10-Q 1 pepsicoq2-10xq6112016.htm FORM 10-Q Document
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 June 11, 2016 (24 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 June 29, 2016 was 1,439,157,837.



PepsiCo, Inc. and Subsidiaries

Table of Contents
Part I Financial Information
Page No.
Item 1.
Condensed Consolidated Financial Statements
 
 
 
 
 
 
Item 2.
Report of Independent Registered Public Accounting Firm
Item 3.
Item 4.
Part II Other Information
 
Item 1.
Item 1A.
Item 2.
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
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

Net Revenue
$
15,395

 
$
15,923

 
$
27,257

 
$
28,140

Cost of sales
6,830

 
7,251

 
11,981

 
12,754

Gross profit
8,565

 
8,672

 
15,276

 
15,386

Selling, general and administrative expenses
5,584

 
5,753

 
10,662

 
10,654

Amortization of intangible assets
17

 
19

 
31

 
35

Operating Profit
2,964

 
2,900

 
4,583

 
4,697

Interest expense
(255
)
 
(217
)
 
(501
)
 
(428
)
Interest income and other
22

 
14

 
36

 
29

Income before income taxes
2,731

 
2,697

 
4,118

 
4,298

Provision for income taxes
718

 
703

 
1,160

 
1,073

Net income
2,013

 
1,994

 
2,958

 
3,225

Less: Net income attributable to noncontrolling interests
8

 
14

 
22

 
24

Net Income Attributable to PepsiCo
$
2,005

 
$
1,980

 
$
2,936

 
$
3,201

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
 
Basic
$
1.39

 
$
1.34

 
$
2.03

 
$
2.16

Diluted
$
1.38

 
$
1.33

 
$
2.01

 
$
2.14

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,443

 
1,476

 
1,445

 
1,480

Diluted
1,456

 
1,491

 
1,458

 
1,497

Cash dividends declared per common share
$
0.7525

 
$
0.7025

 
$
1.455

 
$
1.3575


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 6/11/2016
 
24 Weeks Ended 6/11/2016
 
Pre-tax amounts

Tax amounts

After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income


 


 
$
2,013

 
 
 
 
 
$
2,958

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
760

 
$

 
760

 
$
540

 
$

 
540

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net gains to net income
(8
)
 
2

 
(6
)
 
(29
)
 
7

 
(22
)
Net derivative losses
(32
)
 
8

 
(24
)
 
(32
)
 
7

 
(25
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
46

 
(14
)
 
32

 
83

 
(26
)
 
57

Remeasurement of net liabilities and translation
(11
)
 
4

 
(7
)
 
4

 
(44
)
 
(40
)
Unrealized gains/(losses) on securities
3

 
(2
)
 
1

 
(9
)
 
5

 
(4
)
Total other comprehensive income
$
758

 
$
(2
)
 
756

 
$
557

 
$
(51
)
 
506

Comprehensive income
 
 
 
 
2,769

 
 
 
 
 
3,464

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(8
)
 
 
 
 
 
(22
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
2,761

 
 
 
 
 
$
3,442

 
12 Weeks Ended 6/13/2015
 
24 Weeks Ended 6/13/2015
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
1,994

 
 
 
 
 
$
3,225

Other comprehensive income/(loss)
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
474

 
$

 
474

 
$
(507
)
 
$

 
(507
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net (gains)/losses to net income
(97
)
 
33

 
(64
)
 
82

 
(37
)
 
45

Net derivative gains/(losses)
48

 
(20
)
 
28

 
(107
)
 
44

 
(63
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
58

 
(18
)
 
40

 
109

 
(35
)
 
74

Remeasurement of net liabilities and translation
(16
)
 
5

 
(11
)
 
15

 
(2
)
 
13

Unrealized (losses)/gains on securities
(7
)
 
4

 
(3
)
 
9

 
(4
)
 
5

Total other comprehensive income/(loss)
$
460

 
$
4

 
464

 
$
(399
)
 
$
(34
)
 
(433
)
Comprehensive income
 
 
 
 
2,458

 
 
 
 
 
2,792

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(13
)
 
 
 
 
 
(23
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
2,445

 
 
 
 
 
$
2,769


See accompanying notes to the condensed consolidated financial statements.

4


Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

Operating Activities
 
 
 
Net income
$
2,958

 
$
3,225

Depreciation and amortization
1,044

 
1,075

Share-based compensation expense
123

 
144

Restructuring and impairment charges
79

 
61

Cash payments for restructuring charges
(67
)
 
(107
)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)
373

 

Excess tax benefits from share-based payment arrangements
(84
)
 
(78
)
Pension and retiree medical plan expenses
124

 
215

Pension and retiree medical plan contributions
(155
)
 
(117
)
Deferred income taxes and other tax charges and credits
119

 
42

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(1,049
)
 
(1,309
)
Inventories
(755
)
 
(862
)
Prepaid expenses and other current assets
(202
)
 
(264
)
Accounts payable and other current liabilities
(73
)
 
197

Income taxes payable
704

 
648

Other, net
(218
)
 
(109
)
Net Cash Provided by Operating Activities
2,921

 
2,761

 
 
 
 
Investing Activities
 
 
 
Capital spending
(919
)
 
(832
)
Sales of property, plant and equipment
47

 
26

Acquisitions and investments in noncontrolled affiliates
(4
)
 
(16
)
Divestitures
75

 
74

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(4,604
)
 
(1,675
)
More than three months - maturities
3,786

 
2,269

Three months or less, net
10

 
(1
)
Other investing, net
1

 
(3
)
Net Cash Used for Investing Activities
(1,608
)
 
(158
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt
2,532

 
2,487

Payments of long-term debt
(3,083
)
 
(2,054
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
35

 
12

More than three months - payments
(11
)
 
(5
)
Three months or less, net
2,795

 
2,240

Cash dividends paid
(2,060
)
 
(1,973
)
Share repurchases - common
(1,329
)
 
(2,130
)
Share repurchases - preferred
(2
)
 
(2
)
Proceeds from exercises of stock options
293

 
250

Excess tax benefits from share-based payment arrangements
84

 
78

Other financing
(4
)
 
(2
)
Net Cash Used for Financing Activities
(750
)
 
(1,099
)
Effect of exchange rate changes on cash and cash equivalents
(13
)
 
(76
)
Net Increase in Cash and Cash Equivalents
550

 
1,428

Cash and Cash Equivalents, Beginning of Year
9,096

 
6,134

Cash and Cash Equivalents, End of Period
$
9,646

 
$
7,562


See accompanying notes to the condensed consolidated financial statements.

5


Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)

 
 
 
6/11/2016

 
12/26/2015

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
9,646

 
$
9,096

Short-term investments
3,733

 
2,913

Accounts and notes receivable, less allowance: 6/16 - $146 and 12/15 - $130
7,495

 
6,437

Inventories:
 
 
 
Raw materials
1,512

 
1,312

Work-in-process
325

 
161

Finished goods
1,650

 
1,247

 
3,487

 
2,720

Prepaid expenses and other current assets
1,517

 
1,865

Total Current Assets
25,878

 
23,031

Property, plant and equipment
36,229

 
35,747

Accumulated depreciation
(20,010
)
 
(19,430
)
 
16,219

 
16,317

Amortizable Intangible Assets, net
1,274

 
1,270

Goodwill
14,398

 
14,177

Other nonamortizable intangible assets
12,073

 
11,811

Nonamortizable Intangible Assets
26,471

 
25,988

Investments in Noncontrolled Affiliates
2,002

 
2,311

Other Assets
867

 
750

Total Assets
$
72,711

 
$
69,667

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
4,774

 
$
4,071

Accounts payable and other current liabilities
13,685

 
13,507

Total Current Liabilities
18,459

 
17,578

Long-Term Debt Obligations
30,847

 
29,213

Other Liabilities
5,873

 
5,887

Deferred Income Taxes
5,156

 
4,959

Total Liabilities
60,335

 
57,637

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(188
)
 
(186
)
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: 1,441 and 1,448 shares, respectively)
24

 
24

Capital in excess of par value
3,940

 
4,076

Retained earnings
51,295

 
50,472

Accumulated other comprehensive loss
(12,813
)
 
(13,319
)
Repurchased common stock, in excess of par value (425 and 418 shares, respectively)
(30,051
)
 
(29,185
)
Total PepsiCo Common Shareholders’ Equity
12,395

 
12,068

Noncontrolling interests
128

 
107

Total Equity
12,376

 
12,030

Total Liabilities and Equity
$
72,711

 
$
69,667


See accompanying notes to the condensed consolidated financial statements.

6


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/11/2016
 
6/13/2015
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(186
)
 
(0.7
)
 
(181
)
Redemptions

 
(2
)
 

 
(2
)
Balance, end of period
(0.7
)
 
(188
)
 
(0.7
)
 
(183
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,448

 
24

 
1,488

 
25

Repurchased common stock
(7
)
 

 
(16
)
 

Balance, end of period
1,441

 
24

 
1,472

 
25

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
4,076

 
 
 
4,115

Share-based compensation expense
 
 
125

 
 
 
145

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(155
)
 
 
 
(170
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(102
)
 
 
 
(112
)
Other
 
 
(4
)
 
 
 
(5
)
Balance, end of period
 
 
3,940

 
 
 
3,973

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
50,472

 
 
 
49,092

Net income attributable to PepsiCo
 
 
2,936

 
 
 
3,201

Cash dividends declared – common
 
 
(2,113
)
 
 
 
(2,025
)
Balance, end of period
 
 
51,295

 
 
 
50,268

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,319
)
 
 
 
(10,669
)
Other comprehensive income/(loss) attributable to PepsiCo
 
 
506

 
 
 
(432
)
Balance, end of period
 
 
(12,813
)
 
 
 
(11,101
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(418
)
 
(29,185
)
 
(378
)
 
(24,985
)
Share repurchases
(14
)
 
(1,369
)
 
(23
)
 
(2,180
)
Stock option exercises, RSUs, PSUs and PEPunits converted
7

 
501

 
7

 
470

Other

 
2

 

 
4

Balance, end of period
(425
)
 
(30,051
)
 
(394
)
 
(26,691
)
Total PepsiCo Common Shareholders’ Equity
 
 
12,395

 
 
 
16,474

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
107

 
 
 
110

Net income attributable to noncontrolling interests
 
 
22

 
 
 
24

Currency translation adjustment
 
 

 
 
 
(1
)
Other, net
 
 
(1
)
 
 
 
(1
)
Balance, end of period
 
 
128

 
 
 
132

Total Equity
 
 
$
12,376

 
 
 
$
16,464


(a)
Includes total tax benefits of $56 million in 2016 and $52 million in 2015.
See accompanying notes to the condensed consolidated financial statements.

7


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 June 11, 2016 and Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 11, 2016 and June 13, 2015, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 11, 2016 and June 13, 2015 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 26, 2015. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 26, 2015. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 24 weeks ended June 11, 2016 are not necessarily indicative of the results expected for the full year.
Effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela, and therefore we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting. See further unaudited information in “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
While our financial 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 March, April and May are reflected in our second 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 materials 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. Reclassifications were made to the prior year’s amounts to conform to the current year presentation, including the presentation of certain functional support costs associated with the manufacturing and production of our products within cost of sales. These costs were previously included in selling, general and administrative expenses. In the 12 and 24 weeks ended June 13, 2015, these reclassifications resulted in an increase in cost of sales of $84 million and $145 million, respectively, with a corresponding reduction to gross profit and selling, general and administrative expenses in the same periods. These reclassifications reflect changes in how we are classifying costs of certain support functions as a result of ongoing productivity and efficiency initiatives. These reclassifications had no impact on our consolidated net revenue, operating profit, net interest expense, provision for income taxes, net income or earnings per share.

8


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)
North America Beverages (NAB), which includes all of our beverage businesses in North America;
4)
Latin America, which includes all of our beverage, food and snack businesses in Latin America;
5)
Europe Sub-Saharan Africa (ESSA), which includes all of our beverage, food and snack businesses in Europe and Sub-Saharan Africa; and
6)
Asia, Middle East and North Africa (AMENA), which includes all of our beverage, food and snack businesses in Asia, Middle East and North Africa.
Net revenue and operating profit of each division are as follows:
 
12 Weeks Ended
 
24 Weeks Ended
Net Revenue
6/11/2016


6/13/2015

 
6/11/2016

 
6/13/2015

FLNA
$
3,564

 
$
3,452

 
$
6,982

 
$
6,771

QFNA
561

 
546

 
1,178

 
1,185

NAB
5,145

 
5,113

 
9,506

 
9,411

Latin America (a)
1,717

 
2,224

 
2,759

 
3,638

ESSA
2,660

 
2,813

 
4,019

 
4,309

AMENA
1,748

 
1,775

 
2,813

 
2,826

Total division
$
15,395

 
$
15,923

 
$
27,257

 
$
28,140

 
12 Weeks Ended
 
24 Weeks Ended
Operating Profit
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

FLNA
$
1,083

 
$
1,007

 
$
2,101

 
$
1,927

QFNA (b)
146

 
132

 
312

 
231

NAB
881

 
833

 
1,366

 
1,286

Latin America (a)
242

 
355

 
417

 
574

ESSA
337

 
350

 
404

 
462

AMENA (c)
383

 
373

 
235

 
603

Total division
3,072

 
3,050

 
4,835

 
5,083

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net gains
100

 
39

 
146

 
38

Restructuring and impairment charges
(1
)
 
(1
)
 
(4
)
 
(7
)
Other
(207
)
 
(188
)
 
(394
)
 
(417
)
 
$
2,964

 
$
2,900

 
$
4,583

 
$
4,697

(a)
Effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments using the cost method of accounting. Beginning with the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses.
(b)
Operating profit for QFNA for the 24 weeks ended June 13, 2015 included a pre-tax impairment charge of $65 million associated with our Müller Quaker Dairy (MQD) joint venture investment.
(c)
Operating profit for AMENA for the 24 weeks ended June 11, 2016 includes a pre- and after-tax impairment charge of $373 million to reduce the value of our 5% indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value. Operating profit for AMENA for the 24 weeks ended June 13, 2015 included a pre-tax gain of $39 million associated with refranchising a portion of our bottling operations in India.

9


Total assets of each division are as follows:
 
Total Assets
 
6/11/2016


12/26/2015

FLNA
$
5,640

 
$
5,375

QFNA
847

 
872

NAB
29,291

 
28,128

Latin America
4,505

 
4,284

ESSA
12,894

 
12,225

AMENA
5,628

 
5,901

Total division
58,805

 
56,785

Corporate (a)
13,906

 
12,882


$
72,711

 
$
69,667

(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 - Not Yet Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance is effective in 2020 with early adoption permitted in 2019. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.
In 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition in the income statement of the income tax effects of vested or settled awards. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.
In 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the ability to exercise significant influence is achieved. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the timing of adoption of this guidance.
In 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets, but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

10


In 2016, the FASB issued guidance that requires companies to measure investments in certain equity securities at fair value and recognize any changes in fair value in net income. The guidance is effective in 2018 and early adoption is not permitted. We are currently evaluating the impact of this guidance on our financial statements.
In 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our balance sheet. We are currently evaluating the timing of adoption of this guidance.
In 2015, the FASB issued guidance that changes the subsequent measurement for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are currently evaluating the timing of adoption of this guidance.
In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance 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. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.
Note 3 - Restructuring and Impairment Charges
A summary of our restructuring and impairment charges and other productivity initiatives is as follows:
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

2014 Productivity Plan
$
49

 
$
21

 
$
79

 
$
51

2012 Productivity Plan

 
4

 

 
10

Total restructuring and impairment charges
49

 
25

 
79

 
61

Other productivity initiatives (a)
(3
)
 
10

 
(2
)
 
10

Total restructuring and impairment charges and other productivity initiatives
$
46

 
$
35

 
$
77

 
$
71

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

11


In the 12 weeks ended June 11, 2016 and June 13, 2015, we incurred restructuring charges of $49 million ($31 million after-tax or $0.02 per share) and $21 million ($16 million after-tax or $0.01 per share), respectively. In the 24 weeks ended June 11, 2016 and June 13, 2015, we incurred restructuring charges of $79 million ($56 million after-tax or $0.04 per share) and $51 million ($39 million after-tax or $0.03 per share), respectively. All of these net 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 other costs associated with the implementation of our initiatives, including contract termination costs. The majority of the restructuring accrual at June 11, 2016 is expected to be paid by the end of 2016.
A summary of our 2014 Productivity Plan charges by segment is as follows:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

FLNA (a)
 
$
3

 
$
2

 
$
(1
)
 
$
8

QFNA
 
1

 

 
1

 
1

NAB
 
6

 
7

 
13

 
14

Latin America
 
28

 
5

 
28

 
6

ESSA
 
8

 
4

 
27

 
13

AMENA
 
2

 
2

 
7

 
4

Corporate
 
1

 
1

 
4

 
5

 
 
$
49

 
$
21

 
$
79

 
$
51

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
A summary of our 2014 Productivity Plan activity for the 24 weeks ended June 11, 2016 is as follows:
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 26, 2015
$
61

 
$

 
$
20

 
$
81

2016 restructuring charges
42

 
16

 
21

 
79

Cash payments
(20
)
 

 
(30
)
 
(50
)
Non-cash charges and translation
3

 
(16
)
 
1

 
(12
)
Liability as of June 11, 2016
$
86

 
$

 
$
12

 
$
98

2012 Multi-Year Productivity Plan
The multi-year productivity plan we publicly announced on February 9, 2012 (2012 Productivity Plan) included actions in every aspect of our business that we believed would 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 has enhanced PepsiCo’s cost-competitiveness and provided a source of funding for future brand-building and innovation initiatives.
In the 12 weeks ended June 13, 2015, we incurred restructuring charges of $4 million ($3 million after-tax with a nominal amount per share). In the 24 weeks ended June 13, 2015, we incurred restructuring charges of $10 million ($9 million after-tax or $0.01 per share). All of these charges were recorded in selling, general and administrative expenses and primarily related to severance and other employee-related costs and contract termination costs. Cash payments in the 24 weeks ended June 11, 2016 were $17 million. We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual of $20 million at June 11, 2016 is expected to be paid by the end of 2016.

12


A summary of our 2012 Productivity Plan charges by segment is as follows:
 
 
 
 
 
 
6/13/2015
 
 
 
 
 
 
12 Weeks Ended
 
 24 Weeks Ended
FLNA
 
 
 
 
 
$

 
$

QFNA
 
 
 
 
 

 

NAB
 
 
 
 
 

 
1

Latin America
 
 
 
 
 

 

ESSA
 
 
 
 
 
3

 
6

AMENA
 
 
 
 
 
1

 
1

Corporate
 
 
 
 
 

 
2

 
 
 
 
 
 
$
4

 
$
10

Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
6/11/2016
 
12/26/2015
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
838

 
$
(101
)
 
$
737

 
$
820

 
$
(92
)
 
$
728

Reacquired franchise rights
 
106

 
(101
)
 
5

 
105

 
(99
)
 
6

Brands
 
1,302

 
(995
)
 
307

 
1,298

 
(987
)
 
311

Other identifiable intangibles
 
537

 
(312
)
 
225

 
526

 
(301
)
 
225

 
 
$
2,783

 
$
(1,509
)
 
$
1,274

 
$
2,749

 
$
(1,479
)
 
$
1,270


13


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

12/26/2015
 
 
6/11/2016
FLNA

 

 

Goodwill
$
267

 
$
11

 
$
278

Brands
22

 
2

 
24


289

 
13

 
302

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,754

 
41

 
9,795

Reacquired franchise rights
7,042

 
69

 
7,111

Acquired franchise rights
1,507

 
14

 
1,521

Brands
108

 

 
108


18,411

 
124

 
18,535

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
521

 
16

 
537

Brands
137

 
7

 
144


658

 
23

 
681

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,042

 
159

 
3,201

Reacquired franchise rights
488

 
15

 
503

Acquired franchise rights
190

 
4

 
194

Brands
2,212

 
153

 
2,365


5,932

 
331

 
6,263

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
418

 
(6
)
 
412

Brands
105

 
(2
)
 
103


523

 
(8
)
 
515

 
 
 
 
 
 
Total goodwill
14,177

 
221

 
14,398

Total reacquired franchise rights
7,530

 
84

 
7,614

Total acquired franchise rights
1,697

 
18

 
1,715

Total brands
2,584

 
160

 
2,744


$
25,988

 
$
483

 
$
26,471


14


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
6/11/2016

 
12/26/2015

Balance, beginning of year
$
1,547

 
$
1,587

Additions for tax positions related to the current year
107

 
248

Additions for tax positions from prior years
14

 
122

Reductions for tax positions from prior years
(35
)
 
(261
)
Settlement payments
(9
)
 
(78
)
Statutes of limitations expiration
(16
)
 
(34
)
Translation and other
(6
)
 
(37
)
Balance, end of period
$
1,602

 
$
1,547

Note 6 - Share-Based Compensation
Beginning in 2016, certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo’s Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period. These qualify as liability awards under share-based compensation guidance and are valued through the end of the performance period on a mark-to-market basis using a Monte Carlo simulation model until actual performance is determined.
The following table summarizes our total share-based compensation expense:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

Share-based compensation expense - equity awards
 
$
54

 
$
68

 
$
123

 
$
144

Share-based compensation expense - liability awards
 
1

 

 
3

 

Restructuring and impairment charges
 
1

 
1

 
2

 
1

Total
 
$
56

 
$
69

 
$
128

 
$
145

For the 12 weeks ended June 11, 2016 and June 13, 2015, our grants of stock options, restricted stock units (RSUs), performance stock units (PSUs), PepsiCo equity performance units (PEPunits) and long-term cash awards were nominal.
The following table summarizes share-based awards granted under the terms of our 2007 Long-Term Incentive Plan:
 
 
24 Weeks Ended
 
 
6/11/2016
 
6/13/2015
 
 
Granted (a)
 
Weighted-Average Grant Price
 
Granted (a)
 
Weighted-Average Grant Price
Stock options
 
1.5

 
$
98.75

 
1.6

 
$
99.25

RSUs and PSUs
 
2.9

 
$
98.83

 
2.6

 
$
99.25

PEPunits
 

 
$

 
0.3

 
$
99.25

(a)
In millions. All grant activity is disclosed at target.
We granted long-term cash awards to certain executive officers and other senior executives with an aggregate target value of $17 million during the 24 weeks ended June 11, 2016.

15


Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

Expected life
6 years

 
7 years

Risk-free interest rate
1.5
%
 
1.8
%
Expected volatility
12
%
 
15
%
Expected dividend yield
2.7
%
 
2.7
%
Note 7 - Pension and Retiree Medical Benefits
Effective as of the beginning of 2016, we prospectively changed the method we use to estimate the service and interest cost components of pension and retiree medical expense. The pre-tax reduction in net periodic benefit cost associated with this change in the 12 and 24 weeks ended June 11, 2016 was $29 million ($19 million after-tax or $0.01 per share) and $57 million ($37 million after-tax or $0.03 per share), respectively. See “Pension and Retiree Medical Plans” in “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on this change in accounting estimate.
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension

Retiree Medical
 
6/11/2016


6/13/2015


6/11/2016


6/13/2015


6/11/2016


6/13/2015

 
U.S.

International

 
Service cost
$
90


$
100


$
21


$
26


$
7


$
8

Interest cost
112


126


24


29


10


12

Expected return on plan assets
(192
)

(197
)

(42
)

(45
)

(6
)

(6
)
Amortization of prior service credit








(8
)

(9
)
Amortization of net losses/(gains)
39


48


10


18


(1
)

1


49


77


13


28


2


6

Settlement/curtailment loss

 

 
6

 

 

 

Special termination benefits
1


1









Total expense
$
50


$
78


$
19


$
28


$
2


$
6


16


 
24 Weeks Ended
 
Pension
 
Retiree Medical
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
U.S.
 
International
 
 
Service cost
$
181

 
$
201

 
$
36

 
$
45

 
$
14

 
$
16

Interest cost
223

 
252

 
42

 
51

 
19

 
24

Expected return on plan assets
(384
)
 
(393
)
 
(73
)
 
(78
)
 
(11
)
 
(12
)
Amortization of prior service credit

 
(1
)
 

 

 
(17
)
 
(18
)
Amortization of net losses/(gains)
77

 
95

 
18

 
32

 
(1
)
 
1

 
97

 
154

 
23

 
50

 
4

 
11

Settlement/curtailment loss

 

 
6

 

 

 

Special termination benefits
1

 
5

 

 

 

 
1

Total expense
$
98

 
$
159

 
$
29

 
$
50

 
$
4

 
$
12

We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. During the first quarter of 2016, we made discretionary contributions of $7 million to our international pension plans. There were no discretionary contributions made in the second quarter of 2016. In addition, there were no discretionary contributions made in the first or second quarters of 2015.
Note 8 - Debt Obligations and Commitments
In the first quarter of 2016, we issued the following senior notes:
Interest Rate

 
Maturity Date
 
Amount

 
Floating rate

 
February 2019
 
$
400

 
1.500
%
 
February 2019
 
600

 
2.850
%
 
February 2026
 
750

 
4.450
%
 
April 2046
 
750

 
 
 
 
 
$
2,500

(a) 
(a)
Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.
The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper.
In the 24 weeks ended June 11, 2016, $3.1 billion of senior notes matured and were paid.
In the second quarter of 2016, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 6, 2021. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.
Also in the second quarter of 2016, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement), which expires on June 5, 2017. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. We may request renewal of this facility for an additional 364-day period or convert any amounts outstanding into a term loan for a period of up to one year, which would mature no later than the anniversary of the then effective termination date. The Five-Year Credit Agreement and the 364-Day Credit Agreement together replaced our $3.7225 billion five-year credit agreement dated as of June 8, 2015 and our $3.7225 billion 364-day credit agreement

17


dated as of June 8, 2015. Funds borrowed under the Five-Year Credit Agreement and the 364-Day Credit Agreement may be used for general corporate purposes. Subject to certain conditions, we may borrow, prepay and reborrow amounts under these agreements. As of June 11, 2016, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
As of June 11, 2016, we had $3.6 billion of commercial paper outstanding and $2.7 billion of non-cancelable purchase commitments. For further information on our long-term contractual commitments, see Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
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
 
24 Weeks Ended
 
 
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
Affected Line Item in the Condensed Consolidated Statement of Income
(Gains)/Losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
    Foreign exchange contracts
 
$
1

 
$
(2
)
 
$
1

 
$
(2
)
 
Net revenue
    Foreign exchange contracts
 
(13
)
 
(20
)
 
(34
)
 
(42
)
 
Cost of sales
    Interest rate derivatives
 
1

 
(81
)
 
(2
)
 
112

 
Interest expense
    Commodity contracts
 
2

 
3

 
3

 
8

 
Cost of sales
    Commodity contracts
 
1

 
3

 
3

 
6

 
Selling, general and administrative expenses
    Net (gains)/losses before tax
 
(8
)
 
(97
)
 
(29
)
 
82

 
 
    Tax amounts
 
2

 
33

 
7

 
(37
)
 
 
    Net (gains)/losses after tax
 
$
(6
)
 
$
(64
)
 
$
(22
)
 
$
45

 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and retiree medical items:
 
 
 
 
 
 
 
 
 
 
    Amortization of prior service credit (a)
 
$
(8
)
 
$
(9
)
 
$
(17
)
 
$
(19
)
 
 
    Amortization of net losses (a)
 
48

 
67

 
94

 
128

 
 
    Settlement/curtailment (a)
 
6

 

 
6

 

 
 
    Net losses before tax
 
46

 
58

 
83

 
109

 
 
    Tax amounts
 
(14
)
 
(18
)
 
(26
)
 
(35
)
 
 
    Net losses after tax
 
$
32

 
$
40

 
$
57

 
$
74

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net losses/(gains) reclassified for the period, net of tax
 
$
26

 
$
(24
)
 
$
35

 
$
119

 
 
(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).

18


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 contracts and 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 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 is 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, metals and energy. 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.

19


Our open commodity derivative contracts had a notional value of $0.8 billion as of June 11, 2016 and $1.0 billion as of December 26, 2015.
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