10-Q 1 pepsicoq2-10xq6172017.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 17, 2017 (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
 peplogoa02a02a02a45.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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
  
Accelerated filer  ¨
  
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
  
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨    NO  x
Number of shares of Common Stock outstanding as of July 3, 2017 was 1,425,510,474.



PepsiCo, Inc. and Subsidiaries

Table of Contents
 
 
Page No.
Part I Financial Information
 
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
 
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

Net Revenue
$
15,710

 
$
15,395

 
$
27,759

 
$
27,257

Cost of sales
7,056

 
6,830

 
12,342

 
11,981

Gross profit
8,654

 
8,565

 
15,417

 
15,276

Selling, general and administrative expenses
5,648

 
5,584

 
10,465

 
10,662

Amortization of intangible assets
16

 
17

 
29

 
31

Operating Profit
2,990

 
2,964

 
4,923

 
4,583

Interest expense
(265
)
 
(255
)
 
(517
)
 
(501
)
Interest income and other
49

 
22

 
89

 
36

Income before income taxes
2,774

 
2,731

 
4,495

 
4,118

Provision for income taxes
656

 
718

 
1,048

 
1,160

Net income
2,118

 
2,013

 
3,447

 
2,958

Less: Net income attributable to noncontrolling interests
13

 
8

 
24

 
22

Net Income Attributable to PepsiCo
$
2,105

 
$
2,005

 
$
3,423

 
$
2,936

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
 
Basic
$
1.47

 
$
1.39

 
$
2.40

 
$
2.03

Diluted
$
1.46

 
$
1.38

 
$
2.38

 
$
2.01

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,428

 
1,443

 
1,428

 
1,445

Diluted
1,441

 
1,456

 
1,441

 
1,458

Cash dividends declared per common share
$
0.805

 
$
0.7525

 
$
1.5575

 
$
1.455


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 6/17/2017
 
24 Weeks Ended 6/17/2017
 
Pre-tax amounts

Tax amounts

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


 


 
$
2,118

 
 
 
 
 
$
3,447

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
299

 
$
21

 
320

 
$
811

 
$
25

 
836

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net gains to net income
(53
)
 
19

 
(34
)
 
(86
)
 
30

 
(56
)
Net derivative gains
20

 
(10
)
 
10

 
17

 
(12
)
 
5

Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
32

 
(9
)
 
23

 
60

 
(18
)
 
42

Remeasurement of net liabilities and translation
(27
)
 
6

 
(21
)
 
(41
)
 
10

 
(31
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Reclassification to net income associated with sale of Britvic plc (Britvic) securities
(99
)
 
10

 
(89
)
 
(99
)
 
10

 
(89
)
Unrealized gains on securities
18

 
1

 
19

 
27

 
(4
)
 
23

Other


16


16

 

 
16

 
16

Total other comprehensive income
$
190

 
$
54

 
244

 
$
689

 
$
57

 
746

Comprehensive income
 
 
 
 
2,362

 
 
 
 
 
4,193

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(15
)
 
 
 
 
 
(25
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
2,347

 
 
 
 
 
$
4,168


 
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


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
 
6/17/2017

 
6/11/2016

Operating Activities
 
 
 
Net income
$
3,447

 
$
2,958

Depreciation and amortization
1,031

 
1,044

Share-based compensation expense
143

 
123

Restructuring and impairment charges
61

 
79

Cash payments for restructuring charges
(25
)
 
(67
)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)

 
373

Pension and retiree medical plan expenses
92

 
124

Pension and retiree medical plan contributions
(131
)
 
(155
)
Deferred income taxes and other tax charges and credits
130

 
119

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(733
)
 
(1,049
)
Inventories
(826
)
 
(755
)
Prepaid expenses and other current assets
(250
)
 
(202
)
Accounts payable and other current liabilities
(838
)
 
(73
)
Income taxes payable
310

 
704

Other, net
(170
)
 
(116
)
Net Cash Provided by Operating Activities
2,241

 
3,107

 
 
 
 
Investing Activities
 
 
 
Capital spending
(878
)
 
(919
)
Sales of property, plant and equipment
30

 
47

Acquisitions and investments in noncontrolled affiliates
(40
)
 
(4
)
Divestitures
143

 
75

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(6,785
)
 
(4,604
)
More than three months - maturities
6,709

 
3,786

More than three months - sales
242

 

Three months or less, net

 
10

Other investing, net
8

 
1

Net Cash Used for Investing Activities
(571
)
 
(1,608
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt
3,525

 
2,532

Payments of long-term debt
(1,003
)
 
(3,083
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
51

 
35

More than three months - payments
(57
)
 
(11
)
Three months or less, net
(172
)
 
2,795

Cash dividends paid
(2,175
)
 
(2,060
)
Share repurchases - common
(942
)
 
(1,329
)
Share repurchases - preferred
(2
)
 
(2
)
Proceeds from exercises of stock options
316

 
293

Withholding tax payments on RSUs, PSUs and PEPunits converted
(122
)
 
(102
)
Other financing
(1
)
 
(4
)
Net Cash Used for Financing Activities
(582
)
 
(936
)
Effect of exchange rate changes on cash and cash equivalents
36

 
(13
)
Net Increase in Cash and Cash Equivalents
1,124

 
550

Cash and Cash Equivalents, Beginning of Year
9,158

 
9,096

Cash and Cash Equivalents, End of Period
$
10,282

 
$
9,646


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)

 
 
 
6/17/2017

 
12/31/2016

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
10,282

 
$
9,158

Short-term investments
6,878

 
6,967

Accounts and notes receivable, less allowance: 6/17 - $137 and 12/16 - $134
7,543

 
6,694

Inventories:
 
 
 
Raw materials and packaging
1,537

 
1,315

Work-in-process
312

 
150

Finished goods
1,763

 
1,258

 
3,612

 
2,723

Prepaid expenses and other current assets
933

 
908

Total Current Assets
29,248

 
26,450

Property, plant and equipment
37,966

 
36,818

Accumulated depreciation
(21,224
)
 
(20,227
)
 
16,742

 
16,591

Amortizable Intangible Assets, net
1,256

 
1,237

Goodwill
14,655

 
14,430

Other nonamortizable intangible assets
12,472

 
12,196

Nonamortizable Intangible Assets
27,127

 
26,626

Investments in Noncontrolled Affiliates
1,962

 
1,950

Other Assets
608

 
636

Total Assets
$
76,943

 
$
73,490

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term debt obligations
$
8,279

 
$
6,892

Accounts payable and other current liabilities
13,834

 
14,243

Total Current Liabilities
22,113

 
21,135

Long-Term Debt Obligations
31,205

 
30,053

Other Liabilities
6,666

 
6,669

Deferred Income Taxes
4,429

 
4,434

Total Liabilities
64,413

 
62,291

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(194
)
 
(192
)
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: 1,426 and 1,428 shares, respectively)
24

 
24

Capital in excess of par value
3,913

 
4,091

Retained earnings
53,706

 
52,518

Accumulated other comprehensive loss
(13,174
)
 
(13,919
)
Repurchased common stock, in excess of par value (440 and 438 shares, respectively)
(31,912
)
 
(31,468
)
Total PepsiCo Common Shareholders’ Equity
12,557

 
11,246

Noncontrolling interests
126

 
104

Total Equity
12,530

 
11,199

Total Liabilities and Equity
$
76,943

 
$
73,490


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
 
6/17/2017
 
6/11/2016
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(192
)
 
(0.7
)
 
(186
)
Redemptions

 
(2
)
 

 
(2
)
Balance, end of period
(0.7
)
 
(194
)
 
(0.7
)
 
(188
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,428

 
24

 
1,448

 
24

Change in repurchased common stock
(2
)
 

 
(7
)
 

Balance, end of period
1,426

 
24

 
1,441

 
24

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
4,091

 
 
 
4,076

Share-based compensation expense
 
 
145

 
 
 
125

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(201
)
 
 
 
(155
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(122
)
 
 
 
(102
)
Other
 
 

 
 
 
(4
)
Balance, end of period
 
 
3,913

 
 
 
3,940

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
52,518

 
 
 
50,472

Net income attributable to PepsiCo
 
 
3,423

 
 
 
2,936

Cash dividends declared – common
 
 
(2,235
)
 
 
 
(2,113
)
Balance, end of period
 
 
53,706

 
 
 
51,295

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,919
)
 
 
 
(13,319
)
Other comprehensive income attributable to PepsiCo
 
 
745

 
 
 
506

Balance, end of period
 
 
(13,174
)
 
 
 
(12,813
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(438
)
 
(31,468
)
 
(418
)
 
(29,185
)
Share repurchases
(8
)
 
(967
)
 
(14
)
 
(1,369
)
Stock option exercises, RSUs, PSUs and PEPunits converted
6

 
523

 
7

 
501

Other

 

 

 
2

Balance, end of period
(440
)
 
(31,912
)
 
(425
)
 
(30,051
)
Total PepsiCo Common Shareholders’ Equity
 
 
12,557

 
 
 
12,395

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
104

 
 
 
107

Net income attributable to noncontrolling interests
 
 
24

 
 
 
22

Currency translation adjustment
 
 
1

 
 
 

Other, net
 
 
(3
)
 
 
 
(1
)
Balance, end of period
 
 
126

 
 
 
128

Total Equity
 
 
$
12,530

 
 
 
$
12,376


(a)
Includes total tax benefits of $56 million in 2016.
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 17, 2017, Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 17, 2017 and June 11, 2016, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 17, 2017 and June 11, 2016 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 31, 2016. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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 17, 2017 are not necessarily indicative of the results expected for any future period or the full year.
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. Unless otherwise noted, 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 financial statements to reflect the adoption of the recently issued accounting pronouncements disclosed in Note 2.
Our Divisions
We are organized into six reportable segments (also referred to as divisions), as follows:
1)
Frito-Lay North America (FLNA), which includes our branded food and snack businesses in the United States and Canada;
2)
Quaker Foods North America (QFNA), which includes our cereal, rice, pasta and other branded food businesses in the United States and Canada;
3)
North America Beverages (NAB), which includes our beverage businesses in the United States and Canada;
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.

8


Net revenue and operating profit of each division are as follows:
 
12 Weeks Ended
 
24 Weeks Ended
Net Revenue
6/17/2017


6/11/2016

 
6/17/2017

 
6/11/2016

FLNA
$
3,678

 
$
3,564

 
$
7,177

 
$
6,982

QFNA
553

 
561

 
1,151

 
1,178

NAB
5,242

 
5,145

 
9,702

 
9,506

Latin America
1,823

 
1,717

 
2,900

 
2,759

ESSA
2,812

 
2,660

 
4,257

 
4,019

AMENA
1,602

 
1,748

 
2,572

 
2,813

Total division
$
15,710

 
$
15,395

 
$
27,759

 
$
27,257


 
12 Weeks Ended
 
24 Weeks Ended
Operating Profit
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

FLNA
$
1,153

 
$
1,083

 
$
2,213

 
$
2,101

QFNA
146

 
146

 
310

 
312

NAB
894

 
881

 
1,399

 
1,366

Latin America
228

 
242

 
360

 
417

ESSA (a)
501

 
337

 
603

 
404

AMENA (b)
307

 
383

 
478

 
235

Total division
3,229

 
3,072

 
5,363

 
4,835

Corporate Unallocated
(239
)
 
(108
)
 
(440
)
 
(252
)
 
$
2,990

 
$
2,964

 
$
4,923

 
$
4,583

(a)
Operating profit for ESSA for the 12 and 24 weeks ended June 17, 2017 includes a gain of $95 million associated with the sale of our minority stake in Britvic.
(b)
Operating profit for AMENA for the 24 weeks ended June 11, 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.
Total assets of each division are as follows:
 
Total Assets
 
6/17/2017


12/31/2016

FLNA
$
5,839

 
$
5,731

QFNA
829

 
811

NAB
29,274

 
28,172

Latin America
4,839

 
4,568

ESSA
13,365

 
12,302

AMENA
5,472

 
5,261

Total division
59,618

 
56,845

Corporate (a)
17,325

 
16,645


$
76,943

 
$
73,490

(a)
Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and tax assets.



9


Note 2 - Recently Issued Accounting Pronouncements
Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the accounting for certain aspects of share-based payments to employees. We adopted the provisions of this guidance during our first quarter of 2017, resulting in the following impacts to our financial statements:
Income tax effects of vested or settled awards were recognized in the provision for income taxes on our income statement on a prospective basis. Previously, these tax effects were recorded on our equity statement in capital in excess of par value. For the 12 and 24 weeks ended June 17, 2017, our excess tax benefits were $11 million and $71 million, respectively, resulting in a $0.01 and $0.05 increase to diluted net income attributable to PepsiCo per common share. For the 12 and 24 weeks ended June 11, 2016, our excess tax benefits recognized were $3 million and $56 million, respectively. If we had applied this standard in 2016, there would have been no impact to diluted net income attributable to PepsiCo per common share for the 12 weeks ended June 11, 2016 and a $0.04 increase to diluted net income attributable to PepsiCo per common share for the 24 weeks ended June 11, 2016. The ongoing impact on our financial statements is dependent on the timing of when awards vest or are exercised, our tax rate and the intrinsic value when awards vest or are exercised.
Excess tax benefits are retrospectively presented within operating activities and withholding tax payments upon vesting of restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo equity performance units (PEPunits) are retrospectively presented within financing activities in the cash flow statement. The adoption resulted in an increase of $222 million and $186 million in our operating cash flow with a corresponding decrease in our financing cash flow for the 24 weeks ended June 17, 2017 and June 11, 2016, respectively.
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. Our accounting treatment for outstanding awards was not impacted by our adoption of this provision. In addition, the guidance allows for a policy election to account for forfeitures as they occur. We will continue to apply our policy of estimating forfeitures.
In 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting for an investment originally accounted for by another 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 investor’s ability to exercise significant influence over the investment is achieved. We adopted the provisions of this guidance prospectively during our first quarter of 2017; the adoption did not impact 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. We adopted the provisions of this guidance retrospectively during our first quarter of 2017, resulting in the reclassification of $639 million of deferred taxes from current to non-current on our balance sheet as of December 31, 2016.
Not Yet Adopted
In 2017, the FASB issued guidance that requires companies to retrospectively present the service cost component of net periodic benefit cost for pension and retiree medical plans along with other compensation costs in operating profit and present the other components of net periodic benefit cost below operating profit in the income statement. The guidance also allows only the service cost component of net periodic benefit cost to be eligible for capitalization within inventory or fixed assets on a prospective basis. The guidance is

10


effective beginning in 2018, and we will adopt it in the first quarter of 2018. We are currently evaluating the impact of this guidance on our financial statements. See Note 7 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Note 7 in this Form 10-Q for further information on our service cost and other components of net periodic benefit cost for pension and retiree medical plans.
In 2016, the FASB issued guidance to clarify how restricted cash should be presented in the cash flow statement. The guidance is effective beginning 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 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 beginning 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 requires lessees to recognize most leases on the balance sheet, but record expenses on the income statement 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 beginning in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and related disclosures, including the impact on our current lease portfolio from both a lessor and lessee perspective; this adoption will primarily result in an increase in the assets and liabilities on our balance sheet. We are currently evaluating the timing of adoption of this guidance. See Note 13 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for our minimum lease payments under non-cancelable operating leases.
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 beginning in 2018. Since early adoption is not permitted, we will adopt the guidance in the first quarter of 2018. We are currently evaluating the impact of this guidance on our financial statements, including the impact on certain of our investments in noncontrolled affiliates. In the second quarter of 2017, we sold our minority stake in Britvic, representing all of our available-for-sale equity securities, which reduced the risk and volatility of these investments in our income statement in the future. See Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Note 10 in this Form 10-Q for further information on our available-for-sale securities.
In 2014, the FASB issued guidance on revenue recognition, with final amendments issued in 2016. The guidance provides for a five-step model to determine the revenue recognized for the transfer of goods or services to customers that reflects the expected entitled consideration in exchange for those goods or services. It also provides clarification for principal versus agent considerations and identifying performance obligations. 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. Financial statement disclosures required under the guidance will enable users to understand the nature, amount, timing, judgments and uncertainty of revenue and cash flows relating to customer contracts. The two permitted transition methods under the guidance are the full retrospective approach or a cumulative effect adjustment to the opening retained earnings in the year of adoption (cumulative effect approach). The guidance is effective beginning in 2018, with early adoption permitted.

11


We are utilizing a comprehensive approach to assess the impact of the guidance on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of our performance obligations, principal versus agent considerations and variable consideration. We continue to make significant progress on our contract reviews and are also in the process of evaluating the impact, if any, on changes to our business processes, systems and controls to support recognition and disclosures under the new guidance. Based on the foregoing, we do not currently expect this guidance to have a material impact on our financial statements. We are continuing with our implementation plan and currently expect to adopt the new guidance beginning in 2018 using the cumulative effect approach.
Note 3 - Restructuring and Impairment Charges
We publicly announced a multi-year productivity plan on February 13, 2014 (2014 Productivity Plan) that 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.
In the 12 weeks ended June 17, 2017 and June 11, 2016, we incurred restructuring charges of $34 million ($31 million after-tax or $0.02 per share) and $49 million ($31 million after-tax or $0.02 per share), respectively, in conjunction with our 2014 Productivity Plan. In the 24 weeks ended June 17, 2017 and June 11, 2016, we incurred restructuring charges of $61 million ($58 million after-tax or $0.04 per share) and $79 million ($56 million after-tax or $0.04 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. Substantially all of the restructuring accrual at June 17, 2017 is expected to be paid by the end of 2017.
A summary of our 2014 Productivity Plan charges is as follows:
 
12 Weeks Ended
 
6/17/2017
 
6/11/2016
 
Severance and Other
Employee Costs
 
Asset
Impairments
 
Other 
Costs
 
Total
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other 
Costs
 
Total
FLNA
$
3

 
$

 
$

 
$
3

 
$
1

 
$

 
$
2

 
$
3

QFNA

 

 

 

 

 

 
1

 
1

NAB

 

 

 

 
3

 
1

 
2

 
6

Latin America
21

 
2

 
2

 
25

 
27

 

 
1

 
28

ESSA (a)
6

 

 
(3
)
 
3

 
2

 
2

 
4

 
8

AMENA

 

 
2

 
2

 

 
2

 

 
2

Corporate
1

 

 

 
1

 
1

 

 

 
1

 
$
31

 
$
2

 
$
1

 
$
34

 
$
34

 
$
5

 
$
10

 
$
49

(a)
Income amount primarily reflects a gain on the sale of property, plant and equipment.


12


 
24 Weeks Ended
 
6/17/2017
 
6/11/2016
 
Severance and Other
Employee Costs
 
Asset
Impairments
 
Other 
Costs
 
Total
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other 
Costs
 
Total
FLNA (a)
$
4

 
$

 
$

 
$
4

 
$
(3
)
 
$

 
$
2

 
$
(1
)
QFNA

 

 

 

 

 

 
1

 
1

NAB

 

 
2

 
2

 
10

 
1

 
2

 
13

Latin America
33

 
13

 
3

 
49

 
27

 

 
1

 
28

ESSA (b)
10

 

 
(3
)
 
7

 
3

 
11

 
13

 
27

AMENA (b)

 

 
(4
)
 
(4
)
 
3

 
4

 

 
7

Corporate
2

 

 
1

 
3

 
2

 

 
2

 
4

 
$
49

 
$
13

 
$
(1
)
 
$
61

 
$
42

 
$
16

 
$
21

 
$
79

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
(b)
Income amount primarily reflects a gain on the sale of property, plant and equipment.
Since the inception of the 2014 Productivity Plan, we incurred restructuring charges of $800 million:
 
2014 Productivity Plan Costs to Date
 
Severance and Other Employee Costs
 
Asset
Impairments
 
Other Costs
 
Total
FLNA
$
68

 
$
9

 
$
23

 
$
100

QFNA
15

 

 
6

 
21

NAB
97

 
68

 
84

 
249

Latin America
85

 
26

 
27

 
138

ESSA
91

 
37

 
53

 
181

AMENA
21

 
6

 
16

 
43

Corporate
19

 

 
49

 
68

 
$
396

 
$
146

 
$
258

 
$
800

A summary of our 2014 Productivity Plan activity for the 24 weeks ended June 17, 2017 is as follows:
 
Severance and
Other Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 31, 2016
$
88

 
$

 
$
8

 
$
96

2017 restructuring charges
49

 
13

 
(1
)
 
61

Cash payments
(19
)
 

 
(6
)
 
(25
)
Non-cash charges and translation
(5
)
 
(13
)
 
10

 
(8
)
Liability as of June 17, 2017
$
113

 
$

 
$
11

 
$
124

There were no material charges related to other productivity and efficiency initiatives outside the scope of the 2014 Productivity Plan.
We regularly evaluate different productivity initiatives beyond the 2014 Productivity Plan discussed above.
See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

13


Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
6/17/2017
 
12/31/2016
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
832

 
$
(117
)
 
$
715

 
$
827

 
$
(108
)
 
$
719

Reacquired franchise rights
 
106

 
(103
)
 
3

 
106

 
(102
)
 
4

Brands
 
1,291

 
(998
)
 
293

 
1,277

 
(977
)
 
300

Other identifiable intangibles
 
552

 
(307
)
 
245

 
522

 
(308
)
 
214

 
 
$
2,781

 
$
(1,525
)
 
$
1,256

 
$
2,732

 
$
(1,495
)
 
$
1,237


14


The change in the book value of nonamortizable intangible assets is as follows:
 
Balance
12/31/2016
 
Translation
and Other
 
Balance
6/17/2017

 
 
FLNA

 

 

Goodwill
$
270

 
$
3

 
$
273

Brands
23

 

 
23


293

 
3

 
296

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,843

 
(11
)
 
9,832

Reacquired franchise rights
7,064

 
15

 
7,079

Acquired franchise rights
1,512

 
3

 
1,515

Brands
314

 
24

 
338


18,733

 
31

 
18,764

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
553

 
6

 
559

Brands
150

 
2

 
152


703

 
8

 
711

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,177

 
215

 
3,392

Reacquired franchise rights
488

 
42

 
530

Acquired franchise rights
184

 
11

 
195

Brands
2,358

 
175

 
2,533


6,207

 
443

 
6,650

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
412

 
12

 
424

Brands
103

 
4

 
107


515

 
16

 
531

 
 
 
 
 
 
Total goodwill
14,430

 
225

 
14,655

Total reacquired franchise rights
7,552

 
57

 
7,609

Total acquired franchise rights
1,696

 
14

 
1,710

Total brands
2,948

 
205

 
3,153


$
26,626

 
$
501

 
$
27,127




15


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
6/17/2017

 
12/31/2016

Balance, beginning of year
$
1,885

 
$
1,547

Additions for tax positions related to the current year
144

 
349

Additions for tax positions from prior years
6

 
139

Reductions for tax positions from prior years
(8
)
 
(70
)
Settlement payments
(4
)
 
(26
)
Statutes of limitations expiration
(8
)
 
(27
)
Translation and other
30

 
(27
)
Balance, end of period
$
2,045

 
$
1,885

Note 6 - Share-Based Compensation
The following table summarizes our total share-based compensation expense:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

Share-based compensation expense - equity awards
 
$
71

 
$
54

 
$
143

 
$
123

Share-based compensation expense - liability awards
 
3

 
1

 
7

 
3

Restructuring and impairment charges
 
1

 
1

 
2

 
2

Total
 
$
75

 
$
56

 
$
152

 
$
128

For the 12 weeks ended June 17, 2017 and June 11, 2016, our grants of stock options, RSUs, PSUs 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:
 
24 Weeks Ended
 
6/17/2017
 
6/11/2016
 
Granted(a)
 
Weighted-Average Grant Price
 
Granted(a)
 
Weighted-Average Grant Price
Stock options
1.3

 
$
109.75

 
1.5

 
$
98.75

RSUs and PSUs
2.8

 
$
109.76

 
2.9

 
$
98.83

(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 $19 million and $17 million during the 24 weeks ended June 17, 2017 and June 11, 2016, respectively.

16


Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
24 Weeks Ended
 
6/17/2017

 
6/11/2016

Expected life
5 years

 
6 years

Risk-free interest rate
2.0
%
 
1.5
%
Expected volatility
11
%
 
12
%
Expected dividend yield
2.7
%
 
2.7
%
Note 7 - Pension and Retiree Medical Benefits
Effective January 1, 2017, the U.S. qualified defined benefit pension plans were reorganized into the PepsiCo Employees Retirement Plan A, or active plan, and the PepsiCo Employees Retirement Plan I, or inactive plan. Actuarial gains and losses associated with the active plan are amortized over the average remaining service life of the active participants (approximately 11 years beginning in 2017), while the actuarial gains and losses associated with the inactive plan are amortized over the remaining life expectancy of the inactive participants (approximately 27 years beginning in 2017). The pre-tax reduction in net periodic benefit cost associated with this change was $9 million ($6 million after-tax with a nominal amount per share) in the 12 weeks ended June 17, 2017, and $19 million ($12 million after-tax or $0.01 per share) in the 24 weeks ended June 17, 2017 and will approximate $40 million in 2017, primarily impacting corporate unallocated.
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension

Retiree Medical
 
6/17/2017


6/11/2016


6/17/2017


6/11/2016


6/17/2017


6/11/2016

 
U.S.

International

 
Service cost
$
92


$
90


$
21


$
21


$
7


$
7

Interest cost
108


112


21


24


8


10

Expected return on plan assets
(196
)

(192
)

(40
)

(42
)

(5
)

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








(6
)

(8
)
Amortization of net losses/(gains)
28


39


12


10


(3
)

(1
)

33


49


14


13


1


2

Settlement/curtailment loss

 

 

 
6

 

 

Special termination benefits
1


1









Total expense
$
34


$
50


$
14


$
19


$
1


$
2


17


 
24 Weeks Ended
 
Pension
 
Retiree Medical
 
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

 
U.S.
 
International
 
 
Service cost
$
185

 
$
181

 
$
37

 
$
36

 
$
13

 
$
14

Interest cost
216

 
223

 
36

 
42

 
17

 
19

Expected return on plan assets
(392
)
 
(384
)
 
(70
)
 
(73
)
 
(10
)
 
(11
)
Amortization of prior service cost/(credits)
1

 

 

 

 
(12
)
 
(17
)
Amortization of net losses/(gains)
56

 
77

 
21

 
18

 
(6
)
 
(1
)
 
66

 
97

 
24

 
23

 
2

 
4

Settlement/curtailment loss

 

 

 
6

 

 

Special termination benefits
2

 
1

 

 

 

 

Total expense
$
68

 
$
98

 
$
24

 
$
29

 
$
2

 
$
4

We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. We made discretionary contributions to our international pension plans of $6 million in the second quarter of 2017 and $7 million in the first quarter of 2016. There were no discretionary contributions made in the first quarter of 2017 or the second quarter of 2016.
Note 8 - Debt Obligations
In the second quarter of 2017, we issued the following senior notes:
Interest Rate

 
Maturity Date
 
Amount(a)

 
Floating rate

 
May 2019
 
$
350

 
Floating rate

 
May 2022
 
$
400

 
1.550
%
 
May 2019
 
$
750

 
2.250
%
 
May 2022
 
$
750

 
4.000
%
 
May 2047
 
$
750

 
2.150
%
 
May 2024
 
C$
750

(b) 
(a)
Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.
(b)
These notes, issued in Canadian dollars, were designated as a net investment hedge to partially offset the effects of foreign currency on our investments 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 24 weeks ended June 17, 2017, $1 billion of senior notes matured and were paid.
In the second quarter of 2017, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 5, 2022. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 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 2017, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 4, 2018. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 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

18


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 and our $3.7225 billion 364-day credit agreement both dated as of June 6, 2016. 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 17, 2017, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
As of June 17, 2017, we had $1.8 billion of commercial paper outstanding.
Note 9 - Accumulated Other Comprehensive Loss
The reclassifications from accumulated other comprehensive loss to the income statement are summarized as follows:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
 
 
6/17/2017

 
6/11/2016

 
6/17/2017

 
6/11/2016

 
Affected Line Item in the Income Statement
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
    Foreign exchange contracts
 
$

 
$
1

 
$

 
$
1

 
Net revenue
    Foreign exchange contracts
 
(6
)
 
(13
)
 
(11
)
 
(34
)
 
Cost of sales
    Interest rate derivatives
 
(48
)