


933

Operating Profit
553


484

Investment (income) expense, net
(66
)
 
(1
)
Other pension (income) expense
3

 
28

Interest expense, net
107


110

Income before income taxes
509

 
347

Income tax provision
76


67

Net Income
$
433

 
$
280

 
 
 
 
Basic Earnings Per Common Share
$
1.30


$
0.78

 
 
 
 
Diluted Earnings Per Common Share
$
1.27


$
0.77

 
 
 
 
Dividends Declared Per Common Share
$
0.36

 
$
0.30

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 


4



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
Quarter ended
 
3/31/2018
 
3/31/2017
 
 
 
 
Net Income
$
433

 
$
280

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 period
46

 
50

 
46

 
50

Tax (expense) benefit
(6
)
 
(1
)
 
40

 
49

Changes in pension and post-retirement benefits
 
 
 
Unrealized gains (losses) arising during the period

 
5

Reclassification of (gains) losses into Net Income
6

 
30

 
6

 
35

Tax (expense) benefit
(1
)
 
(12
)
 
5

 
23

Changes in derivative instruments
 
 
 
Unrealized gains (losses) arising during the period
2

 
(3
)
Reclassification of (gains) losses into Net Income
11

 
7

 
13

 
4

Tax (expense) benefit
(4
)
 
(1
)
 
9

 
3

 
 
 
 
Other comprehensive income (loss), net of tax
54

 
75

Comprehensive Income
$
487

 
$
355

 
 
 
 
  See accompanying Notes to Condensed Consolidated Financial Statements.


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
Quarter ended
 
3/31/2018
 
3/31/2017
Cash Flows – Operating Activities
 
 
 
Net Income
$
433

 
$
280

Depreciation and amortization
37

 
70

Refranchising (gain) loss
(156
)

(111
)
Investment (income) expense, net
(66
)
 
(1
)
Contributions to defined benefit pension plans
(3
)
 
(7
)
Deferred income taxes
(1
)
 
20

Share-based compensation expense
17

 
17

Changes in accounts and notes receivable
4

 
18

Changes in prepaid expenses and other current assets
(22
)
 
(1
)
Changes in accounts payable and other current liabilities
(99
)
 
(48
)
Changes in income taxes payable
13

 
12

Other, net
32

 
39

Net Cash Provided by Operating Activities
189

 
288

 
 
 
 
Cash Flows – Investing Activities
 
 
 
Capital spending
(42
)
 
(76
)
Proceeds from refranchising of restaurants
205

 
185

Other, net
1

 
(5
)
Net Cash Provided by Investing Activities
164

 
104

 
 
 
 
Cash Flows – Financing Activities
 
 
 
Proceeds from long-term debt

 
192

Repayments of long-term debt
(332
)
 
(200
)
Revolving credit facilities, three months or less, net

 

Short-term borrowings by original maturity
 
 
 
More than three months - proceeds
12

 

More than three months - payments
(7
)
 

Three months or less, net

 

Repurchase shares of Common Stock
(498
)
 
(461
)
Dividends paid on Common Stock
(120
)
 
(106
)
Debt issuance costs

 
(18
)
Other, net
(31
)
 
(36
)
Net Cash Used in Financing Activities
(976
)
 
(629
)
Effect of Exchange Rates on Cash and Cash Equivalents
38

 
17

Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
(585
)
 
(220
)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period
1,668

 
831

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period
$
1,083

 
$
611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 


6



CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
 
 
 
(in millions)
 
 
 
 
(Unaudited) 3/31/2018
 
12/31/2017
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
982


$
1,522

Accounts and notes receivable, net
501

 
400

Prepaid expenses and other current assets
406

 
384

Advertising cooperative assets, restricted

 
201

Total Current Assets
1,889

 
2,507

 
 
 
 
Property, plant and equipment, net
1,651


1,697

Goodwill
514

 
512

Intangible assets, net
105

 
110

Other assets
490

 
346

Deferred income taxes
187

 
139

Total Assets
$
4,836

 
$
5,311

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current Liabilities
 
 
 
Accounts payable and other current liabilities
$
924

 
$
813

Income taxes payable
124

 
123

Short-term borrowings
61

 
375

Advertising cooperative liabilities

 
201

Total Current Liabilities
1,109

 
1,512

 
 
 
 
Long-term debt
9,419

 
9,429

Other liabilities and deferred credits
1,062

 
704

Total Liabilities
11,590

 
11,645

 
 
 
 
Shareholders’ Deficit
 
 
 
Common Stock, no par value, 750 shares authorized; 327 and 332 shares issued in 2018 and 2017, respectively

 

Accumulated deficit
(6,539
)
 
(6,063
)
Accumulated other comprehensive loss
(215
)

(271
)
Total Shareholders’ Deficit
(6,754
)
 
(6,334
)
Total Liabilities and Shareholders’ Deficit
$
4,836

 
$
5,311

 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 

7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in millions, except per share data)

Note 1 - Financial Statement Presentation

We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles in the United States (“GAAP”) for complete financial statements.  Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (“2017 Form 10-K”).  

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 in more than 135 countries and territories, of which 60% are located outside the U.S.  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 Financial Statements are made using the first person notations of “we,” “us” or “our.”

As of March 31, 2018, YUM consisted of three operating segments:  

The KFC Division which includes our worldwide operations of the KFC concept
The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept
The Taco Bell Division which includes our worldwide operations of the Taco Bell concept

YUM's fiscal year begins on January 1 and ends December 31 of each year, with each quarter comprised of three months. Our U.S. subsidiaries and certain international subsidiaries operate on a weekly periodic calendar where the first three quarters of each fiscal year consists of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks.

Our preparation of the accompanying Financial Statements in conformity with 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 Financial Statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

The accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2017 Form 10-K, our financial position as of March 31, 2018, and the results of our operations, comprehensive income and cash flows for the quarters ended March 31, 2018 and 2017. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year.

Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

In January 2016, the Financial Accounting Standards Board ("FASB") issued a standard that updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. We adopted this standard beginning with the quarter ended March 31, 2018. While the adoption of this standard did not have a material impact on our Financial Statements the standard will require our investment in Grubhub Inc. ("Grubhub") common shares, which was consummated in April 2018 (see Note 12), to be remeasured to fair value in each future reporting period with corresponding changes recorded in our Consolidated Statement of Income.

In October 2016, the FASB issued a standard that requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. As required, we adopted this standard in the quarter ended March 31, 2018 and recorded a cumulative adjustment to retained earnings at the beginning of our first quarter 2018. As a result, we recognized a reduction in Other assets of $34 million to write-off the unamortized tax consequences of certain historical intra-entity transfers of assets with an offsetting increase to our Accumulated deficit.

In August 2017, the FASB issued a standard that refines and expands existing hedge accounting guidance. We adopted this standard beginning with the quarter ended March 31, 2018. The adoption of this standard did not have a material impact on the Financial Statements.


8



In February 2018, the FASB issued a standard that allows a reclassification to retained earnings for stranded tax effects within accumulated other comprehensive (income) loss ("AOCI") subsequent to the accounting in the fourth quarter of 2017 necessary as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). We adopted this standard during the quarter ended March 31, 2018 and reclassified stranded tax effects of $19 million from AOCI with a corresponding decrease to Accumulated deficit at the beginning of our first quarter 2018. These stranded tax effects primarily related to the remeasurement of deferred tax assets associated with pension losses within AOCI.

From 2014 through 2017 the FASB issued standards to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries ("Topic 606"). We adopted these standards beginning with the quarter ended March 31, 2018, using the modified retrospective method. See Notes 2 and 5.

We have reclassified certain other items in the Financial Statements for the prior periods to be comparable with the classification for the quarter ended March 31, 2018. These reclassifications had no effect on previously reported Net Income.


Note 2 - Revenue Recognition Accounting Policy

We adopted Topic 606 at the beginning of the quarter ended March 31, 2018. Below is a discussion of how our revenues are earned, our accounting policies pertaining to revenue recognition prior to adopting Topic 606 ("Legacy GAAP"), our accounting policies pertaining to revenue recognition subsequent to adopting Topic 606 and other required disclosures. Refer to Note 5 for information regarding the cumulative effect adjustment recorded to Accumulated deficit as of the beginning of the quarter ended March 31, 2018 to reflect the adoption of Topic 606. Also included in Note 5 is disclosure of the amount by which each balance sheet and income statement line item was affected in the current reporting period as compared to Legacy GAAP.

Company Sales

Revenues from the sale of food items by Company-owned restaurants are recognized as Company sales when a customer purchases the food, which is when our obligation to perform is satisfied. The timing and amount of revenue recognized related to Company sales was not impacted by the adoption of Topic 606.

Franchise and Property Revenues

Our most significant source of revenues arises from the operation of our Concept stores by our franchisees. Our franchise agreements require that the franchisee remit continuing fees to us as a percentage of the applicable restaurant’s sales in exchange for the license of the intellectual property associated with our Concepts' brands (the “franchise right”). Continuing fees represent the substantial majority of the consideration we receive under our franchise agreements. Franchise rights may be granted through store-level franchise agreements or through a master franchise agreement. Continuing fees are typically billed and paid monthly and are usually 4%-6% for store-level franchise agreements. Master franchise agreements transfer exclusive master franchise rights and administrative obligations, including control of advertising contributions, to master franchisees in certain regions who in turn grant sub-franchising rights to sub-franchisees. As a result of transferring administrative obligations to a master franchisee the percentage of a master franchisee’s restaurants’ sales that we receive as a continuing fee is less than the percentage we receive for restaurants operating under a store-level franchise agreement. Our franchise agreements also typically require certain, less significant, upfront franchise fees such as fees paid upon opening of a store, fees paid to renew the term of the franchise right and fees paid in the event the franchise agreement is transferred to another franchisee. Upfront franchise fees are typically billed and paid when the new franchise agreement becomes effective or when the agreement is transferred to another franchisee.

Under Legacy GAAP, continuing fees from franchisees were recognized as the related sales occurred. The timing and amount of revenue recognized related to continuing fees was not impacted by the adoption of Topic 606 based on the application of the sales-based royalty exception within Topic 606. Under Legacy GAAP, revenue related to initial fees was recognized upon store opening and renewal and transfer fees were recognized when the related agreement became effective. Upon adopting Topic 606, we have determined that the services we provide in exchange for these upfront franchise fees are highly interrelated with the franchise right and are not distinct from the ongoing services we provide to our franchisees. As a result, upon adopting Topic 606 upfront franchise fees are recognized as revenue over the term of each respective franchise agreement. Revenues for these upfront franchise fees are recognized on a straight-line basis, which is consistent with the franchisee’s right to use and benefit from the intellectual property. Revenue from continuing fees and upfront franchise fees is presented within Franchise and property revenues in our Condensed Consolidated Statements of Income.

Additionally, from time-to-time we provide non-refundable consideration to franchisees in the form of cash or other incentives (e.g. cash payments to incent new unit openings and free or subsidized equipment). The Company’s intent in providing such

9



consideration is to drive new unit development or same-store sales growth that will result in higher future revenues for the Company. Under Legacy GAAP, these payments were recognized when we were obligated to make the payment and were presented as either a reduction to Franchise and property revenues, if cash was provided directly to the franchisee, or as Franchise and property expenses, if cash was not provided directly to the franchisee. Upon adopting Topic 606, such payments are capitalized as assets and amortized as a reduction in Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates.

Revenues from franchisees related to their rental of restaurants we lease or sublease to them is recognized as it is earned. Rental income is billed and paid on a monthly basis. Revenues from rental agreements with franchisees are presented within Franchise and property revenues within our Condensed Consolidated Statements of Income. The timing and amount of revenue recognized related to the rental of restaurants we lease or sublease was not impacted by the adoption of Topic 606.

Franchise Contributions for Advertising and Other Services

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, typically within a particular country. Contributions to the advertising cooperatives are required for both Company-owned and franchise restaurants and are generally based on a percentage of restaurant sales. Revenues for these services are billed and paid typically on a monthly basis. Under Legacy GAAP, receipts and expenditures related to advertising cooperatives we were required to consolidate were presented on a net basis in our Condensed Consolidated Statements of Income. Upon adopting the requirements of Topic 606 we act as a principal in the transaction based on our responsibility to define the nature of the goods or services and/or our responsibility to define which franchisees receive the benefit of the goods or services. Additionally, we have determined the advertising services provided to franchisees are highly interrelated with the franchise right and therefore not distinct. Franchisees remit to us a percentage of restaurant sales as consideration for providing the advertising services. As a result, revenues for advertising services are recognized when the related sales occur and are presented as Franchise contributions for advertising and other services. Expenses incurred to provide these services are presented as Franchise advertising and other services expense.

On a much more limited basis, we provide goods or services to certain franchisees that are distinct from the franchise right. Such arrangements typically relate to supply chain, quality assurance and information technology services that are provided by a third party at our direction and that do not require integration with other goods or services we provide. The extent to which we provide such goods or services varies by brand, geographic region and, in some instances, franchisee. Similar to advertising services, receipts and expenditures related to these other services were presented on a net basis under Legacy GAAP. Upon adoption of Topic 606, revenues from the goods or services described above are presented as Franchise contributions for advertising and other services within our Condensed Consolidated Statements of Income. Expenses related to the provisioning of these goods and services are recorded in Franchise advertising and other services expense. Revenues are recognized as the goods or services are transferred to the franchisee and related expenses are recognized as incurred.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue transaction and collected from a customer are excluded from revenue under both Legacy GAAP and Topic 606.

The following table disaggregates revenue by Concept and our most significant markets based on Operating Profit. We believe this disaggregation best reflects how the nature, amount, timing and uncertainty of our revenues and cash flows are impacted by economic factors.

10



 
Quarter ended 3/31/2018
 
 
KFC Division
 
Pizza Hut Division
 
Taco Bell Division
 
Total
U.S.
 
 
 
 
 
 
 
 
Company sales
 
$
17

 
$
14

 
$
242

 
$
273

Franchise and property revenues
 
44

 
70

 
122

 
236

Franchise contributions for advertising and other services
 
2

 
65

 
91

 
158

 
 
 
 
 
 
 
 
 
China
 
 
 
 
 
 
 
 
Franchise and property revenues
 
54

 
16

 

 
70

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Company sales
 
228

 
10

 
1

 
239

Franchise and property revenues
 
209

 
63

 
6

 
278

Franchise contributions for advertising and other services
 
104

 
13

 

 
117

 
 
$
658

 
$
251

 
$
462

 
$
1,371



Our contract liabilities are comprised of unamortized upfront fees received from franchisees. A summary of significant changes to the contract liability balance during the first quarter of 2018 is presented below.

 
 
Deferred Franchise Fees
Balance at January 1, 2018
 
$
392

Revenue recognized that was included in unamortized upfront fees received from franchisees at the beginning of the period
 
(17
)
Increases due to cash received, excluding amounts recognized as revenue during the period
 
20

Balance at March 31, 2018
 
$
395



We expect to recognize contract liabilities as revenue over the remaining term of the associated franchise agreement as follows:

Less than 1 year
$
56

 
1 - 2 years
53

 
2 - 3 years
49

 
3 - 4 years
45

 
4 - 5 years
40

 
Thereafter
152

 
Total
$
395

 


We have applied the optional exemption, as provided for under Topic 606, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.

11




Note 3 - Earnings Per Common Share (“EPS”)
 
 
Quarter ended
 
 
2018
 
2017
Net Income
 
$
433

 
$
280

 
 
 
 
 
Weighted-average common shares outstanding (for basic calculation)
 
332


357

Effect of dilutive share-based employee compensation
 
8

 
7

Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)
 
340


364

 
 
 
 
 
Basic EPS
 
$
1.30

 
$
0.78

 
 
 
 
 
Diluted EPS
 
$
1.27

 
$
0.77

Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS computation(a)
 
2.3

 
1.7


(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 - Shareholders’ Deficit

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during the quarters ended March 31, 2018 and 2017 as indicated below.  All amounts exclude applicable transaction fees.

 
 
 
Shares Repurchased (thousands)
 
Dollar Value of Shares Repurchased
 
Remaining Dollar Value of Shares that may be Repurchased
 
 
Authorization Date
 
2018
 
2017
 
2018
 
2017
 
2018
 
 
November 2016
 

 
 
6,849

 
 
$

 
 
$
442

 
 
$

 
 
 
November 2017
 
6,507

 
 

 
 
528

 
 

 
 
972

 
 
 
Total
 
6,507

(a) 
 
6,849

(b) 
 
$
528

(a) 
 
$
442

(b) 
 
$
972

 
 
 
 
 
 
 

(a)
Includes the effect of $30 million in share repurchases (0.4 million shares) with trade dates prior to March 31, 2018, but cash settlement dates subsequent to March 31, 2018.

(b)
Includes the effect of $26 million in share repurchases (0.4 million shares) with trade dates on, or prior to, March 31, 2017, but cash settlement dates subsequent to March 31, 2017 and excludes the effect of $45 million in share purchases (0.7 million shares) with trades dates prior to December 31, 2016, but cash settlement dates subsequent to December 31, 2016.


12



Changes in AOCI are presented below.
 
 
Translation Adjustments and Gains (Losses) From Intra-Entity Transactions of a Long-Term Nature
 
Pension and Post-Retirement Benefits
 
Derivative Instruments
 
Total
Balance at December 31, 2017, net of tax
 
$
(174
)
 
$
(106
)
 
$
9

 
$
(271
)
 
 
 
 
 
 
 
 
 
Adoption of accounting standards
 
21

(a) 
(17
)
(b) 
(2
)
(b) 
2

 
 
 
 
 
 
 
 
 
Gains (losses) arising during the period classified into AOCI, net of tax
 
39

 

 
(2
)
 
37

 
 
 
 
 
 
 
 
 
(Gains) losses reclassified from AOCI, net of tax
 
1

 
5

 
11

 
17

 
 
 
 
 
 
 
 
 
OCI, net of tax
 
61

 
(12
)
 
7

 
56

 
 
 
 
 
 
 
 
 
Balance at March 31, 2018, net of tax
$
(113
)
 
$
(118
)
 
$
16

 
$
(215
)


(a)
Represents the impact of foreign currency translation from the adoption of Topic 606. See Notes 2 and 5.

(b)
During the quarter ended March 31, 2018, we adopted a standard that allows for the reclassification from AOCI to Accumulated deficit for stranded tax effects resulting from the Tax Act. See Note 1.

Note 5 - Items Affecting Comparability of Net Income, Financial Position and Cash Flows

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.

During the quarter ended March 31, 2018, we refranchised 144 restaurants and received $205 million in pre-tax proceeds. During the quarter ended March 31, 2017, we refranchised 121 restaurants and received $185 million in pre-tax proceeds.

A summary of Refranchising (gain) loss is as follows:

 
 
Quarter ended
 
 
2018
 
2017
KFC Division
 
$
(57
)
 
$
1

Pizza Hut Division
 
(2
)
 
2

Taco Bell Division
 
(97
)
 
(114
)
Worldwide
 
$
(156
)
 
$
(111
)



13



KFC U.S. Acceleration Agreement

During 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we are investing approximately $130 million from 2015 through 2018 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. Under Legacy GAAP these amounts were expensed as incurred and included $3 million during the quarter ended March 31, 2017. We recorded total pre-tax charges of $115 million, primarily as Franchise and property expenses, during the three year period ended December 31, 2017 Due to their size and unique and long-term brand building nature, as well as their non-recurring impact on KFC Division's results when expensed upfront, our CODM did not consider the impact of these investments when assessing segment performance from 2015 through 2017. As such, for these years the investments were not allocated to the KFC Division segment operating results for performance reporting purposes.

Upon adoption of Topic 606 in 2018, approximately $100 million of incentives paid to franchisees from 2015 through 2017 were capitalized, net of amortization of $19 million. These capitalized amounts are being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates. Amortization related to franchise incentive payments that were capitalized upon the adoption of Topic 606 and franchise incentive payments that will be capitalized going forward will be allocated to KFC segment operating results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. During the quarter ended March 31, 2018, we recorded a $2 million reduction to KFC Division Franchise and property revenues related to the amortization of these franchise incentive payments.

In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During the quarters ended March 31, 2018 and 2017, we incurred $2 million and $4 million, respectively, in incremental system advertising expense. We funded approximately $50 million of such advertising during the three year period ended December 31, 2017, which included $20 million during 2017. We currently expect to fund approximately $10 million in 2018. All of these advertising amounts were recorded primarily in Franchise and property expenses and have been and will continue to be included in the KFC Division segment operating results.

YUM's Strategic Transformation Initiatives

In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated separation of our China business on October 31, 2016. Major features of the Company’s strategic transformation plans involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. During the quarters ended March 31, 2018 and 2017, we recognized pre-tax charges of $1 million and $7 million, respectively, primarily within G&A, related to these initiatives. Due to the scope of the initiatives as well as their significance, our CODM does not consider the impact of these initiatives when assessing segment performance. As such, costs associated with the initiatives are not being allocated to any segment 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 that includes a permanent commitment to incremental advertising and digital and technology contributions by franchisees (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and ecommerce capabilities. We currently expect the majority of this investment, which will be a mix of both capital and operating investments, to be split between 2017 and 2018.

We invested $39 million related to the Transformation Agreement in 2017, which included $8 million of investments that we capitalized and $31 million that was expensed primarily as Franchise and property expenses or G&A. The $31 million expense amount included $5 million of franchisee incentive payments that under Legacy GAAP were expensed as incurred. Due to the adoption of Topic 606 in 2018, franchise incentive payments related to the Transformation Agreement, including the $5 million from 2017, are now being capitalized and being amortized as a reduction of Franchise and property revenues.

We invested $7 million in the quarter ended March 31, 2018 related to the Transformation Agreement, primarily consisting of investments that were capitalized.

Due to their unique and long-term brand-building nature as well as their non-recurring impact on Pizza Hut’s Division results, the financial impact of operating investments that are part of the Transformation Agreement are not considered by our CODM when

14



assessing segment performance. As a result, these operating investments are not being allocated to the Pizza Hut Division operating segment results for performance reporting purposes. Depreciation on capital investments is being allocated to Pizza Hut segment results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. For the same reasons, the amortization related to franchise incentive payments that were capitalized upon the adoption of Topic 606 and franchise incentive payments that will be capitalized going forward will be allocated to Pizza Hut segment operating results.

In addition to the investments above, we agreed to fund $37.5 million of incremental system advertising dollars from the second half of 2017 through 2018. During the quarter ended March 31, 2018, we incurred $3 million in related incremental system advertising expense. We funded approximately $25 million of such advertising during 2017, which was expensed in the third and fourth quarters of 2017. We currently expect to fund approximately $12.5 million in 2018. These advertising amounts have been and will continue to be recorded primarily in Franchise and property expenses and are included in Pizza Hut's segment operating results.

Impact of Adopting New Revenue Recognition Standards

As discussed in Note 1, we adopted Topic 606 beginning with the quarter ended March 31, 2018, using the modified retrospective method. Topic 606 was applied to all contracts with customers as of January 1, 2018 and the cumulative effective of this transition was recorded as an adjustment to Accumulated deficit as of this date. As a result, the following adjustments were made to the Condensed Consolidated Balance Sheet as of January 1, 2018:


15



CONDENSED CONSOLIDATED BALANCE SHEET
 
As Reported 12/31/2017
 
Adjustments
 
 
Balances with Adoption of Topic 606 1/1/2018
ASSETS
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
$
1,522

 
$
11

 
 
$
1,533

Accounts and notes receivable, net
400

 
112

 
 
512

Prepaid expenses and other current assets
384

 
76

(a) 
 
460

Advertising cooperative assets, restricted
201

 
(201
)
 
 

Total Current Assets
2,507

 
(2
)
 
 
2,505

 
 
 
 
 
 
 
Property, plant and equipment, net
1,697

 
11

 
 
1,708

Goodwill
512

 

 
 
512

Intangible assets, net
110

 

 
 
110

Other assets
346

 
118

 
 
464

Deferred income taxes
139

 
26

 
 
165

Total Assets
$
5,311

 
$
153

 
 
$
5,464

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
Accounts payable and other current liabilities
$
813

 
$
220

 
 
$
1,033

Income taxes payable
123

 

 
 
123

Short-term borrowings
375

 

 
 
375

Advertising cooperative liabilities
201

 
(201
)
 
 

Total Current Liabilities
1,512

 
19

 
 
1,531

 
 
 
 
 
 
 
Long-term debt
9,429

 

 
 
9,429

Other liabilities and deferred credits
704

 
353

 
 
1,057

Total Liabilities
11,645

 
372

 
 
12,017

 
 
 
 
 
 
 
Shareholders’ Deficit
 
 
 
 
 
 
Accumulated deficit
(6,063
)
 
(240
)
 
 
(6,303
)
Accumulated other comprehensive loss
(271
)
 
21

 
 
(250
)
Total Shareholders’ Deficit
(6,334
)
 
(219
)
 
 
(6,553
)
Total Liabilities and Shareholders’ Deficit
$
5,311

 
$
153

 
 
$
5,464


(a)
Includes $58 million of restricted cash related to advertising cooperatives. These balances can only be used to settle obligations of the respective cooperatives.

We recorded an increase in Accounts payable and other current liabilities and Other liabilities and deferred credits of $57 million and $335 million, respectively, as part of our cumulative adjustment related to unamortized upfront franchise fees, with a corresponding $392 million increase in Accumulated deficit. We recorded increases in Prepaid expenses and other current assets and Other assets of $18 million and $118 million, respectively, as part of our cumulative adjustment related to unamortized franchise incentives, with a corresponding $136 million decrease in Accumulated deficit.

Deferred income taxes increased $26 million as a result of recording the tax effects of the two adjustments noted above, with a corresponding decrease to Accumulated deficit. Accumulated other comprehensive loss decreased $21 million as a result of recognizing the impact of foreign currency translation related to the three adjustments noted above, with a corresponding increase in Accumulated deficit.

The remaining adjustments to our December 31, 2017 Condensed Consolidated Balance Sheet are primarily a result of reclassifying the assets and liabilities of our consolidated advertising cooperates from Advertising cooperative assets, restricted and Advertising cooperative liabilities to the respective balance sheet caption to which the assets and liabilities relate.

16




The following tables reflect the impact of adopting Topic 606 on our Condensed Consolidated Statement of Income for the quarter ended March 31, 2018 and our Condensed Consolidated Balance Sheet as of March 31, 2018 as well as the amounts as if the guidance that was in effect prior to adoption were applied:

CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Quarter ended 3/31/2018
Revenues
As Reported
 
Impact
 
 
Balances without Adoption of Topic 606
Company sales
$
512

 
$

 
 
$
512

Franchise and property revenues
584

 
5

 
 
589

Franchise contributions for advertising and other services
275

 
(275
)
 
 

Total revenues
1,371

 
(270
)
 
 
1,101

Costs and Expenses, Net
 
 
 
 
 
 
Company restaurant expenses
438

 

 
 
438

General and administrative expenses
219

 

 
 
219

Franchise and property expenses
47

 
6



 
53

Franchise advertising and other services expense
272

 
(272
)
 
 

Refranchising (gain) loss
(156
)
 

 
 
(156
)
Other (income) expense
(2
)
 

 
 
(2
)
Total costs and expenses, net
818

 
(266
)
 
 
552

Operating Profit
553

 
(4
)
(a) 
 
549

Investment (income) expense, net
(66
)
 

 
 
(66
)
Other pension (income) expense
3

 

 
 
3

Interest expense, net
107

 

 
 
107

Income before income taxes
509

 
(4
)
 
 
505

Income tax provision
76

 
(1
)
 
 
75

Net Income
$
433

 
$
(3
)
 
 
$
430

 
 
 
 
 
 
 
Basic Earnings Per Common Share
$
1.30

 
$
(0.01
)
 
 
$
1.29

 
 
 
 
 
 
 
Diluted Earnings Per Common Share
$
1.27

 
$
(0.01
)
 
 
$
1.26

 
 
 
 
 
 
 
(a)
Includes $4 million of franchise incentive payments related to the KFC U.S. Acceleration Agreement and the Pizza Hut U.S. Transformation Agreement that would have been expensed immediately and that we would not have allocated to the KFC Division or the Pizza Hut Division under Legacy GAAP. Upon the adoption of Topic 606, these payments have been capitalized as assets.

Upon adopting Topic 606 the timing and amount of revenue recognized for upfront franchise fees and franchise incentives changed from upfront recognition under Legacy GAAP to recognition over the term of the franchise agreement to which the fees and incentives relate. Also, under Legacy GAAP, amounts reported as Franchise contributions for advertising and other services and Franchise advertising and other services expense were presented on a net basis. Upon the adoption of Topic 606 these amounts require gross presentation in our Condensed Consolidated Statements of Income. Lastly, Legacy GAAP required that certain value-added taxes withheld and remitted on our behalf by our franchisees be reported as revenue and corresponding expense in our Condensed Consolidated Statements of Income. Upon adoption of Topic 606 these taxes are reported on a net basis as a reduction in Franchise and property revenues.


17



CONDENSED CONSOLIDATED BALANCE SHEET
 
As Reported 3/31/2018
 
Impact
 
Balances without Adoption of Topic 606 3/31/2018
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
982

 
$
(20
)
 
$
962

Accounts and notes receivable, net
501

 
(109
)
 
392

Prepaid expenses and other current assets
406

 
(71
)
 
335

Advertising cooperative assets, restricted

 
197

 
197

Total Current Assets
1,889

 
(3
)
 
1,886

 
 
 
 
 
 
Property, plant and equipment, net
1,651

 
(13
)
 
1,638

Goodwill
514

 

 
514

Intangible assets, net
105

 

 
105

Other assets
490

 
(118
)
 
372

Deferred income taxes
187

 
(24
)
 
163

Total Assets
$
4,836

 
$
(158
)
 
$
4,678

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts payable and other current liabilities
$
924

 
$
(235
)
 
$
689

Income taxes payable
124

 

 
124

Short-term borrowings
61

 

 
61

Advertising cooperative liabilities

 
197

 
197

Total Current Liabilities
1,109

 
(38
)
 
1,071

 
 
 
 
 
 
Long-term debt
9,419

 

 
9,419

Other liabilities and deferred credits
1,062

 
(339
)
 
723

Total Liabilities
11,590

 
(377
)
 
11,213

 
 
 
 
 
 
Shareholders’ Deficit
 
 
 
 
 
Accumulated deficit
(6,539
)
 
242

 
(6,297
)
Accumulated other comprehensive loss
(215
)
 
(23
)
 
(238
)
Total Shareholders’ Deficit
(6,754
)
 
219

 
(6,535
)
Total Liabilities and Shareholders’ Deficit
$
4,836

 
$
(158
)
 
$
4,678



The significant impacts resulting from the adoption of Topic 606 on our Condensed Consolidated Balance Sheet as of March 31, 2018, are consistent with those recorded as of January 1, 2018 as described previously.

Under Legacy GAAP, Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents pertaining to advertising cooperatives that we were required to consolidate were classified within Advertising cooperative assets, restricted. Upon adoption of Topic 606 these amounts are reflected on our Condensed Consolidated Balance Sheet and changes in these balances are reported within our Condensed Consolidated Statement of Cash Flows. The transition to Topic 606 resulted in a decrease in Net Cash Provided by Operating Activities of $20 million during the quarter ended March 31, 2018 due to the timing of spending in these cooperatives.

Investment in Grubhub

As discussed in Note 12, one of our subsidiaries entered into an investment agreement to purchase shares of Grubhub common stock. In the quarter ended March 31, 2018 we recognized income of $66 million related to the mark-to-market of this investment agreement. See Note 12 for further discussion of the investment agreement.


18



Non-cash Pension Adjustment

During the quarter ended March 31, 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 did not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost was not allocated to any of our segment operating results for performance reporting purposes.


Note 6 - Other (Income) Expense

Other (income) expense primarily includes net foreign exchange (gains) losses.


Note 7 - Supplemental Balance Sheet Information

Accounts and Notes Receivable, net

The Company’s receivables are primarily generated as a result of ongoing business relationships with our franchisees as a result of franchise and lease agreements.  Trade receivables consisting of royalties from franchisees 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 Condensed Consolidated Balance Sheets.  Upon adoption of Topic 606, Accounts and notes receivable, net also includes receivables generated from advertising cooperatives that we consolidate which were previously recorded in Advertising cooperative assets, restricted.
 
3/31/2018
 
12/31/2017
Accounts and notes receivable, gross
$
527

 
$
419

Allowance for doubtful accounts
(26
)
 
(19
)
Accounts and notes receivable, net
$
501

 
$
400


Property, Plant and Equipment, net
 
3/31/2018
 
12/31/2017
Property, plant and equipment, gross
$
3,118

 
$
3,177

Accumulated depreciation and amortization
(1,467
)
 
(1,480
)
Property, plant and equipment, net
$
1,651

 
$
1,697



Assets held-for-sale at March 31, 2018 and December 31, 2017 total $29 million and $37 million, respectively, and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

Reconciliation of Cash and cash equivalents for Condensed Consolidated Statements of Cash Flows
 
3/31/2018
 
12/31/2017
Cash and cash equivalents as presented in Condensed Consolidated Balance Sheets
$
982

 
$
1,522

Restricted cash included in Prepaid expenses and other current assets(a)
84

 
60

Restricted cash included in Other assets(b)
17

 
17

Cash, Cash Equivalents and Restricted Cash as presented in Condensed Consolidated Statements of Cash Flows(c)
$
1,083

 
$
1,599


(a)
Restricted cash within Prepaid expenses and other current assets primarily relates to the Taco Bell Securitization interest reserves and cash related to advertising cooperatives that we consolidate which can only be used to settle obligations of the respective cooperatives.

(b)
Primarily trust accounts related to our self-insurance program and cash balances required, to the extent necessary, to meet statutory minimum net worth requirements for legal entities which enter into U.S. franchise agreements.


19



(c)
Upon adoption of Topic 606 we reclassified $11 million and $58 million, respectively, from Advertising cooperative assets, restricted to Cash and cash equivalents and Prepaid expenses and other current assets. These amounts are included in the Beginning of Period balance of Cash, Cash Equivalents, Restricted Cash and Restricted Cash equivalents in our Condensed Consolidated Statement of Cash Flows for the quarter ended March 31, 2018.

Note 8 - Income Taxes
 
Quarter ended
 
2018
 
2017
Income tax provision
$
76


$
67

Effective tax rate
15.0
%
 
19.4
%


Our first quarter effective tax rate was lower than prior year primarily due to the favorable impact of the reduction in the U.S. federal statutory tax rate, as described below, and lapping the cost of repatriating foreign earnings in the prior year, partially offset in the quarter ended March 31, 2018 by the charge of $16 million as described below. In both periods, our effective tax rate benefited from excess tax benefits associated with employee share-based payments.

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 modified 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 including the elimination of U.S. federal tax on dividends from foreign subsidiaries, a provision designed to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries and a lower U.S. effective tax rate on certain revenues from sources outside the U.S. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 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.

In the quarter ended December 31, 2017, we recorded a provisional discrete net tax expense associated with the Tax Act. In the quarter ended March 31, 2018, we recorded a provisional charge of $16 million as an adjustment to the amounts recorded at December 31, 2017 related to the mandatory one-time deemed repatriation tax on accumulated foreign earnings.
 
As of March 31, 2018, the amounts recorded for the Tax Act remain provisional for the mandatory one-time deemed repatriation tax on accumulated foreign earnings, the remeasurement of deferred taxes, and our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances. These estimates may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of the GILTI provisions. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within SAB 118's measurement period of one year.

Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore is including GILTI in the effective tax rate calculation.

Note 9 - Reportable Operating Segments

We identify our operating segments based on management responsibility. The following tables summarize Revenues and Operating Profit for each of our reportable operating segments:
 
Quarter ended
Revenues
2018
 
2017
KFC Division
$
658

 
$
732

Pizza Hut Division
251

 
234

Taco Bell Division
462


451

 
$
1,371


$
1,417


20



 
Quarter ended
Operating Profit
2018
 
2017
KFC Division
$
221


$
207

Pizza Hut Division
88


83

Taco Bell Division
132


141

Unallocated Franchise and property expenses(a)
(1
)
 
(3
)
Corporate and unallocated G&A expenses(b)
(44
)
 
(53
)
Unallocated Refranchising gain (loss) (See Note 5)
156

 
111

Unallocated Other income (expense)
1


(2
)
Operating Profit
$
553


$
484

Investment income (expense), net (See Note 12)
66

 
1

Other pension income (expense) (See Note 10)
(3
)
 
(28
)
Interest expense, net
(107
)

(110
)
Income before income taxes
$
509


$
347



(a)