10-Q 1 pepsicoq3-10xq982018.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 8, 2018 (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
pepsicologo20185a01.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 every Interactive Data File required to be submitted 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 such files).    YES   x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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  ¨
  
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 September 25, 2018 was 1,411,568,000.



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
 
36 Weeks Ended
 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

Net Revenue
$
16,485

 
$
16,240

 
$
45,137

 
$
43,999

Cost of sales
7,527

 
7,368

 
20,445

 
19,717

Gross profit
8,958

 
8,872

 
24,692

 
24,282

Selling, general and administrative expenses
6,114

 
5,948

 
17,013

 
16,576

Operating Profit
2,844

 
2,924

 
7,679

 
7,706

Other pension and retiree medical benefits income
74

 
69

 
231

 
210

Interest expense
(302
)
 
(269
)
 
(904
)
 
(786
)
Interest income and other
81

 
52

 
248

 
141

Income before income taxes
2,697

 
2,776

 
7,254

 
7,271

Provision for income taxes (See Note 5)
188

 
620

 
1,562

 
1,668

Net income
2,509

 
2,156

 
5,692

 
5,603

Less: Net income attributable to noncontrolling interests
11

 
12

 
31

 
36

Net Income Attributable to PepsiCo
$
2,498

 
$
2,144

 
$
5,661

 
$
5,567

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
 
Basic
$
1.77

 
$
1.50

 
$
3.99

 
$
3.90

Diluted
$
1.75

 
$
1.49

 
$
3.97

 
$
3.87

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,414

 
1,425

 
1,417

 
1,427

Diluted
1,424

 
1,438

 
1,427

 
1,440

Cash dividends declared per common share
$
0.9275

 
$
0.805

 
$
2.66

 
$
2.3625


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
 
36 Weeks Ended
 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

Net income
$
2,509

 
$
2,156

 
$
5,692

 
$
5,603

Other comprehensive (loss)/income, net of taxes:
 
 
 
 
 
 
 
Net currency translation adjustment
(728
)
 
320

 
(1,409
)
 
1,156

Net change on cash flow hedges
(1
)
 
(32
)
 
75

 
(83
)
Net pension and retiree medical adjustments
54

 
9

 
134

 
20

Net change on available-for-sale securities
2

 
2

 
4

 
(64
)
Other

 

 

 
16

 
(673
)
 
299

 
(1,196
)
 
1,045

Comprehensive income
1,836

 
2,455

 
4,496

 
6,648

Comprehensive income attributable to
noncontrolling interests
(11
)
 
(12
)
 
(31
)
 
(37
)
Comprehensive Income Attributable to PepsiCo
$
1,825

 
$
2,443

 
$
4,465

 
$
6,611



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
 
9/8/2018

 
9/9/2017

Operating Activities
 
 
 
Net income
$
5,692

 
$
5,603

Depreciation and amortization
1,636

 
1,604

Share-based compensation expense
203

 
206

Restructuring and impairment charges
79

 
69

Cash payments for restructuring charges
(179
)
 
(83
)
Pension and retiree medical plan expenses
147

 
141

Pension and retiree medical plan contributions
(1,664
)
 
(169
)
Deferred income taxes and other tax charges and credits
(609
)
 
284

Provisional net tax expense related to the Tax Cuts and Jobs Act (TCJ Act)
854

 

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(1,299
)
 
(999
)
Inventories
(362
)
 
(424
)
Prepaid expenses and other current assets
(158
)
 
(119
)
Accounts payable and other current liabilities
116

 
(496
)
Income taxes payable
633

 
633

Other, net
(357
)
 
(163
)
Net Cash Provided by Operating Activities
4,732

 
6,087

 
 
 
 
Investing Activities
 
 
 
Capital spending
(1,578
)
 
(1,474
)
Sales of property, plant and equipment
119

 
82

Acquisitions and investments in noncontrolled affiliates
(253
)
 
(45
)
Divestitures
294

 
143

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(5,637
)
 
(11,742
)
More than three months - maturities
11,874

 
10,400

More than three months - sales
772

 
345

Three months or less, net
7

 
4

Other investing, net

 
9

Net Cash Provided by/(Used for) Investing Activities
5,598

 
(2,278
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt

 
3,525

Payments of long-term debt
(2,506
)
 
(3,256
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
2

 
77

More than three months - payments
(17
)
 
(91
)
Three months or less, net
(1,384
)
 
1,526

Cash dividends paid
(3,621
)
 
(3,324
)
Share repurchases - common
(1,442
)
 
(1,464
)
Share repurchases - preferred
(2
)
 
(4
)
Proceeds from exercises of stock options
215

 
396

Withholding tax payments on restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo
equity performance units (PEPunits) converted
(93
)
 
(131
)
Other financing
(23
)
 
(29
)
Net Cash Used for Financing Activities
(8,871
)
 
(2,775
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(73
)
 
76

Net Increase in Cash and Cash Equivalents and Restricted Cash
1,386

 
1,110

Cash and Cash Equivalents and Restricted Cash, Beginning of Year
10,657

 
9,169

Cash and Cash Equivalents and Restricted Cash, End of Period
$
12,043

 
$
10,279


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)

 
 
 
9/8/2018

 
12/30/2017

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
11,991

 
$
10,610

Short-term investments
1,907

 
8,900

Accounts and notes receivable, less allowance: 9/18 - $120 and 12/17 - $129
7,975

 
7,024

Inventories:
 
 
 
Raw materials and packaging
1,401

 
1,344

Work-in-process
164

 
167

Finished goods
1,577

 
1,436

 
3,142

 
2,947

Prepaid expenses and other current assets
827

 
1,546

Total Current Assets
25,842

 
31,027

Property, plant and equipment
38,878

 
39,106

Accumulated depreciation
(22,337
)
 
(21,866
)
 
16,541

 
17,240

Amortizable Intangible Assets, net
1,193

 
1,268

Goodwill
14,332

 
14,744

Other nonamortizable intangible assets
12,273

 
12,570

Nonamortizable Intangible Assets
26,605

 
27,314

Investments in Noncontrolled Affiliates
2,394

 
2,042

Other Assets
1,057

 
913

Total Assets
$
73,632

 
$
79,804

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term debt obligations
$
4,474

 
$
5,485

Accounts payable and other current liabilities
15,230

 
15,017

Total Current Liabilities
19,704

 
20,502

Long-Term Debt Obligations
30,643

 
33,796

Other Liabilities
9,538

 
11,283

Deferred Income Taxes
3,358

 
3,242

Total Liabilities
63,243

 
68,823

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value

 
41

Repurchased Preferred Stock

 
(197
)
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: 1,412 and 1,420 shares, respectively)
24

 
24

Capital in excess of par value
3,939

 
3,996

Retained earnings
54,404

 
52,839

Accumulated other comprehensive loss
(14,253
)
 
(13,057
)
Repurchased common stock, in excess of par value (455 and 446 shares, respectively)
(33,828
)
 
(32,757
)
Total PepsiCo Common Shareholders’ Equity
10,286

 
11,045

Noncontrolling interests
103

 
92

Total Equity
10,389

 
10,981

Total Liabilities and Equity
$
73,632

 
$
79,804


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
 
9/8/2018
 
9/9/2017
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
0.8

 
$
41

 
0.8

 
$
41

Conversion to common stock
(0.1
)
 
(6
)
 

 

Retirement of preferred stock
(0.7
)
 
(35
)
 

 

Balance, end of period

 

 
0.8

 
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(197
)
 
(0.7
)
 
(192
)
Redemptions

 
(2
)
 

 
(4
)
Retirement of preferred stock
0.7

 
199

 

 

Balance, end of period

 

 
(0.7
)
 
(196
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,420

 
24

 
1,428

 
24

Shares issued in connection with preferred stock conversion to common stock
1

 

 

 

Change in repurchased common stock
(9
)
 

 
(5
)
 

Balance, end of period
1,412

 
24

 
1,423

 
24

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
3,996

 
 
 
4,091

Share-based compensation expense
 
 
204

 
 
 
209

Equity issued in connection with preferred stock conversion to common stock
 
 
6

 
 
 

Stock option exercises, RSUs, PSUs and PEPunits converted
 
 
(172
)
 
 
 
(221
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(93
)
 
 
 
(131
)
Other
 
 
(2
)
 
 
 
(4
)
Balance, end of period
 
 
3,939

 
 
 
3,944

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
52,839

 
 
 
52,518

Cumulative effect of accounting changes
 
 
(145
)
 
 
 

Net income attributable to PepsiCo
 
 
5,661

 
 
 
5,567

Cash dividends declared – common
 
 
(3,787
)
 
 
 
(3,387
)
Retirement of preferred stock
 
 
(164
)
 
 
 

Balance, end of period
 
 
54,404

 
 
 
54,698

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,057
)
 
 
 
(13,919
)
Other comprehensive (loss)/income attributable to PepsiCo
 
 
(1,196
)
 
 
 
1,044

Balance, end of period
 
 
(14,253
)
 
 
 
(12,875
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(446
)
 
(32,757
)
 
(438
)
 
(31,468
)
Share repurchases
(14
)
 
(1,453
)
 
(13
)
 
(1,495
)
Stock option exercises, RSUs, PSUs and PEPunits converted
5

 
381

 
8

 
620

Other

 
1

 

 
2

Balance, end of period
(455
)
 
(33,828
)
 
(443
)
 
(32,341
)
Total PepsiCo Common Shareholders’ Equity
 
 
10,286

 
 
 
13,450

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
92

 
 
 
104

Net income attributable to noncontrolling interests
 
 
31

 
 
 
36

Distributions to noncontrolling interests
 
 
(20
)
 
 
 
(25
)
Currency translation adjustment
 
 

 
 
 
1

Balance, end of period
 
 
103

 
 
 
116

Total Equity
 
 
$
10,389

 
 
 
$
13,411


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 8, 2018, Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 36 weeks ended September 8, 2018 and September 9, 2017, and the Condensed Consolidated Statements of Cash Flows and Equity for the 36 weeks ended September 8, 2018 and September 9, 2017 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 30, 2017 (2017 Form 10-K), as modified to reflect the adoption of those recently issued accounting pronouncements disclosed in Note 2 in this Form 10-Q. This report should be read in conjunction with our 2017 Form 10-K. 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 8, 2018 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. In the 12 weeks ended September 8, 2018, our financial results outside of North America reflect the months of June, July and August. In the 36 weeks ended September 8, 2018, our financial results outside of North America reflect the months of January through August.
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, including merchandising activities, 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. Certain reclassifications were made to the prior year’s financial statements to conform to the current year presentation, including the adoption during the first quarter of 2018 of those 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;


8


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
 
36 Weeks Ended
Net Revenue
9/8/2018(a)


9/9/2017

 
9/8/2018(a)

 
9/9/2017

FLNA
$
3,891

 
$
3,792

 
$
11,345

 
$
10,969

QFNA
567

 
578

 
1,695

 
1,729

NAB
5,456

 
5,332

 
15,064

 
15,034

Latin America
1,868

 
1,873

 
4,935

 
4,773

ESSA
3,161

 
3,098

 
7,945

 
7,355

AMENA
1,542

 
1,567

 
4,153

 
4,139

Total division
$
16,485

 
$
16,240

 
$
45,137

 
$
43,999

(a)
Our primary performance obligation is the distribution and sales of beverage products and food and snack products to our customers, each comprising approximately 50% of our consolidated net revenue. Internationally, our Latin America segment is predominantly a food and snack business, ESSA’s beverage business and food and snack business are each approximately 50% of the segment’s net revenue and AMENA’s beverage business and food and snack business are approximately 35% and 65%, respectively, of the segment’s net revenue. Beverage revenue from company-owned bottlers, which primarily includes our consolidated bottling operations in our NAB and ESSA segments, is approximately 40% of our consolidated net revenue. Generally, our finished goods beverage operations produce higher net revenue, but lower operating margins as compared to concentrate sold to authorized bottling partners for the manufacture of finished goods beverages.
 
12 Weeks Ended
 
36 Weeks Ended
Operating Profit
9/8/2018

 
9/9/2017(a)

 
9/8/2018

 
9/9/2017(a)

FLNA
$
1,241

 
$
1,199

 
$
3,491

 
$
3,392

QFNA
143

 
145

 
443

 
453

NAB
703

 
813

 
1,838

 
2,204

Latin America
284

 
284

 
742

 
645

ESSA (b)
439

 
427

 
995

 
1,015

AMENA (c)
311

 
267

 
994

 
745

Total division
$
3,121

 
$
3,135

 
$
8,503

 
$
8,454

Corporate unallocated
(277
)
 
(211
)
 
(824
)
 
(748
)
 
$
2,844

 
$
2,924

 
$
7,679

 
$
7,706

(a)
Reflects the retrospective adoption of guidance requiring the presentation of non-service cost components of net periodic benefit cost below operating profit. See Note 2 for additional information.
(b)
Operating profit for ESSA for the 36 weeks ended September 9, 2017 includes a gain of $95 million associated with the sale of our minority stake in Britvic plc (Britvic).
(c)
Operating profit for AMENA for the 36 weeks ended September 8, 2018 includes a gain of $144 million associated with refranchising a portion of our beverage business in Thailand.
Note 2 - Recently Issued Accounting Pronouncements
Adopted
In 2017, the Financial Accounting Standards Board (FASB) issued guidance 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 separately below operating profit in the income statement. The guidance also allows only the service cost component

9


of net periodic benefit cost to be eligible for capitalization within inventory or fixed assets on a prospective basis. We adopted the provisions of this guidance retrospectively in the first quarter of 2018, using historical information previously disclosed in our pension and retiree medical benefits footnote as the estimation basis. We also updated our allocation of service costs to our divisions to better approximate actual service cost. The impact from retrospective adoption of this guidance resulted in an increase to cost of sales and selling, general and administrative expenses of $2 million and $67 million, respectively, for the 12 weeks ended September 9, 2017 and $9 million and $201 million, respectively, for the 36 weeks ended September 9, 2017. We recorded a corresponding increase to other pension and retiree medical benefits income below operating profit of $69 million and $210 million for the 12 and 36 weeks ended September 9, 2017, respectively.
The following table shows the (decreases)/increases to operating profit for each division and to corporate unallocated for the respective periods presented below:
 
9/9/2017
 
12 Weeks Ended

 
36 Weeks Ended

FLNA (a)
$
(9
)
 
$
(29
)
QFNA
(1
)
 
(3
)
NAB (b)
(4
)
 
(12
)
Latin America
3

 
4

ESSA
(9
)
 
(24
)
AMENA

 

Corporate unallocated (c)
(49
)
 
(146
)
Total
$
(69
)
 
$
(210
)
(a)
Includes restructuring charges of $1 million for the 12 and 36 weeks ended September 9, 2017.
(b)
Includes restructuring charges of $1 million for the 36 weeks ended September 9, 2017.
(c)
Includes restructuring charges of $1 million and $2 million for the 12 weeks and 36 weeks ended September 9, 2017, respectively.
For the years ended December 30, 2017 and December 31, 2016, implementation of this guidance resulted in a decrease in operating profit of $233 million and an increase in operating profit of $19 million, respectively, primarily impacting selling, general and administrative expenses. The changes described above had no impact on our consolidated net revenue, net income or earnings per share. See Note 7 to our consolidated financial statements in our 2017 Form 10-K 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. We adopted the provisions of this guidance retrospectively during the first quarter of 2018; the adoption did not have a material impact on our financial statements and primarily relates to collateral posted against our derivative asset or liability positions. See Note 9 and Note 13 for further information.
In 2016, the FASB issued guidance that requires companies to account for the income tax effects of intercompany transfers of assets, other than inventory, when the transfer occurs versus deferring income tax effects until the transferred asset is sold to an outside party or otherwise recognized. We adopted the provisions of this guidance during the first quarter of 2018; the adoption did not have a material impact on our financial statements and we recorded an adjustment of $8 million to beginning retained earnings.
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. We adopted the provisions of this guidance during the first quarter of 2018; the adoption did not have an impact on our financial statements. See Note 9 to our consolidated financial statements in our 2017 Form 10-K for further information on our investments in equity securities.

10


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 related 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). We adopted the guidance applied to all contracts using the cumulative effect approach during the first quarter of 2018; the adoption did not have a material impact on our financial statements.
We utilized 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 completed our contract and business process reviews and implemented changes to our controls to support recognition and disclosures under the new guidance. We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of beverage products and food and snack products) is satisfied upon shipment or delivery to our customers based on written sales terms, which is also when control is transferred.
As a result of implementing certain changes, which did not have a material impact on our accounting policies upon adoption, in the first quarter of 2018, we recorded an adjustment of $137 million to beginning retained earnings to reflect marketplace spending that our customers and independent bottlers expect to be entitled to in line with revenue recognition. In addition, we excluded from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions that were not already excluded. The impact of these taxes previously recognized in net revenue and cost of sales was $19 million and $58 million for the 12 and 36 weeks ended September 9, 2017, respectively, and approximately $75 million for the fiscal year ended December 30, 2017, with no impact on operating profit. Shipping and handling activities, including certain merchandising activities, that are performed after a customer obtains control of the product are recorded as fulfillment costs in selling, general and administrative expenses. See Note 2 to our consolidated financial statements in our 2017 Form 10-K for further information on our significant accounting policies related to revenue recognition and total marketplace spending.
Not Yet Adopted
In 2018, the FASB issued guidance related to the TCJ Act for the optional reclassification of the residual tax effects, arising from the change in corporate tax rate, in accumulated other comprehensive loss to retained earnings. The reclassification is the difference between the amount previously recorded in other comprehensive income at the historical U.S. federal tax rate that remains in accumulated other comprehensive loss at the time the TCJ Act was effective and the amount that would have been recorded using the newly enacted rate. If elected, the guidance can be applied retrospectively to each period during which the impact of the TCJ Act is recognized or in the period of adoption. We are currently evaluating the impact and, if elected, we will adopt the guidance when it becomes effective in the first quarter of 2019.
In 2017, the FASB issued guidance to amend and simplify the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance

11


expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. We are currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements. We will adopt the guidance when it becomes effective in the first quarter of 2019.
In 2016, the FASB issued guidance on leases, with amendments issued in 2018. The guidance 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 two permitted transition methods under the guidance are the modified retrospective transition approach, which requires application of the guidance in all comparative periods presented, and the cumulative effect adjustment approach, which requires application at the adoption date. We are currently evaluating the impact of this guidance on our financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet and the impact on our current lease portfolio from both a lessor and lessee perspective. To facilitate this, we are progressing on our comprehensive review of our lease portfolio and enhancing our controls. We identified our significant leases by geography and by asset type that will be impacted by the new guidance, and we are in the process of implementing a new software platform, and corresponding controls, for administering our leases and facilitating compliance with the new guidance. In addition, we are currently evaluating the method of transition. We will adopt the guidance when it becomes effective in the first quarter of 2019. See Note 13 to our consolidated financial statements in our 2017 Form 10-K for our minimum lease payments under non-cancelable operating leases.
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 beverage, food and snack 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. To build on the 2014 Productivity Plan, in the fourth quarter of 2017, we expanded and extended the program through the end of 2019 to take advantage of additional opportunities within the initiatives described above to further strengthen our beverage, food and snack businesses.
In the 12 weeks ended September 8, 2018 and September 9, 2017, we incurred restructuring charges of $35 million ($31 million after-tax or $0.02 per share) and $8 million ($7 million after-tax with a nominal amount per share), respectively, in conjunction with our 2014 Productivity Plan. In the 36 weeks ended September 8, 2018 and September 9, 2017, we incurred restructuring charges of $79 million ($66 million after-tax or $0.05 per share) and $69 million ($65 million after-tax or $0.05 per share), respectively. These net charges were recorded in selling, general and administrative expenses and other pension and retiree medical benefits income 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 September 8, 2018 is expected to be paid by the end of 2018.

12


A summary of our 2014 Productivity Plan charges is as follows:
 
12 Weeks Ended
 
9/8/2018
 
9/9/2017
 
Severance and Other Employee Costs(a)
 
Asset
Impairments
 
Other  
Costs
 
Total
 
Severance and Other
Employee Costs
(a)
 
Asset Impairments
 
Other 
Costs
(b)
 
Total
FLNA
$
(4
)
 
$

 
$
1

 
$
(3
)
 
$
2

 
$

 
$

 
$
2

QFNA

 

 

 

 

 

 

 

NAB
9

 
2

 
2

 
13

 

 

 
(3
)
 
(3
)
Latin America 
2

 
1

 
3

 
6

 
(5
)
 
2

 
1

 
(2
)
ESSA
16

 

 
1

 
17

 
10

 
1

 
1

 
12

AMENA
1

 

 
1

 
2

 
(2
)
 

 
(1
)
 
(3
)
Corporate

 

 

 

 
2

 

 

 
2

 
$
24

 
$
3

 
$
8

 
$
35

 
$
7

 
$
3

 
$
(2
)
 
$
8

(a)
There were no net charges related to other pension and retiree medical benefits for the 12 weeks ended September 8, 2018. The 12 weeks ended September 9, 2017 includes charges related to other pension and retiree medical benefits of $2 million. Income amounts represent adjustments for changes in estimates of previously recorded amounts.
(b)
Income amount for NAB primarily reflects a gain on the sale of property, plant and equipment. Income amount for AMENA represents an adjustment for changes in estimates of previously recorded amounts.
 
36 Weeks Ended
 
9/8/2018
 
9/9/2017
 
Severance and Other Employee Costs(a)
 
Asset
Impairments
 
Other 
Costs
 
Total
 
Severance and Other Employee 
 
Costs(a)
 
Asset Impairments
 
Other 
Costs
(b)
 
Total
FLNA
$
1

 
$
3

 
$
2

 
$
6

 
$
6

 
$

 
$

 
$
6

QFNA
1

 

 

 
1

 

 

 

 

NAB
13

 
6

 
6

 
25

 

 

 
(1
)
 
(1
)
Latin America
10

 
1

 
7

 
18

 
28

 
15

 
4

 
47

ESSA
23

 
1

 
1

 
25

 
20

 
1

 
(2
)
 
19

AMENA
5

 

 
1

 
6

 
(2
)
 

 
(5
)
 
(7
)
Corporate
(5
)
 

 
3

 
(2
)
 
4

 

 
1

 
5

 
$
48

 
$
11

 
$
20

 
$
79

 
$
56

 
$
16

 
$
(3
)
 
$
69

(a)
Includes charges related to other pension and retiree medical benefits of $4 million for each of the 36 weeks ended September 8, 2018 and September 9, 2017. Income amounts represent adjustments for changes in estimates of previously recorded amounts.
(b)
Income amounts primarily reflect gains on the sales of property, plant and equipment.
Since the inception of the 2014 Productivity Plan, we incurred restructuring charges of $1,113 million:
 
2014 Productivity Plan Costs to Date
 
Severance and Other Employee Costs
 
Asset
Impairments
 
Other Costs
 
Total
FLNA
$
132

 
$
12

 
$
25

 
$
169

QFNA
27

 

 
6

 
33

NAB
162

 
75

 
89

 
326

Latin America
119

 
30

 
21

 
170

ESSA
150

 
42

 
60

 
252

AMENA
28

 
6

 
16

 
50

Corporate
57

 

 
56

 
113

 
$
675

 
$
165

 
$
273

 
$
1,113


13


A summary of our 2014 Productivity Plan activity for the 36 weeks ended September 8, 2018 is as follows:
 
Severance and
Other Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 30, 2017
$
212

 
$

 
$
14

 
$
226

2018 restructuring charges
48

 
11

 
20

 
79

Cash payments
(150
)
 

 
(29
)
 
(179
)
Non-cash charges and translation
(10
)
 
(11
)
 
2

 
(19
)
Liability as of September 8, 2018
$
100

 
$

 
$
7

 
$
107

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.
Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
9/8/2018
 
12/30/2017
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
846

 
$
(136
)
 
$
710

 
$
858

 
$
(128
)
 
$
730

Reacquired franchise rights
 
106

 
(104
)
 
2

 
106

 
(104
)
 
2

Brands
 
1,297

 
(1,027
)
 
270

 
1,322

 
(1,026
)
 
296

Other identifiable intangibles
 
494

 
(283
)
 
211

 
521

 
(281
)
 
240

 
 
$
2,743

 
$
(1,550
)
 
$
1,193

 
$
2,807

 
$
(1,539
)
 
$
1,268


14


The change in the book value of nonamortizable intangible assets is as follows:
 
Balance
12/30/2017
 
Translation
and Other
 
Balance
9/8/2018

 
 
FLNA (a)

 

 

Goodwill
$
280

 
$
23

 
$
303

Brands
25

 
140

 
165


305

 
163

 
468

QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,854

 
(24
)
 
9,830

Reacquired franchise rights
7,126

 
(39
)
 
7,087

Acquired franchise rights
1,525

 
(9
)
 
1,516

Brands
353

 

 
353


18,858

 
(72
)
 
18,786

Latin America
 
 
 
 
 
Goodwill
555

 
(51
)
 
504

Brands
141

 
(17
)
 
124


696

 
(68
)
 
628

ESSA
 
 
 
 
 
Goodwill
3,452

 
(330
)
 
3,122

Reacquired franchise rights
549

 
(45
)
 
504

Acquired franchise rights
195

 
(31
)
 
164

Brands
2,545

 
(288
)
 
2,257


6,741

 
(694
)
 
6,047

AMENA
 
 
 
 
 
Goodwill
428

 
(30
)
 
398

Brands
111

 
(8
)
 
103


539

 
(38
)
 
501

 
 
 
 
 
 
Total goodwill
14,744

 
(412
)
 
14,332

Total reacquired franchise rights
7,675

 
(84
)
 
7,591

Total acquired franchise rights
1,720

 
(40
)
 
1,680

Total brands
3,175

 
(173
)
 
3,002


$
27,314

 
$
(709
)
 
$
26,605

(a)
The change in 2018 is primarily related to our acquisition of Bare Foods Co.


15


Note 5 - Income Taxes
A reconciliation of unrecognized tax benefits is as follows: 
 
9/8/2018

 
12/30/2017

Balance, beginning of year
$
2,212

 
$
1,885

Additions for tax positions related to the current year
102

 
309

Additions for tax positions from prior years
124

 
86

Reductions for tax positions from prior years
(734
)
 
(51
)
Settlement payments
(229
)
 
(4
)
Statutes of limitations expiration
(28
)
 
(33
)
Translation and other
(10
)
 
20

Balance, end of period
$
1,437

 
$
2,212

For the 12 weeks ended September 8, 2018, we recognized a non-cash tax benefit of $364 million ($0.26 per share) resulting from the conclusion of certain international tax audits. In the second quarter of 2018, we reached an agreement with the Internal Revenue Service (IRS) resolving all open matters related to the audits of taxable years 2012 and 2013. The conclusion of certain international tax audits and the resolution with the IRS, collectively, resulted in a non-cash tax benefit totaling $678 million ($0.48 per share) for the 36 weeks ended September 8, 2018.
Tax Cuts and Jobs Act
During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of $2.5 billion in the fourth quarter of 2017. See Note 5 to our consolidated financial statements in our 2017 Form 10-K for further information on this provisional net tax expense.
For the 12 weeks ended September 8, 2018, we recognized additional provisional transition tax expense of $76 million ($0.05 per share) reflecting the TCJ Act impact on the conclusion of certain international tax audits, as discussed above. For the 36 weeks ended September 8, 2018, we recognized additional provisional transition tax expense of $854 million ($0.60 per share) reflecting the impact of additional transition tax guidance issued by the IRS through the third quarter of 2018, the TCJ Act impact on the conclusion of certain international tax audits and the resolution with the IRS of all open matters related to the audits of taxable years 2012 and 2013, as discussed above, as well as the impact of actions taken by states within the United States that adopted the TCJ Act. These amounts were in addition to the provisional net tax expense of $2.5 billion recognized in the fourth quarter of 2017.
The TCJ Act also created a new requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. During the first quarter of 2018, we elected to treat the tax effect of GILTI as a current-period expense when incurred.
The components of the provisional net tax expense recorded in 2017 and through the 36 weeks ended September 8, 2018 were based on currently available information and additional information needs to be prepared, obtained and/or analyzed to determine the final amounts. The provisional tax expense for the mandatory repatriation of undistributed international earnings will require further analysis of certain foreign

16


exchange gains or losses, substantiation of foreign tax credits, as well as estimated cash and cash equivalents as of November 30, 2018, the tax year-end of our foreign subsidiaries. The provisional tax benefit for the remeasurement of deferred taxes will require additional information necessary for the preparation of our U.S. federal tax return, and further analysis and interpretation of certain provisions of the TCJ Act impacting deferred taxes, for example 100% expensing of qualified assets, could impact our deferred tax balance as of December 30, 2017.
Tax effects for these items will be recorded as discrete adjustments to our income tax provision, once complete. We elected to adopt the guidance issued by the Securities and Exchange Commission that allows for a measurement period, not to exceed one year after the enactment date of the TCJ Act, to finalize the recording of the related tax impacts. We currently expect to finalize and record any resulting adjustments by the end of 2018.
The recorded impact of the TCJ Act is provisional and the final amount may differ, possibly materially, due to, among other things, changes in estimates, interpretations and assumptions we have made, changes in IRS interpretations, the issuance of new guidance, legislative actions, changes in accounting standards or related interpretations in response to the TCJ Act and future actions by states within the United States that have not currently adopted the TCJ Act.
For further unaudited information and discussion of the potential impact of the TCJ Act, refer to “Item 1A. Risk Factors” and Note 5 to our consolidated financial statements in our 2017 Form 10-K and “Our Critical Accounting Policies,” “Our Business Risks” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. 
Note 6 - Share-Based Compensation
The following table summarizes our total share-based compensation expense:
 
 
12 Weeks Ended
 
36 Weeks Ended
 
 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

Share-based compensation expense - equity awards
 
$
57

 
$
63

 
$
203

 
$
206

Share-based compensation expense - liability awards
 
2

 
3

 
4

 
10

Restructuring and impairment charges
 
(1
)
 
1

 
1

 
3

Total
 
$
58

 
$
67

 
$
208

 
$
219

For the 12 weeks ended September 8, 2018 and September 9, 2017, 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:
 
36 Weeks Ended
 
9/8/2018
 
9/9/2017
 
Granted(a)
 
Weighted-Average Grant Price
 
Granted(a)
 
Weighted-Average Grant Price
Stock options
1.4

 
$
108.75

 
1.4

 
$
110.04

RSUs and PSUs
2.6

 
$
108.70

 
2.8

 
$
109.84

(a)
In millions. All grant activity is disclosed at target.

17


We granted long-term cash awards to certain executive officers and other senior executives with an aggregate target value of $21 million and $19 million during the 36 weeks ended September 8, 2018 and September 9, 2017, respectively.
Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
36 Weeks Ended
 
9/8/2018

 
9/9/2017

Expected life
5 years

 
5 years

Risk-free interest rate
2.6
%
 
2.0
%
Expected volatility
12
%
 
11
%
Expected dividend yield
2.7
%
 
2.7
%
Note 7 - Pension and Retiree Medical Benefits
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension
 
Retiree Medical
 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

 
U.S.
 
International
 
 
Service cost
$
99

 
$
93

 
$
23

 
$
21

 
$
7

 
$
6

Interest cost
111

 
108

 
23

 
21

 
8

 
8

Expected return on plan assets
(218
)
 
(196
)
 
(50
)
 
(42
)
 
(4
)
 
(5
)
Amortization of prior service cost/(credits)
1

 

 

 

 
(5
)
 
(5
)
Amortization of net losses/(gains)
41

 
29

 
12

 
12

 
(2
)
 
(3
)
 
34

 
34

 
8

 
12

 
4

 
1

Settlement loss
7

 

 
2

 
2

 

 

Special termination benefits

 
2

 

 

 

 

Total
$
41

 
$
36

 
$
10

 
$
14

 
$
4

 
$
1

 
36 Weeks Ended
 
Pension
 
Retiree Medical
 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

 
9/8/2018

 
9/9/2017

 
U.S.
 
International
 
 
Service cost
$
298

 
$
278

 
$
63

 
$
58

 
$
22

 
$
19

Interest cost
333

 
324

 
63

 
57

 
24

 
25

Expected return on plan assets
(653
)
 
(588
)
 
(134
)
 
(112
)
 
(13
)
 
(15
)
Amortization of prior service cost/(credits)
2

 
1

 

 

 
(14
)
 
(17
)
Amortization of net losses/(gains)
124

 
85

 
31

 
33

 
(7
)
 
(9
)
 
104

 
100

 
23

 
36

 
12

 
3

Settlement loss
7

 

 
2

 
2

 

 

Special termination benefits
3

 
4

 
1

 

 

 

Total
$
114

 
$
104

 
$
26

 
$
38

 
$
12

 
$
3


18


We regularly evaluate opportunities to reduce risk and volatility associated with our pension and retiree medical plans. During the first quarter of 2018, we made discretionary contributions of $1.4 billion to the PepsiCo Employees Retirement Plan A (Plan A) in the United States. During the third quarter of 2018, we made discretionary contributions of $37 million to fund U.S. retiree medical plan benefits. We made discretionary contributions to our international pension plans of $17 million and $6 million for the 36 weeks ended September 8, 2018 and September 9, 2017, respectively.
Note 8 - Debt Obligations
In the 36 weeks ended September 8, 2018, $2.5 billion of senior notes matured and were paid.
As of September 8, 2018, we had no commercial paper outstanding.
In the second quarter of 2018, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 4, 2023. 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 2018, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 3, 2019. 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 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 $3.75 billion five-year credit agreement and our $3.75 billion 364-day credit agreement, both dated as of June 5, 2017. 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 8, 2018, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
Note 9 - Financial Instruments
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.
There have been no material changes during the 36 weeks ended September 8, 2018 with respect to our risk management policies or strategies and valuation techniques used in measuring the fair value of the financial assets or liabilities disclosed in Note 9 to our consolidated financial statements in our 2017 Form 10-K.
The notional amounts of our financial instruments used to hedge the above risks as of September 8, 2018 and December 30, 2017 are as follows:
 
Notional Amounts(a)
 
9/8/2018

 
12/30/2017

Commodity
$
0.9

 
$
0.9

Foreign exchange
$
1.9

 
$
1.6

Interest rate
$
11.9

 
$
14.2

Net investment
$
1.4

 
$
1.5

(a)
In billions.

19


Ineffectiveness for all derivatives and non-derivatives that qualify for hedge accounting treatment was not material for all periods presented.
As of September 8, 2018, approximately 36% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 43% as of December 30, 2017.
Fair Value Measurements
The fair values of our financial assets and liabilities as of September 8, 2018 and December 30, 2017 are categorized as follows:
 
 
 
9/8/2018
 
12/30/2017
 
Fair Value Hierarchy Levels
 
Assets(a)
 
Liabilities(a)
 
Assets(a)
 
Liabilities(a)
Available-for-sale debt securities (b)
2
 
$
8,218

 
$

 
$
14,510

 
$

Short-term investments (c)
1
 
$
234

 
$

 
$
228

 
$

Prepaid forward contracts (d)
2
 
$
22

 
$

 
$
27

 
$

Deferred compensation (e)
2
 
$

 
$
489

 
$

 
$
503

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate (f)
2
 
$

 
$
224

 
$
24

 
$
130

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange (g)
2
 
$
46

 
$
10

 
$
15

 
$
31

Interest rate (g)
2
 

 
242

 

 
213

Commodity (h)
1
 

 
1

 

 
2

Commodity (i)
2
 
2

 

 
2

 

 
 
 
$
48

 
$
253

 
$
17

 
$
246

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange (g)
2
 
$
2

 
$
6

 
$
10

 
$
3

Commodity (h)
1
 
1

 
16

 

 
19

Commodity (i)
2
 
47

 
32

 
85

 
12

 
 
 
$
50

 
$
54

 
$
95

 
$
34

Total derivatives at fair value (j)
 
 
$
98

 
$
531

 
$
136

 
$
410

Total
 
 
$
8,572

 
$
1,020

 
$
14,901

 
$
913

(a)
Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities.
(b)
Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of September 8, 2018, $6.5 billion and $1.7 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 30, 2017, $5.8 billion and $8.7 billion of debt securities were classified as cash equivalents and short-term investments, respectively. Unrealized gains and losses on our investments in debt securities as of September 8, 2018 and December 30, 2017 were not material. All of our available-for-sale debt securities have maturities of one year or less.
(c)
Based on the price of index funds. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.
(d)
Based primarily on the price of our common stock.
(e)
Based on the fair value of investments corresponding to employees’ investment elections.
(f)
Based on LIBOR forward rates.
(g)
Based on recently reported market transactions of spot and forward rates.
(h)
Based on quoted contract prices on futures exchange markets.
(i)
Based on recently reported market transactions of swap arrangements.