10-Q 1 pepsicoq1-10xq3212015.htm FORM 10-Q Pepsico Q1-10-Q 3.21.2015
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 21, 2015 (12 weeks)
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 1-1183
 
PepsiCo, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
North Carolina
  
13-1584302
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
 
700 Anderson Hill Road, Purchase, New York
  
10577
(Address of Principal Executive Offices)
  
(Zip Code)

914-253-2000
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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   X    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   X    NO      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  X 
  
Accelerated filer     
Non-accelerated filer     
(Do not check if a smaller reporting company)
  
Smaller reporting company     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES           NO  X
Number of shares of Common Stock outstanding as of April 17, 2015 was 1,476,050,863.



PepsiCo, Inc. and Subsidiaries

Table of Contents
Part I Financial Information
Page No.
Item 1.
Condensed Consolidated Financial Statements
 
Condensed Consolidated Statement of Income –
12 Weeks Ended March 21, 2015 and March 22, 2014
                                                                                                                 
 
Condensed Consolidated Statement of Comprehensive Income –
12 Weeks Ended March 21, 2015 and March 22, 2014
 
Condensed Consolidated Statement of Cash Flows –
12 Weeks Ended March 21, 2015 and March 22, 2014
 
Condensed Consolidated Balance Sheet –
March 21, 2015 and December 27, 2014
 
Condensed Consolidated Statement of Equity –
12 Weeks Ended March 21, 2015 and March 22, 2014
 
Item 2.
Report of Independent Registered Public Accounting Firm
Item 3.
Item 4.
Part II Other Information
 
Item 1.
Item 1A.
Item 2.
Item 5.
Other Information
Item 6.


2


PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts, unaudited) 
 
12 Weeks Ended
 
3/21/2015

 
3/22/2014

Net Revenue
$
12,217

 
$
12,623

Cost of sales
5,442

 
5,747

Gross profit
6,775

 
6,876

Selling, general and administrative expenses
4,962

 
5,048

Amortization of intangible assets
16

 
21

Operating Profit
1,797

 
1,807

Interest expense
(211
)
 
(201
)
Interest income and other
15

 
10

Income before income taxes
1,601

 
1,616

Provision for income taxes
370

 
389

Net income
1,231

 
1,227

Less: Net income attributable to noncontrolling interests
10

 
11

Net Income Attributable to PepsiCo
$
1,221

 
$
1,216

Net Income Attributable to PepsiCo per Common Share
 
 
 
Basic
$
0.82

 
$
0.80

Diluted
$
0.81

 
$
0.79

Weighted-average common shares outstanding
 
 
 
Basic
1,484

 
1,524

Diluted
1,503

 
1,540

Cash dividends declared per common share
$
0.655

 
$
0.5675


See accompanying notes to the condensed consolidated financial statements.


3


Condensed Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited) 
 
12 Weeks Ended 3/21/2015
 
Pre-tax amounts

Tax amounts

After-tax amounts
Net income


 


 
$
1,231

Other Comprehensive Loss
 
 
 
 
 
Currency translation adjustment
$
(981
)
 
$

 
(981
)
Cash flow hedges:
 
 
 
 
 
Reclassification of net losses to net income
179

 
(70
)
 
109

Net derivative losses
(155
)
 
64

 
(91
)
Pension and retiree medical:

 

 

Reclassification of net losses to net income
51

 
(17
)
 
34

Remeasurement of net liabilities and translation
31

 
(7
)
 
24

Unrealized gains on securities
16

 
(8
)
 
8

Total Other Comprehensive Loss
$
(859
)
 
$
(38
)
 
(897
)
Comprehensive income
 
 
 
 
334

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(10
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
324

 
12 Weeks Ended 3/22/2014
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
1,227

Other Comprehensive Loss
 
 
 
 
 
Currency translation adjustment
$
(874
)
 
$

 
(874
)
Cash flow hedges:
 
 
 
 
 
Reclassification of net losses to net income
10

 
(4
)
 
6

Net derivative gains
16

 
(5
)
 
11

Pension and retiree medical:
 
 
 
 
 
Reclassification of net losses to net income
48

 
(16
)
 
32

Remeasurement of net liabilities and translation
3

 
(1
)
 
2

Unrealized gains on securities
18

 
(9
)
 
9

Total Other Comprehensive Loss
$
(779
)
 
$
(35
)
 
(814
)
Comprehensive income
 
 
 
 
413

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(10
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
403


See accompanying notes to the condensed consolidated financial statements.

4


Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/21/2015

 
3/22/2014

Operating Activities
 
 
 
Net income
$
1,231

 
$
1,227

Depreciation and amortization
496

 
532

Stock-based compensation expense
76

 
72

Restructuring and impairment charges
36

 
98

Cash payments for restructuring charges
(47
)
 
(25
)
Excess tax benefits from share-based payment arrangements
(38
)
 
(47
)
Pension and retiree medical plan expenses
104

 
119

Pension and retiree medical plan contributions
(83
)
 
(84
)
Deferred income taxes and other tax charges and credits
(19
)
 
62

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(435
)
 
(358
)
Inventories
(414
)
 
(406
)
Prepaid expenses and other current assets
(262
)
 
(234
)
Accounts payable and other current liabilities
(689
)
 
(813
)
Income taxes payable
294

 
175

Other, net
20

 
(137
)
Net Cash Provided by Operating Activities
270

 
181

 
 
 
 
Investing Activities
 
 
 
Capital spending
(270
)
 
(355
)
Sales of property, plant and equipment
11

 
7

Acquisitions and investments in noncontrolled affiliates
(9
)
 
(24
)
Divestitures
68

 
85

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(647
)
 

More than three months - maturities
1,164

 

Three months or less, net
3

 
59

Other investing, net

 
5

Net Cash Provided by/(Used for) Investing Activities
320

 
(223
)
 


(Continued on following page)


5


Condensed Consolidated Statement of Cash Flows (continued)
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/21/2015

 
3/22/2014

Financing Activities
 
 
 
Proceeds from issuances of long-term debt
$

 
$
1,990

Payments of long-term debt
(2,052
)
 
(1,652
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
10

 

More than three months - payments
(2
)
 

Three months or less, net
3,729

 
2,125

Cash dividends paid
(978
)
 
(888
)
Share repurchases - common
(1,124
)
 
(1,249
)
Share repurchases - preferred
(1
)
 
(2
)
Proceeds from exercises of stock options
171

 
171

Excess tax benefits from share-based payment arrangements
38

 
47

Other financing
(1
)
 

Net Cash (Used for)/Provided by Financing Activities
(210
)
 
542

Effect of exchange rate changes on cash and cash equivalents
(104
)
 
(36
)
Net Increase in Cash and Cash Equivalents
276

 
464

Cash and Cash Equivalents, Beginning of Year
6,134

 
9,375

Cash and Cash Equivalents, End of Period
$
6,410

 
$
9,839


See accompanying notes to the condensed consolidated financial statements.


6


Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions)
 
(Unaudited)
 
 
 
3/21/2015

 
12/27/2014

Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
6,410

 
$
6,134

Short-term investments
2,085

 
2,592

Accounts and notes receivable, less allowance: 3/15 - $137 and 12/14 - $137
6,963

 
6,651

Inventories
 
 
 
Raw materials
1,567

 
1,593

Work-in-process
274

 
173

Finished goods
1,621

 
1,377

 
3,462

 
3,143

Prepaid expenses and other current assets
2,002

 
2,143

Total Current Assets
20,922

 
20,663

Property, Plant and Equipment
35,621

 
36,300

Accumulated Depreciation
(18,943
)
 
(19,056
)
 
16,678

 
17,244

Amortizable Intangible Assets, net
1,397

 
1,449

Goodwill
14,681

 
14,965

Other Nonamortizable Intangible Assets
12,361

 
12,639

Nonamortizable Intangible Assets
27,042

 
27,604

Investments in Noncontrolled Affiliates
2,626

 
2,689

Other Assets
960

 
860

Total Assets
$
69,625

 
$
70,509



 
(Continued on following page)

 

7


Condensed Consolidated Balance Sheet (continued)
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)
 
 
 
3/21/2015

 
12/27/2014

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
7,962

 
$
5,076

Accounts payable and other current liabilities
12,165

 
13,016

Total Current Liabilities
20,127

 
18,092

Long-term Debt Obligations
22,403

 
23,821

Other Liabilities
5,882

 
5,744

Deferred Income Taxes
5,224

 
5,304

Total Liabilities
53,636

 
52,961

Commitments and Contingencies
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(182
)
 
(181
)
PepsiCo Common Shareholders’ Equity
 
 
 
Common stock, par value 12/3¢ per share (authorized 3,600 shares, issued, net of repurchased common stock at par value: 1,479 and 1,488 shares, respectively)
25

 
25

Capital in excess of par value
4,129

 
4,115

Retained earnings
49,335

 
49,092

Accumulated other comprehensive loss
(11,566
)
 
(10,669
)
Repurchased common stock, in excess of par value (387 and 378 shares, respectively)
(25,913
)
 
(24,985
)
Total PepsiCo Common Shareholders’ Equity
16,010

 
17,578

Noncontrolling interests
120

 
110

Total Equity
15,989

 
17,548

Total Liabilities and Equity
$
69,625

 
$
70,509



See accompanying notes to the condensed consolidated financial statements.


8


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/21/2015
 
3/22/2014
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(181
)
 
(0.6
)
 
(171
)
Redemptions

 
(1
)
 

 
(2
)
Balance, end of period
(0.7
)
 
(182
)
 
(0.6
)
 
(173
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,488

 
25

 
1,529

 
25

Repurchased common stock
(9
)
 

 
(10
)
 

Balance, end of period
1,479

 
25

 
1,519

 
25

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
4,115

 
 
 
4,095

Stock-based compensation expense
 
 
76

 
 
 
72

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(36
)
 
 
 
(172
)
Withholding tax on RSUs and PSUs converted
 
 
(22
)
 
 
 
(69
)
Other
 
 
(4
)
 
 
 
16

Balance, end of period
 
 
4,129

 
 
 
3,942

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
49,092

 
 
 
46,420

Net income attributable to PepsiCo
 
 
1,221

 
 
 
1,216

Cash dividends declared – common
 
 
(971
)
 
 
 
(863
)
Cash dividends declared – RSUs and PSUs
 
 
(7
)
 
 
 
(3
)
Balance, end of period
 
 
49,335

 
 
 
46,770

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(10,669
)
 
 
 
(5,127
)
Currency translation adjustment
 
 
(981
)
 
 
 
(873
)
Cash flow hedges, net of tax:
 
 
 
 
 
 
 
Reclassification of net losses to net income
 
 
109

 
 
 
6

Net derivative (losses)/gains
 
 
(91
)
 
 
 
11

Pension and retiree medical, net of tax:
 
 
 
 
 
 
 
Reclassification of net losses to net income
 
 
34

 
 
 
32

Remeasurement of net liabilities and translation
 
 
24

 
 
 
2

Unrealized gains on securities, net of tax
 
 
8

 
 
 
9

Balance, end of period
 
 
(11,566
)
 
 
 
(5,940
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(378
)
 
(24,985
)
 
(337
)
 
(21,004
)
Share repurchases
(12
)
 
(1,166
)
 
(15
)
 
(1,249
)
Stock option exercises
3

 
204

 
3

 
204

Other

 
34

 
2

 
157

Balance, end of period
(387
)
 
(25,913
)
 
(347
)
 
(21,892
)
Total PepsiCo Common Shareholders’ Equity
 
 
16,010

 
 
 
22,905

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
110

 
 
 
110

Net income attributable to noncontrolling interests
 
 
10

 
 
 
11

Currency translation adjustment
 
 

 
 
 
(1
)
Balance, end of period
 
 
120

 
 
 
120

Total Equity
 
 
$
15,989

 
 
 
$
22,893


(a)
Includes total tax benefits of $29 million in 2015 and $17 million in 2014.
See accompanying notes to the condensed consolidated financial statements.

9


Notes to the Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation and Our Divisions
Basis of Presentation
When used in this report, the terms “we,” “us,” “our,” “PepsiCo” and the “Company” mean PepsiCo, Inc. and its consolidated subsidiaries, collectively.
Our Condensed Consolidated Balance Sheet as of March 21, 2015 and Condensed Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the 12 weeks ended March 21, 2015 and March 22, 2014 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 weeks ended March 21, 2015 are not necessarily indicative of the results expected for the full year.
The results of our Venezuelan businesses have been reported under highly inflationary accounting since the beginning of 2010. See further unaudited information in “Our Business Risks” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
While our results in the United States and Canada (North America) are reported on a 12-week basis, most of our international operations report on a monthly calendar basis for which the months of January and February are reflected in our first quarter results.
Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives and certain advertising and marketing costs in proportion to revenue or volume, as applicable, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
Our Divisions
We are organized into six reportable segments (also referred to as divisions), as follows:
1)
Frito-Lay North America (FLNA);
2)
Quaker Foods North America (QFNA);
3)
Latin America Foods (LAF), which includes all of our food and snack businesses in Latin America;
4)
PepsiCo Americas Beverages (PAB), which includes all of our North American and Latin American beverage businesses;
5)
PepsiCo Europe (Europe), which includes all beverage, food and snack businesses in Europe and South Africa; and
6)
PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in Asia, Middle East and Africa, excluding South Africa.

10


Net revenue and operating profit of each division are as follows:
 
12 Weeks Ended
 
Net Revenue
 
Operating Profit
 
3/21/2015

 
3/22/2014

 
3/21/2015

 
3/22/2014

FLNA
$
3,319

 
$
3,219

 
$
920

 
$
862

QFNA (a)
639

 
634

 
99

 
160

LAF
1,279

 
1,338

 
204

 
232

PAB
4,433

 
4,426

 
468

 
429

Europe
1,477

 
1,961

 
100

 
152

AMEA (b)
1,070

 
1,045

 
242

 
194

Total division
12,217

 
12,623

 
2,033

 
2,029

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net (losses)/gains


 


 
(1
)
 
34

Restructuring and impairment charges (c)


 


 
(6
)
 
3

Other


 


 
(229
)
 
(259
)
 
$
12,217

 
$
12,623

 
$
1,797

 
$
1,807


(a)
Operating profit for QFNA for the 12 weeks ended March 21, 2015 includes a pre-tax impairment charge of $65 million ($50 million after-tax) associated with our Muller Quaker Dairy (MQD) joint venture investment.
(b)
Operating profit for AMEA for the 12 weeks ended March 21, 2015 includes a pre-tax gain of $39 million ($28 million after-tax) associated with refranchising a portion of our bottling operations in India.
(c)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
Total assets of each division are as follows:
 
Total Assets
 
3/21/2015


12/27/2014
FLNA
$
5,247

 
$
5,307

QFNA
932

 
982

LAF
4,661

 
4,760

PAB
30,560

 
30,188

Europe
13,232

 
13,902

AMEA
5,889

 
5,887

Total division
60,521

 
61,026

Corporate (a)
9,104

 
9,483


$
69,625

 
$
70,509


(a)
Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and pension and tax assets.
Note 2 - Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued new accounting guidance intended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation for debt discounts. The guidance is effective as of the beginning of our 2016 fiscal year and must be applied on a retrospective basis with early adoption permitted. This guidance is not expected to have a material impact on our financial statements and we have not yet early adopted this standard.

11


In June 2014, the FASB issued new accounting guidance for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that could be achieved after the requisite service period is treated as a performance condition that affects the vesting of the award rather than factored into the grant date fair value. The guidance is effective as of the beginning of our 2016 fiscal year and can be applied prospectively to all share-based payments granted or modified on or after the effective date with early adoption permissible. This guidance is not expected to have any impact on our financial statements and we have not yet early adopted this standard.
In May 2014, the FASB issued new accounting guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. In April 2015, the FASB proposed a one-year deferral of the effective date of the new revenue standard. Under the proposal, the new guidance will be effective as of the beginning of our 2018 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.
Note 3 - Restructuring, Impairment and Integration Charges
2014 Multi-Year Productivity Plan
The multi-year productivity plan we publicly announced on February 13, 2014 (2014 Productivity Plan) includes the next generation of productivity initiatives that we believe will strengthen our food, snack and beverage businesses by: accelerating our investment in manufacturing automation; further optimizing our global manufacturing footprint, including closing certain manufacturing facilities; re-engineering our go-to-market systems in developed markets; expanding shared services; and implementing simplified organization structures to drive efficiency. The 2014 Productivity Plan is in addition to the productivity plan we began implementing in 2012 and is expected to continue the benefits of that plan.
In the 12 weeks ended March 21, 2015 and March 22, 2014, we incurred restructuring charges of $30 million ($24 million after-tax or $0.02 per share) and $96 million ($73 million after-tax or $0.05 per share), respectively, in conjunction with the 2014 Productivity Plan. All of these charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash) and contract termination costs. Substantially all of the restructuring accrual at March 21, 2015 is expected to be paid by the end of 2015.
A summary of our 2014 Productivity Plan charges is as follows:
 
 
12 Weeks Ended
 
 
3/21/2015
 
3/22/2014
FLNA
 
$
6

 
$
12

QFNA
 
1

 
2

LAF
 
2

 
1

PAB
 
6

 
82

Europe
 
9

 
2

AMEA
 
2

 
2

Corporate (a)
 
4

 
(5
)
 
 
$
30

 
$
96

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.

12


A summary of our 2014 Productivity Plan activity in 2015 is as follows:
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 27, 2014
$
89

 
$

 
$
24

 
$
113

2015 restructuring charges
11

 
1

 
18

 
30

Cash payments
(16
)
 

 
(20
)
 
(36
)
Non-cash charges
(3
)
 
(1
)
 
(1
)
 
(5
)
Liability as of March 21, 2015
$
81

 
$

 
$
21

 
$
102

2012 Multi-Year Productivity Plan
The multi-year productivity plan we publicly announced on February 9, 2012 (2012 Productivity Plan) includes actions in every aspect of our business that we believe will strengthen our complementary food, snack and beverage businesses by: leveraging new technologies and processes across PepsiCo’s operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management. The 2012 Productivity Plan continues to enhance PepsiCo’s cost-competitiveness and provide a source of funding for future brand-building and innovation initiatives.
In the 12 weeks ended March 21, 2015 and March 22, 2014, we incurred restructuring charges of $6 million ($5 million after-tax with a nominal amount per share) and $2 million ($3 million after-tax with a nominal amount per share), respectively, in conjunction with our 2012 Productivity Plan. All of these charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs and contract termination costs. Substantially all of the restructuring accrual at March 21, 2015 is expected to be paid by the end of 2015.
A summary of our 2012 Productivity Plan charges is as follows:
 
 
12 Weeks Ended
 
 
3/21/2015

 
3/22/2014

FLNA
 
$

 
$
1

QFNA
 

 

LAF (a)
 

 
(5
)
PAB
 
1

 
4

Europe (a)
 
3

 
(2
)
AMEA
 

 
2

Corporate
 
2

 
2

 
 
$
6

 
$
2

(a) Income amounts represent adjustments for changes in estimates of previously recorded amounts.

13


A summary of our 2012 Productivity Plan activity in 2015 is as follows: 
 
Severance and Other
Employee Costs
 
Other Costs
 
Total
Liability as of December 27, 2014
$
28

 
$
5

 
$
33

2015 restructuring charges
1

 
5

 
6

Cash payments
(5
)
 
(6
)
 
(11
)
Non-cash charges
(1
)
 

 
(1
)
Liability as of March 21, 2015
$
23

 
$
4

 
$
27

Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
3/21/2015
 
12/27/2014
Amortizable intangible assets, net
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
858

 
$
(91
)
 
$
767

 
$
879

 
$
(89
)
 
$
790

Reacquired franchise rights
 
106

 
(96
)
 
10

 
107

 
(95
)
 
12

Brands
 
1,339

 
(995
)
 
344

 
1,361

 
(1,004
)
 
357

Other identifiable intangibles
 
576

 
(300
)
 
276

 
595

 
(305
)
 
290

 
 
$
2,879

 
$
(1,482
)
 
$
1,397

 
$
2,942

 
$
(1,493
)
 
$
1,449


14


The change in the book value of nonamortizable intangible assets is as follows:
 
Balance
 
Translation
and Other
 
Balance

12/27/2014
 
 
3/21/2015
FLNA

 

 

Goodwill
$
291

 
$
(12
)
 
$
279

Brands
27

 
(3
)
 
24


318

 
(15
)
 
303

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
LAF
 
 
 
 
 
Goodwill
601

 
(26
)
 
575

Brands
189

 
(9
)
 
180


790

 
(35
)
 
755

 
 
 
 
 
 
PAB
 
 
 
 
 
Goodwill
9,889

 
(52
)
 
9,837

Reacquired franchise rights
7,193

 
(78
)
 
7,115

Acquired franchise rights
1,538

 
(16
)
 
1,522

Brands
142

 
(3
)
 
139


18,762

 
(149
)
 
18,613

 
 
 
 
 
 
Europe
 
 
 
 
 
Goodwill
3,539

 
(174
)
 
3,365

Reacquired franchise rights
571

 
(41
)
 
530

Acquired franchise rights
199

 
(14
)
 
185

Brands
2,663

 
(109
)
 
2,554


6,972

 
(338
)
 
6,634

 
 
 
 
 
 
AMEA
 
 
 
 
 
Goodwill
470

 
(20
)
 
450

Brands
117

 
(5
)
 
112


587

 
(25
)
 
562

 
 
 
 
 
 
Total goodwill
14,965

 
(284
)
 
14,681

Total reacquired franchise rights
7,764

 
(119
)
 
7,645

Total acquired franchise rights
1,737

 
(30
)
 
1,707

Total brands
3,138

 
(129
)
 
3,009


$
27,604

 
$
(562
)
 
$
27,042


15


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
3/21/2015

 
12/27/2014

Balance, beginning of year
$
1,587

 
$
1,268

Additions for tax positions related to the current year
40

 
349

Additions for tax positions from prior years
1

 
215

Reductions for tax positions from prior years
(1
)
 
(81
)
Settlement payments
(3
)
 
(70
)
Statutes of limitations expiration
(25
)
 
(42
)
Translation and other
(9
)
 
(52
)
Balance, end of period
$
1,590

 
$
1,587

Note 6 - Stock-Based Compensation
The following table summarizes our total stock-based compensation expense:
 
 
12 Weeks Ended
 
 
3/21/2015

 
3/22/2014

Stock-based compensation expense
 
$
76

 
$
72

Restructuring and impairment benefits
 

 
(3
)
Total
 
$
76

 
$
69

Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
12 Weeks Ended
 
3/21/2015

 
3/22/2014

Expected life
7 years

 
6 years

Risk free interest rate
1.8
%
 
1.8
%
Expected volatility (a)
15
%
 
16
%
Expected dividend yield
2.7
%
 
2.9
%
(a)
Reflects movements in our stock price over the most recent historical period equivalent to the expected life.
The following table summarizes awards granted under the terms of our 2007 Long-Term Incentive Plan:
 
 
12 Weeks Ended
 
 
3/21/2015
 
3/22/2014
 
 
Granted (a)
 
Weighted-Average Grant Price
 
Granted (a)
 
Weighted-Average Grant Price
Stock options
 
1.6

 
$
99.25

 
3.0

 
$
79.75

Restricted stock units (RSUs) and Performance stock units (PSUs)
 
2.6

 
$
99.25

 
4.2

 
$
79.76

PepsiCo equity performance units (PEPunits)
 
0.3

 
$
99.25

 
0.4

 
$
79.75

(a)
In millions.

16


Note 7 - Pension and Retiree Medical Benefits
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension

Retiree Medical
 
3/21/2015


3/22/2014


3/21/2015


3/22/2014


3/21/2015


3/22/2014

 
U.S.

International

 
Service cost
$
101


$
91


$
19


$
19


$
8


$
8

Interest cost
126


134


22


24


12


14

Expected return on plan assets
(196
)

(181
)

(33
)

(32
)

(6
)

(6
)
Amortization of prior service (credit)/cost
(1
)

5






(9
)

(5
)
Amortization of net losses/(gains)
47


40


14


9




(1
)

77


89


22


20


5


10

Special termination benefits
4


8






1



Total expense
$
81


$
97


$
22


$
20


$
6


$
10

Note 8 - Debt Obligations and Commitments
In the first quarter of 2015, $2.1 billion of senior notes matured and were paid. As of March 21, 2015, we had $4.4 billion of commercial paper outstanding.

17


Note 9 - Accumulated Other Comprehensive Loss
The reclassifications from Accumulated Other Comprehensive Loss to the Condensed Consolidated Statement of Income are summarized as follows:
 
 
12 Weeks Ended
 
 
 
 
3/21/2015
 
3/22/2014
 
 
 
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Condensed Consolidated Statement of Income
Losses/(Gains) on cash flow hedges:
 
 
 
 
 
 
    Foreign exchange contracts
 
$
(22
)
 
$
(6
)
 
Cost of sales
    Interest rate derivatives
 
193

 
5

 
Interest expense
    Commodity contracts
 
5

 
12

 
Cost of sales
    Commodity contracts
 
3

 
(1
)
 
Selling, general and administrative expenses
    Net losses before tax
 
179

 
10

 
 
    Tax amounts
 
(70
)
 
(4
)
 
 
    Net losses after tax
 
$
109

 
$
6

 
 
 
 
 
 
 
 
 
Pension and retiree medical items:
 
 
 
 
 
 
    Amortization of prior service credit (a)
 
$
(10
)
 
$

 
 
    Amortization of net losses (a)
 
61

 
48

 
 
    Net losses before tax
 
51

 
48

 
 
    Tax amounts
 
(17
)
 
(16
)
 
 
    Net losses after tax
 
$
34

 
$
32

 
 
 
 
 
 
 
 
 
Total net losses reclassified for the period, net of tax
 
$
143

 
$
38

 


(a)
These items are included in the components of net periodic benefit cost for pension and retiree medical plans (see Note 7 for additional details).
Note 10 - Financial Instruments
Derivatives
We are exposed to market risks arising from adverse changes in:
commodity prices, affecting the cost of our raw materials and energy;
foreign exchange rates and currency restrictions; and
interest rates.
In the normal course of business, we manage commodity price, foreign exchange and interest rate risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging. Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include fixed-price purchase orders and pricing agreements.
Our hedging strategies include the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity price, foreign exchange or interest rate risks are classified as operating activities in the Condensed Consolidated Statement of Cash

18


Flows. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item.
For cash flow hedges, the effective portion of changes in fair value are deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.
Commodity Prices
We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, which include swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for agricultural products, energy and metals. Ineffectiveness for those derivatives that qualify for hedge accounting treatment was not material for all periods presented. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit.
Our open commodity derivative contracts had a notional value of $1.1 billion as of March 21, 2015 and $1.2 billion as of December 27, 2014.
Foreign Exchange
We are exposed to foreign exchange risk from foreign currency purchases and foreign currency assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of derivatives, primarily forward contracts with terms of no more than two years. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.
Our foreign currency derivatives had a total notional value of $2.3 billion as of March 21, 2015 and $2.7 billion as of December 27, 2014. Ineffectiveness for those derivatives that qualify for hedge accounting treatment was not material for all periods presented. For foreign currency derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no material net impact on earnings.

19


Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.
The notional values of the interest rate derivative instruments outstanding as of March 21, 2015 and December 27, 2014 were $7.8 billion and $9.3 billion, respectively. Ineffectiveness for those derivatives that qualify for cash flow hedge accounting treatment was not material for all periods presented.
As of March 21, 2015, approximately 31% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to approximately 25% as of December 27, 2014.
Available-for-Sale Securities
Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as available-for-sale. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale securities are recognized in accumulated other comprehensive loss within common shareholders’ equity. Unrealized gains and losses on our investments in debt securities as of March 21, 2015 were not material. The pre-tax unrealized gains on our investments in marketable equity securities were $126 million and $111 million as of March 21, 2015 and December 27, 2014, respectively.
Changes in the fair value of available-for-sale securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. We recorded no other-than-temporary impairment charges for the 12 weeks ended March 21, 2015 and March 22, 2014, respectively.
Tingyi-Asahi Beverages Holding Co. Ltd. Call Option
In connection with our transaction with Tingyi (Cayman Islands) Holding Corp. in the second quarter of 2012, we received a call option to increase our holding in Tingyi-Asahi Beverages Holding Co. Ltd. to 20% that expires in the fourth quarter of 2015. If the Company decides not to exercise this call option, we would record a charge to write off the recorded value of the option. Such a charge would be reflected in “Items Affecting Comparability” in the period recognized.



20


Fair Value Measurements
The fair values of our financial assets and liabilities as of March 21, 2015 and December 27, 2014 are categorized as follows:
 
3/21/2015
 
12/27/2014
 
Assets (a)
 
Liabilities (a)
 
Assets (a)
 
Liabilities (a)
Available-for-sale securities:


 


 


 


Equity securities (b)
$
139

 
$

 
$
124

 
$

Debt securities (c)
4,104

 

 
3,167

 

 
$
4,243

 
$

 
$
3,291

 
$

Short-term investments (d)
$
200

 
$

 
$
197

 
$

Prepaid forward contracts (e)
$
25

 
$

 
$
26

 
$

Deferred compensation (f)
$

 
$
503

 
$

 
$
504

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
Interest rate (g)
$
162

 
$

 
$
140

 
$

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
95

 
$
24

 
$
76

 
$
12

Interest rate (h)

 
310

 
1

 
117

Commodity (i)
1

 
7

 
3

 
10

 
$
96

 
$
341

 
$
80

 
$
139

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
8

 
$
4

 
$
12

 
$
13

Interest rate (g)
62

 
78

 
57

 
75

Commodity (i)
11

 
152

 
18

 
166

 
$
81

 
$
234

 
$
87

 
$
254

Total derivatives at fair value (j)
$
339

 
$
575

 
$
307

 
$
393

Total
$
4,807

 
$
1,078

 
$
3,821

 
$
897

(a)
Unless otherwise noted, financial assets are classified on our Condensed Consolidated Balance Sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our Condensed Consolidated Balance Sheet within accounts payable and other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.
(b)
Based on the price of common stock. Categorized as a Level 1 asset. These equity securities are classified as investments in noncontrolled affiliates.
(c)
Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of March 21, 2015, $2.2 billion and $1.9 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 27, 2014, $0.8 billion and $2.4 billion of debt securities were classified as cash equivalents and short-term investments, respectively. All of the Company’s available-for-sale debt securities have contractual maturities of one year or less.
(d)
Based on the price of index funds. Categorized as a Level 1 asset. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.
(e)
Based primarily on the price of our common stock.
(f)
Based on the fair value of investments corresponding to employees’ investment elections.
(g)
Based on LIBOR forward rates. As of March 21, 2015 and December 27, 2014, amounts related to non-designated instruments are presented as a net liability on our Condensed Consolidated Balance Sheet.
(h)
Based on recently reported market transactions of spot and forward rates.
(i)
Based on recently reported market transactions, primarily swap arrangements.
(j)
Unless otherwise noted, derivative assets and liabilities are presented on a gross basis on our Condensed Consolidated Balance Sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the Condensed Consolidated Balance Sheet as of March 21, 2015 and December 27, 2014 were immaterial. Collateral received against any of our asset positions was immaterial.

21


The carrying amounts of our cash and cash equivalents and short-term investments approximate fair value due to their short-term maturity. The fair value of our debt obligations as of March 21, 2015 and December 27, 2014 was $33 billion and $31 billion, respectively, based upon prices of similar instruments in the marketplace.
Pre-tax losses/(gains) on our derivative instruments are categorized as follows:
 
12 Weeks Ended
 
Fair Value/Non-
designated Hedges

Cash Flow Hedges
 
Losses/(Gains)
Recognized in
Income Statement (a)

Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss

Losses/(Gains)
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement (b)

3/21/2015


3/22/2014


3/21/2015


3/22/2014


3/21/2015


3/22/2014

Foreign exchange
$
(8
)

$
(17
)

$
(41
)

$
(18
)

$
(22
)

$
(6
)
Interest rate
(23
)

1


194


(5
)

193


5

Commodity
54


(9
)

2


7


8


11

Total
$
23


$
(25
)

$
155


$
(16
)

$
179


$
10


(a)
Foreign exchange derivative gains/losses are primarily included in selling, general and administrative expenses. Interest rate derivative gains/losses are primarily from fair value hedges and are included in interest expense. These gains/losses are substantially offset by increases/decreases in the value of the underlying debt, which are also included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
(b)
Foreign exchange derivative gains/losses are primarily included in cost of sales. Interest rate derivative gains/losses are included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
During the next 12 months, we expect to reclassify net gains of $39 million related to our cash flow hedges from accumulated other comprehensive loss into net income.

22


Note 11 - Net Income Attributable to PepsiCo per Common Share
The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:
 
12 Weeks Ended
 
3/21/2015

3/22/2014
 
Income

Shares (a)

Income

Shares (a)
Net income attributable to PepsiCo
$
1,221




$
1,216



Preferred shares:







Dividends







Redemption premium
(1
)



(1
)


Net income available for PepsiCo common shareholders
$
1,220


1,484


$
1,215


1,524

Basic net income attributable to PepsiCo per common share
$
0.82




$
0.80



Net income available for PepsiCo common shareholders
$
1,220


1,484


$
1,215


1,524

Dilutive securities:







 Stock options, RSUs, PSUs, PEPunits and Other (b)


18




15

Employee stock ownership plan (ESOP) convertible preferred stock

1


1


1


1

Diluted
$
1,221


1,503


$
1,216


1,540

Diluted net income attributable to PepsiCo per common share
$
0.81




$
0.79



(a)
Weighted-average common shares outstanding (in millions).
(b)
In the 12 weeks ended March 21, 2015 and March 22, 2014, options to purchase 1.6 million shares and 0.2 million shares, respectively, were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. These out-of-the-money options had average exercise prices of $99.25 and $82.25 in the 12 weeks ended March 21, 2015 and March 22, 2014, respectively.

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.
Our Critical Accounting Policies
The critical accounting policies below should be read in conjunction with those outlined in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
Sales Incentives and Advertising and Marketing Costs
We offer sales incentives and discounts through various programs to customers and consumers. These incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. Certain advertising and marketing costs are also based on annual targets.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for advertising and other marketing activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.

24


Our Business Risks
This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goals,” “guidance,” “intend,” “may,” “objectives,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo’s products, as a result of changes in consumer preferences or otherwise; changes in the legal and regulatory environment; imposition of new taxes, disagreements with tax authorities or additional tax liabilities; PepsiCo’s ability to compete effectively; PepsiCo’s ability to grow its business in developing and emerging markets or unstable political conditions, civil unrest or other developments and risks in the markets where PepsiCo’s products are made, manufactured, distributed or sold; unfavorable economic conditions in the countries in which PepsiCo operates; increased costs, disruption of supply or shortages of raw materials and other supplies; failure to realize anticipated benefits from PepsiCo’s productivity initiatives or global operating model; disruption of PepsiCo’s supply chain; product contamination or tampering or issues or concerns with respect to product quality, safety and integrity; damage to PepsiCo’s reputation or brand image; failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo’s existing operations or to complete or manage divestitures or refranchisings; PepsiCo’s ability to hire or retain key employees or a highly skilled and diverse workforce; loss of any key customer or changes to the retail landscape; any downgrade or potential downgrade of PepsiCo’s credit ratings; the ability to protect information systems against or effectively respond to a cybersecurity incident or other disruption; PepsiCo’s ability to implement shared services or utilize information technology systems and networks effectively; fluctuations or other changes in exchange rates, including changes in currency exchange mechanisms or additional governmental actions in Venezuela; climate change, or legal, regulatory or market measures to address climate change; failure to successfully negotiate collective bargaining agreements or strikes or work stoppages; any infringement of or challenge to PepsiCo’s intellectual property rights; potential liabilities and costs from litigation or legal proceedings; and other factors that may adversely affect the price of PepsiCo’s common stock and financial performance including those described in “Risk Factors” in Item 1A. and “Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Business Risks” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 27, 2014 and in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Business Risks” of this Quarterly Report on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
In the first quarter of 2015, our operations outside of North America reflect the months of January and February. Our operations outside of the U.S. generated 37% of our net revenue, with Mexico, Canada, Russia, the United Kingdom and Brazil comprising approximately 17% of our net revenue. As a result, we are exposed to foreign exchange risks in many of the international markets in which we operate. In addition, unstable economic, political and social conditions and civil unrest in certain markets in which our products are sold, including in Russia, Ukraine and the Middle East, and currency fluctuations in certain of these international

25


markets and in Venezuela (discussed below), continue to result in challenging operating environments. In the 12 weeks ended March 21, 2015, unfavorable foreign exchange negatively impacted net revenue performance by 8 percentage points, primarily due to the Russian ruble, Venezuelan bolivar, euro, Mexican peso and the Canadian dollar. Currency declines against the U.S. dollar which are not offset could adversely impact our future results.
The results of our Venezuelan snack and beverage businesses have been reported under highly inflationary accounting since the beginning of our 2010 fiscal year, at which time the functional currency of our Venezuelan entities was changed from the bolivar to the U.S. dollar.
As of March 21, 2015, there was a three-tiered exchange rate mechanism in Venezuela for exchanging bolivars into U.S. dollars:
The government-operated National Center of Foreign Commerce (CENCOEX), which has a fixed exchange rate of 6.3 bolivars per U.S. dollar (fixed exchange rate) mainly intended for the import of essential goods and services by designated industry sectors.
The auction-based Supplementary Foreign Currency Administration System (now known as SICAD, resulting from the unification in February 2015 of SICAD I and II), which is intended for certain transactions, including foreign investments.
An open market Marginal Foreign Exchange System (SIMADI), established in February 2015, which is available to companies and individuals to exchange foreign currency based on supply and demand.
At the end of each period, we remeasure the net monetary assets of our Venezuela entities from the bolivar to the U.S. dollar at the rate we believe is legally available to us, including for the payment of dividends. Based on our analysis, we continue to believe that, except as noted below, the SICAD exchange rate is the most appropriate rate to remeasure our net monetary assets. We remeasure certain other net monetary assets at the fixed exchange rate, since we believe that requests for remittance of dividends submitted to CENCOEX in certain prior years at the fixed exchange rate and payables for imports of essential goods approved by CENCOEX continue to qualify for settlement at the fixed exchange rate.
In the first quarter of 2015, our results of operations in Venezuela, which reflect the months of January and February, generated 2% of our net revenue and 1% of our operating profit. As of March 21, 2015, our operations in Venezuela comprised 9% of our cash and cash equivalents balance. Our bolivar-denominated net monetary assets in Venezuela, which primarily include cash and cash equivalents, approximated $505 million at March 21, 2015. At March 21, 2015, we had pending requests with the Venezuelan government for remittance of dividends of approximately $310 million at the fixed exchange rate. These requests pertain to the years from 2006 to 2012. We are unable to predict the likelihood of Venezuelan government approvals of these requests or any requests that we may file in the future or, if any such requests are approved, the estimated time for remittance. We continue to evaluate available options to obtain U.S. dollars to meet our operational needs in Venezuela. Our non-monetary assets in Venezuela, which primarily include an equity investment in our bottler, intangible assets, inventory and property, plant and equipment, approximated $635 million at March 21, 2015.
We believe that significant uncertainty exists regarding the exchange mechanisms in Venezuela, including the nature of transactions that are eligible to flow through CENCOEX, SICAD or SIMADI, or any other new exchange mechanism that may emerge, how any such mechanisms will operate in the future, as well as the availability of U.S. dollars under each mechanism. We continue to monitor developments closely and may determine in the future that rates other than the SICAD exchange rate or the fixed exchange rate, as applicable, are appropriate for remeasurement of the net monetary assets of our Venezuelan entities. If, at the end of the first quarter of 2015, we had used the SICAD exchange rate, which was 12 bolivars per U.S. dollar as of that date, to remeasure the net monetary assets that are currently recorded at the fixed exchange rate, we would

26


have incurred a net charge of approximately $160 million. If, at the end of the first quarter of 2015, we had remeasured all net monetary assets of our Venezuela businesses at the SIMADI exchange rate, which was approximately 177 bolivars per U.S. dollar as of that date, we would have incurred a net charge of approximately $480 million. In addition, if we were to conclude that the SIMADI exchange rate is the appropriate rate for remeasurement of our Venezuelan entities, our results of operations in Venezuela for the remainder of 2015 would expect to generate 0% of our net revenue and 0% of our operating profit and it would also lead to an impairment of our non-monetary assets, which were approximately $635 million at March 21, 2015. Any such remeasurement and potential impairment charges, if recognized, would be reflected in “Items Affecting Comparability.” Any further devaluation of the bolivar, change in the currency exchange mechanisms, additional governmental actions or fluctuation of the auction-based SICAD exchange rate could adversely affect our financial position, including a potential impairment of non-monetary assets, results of operations, both for any period in which we determine to remeasure using another rate and on a going forward basis following any such remeasurement, and our ability to make effective business decisions with respect to our Venezuela operations.
During 2014, Russia announced economic sanctions against the United States and other nations that include a ban on imports of certain ingredients and finished goods from specific countries. The sanctions did not have and are not expected to have a material impact on the results of our operations in Russia or our consolidated results or financial position, and we will continue to monitor the economic, operating and political environment in Russia closely. In each of the 12 week periods ended March 21, 2015 and March 22, 2014, 3% and 5.5%, respectively, of our total net revenue was generated by our operations in Russia. As of March 21, 2015, our long-lived assets in Russia were $4.3 billion. Our operations in Ukraine are not significant in relation to our consolidated results or financial position.
See Note 10 to our condensed consolidated financial statements for a discussion of our financial instruments, including their fair values as of March 21, 2015 and March 22, 2014. Cautionary statements included above and in “Item 1A. Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014, should be considered when evaluating our trends and future results.
Results of Operations – Consolidated Review
Items Affecting Comparability
Our reported financial results are impacted by the following items in each of the following periods: 
 
 
12 Weeks Ended
 
3/21/2015
 
3/22/2014
Operating profit
 
 
 
 
Mark-to-market net (losses)/gains
$
(1
)
 
$
34

Restructuring and impairment charges
$
(36
)
 
$
(98
)
Net income attributable to PepsiCo
 
 
 
 
Mark-to-market net (losses)/gains
$
(1
)
 
$
21

Restructuring and impairment charges
$
(29
)
 
$
(76
)
Net income attributable to PepsiCo per common share – diluted
 
 
 
 
 
$
(—
)
 
$
0.01

Restructuring and impairment charges
$
(0.02
)
 
$
(0.05
)

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Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.
In the 12 weeks ended March 21, 2015, we recognized $1 million ($1 million after-tax with a nominal amount per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses, with an $18 million net loss recognized in cost of sales and a $17 million net gain recognized in selling, general and administrative expenses.
In the 12 weeks ended March 22, 2014, we recognized $34 million ($21 million after-tax or $0.01 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses, with a $46 million net gain recognized in cost of sales and a $12 million net loss recognized in selling, general and administrative expenses.
Restructuring and Impairment Charges
2014 Multi-Year Productivity Plan
In the 12 weeks ended March 21, 2015 and March 22, 2014, we incurred restructuring charges of $30 million ($24 million after-tax or $0.02 per share) and $96 million ($73 million after-tax or $0.05 per share), respectively, in conjunction with the 2014 Productivity Plan. See Note 3 to our condensed consolidated financial statements for further information.
We expect to incur pre-tax charges of approximately $990 million, of which approximately $690 million represents cash expenditures related to the 2014 Productivity Plan, summarized by period as follows:
 
 
Charges
 
Cash
Expenditures
 
2013
 
$
53

 
$

 
2014
 
357

 
175

(b) 
First quarter 2015
 
30

 
36

 
 
 
440

 
211

 
Remainder of 2015 (expected)
 
210

 
186

 
2016 - 2019 (expected)
 
340

 
293

 
 
 
$
990

(a) 
$
690

 
(a)
This total pre-tax charge is expected to consist of approximately $530 million of severance and other employee-related costs, approximately $180 million for asset impairments (all non-cash) resulting from plant closures and related actions, and approximately $280 million for other costs, including costs related to the termination of leases and other contracts. This charge is expected to impact reportable segments approximately as follows: FLNA 13%, QFNA 2%, LAF 15%, PAB 35%, Europe 25%, AMEA 4% and Corporate 6%.
(b)
In 2014, cash expenditures include $10 million reported on the Condensed Consolidated Statement of Cash Flows in pension and retiree medical plan contributions.

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2012 Multi-Year Productivity Plan
In the 12 weeks ended March 21, 2015 and March 22, 2014, we incurred restructuring charges of $6 million ($5 million after-tax with a nominal amount per share) and $2 million ($3 million after-tax with a nominal amount per share), respectively, in conjunction with the 2012 Productivity Plan. See Note 3 to our condensed consolidated financial statements for further information.
We expect to incur pre-tax charges of approximately $910 million, of which approximately $704 million represents cash expenditures related to the 2012 Productivity Plan, summarized by period as follows:
 
 
Charges
 
Cash
Expenditures
2011
 
$
383

 
$
30

2012
 
279

 
343

2013
 
110

 
133

2014
 
61

 
101

First quarter 2015
 
6

 
11

 
 
839

 
618

Remainder of 2015 (expected)
 
71

 
86