10-Q 1 pepsicoq3-10xq932016.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 September 3, 2016 (36 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
 peplogoa02a02a02a17.jpg
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 September 22, 2016 was 1,434,183,120.



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
 
36 Weeks Ended
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

Net Revenue
$
16,027

 
$
16,331

 
$
43,284

 
$
44,471

Cost of sales
7,284

 
7,490

 
19,265

 
20,244

Gross profit
8,743

 
8,841

 
24,019

 
24,227

Selling, general and administrative expenses
5,904

 
6,048

 
16,566

 
16,702

Venezuela impairment charges

 
1,359

 

 
1,359

Amortization of intangible assets
18

 
18

 
49

 
53

Operating Profit
2,821

 
1,416

 
7,404

 
6,113

Interest expense
(247
)
 
(225
)
 
(748
)
 
(653
)
Interest income and other
30

 
2

 
66

 
31

Income before income taxes
2,604

 
1,193

 
6,722

 
5,491

Provision for income taxes
600

 
650

 
1,760

 
1,723

Net income
2,004

 
543

 
4,962

 
3,768

Less: Net income attributable to noncontrolling interests
12

 
10

 
34

 
34

Net Income Attributable to PepsiCo
$
1,992

 
$
533

 
$
4,928

 
$
3,734

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
 
Basic
$
1.38

 
$
0.36

 
$
3.41

 
$
2.53

Diluted
$
1.37

 
$
0.36

 
$
3.39

 
$
2.50

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,438

 
1,467

 
1,443

 
1,475

Diluted
1,452

 
1,483

 
1,456

 
1,492

Cash dividends declared per common share
$
0.7525

 
$
0.7025

 
$
2.2075

 
$
2.06


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 9/3/2016
 
36 Weeks Ended 9/3/2016
 
Pre-tax amounts

Tax amounts

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


 


 
$
2,004

 
 
 
 
 
$
4,962

Other comprehensive (loss)/income
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
(116
)
 
$
3

 
(113
)
 
$
419

 
$
8

 
427

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
71

 
(28
)
 
43

 
42

 
(21
)
 
21

Net derivative losses
(14
)
 
14

 

 
(46
)
 
21

 
(25
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
45

 
(15
)
 
30

 
128

 
(41
)
 
87

Remeasurement of net liabilities and translation
48

 
(16
)
 
32

 
52

 
(60
)
 
(8
)
Unrealized losses on securities
(16
)
 
8

 
(8
)
 
(25
)
 
13

 
(12
)
Total other comprehensive (loss)/income
$
18

 
$
(34
)
 
(16
)
 
$
570

 
$
(80
)
 
490

Comprehensive income
 
 
 
 
1,988

 
 
 
 
 
5,452

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(12
)
 
 
 
 
 
(34
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
1,976

 
 
 
 
 
$
5,418

 
12 Weeks Ended 9/5/2015
 
36 Weeks Ended 9/5/2015
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
543

 
 
 
 
 
$
3,768

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
Currency translation:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
(1,600
)
 
$

 
(1,600
)
 
$
(2,107
)
 
$

 
(2,107
)
Reclassification associated with Venezuelan entities
111

 

 
111

 
111

 

 
111

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
6

 
(3
)
 
3

 
88

 
(40
)
 
48

Net derivative gains/(losses)
13

 
(1
)
 
12

 
(94
)
 
43

 
(51
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
58

 
(18
)
 
40

 
167

 
(53
)
 
114

Reclassification associated with Venezuelan entities
20

 
(4
)
 
16

 
20

 
(4
)
 
16

Remeasurement of net liabilities and translation
16

 
(5
)
 
11

 
31

 
(7
)
 
24

Unrealized losses on securities
(11
)
 
5

 
(6
)
 
(2
)
 
1

 
(1
)
Total other comprehensive loss
$
(1,387
)
 
$
(26
)
 
(1,413
)
 
$
(1,786
)
 
$
(60
)
 
(1,846
)
Comprehensive (loss)/income
 
 
 
 
(870
)
 
 
 
 
 
1,922

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(10
)
 
 
 
 
 
(33
)
Comprehensive (Loss)/Income Attributable to PepsiCo
 
 
 
 
$
(880
)
 
 
 
 
 
$
1,889


See accompanying notes to the condensed consolidated financial statements.

4


Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
36 Weeks Ended
 
9/3/2016

 
9/5/2015

Operating Activities
 
 
 
Net income
$
4,962

 
$
3,768

Depreciation and amortization
1,611

 
1,644

Share-based compensation expense
190

 
208

Restructuring and impairment charges
106

 
113

Cash payments for restructuring charges
(90
)
 
(149
)
Charges related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)
373

 
73

Venezuela impairment charges

 
1,359

Excess tax benefits from share-based payment arrangements
(115
)
 
(85
)
Pension and retiree medical plan expenses
191

 
326

Pension and retiree medical plan contributions
(182
)
 
(165
)
Deferred income taxes and other tax charges and credits
285

 
186

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(1,301
)
 
(1,553
)
Inventories
(381
)
 
(574
)
Prepaid expenses and other current assets
(141
)
 
(157
)
Accounts payable and other current liabilities
523

 
1,014

Income taxes payable
813

 
1,002

Other, net
(249
)
 
(235
)
Net Cash Provided by Operating Activities
6,595

 
6,775

 
 
 
 
Investing Activities
 
 
 
Capital spending
(1,566
)
 
(1,463
)
Sales of property, plant and equipment
59

 
63

Acquisitions and investments in noncontrolled affiliates
(16
)
 
(24
)
Reduction of cash due to Venezuela deconsolidation

 
(568
)
Divestitures
76

 
75

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(7,084
)
 
(2,391
)
More than three months - maturities
5,479

 
3,005

Three months or less, net
12

 

Other investing, net
9

 
(3
)
Net Cash Used for Investing Activities
(3,031
)
 
(1,306
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt
3,355

 
5,719

Payments of long-term debt
(3,085
)
 
(4,066
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
57

 
13

More than three months - payments
(12
)
 
(31
)
Three months or less, net
2,024

 
1,431

Cash dividends paid
(3,144
)
 
(3,008
)
Share repurchases - common
(2,079
)
 
(3,199
)
Share repurchases - preferred
(3
)
 
(3
)
Proceeds from exercises of stock options
415

 
327

Excess tax benefits from share-based payment arrangements
115

 
85

Other financing
(29
)
 
(26
)
Net Cash Used for Financing Activities
(2,386
)
 
(2,758
)
Effect of exchange rate changes on cash and cash equivalents
(18
)
 
(147
)
Net Increase in Cash and Cash Equivalents
1,160

 
2,564

Cash and Cash Equivalents, Beginning of Year
9,096

 
6,134

Cash and Cash Equivalents, End of Period
$
10,256

 
$
8,698


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)

 
 
 
9/3/2016

 
12/26/2015

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
10,256

 
$
9,096

Short-term investments
4,524

 
2,913

Accounts and notes receivable, less allowance: 9/16 - $157 and 12/15 - $130
7,745

 
6,437

Inventories:
 
 
 
Raw materials
1,438

 
1,312

Work-in-process
228

 
161

Finished goods
1,454

 
1,247

 
3,120

 
2,720

Prepaid expenses and other current assets
1,454

 
1,865

Total Current Assets
27,099

 
23,031

Property, plant and equipment
36,603

 
35,747

Accumulated depreciation
(20,298
)
 
(19,430
)
 
16,305

 
16,317

Amortizable Intangible Assets, net
1,257

 
1,270

Goodwill
14,394

 
14,177

Other nonamortizable intangible assets
12,024

 
11,811

Nonamortizable Intangible Assets
26,418

 
25,988

Investments in Noncontrolled Affiliates
1,975

 
2,311

Other Assets
843

 
750

Total Assets
$
73,897

 
$
69,667

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
6,284

 
$
4,071

Accounts payable and other current liabilities
14,305

 
13,507

Total Current Liabilities
20,589

 
17,578

Long-Term Debt Obligations
29,322

 
29,213

Other Liabilities
6,088

 
5,887

Deferred Income Taxes
5,180

 
4,959

Total Liabilities
61,179

 
57,637

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(189
)
 
(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: 1,436 and 1,448 shares, respectively)
24

 
24

Capital in excess of par value
4,001

 
4,076

Retained earnings
52,200

 
50,472

Accumulated other comprehensive loss
(12,829
)
 
(13,319
)
Repurchased common stock, in excess of par value (430 and 418 shares, respectively)
(30,646
)
 
(29,185
)
Total PepsiCo Common Shareholders’ Equity
12,750

 
12,068

Noncontrolling interests
116

 
107

Total Equity
12,718

 
12,030

Total Liabilities and Equity
$
73,897

 
$
69,667


See accompanying notes to the condensed consolidated financial statements.

6


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
36 Weeks Ended
 
9/3/2016
 
9/5/2015
 
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

 
(3
)
 

 
(3
)
Balance, end of period
(0.7
)
 
(189
)
 
(0.7
)
 
(184
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,448

 
24

 
1,488

 
25

Repurchased common stock
(12
)
 

 
(26
)
 
(1
)
Balance, end of period
1,436

 
24

 
1,462

 
24

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

 
 
 
4,115

Share-based compensation expense
 
 
193

 
 
 
210

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(148
)
 
 
 
(175
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(114
)
 
 
 
(125
)
Other
 
 
(6
)
 
 
 
(4
)
Balance, end of period
 
 
4,001

 
 
 
4,021

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
50,472

 
 
 
49,092

Net income attributable to PepsiCo
 
 
4,928

 
 
 
3,734

Cash dividends declared – common
 
 
(3,200
)
 
 
 
(3,058
)
Cash dividends declared – preferred
 
 

 
 
 
(1
)
Balance, end of period
 
 
52,200

 
 
 
49,767

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,319
)
 
 
 
(10,669
)
Other comprehensive income/(loss) attributable to PepsiCo
 
 
490

 
 
 
(1,845
)
Balance, end of period
 
 
(12,829
)
 
 
 
(12,514
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(418
)
 
(29,185
)
 
(378
)
 
(24,985
)
Share repurchases
(21
)
 
(2,112
)
 
(34
)
 
(3,273
)
Stock option exercises, RSUs, PSUs and PEPunits converted
9

 
646

 
8

 
560

Other

 
5

 

 
4

Balance, end of period
(430
)
 
(30,646
)
 
(404
)
 
(27,694
)
Total PepsiCo Common Shareholders’ Equity
 
 
12,750

 
 
 
13,604

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
107

 
 
 
110

Net income attributable to noncontrolling interests
 
 
34

 
 
 
34

Distributions to noncontrolling interests
 
 
(25
)
 
 
 
(23
)
Currency translation adjustment
 
 

 
 
 
(1
)
Other, net
 
 

 
 
 
(2
)
Balance, end of period
 
 
116

 
 
 
118

Total Equity
 
 
$
12,718

 
 
 
$
13,579


(a)
Includes total tax benefits of $86 million in 2016 and $59 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 September 3, 2016 and Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 36 weeks ended September 3, 2016 and September 5, 2015, and the Condensed Consolidated Statements of Cash Flows and Equity for the 36 weeks ended September 3, 2016 and September 5, 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 36 weeks ended September 3, 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 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 June, July and August are reflected in our third 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 36 weeks ended September 5, 2015, these reclassifications resulted in an increase in cost of sales of $95 million and $240 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.

9


Net revenue and operating profit/(loss) of each division are as follows:
 
12 Weeks Ended
 
36 Weeks Ended
Net Revenue
9/3/2016


9/5/2015

 
9/3/2016

 
9/5/2015

FLNA
$
3,676

 
$
3,555

 
$
10,658

 
$
10,326

QFNA
571

 
583

 
1,749

 
1,768

NAB
5,518

 
5,360

 
15,024

 
14,771

Latin America (a)
1,762

 
2,283

 
4,521

 
5,921

ESSA
2,864

 
2,918

 
6,883

 
7,227

AMENA
1,636

 
1,632

 
4,449

 
4,458

Total division
$
16,027

 
$
16,331

 
$
43,284

 
$
44,471

 
12 Weeks Ended
 
36 Weeks Ended
Operating Profit/(Loss)
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

FLNA
$
1,148

 
$
1,085

 
$
3,249

 
$
3,012

QFNA (b)
144

 
150

 
456

 
381

NAB (c)
904

 
860

 
2,270

 
2,146

Latin America (a)
247

 
(994
)
 
664

 
(420
)
ESSA
388

 
398

 
792

 
860

AMENA (d)
264

 
199

 
499

 
802

Total division
3,095

 
1,698

 
7,930

 
6,781

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net (losses)/gains
(39
)
 
(28
)
 
107

 
10

Other
(235
)
 
(254
)
 
(633
)
 
(678
)
 
$
2,821

 
$
1,416

 
$
7,404

 
$
6,113

(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, Latin America’s financial results have not included the results of our Venezuelan businesses. Additionally, operating loss for the 12 and 36 weeks ended September 5, 2015 included charges of $1.4 billion related to our change in accounting for our investments in our wholly-owned Venezuelan subsidiaries and beverage joint venture.
(b)
Operating profit for QFNA for the 36 weeks ended September 5, 2015 included an impairment charge of $65 million associated with our Müller Quaker Dairy (MQD) joint venture investment.
(c)
Operating profit for NAB for the 12 and 36 weeks ended September 5, 2015 included a gain of $37 million associated with the settlement of a pension-related liability from a previous acquisition.
(d)
Operating profit for AMENA for the 36 weeks ended September 3, 2016 includes an 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 the 12 and 36 weeks ended September 5, 2015 included a charge of $73 million related to a write-off of the recorded value of a call option to increase our holding in TAB and an impairment charge of $29 million associated with a joint venture in the Middle East. In addition, operating profit for the 36 weeks ended September 5, 2015 included a gain of $39 million associated with refranchising a portion of our bottling operations in India.

10


Total assets of each division are as follows:
 
Total Assets
 
9/3/2016


12/26/2015

FLNA
$
5,648

 
$
5,375

QFNA
864

 
872

NAB
28,996

 
28,128

Latin America
4,684

 
4,284

ESSA
13,086

 
12,225

AMENA
5,752

 
5,901

Total division
59,030

 
56,785

Corporate (a)
14,867

 
12,882


$
73,897

 
$
69,667

(a)
Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment, pension and tax assets.
Note 2 - Recent Accounting Pronouncements - Not Yet Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance to clarify how certain cash receipts and payments should be presented in the statement of cash flows. The guidance is effective in 2018 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 2016, the 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

11


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.
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, with final amendments issued in 2016. The revenue recognition guidance provides for a single five-step model to be applied to all revenue contracts with customers and provides clarification 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. 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 implementation option to use either a retrospective approach or a cumulative effect adjustment approach. The guidance is effective in 2018, with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected an implementation 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
 
36 Weeks Ended
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

2014 Productivity Plan
$
27

 
$
43

 
$
106

 
$
94

2012 Productivity Plan

 
9

 

 
19

Total restructuring and impairment charges
27

 
52

 
106

 
113

Other productivity initiatives (a)

 
44

 
(2
)
 
54

Total restructuring and impairment charges and other productivity initiatives
$
27

 
$
96

 
$
104

 
$
167

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

12


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 September 3, 2016 and September 5, 2015, we incurred restructuring charges of $27 million ($20 million after-tax or $0.01 per share) and $43 million ($33 million after-tax or $0.02 per share), respectively. In the 36 weeks ended September 3, 2016 and September 5, 2015, we incurred restructuring charges of $106 million ($76 million after-tax or $0.05 per share) and $94 million ($73 million after-tax or $0.05 per share), respectively. 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 other costs associated with the implementation of our initiatives, including contract termination costs. Substantially all of the restructuring accrual at September 3, 2016 is expected to be paid by the end of 2017.
A summary of our 2014 Productivity Plan charges by segment is as follows:
 
 
12 Weeks Ended
 
36 Weeks Ended
 
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

FLNA
 
$
2

 
$
12

 
$
1

 
$
20

QFNA
 

 
1

 
1

 
2

NAB
 
6

 
4

 
19

 
18

Latin America
 

 
5

 
28

 
11

ESSA
 
11

 
15

 
38

 
28

AMENA
 
4

 
3

 
11

 
7

Corporate
 
4

 
3

 
8

 
8

 
 
$
27

 
$
43

 
$
106

 
$
94

A summary of our 2014 Productivity Plan activity for the 36 weeks ended September 3, 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
59

 
21

 
26

 
106

Cash payments
(29
)
 

 
(35
)
 
(64
)
Non-cash charges and translation
(5
)
 
(21
)
 
1

 
(25
)
Liability as of September 3, 2016
$
86

 
$

 
$
12

 
$
98


13


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 September 5, 2015, we incurred restructuring charges of $9 million ($8 million after-tax or $0.01 per share). In the 36 weeks ended September 5, 2015, we incurred restructuring charges of $19 million ($16 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 36 weeks ended September 3, 2016 were $26 million. We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual of $9 million at September 3, 2016 is expected to be paid by the end of 2016.
A summary of our 2012 Productivity Plan charges by segment is as follows:
 
 
 
 
 
 
9/5/2015
 
 
 
 
 
 
12 Weeks Ended
 
36 Weeks Ended
FLNA
 
 
 
 
 
$

 
$

QFNA
 
 
 
 
 

 

NAB
 
 
 
 
 

 
1

Latin America
 
 
 
 
 
5

 
5

ESSA
 
 
 
 
 
3

 
9

AMENA
 
 
 
 
 

 
1

Corporate
 
 
 
 
 
1

 
3

 
 
 
 
 
 
$
9

 
$
19

Other Productivity Initiatives
In the 12 and 36 weeks ended September 5, 2015, we incurred charges of $44 million ($29 million after-tax or $0.02 per share) and $54 million ($37 million after-tax or $0.02 per share), respectively. These charges are related to productivity and efficiency initiatives outside the scope of the 2014 and 2012 Productivity Plans discussed above. These amounts were recorded in selling, general and administrative expenses and primarily reflect severance and other employee-related costs. Cash payments in the 36 weeks ended September 3, 2016 were $35 million. Substantially all of the accrual of $26 million at September 3, 2016 is expected to be paid by the end of 2016. See additional unaudited information in “Results of Operations – Consolidated Review” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

14


A summary of our charges related to productivity and efficiency initiatives outside the scope of the 2014 and 2012 Productivity Plans by segment is as follows:
 
9/5/2015
 
12 Weeks Ended
 
36 Weeks Ended
FLNA
$

 
$

QFNA

 

NAB

 

Latin America
5

 
5

ESSA
1

 
5

AMENA
8

 
14

Corporate
30

 
30

 
$
44

 
$
54

Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
9/3/2016
 
12/26/2015
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
833

 
$
(105
)
 
$
728

 
$
820

 
$
(92
)
 
$
728

Reacquired franchise rights
 
106

 
(101
)
 
5

 
105

 
(99
)
 
6

Brands
 
1,305

 
(1,003
)
 
302

 
1,298

 
(987
)
 
311

Other identifiable intangibles
 
540

 
(318
)
 
222

 
526

 
(301
)
 
225

 
 
$
2,784

 
$
(1,527
)
 
$
1,257

 
$
2,749

 
$
(1,479
)
 
$
1,270


15


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

12/26/2015
 
 
9/3/2016
FLNA

 

 

Goodwill
$
267

 
$
7

 
$
274

Brands
22

 
2

 
24


289

 
9

 
298

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,754

 
27

 
9,781

Reacquired franchise rights
7,042

 
46

 
7,088

Acquired franchise rights
1,507

 
10

 
1,517

Brands
108

 

 
108


18,411

 
83

 
18,494

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
521

 
38

 
559

Brands
137

 
15

 
152


658

 
53

 
711

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,042

 
132

 
3,174

Reacquired franchise rights
488

 
18

 
506

Acquired franchise rights
190

 
4

 
194

Brands
2,212

 
116

 
2,328


5,932

 
270

 
6,202

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
418

 
13

 
431

Brands
105

 
2

 
107


523

 
15

 
538

 
 
 
 
 
 
Total goodwill
14,177

 
217

 
14,394

Total reacquired franchise rights
7,530

 
64

 
7,594

Total acquired franchise rights
1,697

 
14

 
1,711

Total brands
2,584

 
135

 
2,719


$
25,988

 
$
430

 
$
26,418


16


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
9/3/2016

 
12/26/2015

Balance, beginning of year
$
1,547

 
$
1,587

Additions for tax positions related to the current year
176

 
248

Additions for tax positions from prior years
80

 
122

Reductions for tax positions from prior years
(36
)
 
(261
)
Settlement payments
(10
)
 
(78
)
Statutes of limitations expiration
(16
)
 
(34
)
Translation and other
(10
)
 
(37
)
Balance, end of period
$
1,731

 
$
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
 
36 Weeks Ended
 
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

Share-based compensation expense - equity awards
 
$
67

 
$
64

 
$
190

 
$
208

Share-based compensation expense - liability awards
 
1

 

 
4

 

Restructuring and impairment charges
 
1

 
1

 
3

 
2

Total
 
$
69

 
$
65

 
$
197

 
$
210

For the 12 weeks ended September 3, 2016 and September 5, 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 the PepsiCo, Inc. Long-Term Incentive Plan (previously named the 2007 Long-Term Incentive Plan):
 
 
36 Weeks Ended
 
 
9/3/2016
 
9/5/2015
 
 
Granted (a)
 
Weighted-Average Grant Price
 
Granted (a)
 
Weighted-Average Grant Price
Stock options
 
1.6

 
$
99.51

 
1.8

 
$
98.76

RSUs and PSUs
 
3.0

 
$
98.87

 
2.7

 
$
99.15

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 36 weeks ended September 3, 2016.

17


Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
36 Weeks Ended
 
9/3/2016

 
9/5/2015

Expected life
6 years

 
7 years

Risk-free interest rate
1.4
%
 
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 36 weeks ended September 3, 2016 was $29 million ($19 million after-tax or $0.01 per share) and $86 million ($56 million after-tax or $0.04 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
 
9/3/2016


9/5/2015


9/3/2016


9/5/2015


9/3/2016


9/5/2015

 
U.S.

International

 
Service cost
$
91


$
100


$
20


$
25


$
7


$
8

Interest cost
112


126


24


30


9


12

Expected return on plan assets
(193
)

(195
)

(42
)

(44
)

(6
)

(6
)
Amortization of prior service credit
(1
)

(1
)





(8
)

(9
)
Amortization of net losses
39


47


11


18






48


77


13


29


2


5

Settlement/curtailment loss
4

 

 
3

 
3

 

 

Special termination benefits
1


4









Total expense
$
53


$
81


$
16


$
32


$
2


$
5


18


 
36 Weeks Ended
 
Pension
 
Retiree Medical
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

 
U.S.
 
International
 
 
Service cost
$
272

 
$
301

 
$
56

 
$
70

 
$
21

 
$
24

Interest cost
335

 
378

 
66

 
81

 
28

 
36

Expected return on plan assets
(577
)
 
(588
)
 
(115
)
 
(122
)
 
(17
)
 
(18
)
Amortization of prior service credit
(1
)
 
(2
)
 

 

 
(25
)
 
(27
)
Amortization of net losses/(gains)
116

 
142

 
29

 
50

 
(1
)
 
1

 
145

 
231

 
36

 
79

 
6

 
16

Settlement/curtailment loss
4

 

 
9

 
3

 

 

Special termination benefits
2

 
9

 

 

 

 
1

Total expense
$
151

 
$
240

 
$
45

 
$
82

 
$
6

 
$
17

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 or third quarters of 2016 or in the first three quarters of 2015. Subsequent to the third quarter of 2016, we made discretionary pension contributions of $202 million to our U.S. pension plans, and may make additional discretionary pension contributions in the fourth quarter of 2016 that would reduce our net cash provided by operating activities.
We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans, which may result in settlement charges that would be reflected in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Note 8 - Debt Obligations and Commitments
In the 36 weeks ended September 3, 2016, we issued the following senior notes:
Interest Rate

 
Maturity Date
 
Amount (a)

 
Floating rate

 
February 2019
 
$
400

 
1.500
%
 
February 2019
 
$
600

 
2.850
%
 
February 2026
 
$
750

 
4.450
%
 
April 2046
 
$
750

 
0.875
%
 
July 2028
 
750

(b) 
(a)
Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.
(b)
These notes were designated as a net investment hedge to partially offset the effects of foreign currency on our investment in certain of our foreign subsidiaries.
The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper.
In the 36 weeks ended September 3, 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.

19


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 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 September 3, 2016, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
As of September 3, 2016, we had $2.9 billion of commercial paper outstanding and $2.9 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.

20


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
 
36 Weeks Ended
 
 
 
 
9/3/2016

 
9/5/2015

 
9/3/2016

 
9/5/2015

 
Affected Line Item in the Condensed Consolidated Statement of Income
Currency translation:
 
 
 
 
 
 
 
 
 
 
Venezuelan entities
 
$

 
$
111

 
$

 
$
111

 
Venezuela impairment charges
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
    Foreign exchange contracts
 
$
1

 
$

 
$
2

 
$
(2
)
 
Net revenue
    Foreign exchange contracts
 
(5
)
 
(17
)
 
(39
)
 
(59
)
 
Cost of sales
    Interest rate derivatives
 
73

 
21

 
71

 
133

 
Interest expense
    Commodity contracts
 
1

 

 
4

 
8

 
Cost of sales
    Commodity contracts
 
1

 
2

 
4

 
8

 
Selling, general and administrative expenses
    Net losses before tax
 
71

 
6

 
42

 
88

 
 
    Tax amounts
 
(28
)
 
(3
)
 
(21
)
 
(40
)
 
 
    Net losses after tax