10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

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 12, 2010 (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

LOGO

 

   PepsiCo, Inc.  
   (Exact Name of Registrant as Specified in its Charter)  

 

        North Carolina             13-1584302  
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
700 Anderson Hill Road, Purchase, New York     10577  
(Address of Principal Executive Offices)   (Zip Code)

 

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

 

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   X   NO      

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   X      NO      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

 

Large accelerated filer  X    Accelerated filer     
Non-accelerated filer       

Smaller reporting company     

(Do not check if a smaller reporting company)  
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES    NO X 

Number of shares of Common Stock outstanding as of July 9, 2010: 1,590,933,558


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

INDEX

 

     Page No.

Part I Financial Information

  

Item 1. Condensed Consolidated Financial Statements

   3

Condensed Consolidated Statement of Income – 12 and 24 Weeks Ended June 12, 2010 and June  13, 2009

   3

Condensed Consolidated Statement of Cash Flows – 24 Weeks Ended June 12, 2010 and June  13, 2009

   4

Condensed Consolidated Balance Sheet – June 12, 2010 and December 26, 2009

   5-6

Condensed Consolidated Statement of Equity – 24 Weeks Ended June 12, 2010 and June 13, 2009

   7

Condensed Consolidated Statement of Comprehensive Income – 12 and 24 Weeks Ended June  12, 2010 and June 13, 2009

   8

Notes to the Condensed Consolidated Financial Statements

   9-33

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

   34-56

Report of Independent Registered Public Accounting Firm

   57

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   58

Item 4. Controls and Procedures

   58

Part II Other Information

  

Item 1. Legal Proceedings

   59

Item 1A. Risk Factors

   59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   59-61

Item 6. Exhibits

   62

 

2


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements.

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in millions except per share amounts, unaudited)

 

     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     6/12/10     6/13/09  

Net Revenue

   $ 14,801      $ 10,592      $ 24,169      $ 18,855   

Cost of sales

     6,745        4,881        11,208        8,625   

Selling, general and administrative expenses

     5,563        3,507        9,612        6,428   

Amortization of intangible assets

     32        14        48        24   
                                

Operating Profit

     2,461        2,190        3,301        3,778   

Bottling equity income

     9        119        718        144   

Interest expense

     (172     (101     (326     (199

Interest income

     2        28        8        28   
                                

Income before income taxes

     2,300        2,236        3,701        3,751   

Provision for income taxes

     687        568        654        942   
                                

Net income

     1,613        1,668        3,047        2,809   

Less: Net income attributable to noncontrolling interests

     10        8        14        14   
                                

Net Income Attributable to PepsiCo

   $ 1,603      $ 1,660      $ 3,033      $ 2,795   
                                

Net Income Attributable to PepsiCo per Common Share

        

Basic

   $ 1.00      $ 1.06      $ 1.90      $ 1.79   

Diluted

   $ 0.98      $ 1.06      $ 1.87      $ 1.78   

Cash Dividends Declared per Common Share

   $ 0.48      $ 0.45      $ 0.93      $ 0.875   

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, unaudited)

 

     24 Weeks Ended  
     6/12/10     6/13/09  

Operating Activities

    

Net income

   $ 3,047      $ 2,809   

Depreciation and amortization

     969        685   

Stock-based compensation expense

     119        108   

2009 restructuring and impairment charges

            36   

Cash payments for 2009 restructuring charges

     (28     (160

PBG/PAS merger and integration costs

     476          

Cash payments for PBG/PAS merger and integration costs

     (209       

Gain on previously held equity interests in PBG and PAS

     (958       

Asset write-off

     145          

Non-cash foreign exchange loss related to Venezuela devaluation

     120          

Excess tax benefits from share-based payment arrangements

     (47     (8

Pension and retiree medical plan contributions

     (694     (1,088

Pension and retiree medical plan expenses

     248        192   

Bottling equity income, net of dividends

     42        (101

Deferred income taxes and other tax charges and credits

     186        4   

Change in accounts and notes receivable

     (994     (489

Change in inventories

     40        (384

Change in prepaid expenses and other current assets

     (139     (124

Change in accounts payable and other current liabilities

     (55     (505

Change in income taxes payable

     337        669   

Other, net

     (163     (152
                

Net Cash Provided by Operating Activities

     2,442        1,492   
                

Investing Activities

    

Capital spending

     (968     (735

Sales of property, plant and equipment

     37        26   

Acquisitions of PBG and PAS, net of cash and cash equivalents acquired

     (2,833       

Acquisition of manufacturing and distribution rights from Dr Pepper Snapple Group, Inc. (DPSG)

     (900       

Other acquisitions and investments in noncontrolled affiliates

     (34     (120

Divestitures

            16   

Short-term investments, by original maturity

    

More than three months – purchases

     (6     (23

More than three months – maturities

     15        34   

Three months or less, net

     (46     6   

Other investing, net

     (10       
                

Net Cash Used for Investing Activities

     (4,745     (796
                

Financing Activities

    

Proceeds from issuances of long-term debt

     4,216        1,053   

Payments of long-term debt

     (26     (151

Short-term borrowings, by original maturity

    

More than three months – proceeds

     31        33   

More than three months – payments

     (19     (64

Three months or less, net

     3,329        (196

Cash dividends paid

     (1,451     (1,331

Share repurchases – common

     (3,308       

Share repurchases – preferred

     (2     (3

Proceeds from exercises of stock options

     464        117   

Excess tax benefits from share-based payment arrangements

     47        8   

Acquisition of noncontrolling interest in Lebedyansky from PBG

     (159       

Other financing

     (6       
                

Net Cash Provided by/(Used for) Financing Activities

     3,116        (534

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (227     (12
                

Net Increase in Cash and Cash Equivalents

     586        150   

Cash and Cash Equivalents – Beginning of year

     3,943        2,064   
                

Cash and Cash Equivalents – End of period

   $ 4,529      $ 2,214   
                

Non-cash activity:

    

Issuance of common stock and equity awards in connection with our acquisitions of PBG and PAS, as reflected in investing and financing activities

   $ 4,451      $   
                

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

 

    

(Unaudited)

       
     6/12/10     12/26/09  

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 4,529      $ 3,943   

Short-term investments

     225        192   

Accounts and notes receivable, less allowance: 6/10 – $151, 12/09 – $90

     6,880        4,624   

Inventories

    

Raw materials

     1,725        1,274   

Work-in-process

     252        165   

Finished goods

     1,553        1,179   
                
     3,530        2,618   

Prepaid expenses and other current assets

     1,579        1,194   
                

Total Current Assets

 

    

 

16,743

 

  

 

   

 

12,571

 

  

 

Property, Plant and Equipment

     31,116        24,912   

Accumulated Depreciation

     (12,720     (12,241
                
     18,396        12,671   

Amortizable Intangible Assets, net

 

    

 

2,080

 

  

 

   

 

841

 

  

 

Goodwill

     13,605        6,534   

Other Nonamortizable Intangible Assets

     11,796        1,782   
                

Nonamortizable Intangible Assets

     25,401        8,316   

Investments in Noncontrolled Affiliates

     1,373        4,484   

Other Assets

     1,081        965   
                

Total Assets

   $ 65,074      $ 39,848   
                

Continued on next page.

 

5


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (continued)

(in millions except per share amounts)

 

 

     (Unaudited)        
     6/12/10     12/26/09  

Liabilities and Equity

    

Current Liabilities

    

Short-term obligations

   $ 4,493      $ 464   

Accounts payable and other current liabilities

     9,843        8,127   

Income taxes payable

     236        165   
                

Total Current Liabilities

     14,572        8,756   

Long-term Debt Obligations

     19,586        7,400   

Other Liabilities

     6,843        5,591   

Deferred Income Taxes

     4,159        659   
                

Total Liabilities

     45,160        22,406   

Commitments and Contingencies

    

Preferred Stock, no par value

     41        41   

Repurchased Preferred Stock

     (147     (145

PepsiCo Common Shareholders’ Equity

    

Common stock, par value 1 2/3 cents per share:

    

Authorized 3,600 shares, issued 6/10 – 1,865 shares, 12/09 – 1,782 shares

     31        30   

Capital in excess of par value

     4,539        250   

Retained earnings

     35,328        33,805   

Accumulated other comprehensive loss

     (4,226     (3,794

Less: repurchased common stock, at cost:

    

6/10 – 272 shares, 12/09 – 217 shares

     (15,940     (13,383
                

Total PepsiCo Common Shareholders’ Equity

     19,732        16,908   

Noncontrolling interests

     288        638   
                

Total Equity

     19,914        17,442   
                

Total Liabilities and Equity

   $ 65,074      $ 39,848   
                

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

6


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions, unaudited)

 

     24 Weeks Ended  
     6/12/10     6/13/09  
     Shares     Amount     Shares     Amount  

Preferred Stock

   0.8      $ 41      0.8      $ 41   
                            

Repurchased Preferred Stock

        

Balance, beginning of year

   (0.6     (145   (0.5     (138

Redemptions

          (2          (3
                            

Balance, end of period

   (0.6     (147   (0.5     (141
                            

Common Stock

        

Balance, beginning of year

   1,782        30      1,782        30   

Shares issued in connection with our acquisitions of PBG and PAS

   83        1               
                            

Balance, end of period

   1,865        31      1,782        30   
                            

Capital in Excess of Par Value

        

Balance, beginning of year

       250          351   

Stock-based compensation expense

       119          108   

Stock option exercises/RSUs converted(a)

       (321       (158

Withholding tax on RSUs converted

       (55       (32

Equity issued in connection with our acquisitions of PBG and PAS

       4,451            

Other

       95            
                    

Balance, end of period

       4,539          269   
                    

Retained Earnings

        

Balance, beginning of year

       33,805          30,638   

Net income attributable to PepsiCo

       3,033          2,795   

Cash dividends declared – common

       (1,510       (1,362

Cash dividends declared – preferred

       (1       (1

Cash dividends declared – RSUs

       (6       (5

Other

       7            
                    

Balance, end of period

       35,328          32,065   
                    

Accumulated Other Comprehensive Loss

        

Balance, beginning of year

       (3,794       (4,694

Currency translation adjustment

       (581       281   

Cash flow hedges, net of tax:

        

Net derivative losses

       (86       (23

Reclassification of derivative losses/(gains) to net income

       23          (16

Reclassification of pension and retiree medical losses to net income, net of tax

       211          10   

Unrealized gains on securities, net of tax

       1          4   
                    

Balance, end of period

       (4,226       (4,438
                    

Repurchased Common Stock

        

Balance, beginning of year

   (217     (13,383   (229     (14,122

Share repurchases

   (52     (3,370            

Stock option exercises

   11        696      3        187   

Other

   (14     117      1        86   
                            

Balance, end of period

   (272     (15,940   (225     (13,849
                            

Total Common Shareholders’ Equity

       19,732          14,077   
                    

Noncontrolling Interests

        

Balance, beginning of year

       638          476   

Net income attributable to noncontrolling interests

       14          14   

Distributions to noncontrolling interests, net

       (350         

Currency translation adjustment

       (14       (62

Other, net

                4   
                    

Balance, end of period

       288          432   
                    

Total Equity

     $ 19,914        $ 14,409   
                    

 

(a) Includes total tax benefit/(shortfall) of $30 million in 2010 and $(1) million in 2009.

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

7


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(in millions, unaudited)

 

     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     6/12/10     6/13/09  

Net Income

   $ 1,613      $ 1,668      $ 3,047      $ 2,809   

Other Comprehensive Income

        

Currency translation adjustment

     (700     1,324        (595     219   

Reclassification of pension and retiree medical losses/(gains) to net income, net of tax

     75        (15     211        10   

Cash flow hedges, net of tax:

        

Net derivative losses

     (38     (14     (86     (23

Reclassification of derivative losses/(gains) to net income

     5        (19     23        (16

Unrealized gains on securities, net of tax

     2        9        1        4   
                                
     (656     1,285        (446     194   
                                

Comprehensive Income

     957        2,953        2,601        3,003   

Comprehensive (income)/loss attributable to noncontrolling interests

     (11     (33            48   
                                

Comprehensive Income Attributable to PepsiCo

   $ 946      $ 2,920      $ 2,601      $ 3,051   
                                

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

8


Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation and Our Divisions

 

Basis of Presentation

The Condensed Consolidated Balance Sheet as of June 12, 2010, the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 12, 2010 and June 13, 2009, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 12, 2010 and June 13, 2009 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 26, 2009. 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 are not necessarily indicative of the results expected for the full year.

While the majority of our results are reported on a period 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.

On February 26, 2010, we completed our acquisitions of The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS). The results of the acquired companies in the U.S. and Canada are reflected in our condensed consolidated results as of the acquisition date, and the international results of the acquired companies have been reported as of the beginning of our second quarter 2010, consistent with our monthly international reporting calendar. The results of the acquired companies in the U.S., Canada and Mexico are reported within our PAB segment, and the results of the acquired companies in Europe, including Russia, are reported within our Europe segment. Prior to our acquisitions of PBG and PAS, we recorded our share of equity income or loss from the acquired companies in bottling equity income in our income statement. Subsequent to our acquisitions of PBG and PAS, we continue to record our share of equity income or loss from Pepsi Bottling Ventures LLC in bottling equity income and our share of income or loss from other noncontrolled affiliates as a component of selling, general and administrative expenses. Additionally, in connection with our acquisitions of PBG and PAS, we recorded a gain on our previously held equity interests of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests. See also Acquisitions of PBG and PAS and “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As of the beginning of our 2010 fiscal year, the results of our Venezuelan businesses are reported under hyperinflationary accounting. See “Our Business Risks” and “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, generally in proportion to revenue, 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,

 

9


Table of Contents

costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.

The following information is unaudited. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 26, 2009.

Our Divisions

We are organized into four business units, as follows:

 

  1.

PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of our Latin American food and snack businesses (LAF), including our Sabritas and Gamesa businesses in Mexico;

 

  2.

PepsiCo Americas Beverages (PAB), which includes PepsiCo Beverages Americas and Pepsi Beverages Company;

 

  3.

PepsiCo Europe, which includes all beverage, food and snack businesses in Europe; and

 

  4.

PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in AMEA.

Our four business units comprise six reportable segments (referred to as divisions), as follows:

 

   

FLNA,

 

   

QFNA,

 

   

LAF,

 

   

PAB,

 

   

Europe, and

 

   

AMEA.

 

10


Table of Contents
     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     6/12/10     6/13/09  

Net Revenue

        

FLNA

   $ 3,195      $ 3,138      $ 6,262      $ 6,138   

QFNA

     379        396        859        881   

LAF

     1,538        1,378        2,521        2,245   

PAB(a)

     5,548        2,618        8,313        4,706   

Europe(a)

     2,416        1,642        3,409        2,589   

AMEA

     1,725        1,420        2,805        2,296   
                                
   $ 14,801      $ 10,592      $ 24,169      $ 18,855   
                                
     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     6/12/10     6/13/09  

Operating Profit

        

FLNA

   $ 845      $ 783      $ 1,615      $ 1,480   

QFNA

     114        132        267        307   

LAF

     233        240        378        404   

PAB(a)

     952        618        1,025        1,043   

Europe(a)

     266        257        379        355   

AMEA

     277        237        437        373   
                                

Total division

     2,687        2,267        4,101        3,962   

Corporate Unallocated

        

Net impact of mark-to-market on commodity hedges

     (4     100        42        162   

PBG/PAS merger and integration costs

     (24            (112       

Venezuela currency devaluation

                   (129       

Asset write-off

                   (145       

Foundation contribution

                   (100       

Other

     (198     (177     (356     (346
                                
   $ 2,461      $ 2,190      $ 3,301      $ 3,778   
                                

 

(a) Changes in 2010 relate primarily to our acquisitions of PBG and PAS.

 

11


Table of Contents
     Total Assets
     6/12/10    12/26/09

FLNA

   $ 6,391    $ 6,337

QFNA

     931      997

LAF

     3,503      3,575

PAB(a)

     32,227      7,670

Europe(a)

     12,522      9,321

AMEA

     5,294      4,937
             

Total division

     60,868      32,837

Corporate

     3,967      3,933

Investments in bottling affiliates(a)

     239      3,078
             
   $ 65,074    $ 39,848
             

 

(a) Changes in 2010 relate primarily to our acquisitions of PBG and PAS.

 

12


Table of Contents

Acquisitions of PBG and PAS

 

On February 26, 2010, PepsiCo announced that pursuant to the terms of merger agreements entered into on August 3, 2009 (the “Merger Agreements”), PBG and PAS merged with and into Pepsi-Cola Metropolitan Bottling Company, Inc. (“Metro”), with Metro continuing as the surviving corporation and a wholly owned subsidiary of PepsiCo. We acquired PBG and PAS to create a more fully integrated supply chain and go-to-market business model, improving the effectiveness and efficiency of the distribution of our brands and enhancing our revenue growth. The total purchase price was approximately $12.6 billion, which included $8.3 billion of cash and equity and the fair value of our previously held equity interests in PBG and PAS of $4.3 billion.

Under the terms of the Merger Agreements: (i) each outstanding share of common stock of PBG not held by Metro, PepsiCo or a subsidiary of PepsiCo or held by PBG as treasury stock (each, a “PBG Share”) was canceled and converted into the right to receive, at the holder’s election, either 0.6432 shares of common stock of PepsiCo (the “PBG Per Share Stock Consideration”) or $36.50 in cash, without interest (the “PBG Cash Election Price”), subject to proration provisions which provide that an aggregate 50% of such outstanding PBG Shares were converted into the right to receive common stock of PepsiCo and an aggregate 50% of such outstanding PBG Shares were converted into the right to receive cash and each PBG Share and share of Class B common stock of PBG held by Metro, PepsiCo or a subsidiary of PepsiCo was canceled or converted to the right to receive 0.6432 shares of common stock of PepsiCo; and (ii) each outstanding share of common stock of PAS not held by Metro, PepsiCo or a subsidiary of PepsiCo or held by PAS as treasury stock (each, a “PAS Share”) was canceled and converted into the right to receive, at the holder’s election, either 0.5022 shares of common stock of PepsiCo (the “PAS Per Share Stock Consideration”) or $28.50 in cash, without interest (the “PAS Cash Election Price”), subject to proration provisions which provide that an aggregate 50% of such outstanding PAS Shares were converted into the right to receive common stock of PepsiCo and an aggregate 50% of such outstanding PAS Shares were converted into the right to receive cash and each PAS Share held by Metro, PepsiCo or a subsidiary of PepsiCo was canceled or converted into the right to receive 0.5022 shares of common stock of PepsiCo.

Each PBG or PAS stock option was converted into an adjusted PepsiCo stock option to acquire a number of shares of PepsiCo common stock, determined by multiplying the number of shares of PBG or PAS common stock subject to the PBG or PAS stock option by an exchange ratio (the “Closing Exchange Ratio”) equal to the closing price of a share of PBG or PAS common stock on the business day immediately before the acquisition date divided by the closing price of a share of PepsiCo common stock on the business day immediately before the acquisition date. The exercise price per share of PepsiCo common stock subject to the adjusted PepsiCo stock option is equal to the per share exercise price of PBG or PAS stock option divided by the Closing Exchange Ratio.

Each PBG restricted stock unit (RSU) was adjusted so that its holder is entitled to receive, upon settlement, a number of shares of PepsiCo common stock equal to the number of shares of PBG common stock subject to the PBG RSU multiplied by the PBG Per Share Stock Consideration. PBG performance-based RSUs were converted into PepsiCo RSUs based on 100% target achievement, and, following conversion, remain subject to continued service of the holder. Each PBG RSU held by a non-employee director was vested and canceled at the acquisition date, and, in exchange for cancellation of the PBG RSU, the holder received the PBG Per Share Stock Consideration for each share of PBG common stock subject to the PBG RSU.

 

13


Table of Contents

Each cash-settled PAS RSU was canceled in exchange for a cash payment equal to the closing price of a share of PAS common stock on the business day immediately before the closing of the PAS merger for each share of PAS common stock subject to each PAS RSU. Each PAS restricted share was converted into either the PAS Per Share Stock Consideration or the PAS Cash Election Price, at the election of the holder, with the same proration procedures applicable to PAS stockholders described above.

Pursuant to the terms of PBG’s executive retention arrangements, PBG equity awards granted to certain executives prior to the PBG merger vest immediately upon a qualifying termination of the executive’s employment except for certain PBG executives whose equity awards vested immediately at the effective time of the PBG merger pursuant to the terms of PepsiCo’s executive retention agreements. Each PAS equity award granted prior to the PAS merger vested immediately at the effective time of the PAS merger pursuant to the original terms of the awards.

Prior to the mergers, we had equity investments in PBG and PAS. In addition to approximately 32% of PBG’s outstanding common stock that we owned at year-end 2009, we owned 100% of PBG’s class B common stock and approximately 7% of the equity of Bottling Group, LLC, PBG’s principal operating subsidiary. At year-end 2009, we owned approximately 43% of the outstanding common stock of PAS.

The guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. Thus, in connection with our acquisitions of PBG and PAS, the carrying amounts of our previously held equity interests in PBG and PAS were revalued to fair value at the acquisition date, resulting in a gain in the first quarter of 2010 of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests.

As discussed in Debt Obligations and Commitments, in January 2010, we issued $4.25 billion of fixed and floating rate notes. A portion of the net proceeds from the issuance of these notes was used to finance our acquisitions of PBG and PAS.

Our actual stock price on February 25, 2010 (the last trading day prior to the closing of the mergers) was used to determine the value of stock, stock options and RSUs issued as consideration in connection with our acquisitions of PBG and PAS and thus to calculate the actual purchase price.

 

14


Table of Contents

The table below represents the computation of the purchase price excluding assumed debt and the fair value of our previously held equity interests in PBG and PAS as of the acquisition date:

 

     Total Number of
Shares/Awards
Issued
   Total
Estimated

Fair  Value

Payment in cash, for the remaining (not owned by PepsiCo and its subsidiaries) outstanding shares of PBG and PAS common stock and equity awards vested at consummation of merger

      $ 3,813

Payment to PBG and PAS of shares of PepsiCo common stock for the remaining (not owned by PepsiCo and its subsidiaries) outstanding shares of PBG and PAS common stock and equity awards vested at consummation of merger

   67      4,175

Issuance of PepsiCo equity awards (vested and unvested) to replace existing PBG and PAS equity awards

   16      276
           

Total purchase price

   83    $ 8,264
           

The following table summarizes the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed in the PBG and PAS acquisitions and the resulting goodwill as of the acquisition date. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when appraisals are finalized. We expect to finalize these amounts as soon as possible but no later than by the end of 2010.

 

     Preliminary
Estimates of
Acquisition Date
Fair Value
 

Inventory

   $ 1,007   

Property, plant and equipment

     6,230   

Amortizable intangible assets

     1,313   

Nonamortizable intangible assets, primarily reacquired franchise rights

     9,286   

Other current assets and current liabilities(a)

     774   

Other noncurrent assets

     280   

Debt obligations

     (8,814

Pension and retiree medical benefits

     (962

Other noncurrent liabilities

     (610

Deferred income taxes

     (3,494
        

Total identifiable net assets

     5,010   

Goodwill

     7,229   
        

Subtotal

     12,239   

Fair value of acquisition of noncontrolling interest

     317   
        

Total purchase price

   $ 12,556   
        

 

(a)

Includes cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and other current liabilities.

 

15


Table of Contents

Goodwill is calculated as the excess of the purchase price paid over the net assets recognized. The goodwill recorded as part of the PBG and PAS acquisitions primarily reflects the value of adding PBG and PAS to PepsiCo to create a more fully integrated supply chain and go-to-market business model, as well as any intangible assets that do not qualify for separate recognition. Goodwill is not amortizable nor deductible for tax purposes. While the final calculation of goodwill and its allocation among reporting units is not complete, substantially all of the goodwill is recorded in our PAB segment.

In connection with our acquisitions of PBG and PAS, we reacquired certain franchise rights which had previously provided PBG and PAS with the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. Reacquired franchise rights totaling $8.2 billion were assigned a perpetual life and are, therefore, not amortizable. Amortizable acquired franchise rights of $1 billion have weighted-average estimated useful lives of 49 years. Other amortizable intangible assets, primarily customer relationships, have weighted-average estimated useful lives of 20 years.

Under the guidance on accounting for business combinations, merger and integration costs are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. See Restructuring, Impairment and Integration Charges for details on the expenses incurred during the 12 and 24 weeks ended June 12, 2010.

The following table presents unaudited consolidated pro forma financial information as if the closing of our acquisitions of PBG and PAS had occurred on December 27, 2009 for purposes of the financial information presented for the 12 weeks ended June 12, 2010; and as if the closing of our acquisitions of PBG and PAS had occurred on December 28, 2008 for purposes of the financial information presented for the 12 and 24 weeks ended June 13, 2009.

 

     (unaudited)
     12 Weeks Ended    24 Weeks Ended
     6/13/09    6/12/10     6/13/09

Net Revenue

   $ 14,307    $ 25,913      $ 25,390

Net Income Attributable to PepsiCo

   $ 1,903    $ 2,569 (a)    $ 3,103

Net Income Attributable to PepsiCo per Common Share – Diluted

   $ 1.16    $ 1.56 (a)    $ 1.89

 

(a)

Includes PBG/PAS merger and integration costs, inventory fair value adjustments and the gain on previously held equity interests.

The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards, and the regulations of the U.S. Securities and Exchange Commission, and is not necessarily indicative of the results of operations that would have occurred if our acquisitions of PBG and PAS had been completed on the dates indicated, nor is it indicative of the future operating results of PepsiCo.

The historical unaudited consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) expected to have a continuing impact on the combined results of PepsiCo, PBG and PAS.

The unaudited pro forma results have been adjusted with respect to certain aspects of our acquisitions of PBG and PAS to reflect:

 

   

the consummation of the acquisitions;

 

16


Table of Contents
   

consolidation of PBG and PAS which are now owned 100% by PepsiCo and the corresponding gain resulting from the remeasurement of our previously held equity interests in PBG and PAS;

 

   

the elimination of related party transactions between PepsiCo and PBG, and PepsiCo and PAS;

 

   

changes in assets and liabilities to record their preliminary estimated acquisition date fair values and changes in certain expenses resulting therefrom;

 

   

additional indebtedness, including, but not limited to, debt issuance costs and interest expense, incurred in connection with the acquisitions; and

 

   

merger and integration charges associated with the acquisitions.

The unaudited pro forma results do not reflect future events that may occur after the acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain one-time charges we expect to incur in connection with the acquisitions, including, but not limited to, charges that are expected to achieve ongoing cost savings and synergies.

Intangible Assets

 

 

     6/12/10     12/26/09  

Amortizable intangible assets, net

    

Acquired franchise rights

   $ 966      $   

Reacquired franchise rights

     120          

Brands

     1,430        1,465   

Other identifiable intangibles

     720        505   
                
     3,236        1,970   

Accumulated amortization

     (1,156     (1,129
                
   $ 2,080      $ 841   
                

 

17


Table of Contents

The change in the book value of nonamortizable intangible assets is as follows:

 

     Balance
12/26/09
   Acquisitions    Translation
and Other
    Balance
6/12/10

FLNA

          

Goodwill

   $ 306    $    $ 2      $ 308

Brands

     30                  30
                            
     336           2        338
                            

QFNA

          

Goodwill

     175                  175
                            
          

LAF

          

Goodwill

     479           (2     477

Brands

     136           3        139
                            
     615           1        616
                            

PAB(a)

          

Goodwill

     2,431      6,480      8        8,919

Reacquired franchise rights

          7,507      21        7,528

Acquired franchise rights

          585      902 (b )      1,487

Brands

     112      36      (2     146
                            
     2,543      14,608      929        18,080
                            

Europe(a)

          

Goodwill

     2,624      749      (223     3,150

Reacquired franchise rights

          691      (48     643

Acquired franchise rights

          475      (38     437

Brands

     1,378           (117     1,261
                            
     4,002      1,915      (426     5,491
                            

AMEA

          

Goodwill

     519      84      (27     576

Brands

     126      8      (9     125
                            
     645      92      (36     701
                            

Total goodwill

     6,534      7,313      (242     13,605

Total reacquired franchise rights

          8,198      (27     8,171

Acquired franchise rights

          1,060      864        1,924

Total brands

     1,782      44      (125     1,701
                            
   $ 8,316    $ 16,615    $ 470      $ 25,401
                            

 

(a)

Net increases in 2010 relate primarily to our acquisitions of PBG and PAS.

 

(b)

Includes $900 million related to our upfront payment to Dr Pepper Snapple Group (DPSG) to manufacture and distribute Dr Pepper and certain other DPSG products.

 

18


Table of Contents

Stock-Based Compensation

 

In connection with our acquisition of PBG, we issued 13.4 million stock options and 2.7 million RSUs at weighted-average grant prices of $42.89 and $62.30, respectively, to replace previously held PBG equity awards. In connection with our acquisition of PAS, we issued 0.4 million stock options at a weighted-average grant price of $31.72 to replace previously held PAS equity awards. Our equity issuances included 8.3 million stock options and 0.6 million RSUs which were vested at the acquisition date and were included in the purchase price consideration. The remaining 5.5 million stock options and 2.1 million RSUs issued are unvested and are being amortized over their remaining vesting period, up to 3 years.

For the 12 weeks ended June 12, 2010, we recognized stock-based compensation expense of $85 million ($72 million recorded as stock-based compensation expense and $13 million included in PBG/PAS merger and integration charges). Of the $85 million, $21 million was related to the unvested acquisition-related grants described above. For the 24 weeks ended June 12, 2010, we recognized stock-based compensation expense of $159 million ($119 million recorded as stock-based compensation expense and $40 million included in PBG/PAS merger and integration charges). Of the $159 million, $53 million was related to the unvested acquisition-related grants described above. For the 12 and 24 ended June 13, 2009, we recognized stock-based compensation expense of $54 million and $108 million, respectively.

In connection with our acquisitions of PBG and PAS, The Compensation Committee of PepsiCo’s Board of Directors elected to delay the annual equity award grant from the first quarter of 2010 to the second quarter of 2010, in order to ensure that all eligible employees receive grants on the same date and at the same market price. For the 12 and 24 weeks ended June 12, 2010, we granted 12.0 million stock options and 4.6 million RSUs at weighted-average grant prices of $66.50 and $66.46, respectively, under the terms of our 2007 Long-Term Incentive Plan.

Our weighted-average Black-Scholes fair value assumptions are as follows:

 

     24 Weeks Ended  
     6/12/10     6/13/09  

Expected life

   5 yrs.      6 yrs.   

Risk free interest rate

   2.3   2.8

Expected volatility( a)

   17   17

Expected dividend yield

   2.8   3.0

 

 

(a) Reflects movements in our stock price over the most recent historical period equivalent to the expected life.

 

19


Table of Contents

Pension and Retiree Medical Benefits

 

In connection with our acquisitions of PBG and PAS, we assumed sponsorship of pension and retiree medical plans that provide defined benefits to U.S. and certain international employees. As of the acquisition date, we preliminarily estimated and recorded the following assets and liabilities for these plans and recorded the net funded status:

 

     Pension     Retiree
Medical
 
     U.S.     International        

Fair value of plan assets

   $ 1,633      $ 52      $   

Projected benefit liability

     2,161        90        396   
                        

Funded status

   $ (528   $ (38   $ (396
                        

The components of net periodic benefit cost for pension and retiree medical plans (including, in 2010, the preliminary estimate of the impact of our acquisitions of PBG and PAS) are as follows:

 

     12 Weeks Ended  
     Pension     Retiree Medical  
     6/12/10     6/13/09     6/12/10     6/13/09     6/12/10     6/13/09  
     U.S.     International        

Service cost

   $ 69      $ 55      $ 19      $ 11      $ 14      $ 10   

Interest cost

     120        86        26        19        23        19   

Expected return on plan assets

     (150     (106     (31     (24              

Amortization of prior service cost/(benefit)

     2        2        1               (4     (4

Amortization of experience loss

     25        26        6        2        1        2   
                                                
     66        63        21        8        34        27   

Special termination benefits

     15                             1          

Curtailment gain

     (2     (2                            
                                                

Total expense

   $ 79      $ 61      $ 21      $ 8      $ 35      $ 27   
                                                

 

20


Table of Contents
     24 Weeks Ended  
     Pension     Retiree Medical  
     6/12/10     6/13/09     6/12/10     6/13/09     6/12/10     6/13/09  
     U.S.     International        

Service cost

   $ 130      $ 110      $ 33      $ 19      $ 26      $ 20   

Interest cost

     218        172        44        33        43        38   

Expected return on plan assets

     (275     (213     (53     (42              

Amortization of prior service cost/(benefit)

     5        5        1        1        (8     (8

Amortization of experience loss

     50        51        10        3        2        5   
                                                
     128        125        35        14        63        55   

Special termination benefits

     23                             1          

Curtailment gain

     (2     (2                            
                                                

Total expense

   $ 149      $ 123      $ 35      $ 14      $ 64      $ 55   
                                                

In 2010, we expect to make total pension contributions of approximately $1.3 billion with up to approximately $1.2 billion expected to be discretionary. Our cash payments for retiree medical benefits are estimated to be approximately $100 million in 2010.

Income Taxes

 

A rollforward of our reserves for all federal, state and foreign tax jurisdictions, is as follows:

 

     6/12/10     12/26/09  

Balance, beginning of year

   $ 1,731      $ 1,711   

Additions for tax positions related to the current year

     89        238   

Additions for tax positions from prior years

     417        79   

Reductions for tax positions from prior years

     (386     (236

Settlement payments

            (64

Statute of limitations expiration

     (1     (4

Translation and other

     (6     7   
                

Balance, end of period

   $ 1,844 (a)    $ 1,731   
                

 

(a)

Includes a preliminary estimate of amounts related to our acquisitions of PBG and PAS.

 

21


Table of Contents

Net Income Attributable to PepsiCo per Common Share

 

The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:

 

     12 Weeks Ended
     6/12/10    6/13/09
     Income     Shares(a)    Income     Shares(a)

Net income attributable to PepsiCo

   $ 1,603         $ 1,660     

Preferred shares:

         

Dividends

     (1        (1  

Redemption premium

     (1        (1  
                     

Net income available for PepsiCo common shareholders

   $ 1,601      1,608    $ 1,658      1,557
                     

Basic net income attributable to PepsiCo per common share

   $ 1.00         $ 1.06     
                     

Net income available for PepsiCo common shareholders

   $ 1,601      1,608    $ 1,658      1,557

Dilutive securities:

         

Stock options and RSUs(b)

          25           14

ESOP convertible preferred stock

     2      1      2      1
                         

Diluted

   $ 1,603      1,634    $ 1,660      1,572
                         

Diluted net income attributable to PepsiCo per common share

   $ 0.98         $ 1.06     
                     

 

     24 Weeks Ended
     6/12/10    6/13/09
     Income     Shares(a)    Income     Shares(a)

Net income attributable to PepsiCo

   $ 3,033         $ 2,795     

Preferred shares:

         

Dividends

     (1        (1  

Redemption premium

     (2        (2  
                     

Net income available for PepsiCo common shareholders

   $ 3,030      1,595    $ 2,792      1,556
                     

Basic net income attributable to PepsiCo per common share

   $ 1.90         $ 1.79     
                     

Net income available for PepsiCo common shareholders

   $ 3,030      1,595    $ 2,792      1,556

Dilutive securities:

         

Stock options and RSUs(b)

          24           14

ESOP convertible preferred stock

     3      1      3      1
                         

Diluted

   $ 3,033      1,620    $ 2,795      1,571
                         

Diluted net income attributable to PepsiCo per common share

   $ 1.87         $ 1.78     
                     

 

(a)

Weighted-average common shares outstanding.

 

(b)

Options to purchase 22.9 million and 21.8 million shares, respectively, for the 12 and 24 weeks in 2010 were not included in the calculation of earnings per share because these options were out-of-the money. These out-of-the money options had average exercise prices of $67.60 and $67.33, respectively. Options to purchase 54.9 million and 55.1 million shares, respectively, for the 12 and 24 weeks in 2009 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options for the 12 and 24 weeks in 2009 had average exercise prices of $59.41 and $59.42, respectively.

 

22


Table of Contents

Debt Obligations and Commitments

 

In the first quarter of 2010, we issued $4.25 billion of fixed and floating rate notes. The issuance was comprised of $1.25 billion of floating rate senior unsecured notes maturing in 2011 (the “2011 Floating Rate Notes”), $1.0 billion of 3.10% senior unsecured notes maturing in 2015, $1.0 billion of 4.50% senior unsecured notes maturing in 2020 and $1.0 billion of 5.50% senior unsecured notes maturing in 2040. The 2011 Floating Rate Notes bear interest at a rate equal to the three-month London Inter-Bank Offered Rate (“LIBOR”) plus 3 basis points. A portion of the net proceeds from the issuance of these notes was used to finance our acquisitions of PBG and PAS. The remainder of the net proceeds from the issuance of these notes was designated for general corporate purposes.

On February 26, 2010, in connection with the transactions contemplated by the PBG Merger Agreement, Metro, PBG, Bottling Group, LLC and The Bank of New York Mellon (as successor to The Chase Manhattan Bank) (the PBG Trustee) entered into a First Supplemental Indenture (the PBG Supplemental Indenture) to the Indenture dated March 8, 1999 (the PBG Indenture) between PBG, Bottling Group, LLC and the PBG Trustee. Pursuant to the PBG Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 7.00% Senior Notes due March 1, 2029 (the 7.00% Notes) under the PBG Indenture. As of June 12, 2010, the outstanding principal amount of the 7.00% Notes was approximately $1 billion. The 7.00% Notes are guaranteed by Bottling Group, LLC.

On February 26, 2010, in connection with the transactions contemplated by the PAS Merger Agreement, Metro, PAS and The Bank New York Mellon Trust Company, N.A. (as ultimate successor in interest to The First National Bank of Chicago) (the PAS IL Trustee) entered into a Second Supplemental Indenture (the PAS IL Supplemental Indenture) to the Indenture dated January 15, 1993 (the PAS IL Indenture) between PAS and the PAS IL Trustee. Pursuant to the PAS IL Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 7.625% Notes due 2015 (the 7.625% Notes), the 7.29% Notes due 2026 (the 7.29% Notes), the 7.44% Notes due 2026 (the 7.44% Notes) and the 4.50% Notes due 2013 (the 4.50% Notes) under the PAS IL Indenture. As of June 12, 2010, the outstanding principal amount of the 7.625% Notes was approximately $9 million, the outstanding principal amount of the 7.29% Notes was approximately $100 million, the outstanding principal amount of the 7.44% Notes was approximately $25 million and the outstanding principal amount of the 4.50% Notes was approximately $150 million.

On February 26, 2010, also in connection with the transactions contemplated by the PAS Merger Agreement, Metro, PAS and Wells Fargo Bank, National Association (the PAS MN Trustee, formerly known as Wells Fargo Bank Minnesota, National Association) entered into a First Supplemental Indenture (the PAS MN Supplemental Indenture) to the Indenture dated August 15, 2003 (the PAS MN Indenture) between PAS and the PAS MN Trustee. Pursuant to the PAS MN Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 5.625% Notes due 2011 (the 5.625% Notes), the 5.75% Notes due 2012 (the 5.75% Notes), the 4.375% Notes due 2014 (the 4.375% Notes), the 4.875% Notes due 2015 (the 4.875% Notes), the 5.00% Notes due 2017 (the 5.00% Notes) and the 5.50% Notes due 2035 (the 5.50% Notes) under the PAS MN Indenture. As of June 12, 2010, the outstanding principal amount of the 5.625% Notes was approximately $250 million, the outstanding principal

 

23


Table of Contents

amount of the 5.75% Notes was approximately $300 million, the outstanding principal amount of the 4.375% Notes was approximately $350 million, the outstanding principal amount of the 4.875% Notes was approximately $300 million, the outstanding principal amount of the 5.00% Notes was approximately $250 million and the outstanding principal amount of the 5.50% Notes was approximately $250 million.

As a result of the transactions contemplated by the PBG Merger Agreement, Bottling Group, LLC, which was previously a subsidiary of PBG, became a wholly-owned subsidiary of Metro. Bottling Group, LLC currently has issued and outstanding approximately $1 billion of its 4.625% Senior Notes due 2012 (the 4.625% Notes), $250 million of its 4.125% Senior Notes due 2015, $400 million of its 5.00% Senior Notes due 2013, $800 million of 5.50% Senior Notes due 2016, $1.3 billion of its 6.95% Senior Notes due 2014 (the 6.95% Notes) and $750 million of its 5.125% Senior Notes due 2019. Bottling Group, LLC’s 4.625% Notes and 6.95% Notes are guaranteed by PepsiCo.

As of June 12, 2010, the long-term debt acquired from our anchor bottlers (including debt previously issued by PBG, Bottling Group, LLC and PAS) in connection with our acquisitions of PBG and PAS has a total face value of approximately $7.5 billion (fair value of $8.6 billion) with a weighted-average stated interest rate of 5.7%. This acquired debt has a remaining weighted-average maturity of 7.2 years. See also Acquisitions of PBG and PAS.

As previously disclosed, we entered into amendments to PBG’s revolving credit facility (the Amended PBG Credit Facility) and PAS’s revolving credit facility (the Amended PAS Credit Facility) and these amendments became effective on February 26, 2010. Under the Amended PBG Credit Facility, Metro is able to borrow up to $1,080 million from time to time. Borrowings under the Amended PBG Credit Facility, which expires in October 2012, are guaranteed by PepsiCo. The Amended PBG Credit Facility was unused as of June 12, 2010. Under the Amended PAS Credit Facility as of June 12, 2010, Metro is able to borrow up to $540 million from time to time. Borrowings under the Amended PAS Credit Facility, which is due to expire in June 2011, are guaranteed by PepsiCo. The Amended PAS Credit Facility was unused as of June 12, 2010 and subsequently terminated on June 16, 2010.

As of June 12, 2010, short-term obligations totaled $4.5 billion, of which $3.5 billion was comprised of commercial paper.

Subsequent to the end of the second quarter of 2010, on June 16, 2010, we entered into a new 364-day unsecured revolving credit agreement which enables us to borrow up to $2,575 million, subject to customary terms and conditions, and expires in June 2011. 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 June 2012. This agreement replaces a $1,975 million 364-day unsecured revolving credit agreement and the $540 million Amended PAS Credit Facility. Funds borrowed under this new agreement may be used for general corporate purposes, including but not limited to repayment of our outstanding commercial paper, working capital, capital investments and/or acquisitions. This agreement is in addition to our existing $3,080 million unsecured revolving credit agreement which expires in 2012. Our lines of credit remain unused as of June 12, 2010.

 

24


Table of Contents

Long-Term Contractual Commitments(a)

 

     Payments Due by Period
     Total    2010    2011 –
2012
   2013 –
2014
   2015 and
beyond

Long-term debt obligations(b)

   $ 19,586    $    $ 3,748    $ 4,525    $ 11,313

Interest on debt obligations(c)

     7,178      439      1,540      1,209      3,990

Operating leases

     1,452      226      507      291      428

Purchasing commitments

     2,656      495      1,308      608      245

Marketing commitments

     727      112      351      92      172
                                  
   $ 31,599    $ 1,272    $ 7,454    $ 6,725    $ 16,148
                                  

 

 

(a)

Reflects non-cancelable commitments as of June 12, 2010 based on foreign exchange rates in effect at that time and excludes any reserves for uncertain tax positions as we are unable to reasonably predict the ultimate amount or timing of settlement.

 

(b)

Excludes current maturities of long-term debt obligations of $358 million. Includes $60 million of principal and accrued interest related to our zero coupon notes.

 

(c)

Interest payments on floating-rate debt are estimated using interest rates effective as of June 12, 2010.

As of June 12, 2010, our total long-term contractual commitments totaled $31.6 billion, an increase of $17.9 billion from December 26, 2009. This increase is substantially due to the assumption of PBG’s and PAS’s outstanding debt, the issuance of new debt to finance our acquisitions of PBG and PAS, and the associated interest on debt.

Most long-term contractual commitments, except for our long-term debt obligations, are not recorded on our balance sheet. Non-cancelable operating leases primarily represent building leases. Non-cancelable purchasing commitments are primarily for packaging materials, oranges and orange juice, and cooking oil. Non-cancelable marketing commitments are primarily for sports marketing. See Pension and Retiree Medical Benefits regarding our pension and retiree medical obligations.

Restructuring, Impairment and Integration Charges

 

In the 12 weeks ended June 12, 2010, we incurred merger and integration charges of $155 million related to our acquisitions of PBG and PAS, including $103 million recorded in the PAB segment, $28 million recorded in the Europe segment and $24 million recorded in corporate unallocated expenses. In the 24 weeks ended June 12, 2010, we incurred merger and integration charges of $467 million related to our acquisitions of PBG and PAS, including $296 million recorded in the PAB segment, $29 million recorded in the Europe segment, $112 million recorded in corporate unallocated expenses and $30 million recorded in interest expense. All of these charges, other than the interest expense portion, were recorded in selling, general and administrative expenses. These charges are being incurred to help create a more fully integrated supply chain and go-to-market business model, to improve the effectiveness and efficiency of the distribution of our brands and to enhance our revenue growth. These charges also include closing costs, one-time financing costs and advisory fees related to our acquisitions of PBG and PAS. In addition, in the first quarter of 2010, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, in bottling equity income. Substantially all cash payments related to the above charges are expected to be paid by the end of 2011. In total, these charges had an after-tax impact

 

25


Table of Contents

of $119 million ($0.07 per share) and $380 million ($0.23 per share) for the 12 and 24 weeks ended June 12, 2010, respectively. In the second half of 2009, we incurred $50 million of charges related to the merger of PBG and PAS, of which substantially all was paid in 2009.

In the 12 and 24 weeks ended June 13, 2009, we incurred charges of $11 million ($10 million after-tax or $0.01 per share) and $36 million ($29 million after-tax or $0.02 per share), respectively, in conjunction with our Productivity for Growth program. Our Productivity for Growth program was completed in the first half of 2009. These charges were recorded in selling, general and administrative expenses. The program included actions in all divisions of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio, and simplify the organization for more effective and timely decision-making. Substantially all cash payments related to these charges are expected to be paid by the end of 2010.

A summary of our merger and integration activity in 2010 is as follows:

 

     Severance and Other
Employee  Costs
(a)
    Asset
Impairment
    Other Costs     Total  

2010 merger and integration charges

   $ 185      $ 113      $ 178      $ 476   

Cash payments

     (32            (177     (209

Non-cash charges

     (59     (113     13        (159
                                

Liability as of June 12, 2010

   $ 94      $      $ 14      $ 108   
                                

 

(a) Primarily reflects termination costs for approximately 990 employees.

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 risks, and

 

   

interest rates.

In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity, foreign exchange or interest risks are classified as operating activities. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our business risks.

For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the

 

26


Table of Contents

value of the underlying hedged item. Ineffectiveness of our hedges has not been material. If the derivative instrument is terminated, we continue to defer the related gain or loss and then include it as a component of the cost of the underlying hedged item. Upon determination that the underlying hedged item will not be part of an actual transaction, we recognize the related gain or loss in net income immediately.

We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk and generally settle with these financial institutions on a net basis.

Commodity Prices

We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements, geographic diversity and derivatives. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for natural gas, diesel fuel and aluminum. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net losses of $38 million related to these hedges from accumulated other comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting are marked to market each period and reflected in our income statement.

Our open commodity derivative contracts that qualify for hedge accounting had a face value of $587 million as of June 12, 2010 and $214 million as of June 13, 2009. These contracts resulted in net unrealized losses of $15 million as of June 12, 2010 and $61 million as of June 13, 2009.

Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $246 million as of June 12, 2010 and $429 million as of June 13, 2009. These contracts resulted in net losses of $14 million as of June 12, 2010 and $151 million as of June 13, 2009.

Foreign Exchange

Financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive loss within common shareholders’ equity as currency translation adjustment.

On occasion, we may enter into derivatives, primarily forward contracts with terms of no more than two years, to manage our exposure to foreign currency transaction risk. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.

 

27


Table of Contents

Our foreign currency derivatives had a total face value of $1.3 billion as of June 12, 2010 and June 13, 2009. The contracts that qualify for hedge accounting resulted in net unrealized gains of $5 million as of June 12, 2010 and $12 million as of June 13, 2009. During the next 12 months, we expect to reclassify a net gain of $1 million related to these hedges from accumulated other comprehensive loss into net income. The contracts that do not qualify for hedge accounting resulted in net gains of $6 million as of June 12, 2010 and net losses of $29 million as of June 13, 2009. All losses and gains were offset by changes in the underlying hedged items, resulting in no net material impact on earnings.

Interest Rates

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross currency swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.

The notional amounts of the interest rate derivative instruments outstanding as of June 12, 2010 and June 13, 2009 were $8.6 billion and $3.75 billion, respectively. For those interest rate derivative instruments that qualify for cash flow hedge accounting, any ineffectiveness is recorded immediately. We classify both the earnings and cash flow impact from these interest rate derivative instruments consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net losses of $6 million related to these hedges from accumulated other comprehensive loss into net income.

Subsequent to the end of the second quarter of 2010, we executed interest rate derivative instruments with an aggregate notional value of $500 million in various maturities to hedge forecasted treasury transactions.

At June 12, 2010, approximately 47% of total debt (including indebtedness acquired in our acquisitions of PBG and PAS), after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to 57% as of December 26, 2009. In addition to variable rate long-term debt, all debt with maturities of less than one year is categorized as variable for purposes of this measure.

 

28


Table of Contents

Fair Value Measurements

The fair values of our financial assets and liabilities are categorized as follows:

 

     June 12, 2010
     Total    Level 1    Level 2    Level 3

Assets(a)

           

Available-for-sale securities(b)

   $ 79    $ 79    $    $

Short-term investments – index funds(c)

   $ 144    $ 144    $    $

Derivatives designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 24    $    $ 24    $

Interest rate derivatives(e)

     268           268     

Prepaid forward contracts(f)

     61           61     

Commodity contracts – other(g)

     37           37     
                           
   $ 390    $    $ 390    $

Derivatives not designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 12    $    $ 12    $

Interest rate derivatives(e)

     7           7     

Commodity contracts – other(g)

     5           5     
                           
   $ 24    $    $ 24    $
                           

Total asset derivatives at fair value

   $ 414    $    $ 414    $
                           

Total assets at fair value

   $ 637    $ 223    $ 414    $
                           

Liabilities(a)

           

Deferred compensation(h)

   $ 554    $ 144    $ 410    $

Derivatives designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 19    $    $ 19    $

Interest rate derivatives(e)

     27           27     

Commodity contracts – other(g)

     27           27     

Commodity contracts – futures(i)

     26      26          
                           
   $ 99    $ 26    $ 73    $

Derivatives not designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 6    $    $ 6    $

Interest rate derivatives(e)

     48           48     

Commodity contracts – other(g)

     19           19     

Commodity contracts – futures(i)

     1      1          
                           
   $ 74    $ 1    $ 73    $
                           

Total liability derivatives at fair value

   $ 173    $ 27    $
146
   $
                           

Total liabilities at fair value

   $ 727    $ 171    $ 556    $
                           

 

(a)

Financial assets are classified on our balance sheet within other assets, with the exception of short-term investments. Financial liabilities are classified on our balance sheet within other current liabilities and other liabilities.

 

(b)

Based on the price of common stock.

 

(c)

Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability.

 

(d)

Based on observable market transactions of spot and forward rates.

 

(e)

Based on LIBOR and recently reported transactions in the marketplace.

 

(f)

Based primarily on the price of our common stock.

 

(g)

Based on recently reported transactions in the marketplace, primarily swap arrangements.

 

(h)

Based on the fair value of investments corresponding to employees’ investment elections.

 

(i)

Based on average prices on futures exchanges.

The fair value of our debt obligations as of June 12, 2010 was $25.8 billion, based upon prices of similar instruments in the marketplace.

 

29


Table of Contents
     June 13, 2009
     Total    Level 1    Level 2    Level 3

Assets(a)

           

Available-for-sale securities(b)

   $ 48    $ 48    $    $

Short-term investments – index funds(c)

   $ 101    $ 101    $    $

Derivatives designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 38    $    $ 38    $

Interest rate swaps(e)

     127           127     

Prepaid forward contracts(f)

     41           41     

Commodity contracts – other(g)

     5           5     
                           
   $ 211    $    $ 211    $

Derivatives not designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 6    $    $ 6    $

Commodity contracts – other(g)

     8           8     
                           
   $ 14    $    $ 14    $
                           

Total asset derivatives at fair value

   $ 225    $    $ 225    $
                           

Total assets at fair value

   $ 374    $ 149    $ 225    $
                           

Liabilities(a)

           

Deferred compensation(h)

   $ 442    $ 103    $ 339    $

Derivatives designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 26    $    $ 26    $

Interest rate swaps(e)

     18           18     

Commodity contracts – other(g)

     22           22     

Commodity contracts – futures(i)

     44      44          
                           
   $ 110    $ 44    $ 66    $

Derivatives not designated as hedging instruments:

           

Forward exchange contracts(d)

   $ 35    $    $ 35    $

Commodity contracts – other(g)

     133           133     

Commodity contracts – futures(i)

     27      27          
                           
   $ 195    $ 27    $ 168    $
                           

Total liability derivatives at fair value

   $ 305    $ 71    $ 234    $
                           

Total liabilities at fair value

   $ 747    $ 174    $ 573    $
                           

 

(a)

Financial assets are classified on our balance sheet as other assets, with the exception of short-term investments. Financial liabilities are classified on our balance sheet as other liabilities.

 

(b)

Based on the price of common stock.

 

(c)

Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability.

 

(d)

Based on observable market transactions of spot and forward rates.

 

(e)

Based on LIBOR and recently reported transactions in the marketplace.

 

(f)

Based primarily on the price of our common stock.

 

(g)

Based on recently reported transactions in the marketplace, primarily swap arrangements.

 

(h)

Based on the fair value of investments corresponding to employees’ investment elections.

 

(i)

Based on average prices on futures exchanges.

 

30


Table of Contents

The effective portion of the pre-tax (gains)/losses on our derivative instruments are categorized in the tables below.

 

     12 Weeks Ended
June 12, 2010
     (Gains)/Losses
Recognized in
Income
Statement
    (Gains)/Losses
Recognized in
Accumulated Other
Comprehensive Loss
    Losses Reclassified
from Accumulated
Other
Comprehensive Loss
into Income
Statement

Fair Value/Non-designated Hedges

      

Forward exchange contracts(a )

   $ (11    

Interest rate derivatives(b )

     (70    

Prepaid forward contracts(a )

     3       

Commodity contracts(a)

     3       
            

Total

   $ (75    
            

Cash Flow Hedges

      

Forward exchange contracts(c )

     $ (21   $ 11

Commodity contracts(c)

       70       

Interest rate derivatives(b )

       23       
                

Total

     $ 72      $ 11
                
     24 Weeks Ended
June 12, 2010
     (Gains)/Losses
Recognized in
Income
Statement
    (Gains)/Losses
Recognized in
Accumulated Other
Comprehensive Loss
    Losses Reclassified
from Accumulated
Other
Comprehensive Loss
into Income
Statement

Fair Value/Non-designated Hedges

      

Forward exchange contracts(a )

   $ (5    

Interest rate derivatives(b )

     (60    

Prepaid forward contracts(a )

     (15    

Commodity contracts(a)

     (43    
            

Total

   $ (123    
            

Cash Flow Hedges

      

Forward exchange contracts(c )

     $ (8   $ 22

Commodity contracts(c)

       58        16

Interest rate derivatives(b )

       36       
                

Total

     $ 86      $ 38
                

 

(a)

Included in corporate unallocated expenses.

 

(b)

Included in interest expense in our income statement.

 

(c)

Included in cost of sales in our income statement.

 

31


Table of Contents
     12 Weeks Ended
June 13, 2009
 
     (Gains)/Losses
Recognized in
Income
Statement
    Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
    (Gains)/Losses
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement
 

Fair Value/Non-designated Hedges

      

Forward exchange contracts(a )

   $ (39    

Commodity contracts(a)

     (100    

Interest rate swaps(b )

     198       

Prepaid forward contracts(a )

     (3    
            

Total

   $ 56       
            

Cash Flow Hedges

      

Forward exchange contracts(c )

     $ 51      $ (30

Commodity contracts(c)

       (27     7   
                  

Total

     $ 24      $ (23
                  
     24 Weeks Ended
June 13, 2009
 
     Losses/(Gains)
Recognized in
Income
Statement
    Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
    (Gains)/Losses
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement
 

Fair Value/Non-designated Hedges

      

Forward exchange contracts(a )

   $ 1       

Commodity contracts(a)

     (162    

Interest rate swaps(b )

     264       
            

Total

   $ 103       
            

Cash Flow Hedges

      

Forward exchange contracts(c )

     $ 51      $ (52

Commodity contracts(c)

       (6     33   
                  

Total

     $ 45      $ (19
                  

 

(a)

Included in corporate unallocated expenses.

 

(b)

Included in interest expense in our income statement.

 

(c)

Included in cost of sales in our income statement.

 

32


Table of Contents

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (FASB) amended its accounting guidance on the consolidation of variable interest entities (VIE). Among other things, the new guidance requires a qualitative rather than a quantitative assessment to determine the primary beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In addition, the amended guidance requires an ongoing reconsideration of the primary beneficiary. The provisions of this new guidance were effective as of the beginning of our 2010 fiscal year, and the adoption did not have a material impact on our financial statements.

In the second quarter of 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law. The PPACA changes the tax treatment related to an existing retiree drug subsidy (RDS) available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, RDS payments will effectively become taxable in tax years beginning in 2013, by requiring the amount of the subsidy received to be offset against our deduction for health care expenses. The provisions of the PPACA required us to record the effect of this tax law change beginning in our second quarter of 2010, and consequently we recorded a one-time related tax charge of $41 million in the second quarter of 2010. We are currently evaluating the longer-term impacts of this new legislation.

 

33


Table of Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FINANCIAL REVIEW

 

Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Our Divisions in the Notes to the Condensed Consolidated Financial Statements. Tabular dollars are presented 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. Percentage changes are based on unrounded amounts.

Our Critical Accounting Policies

 

Sales Incentives and Advertising and Marketing Costs

We offer sales incentives and discounts through various programs to customers and consumers. These incentives are accounted for as a reduction of revenue. Certain sales incentives are recognized at the time of sale while other incentives, such as bottler funding and customer volume rebates, are recognized during the year incurred, generally in proportion to revenue, based on annual targets. Anticipated payments are estimated based on historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also recognized during the year incurred, generally in proportion to revenue.

Income Taxes

In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.

Goodwill and Other Nonamortizable Assets

In connection with our acquisitions of PBG and PAS, we reacquired certain franchise rights which provided PBG and PAS with the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining the useful life of these reacquired franchise rights, we considered many factors including the existing perpetual bottling arrangements, the indefinite period expected for the reacquired rights to contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of the reacquired rights to us, including legal, regulatory, contractual, competitive, economic or other factors. Therefore, certain reacquired franchise rights, as well as perpetual brands and goodwill, will not be amortized, but instead will be tested for impairment at least annually. Certain reacquired and acquired franchise rights are amortizable over the remaining contractual period of the contract in which the right was granted.

 

34


Table of Contents

On December 7, 2009, we reached an agreement with DPSG to manufacture and distribute Dr Pepper and certain other DPSG products in the territories where they were previously sold by PBG and PAS. Under the terms of the agreement, we made an upfront payment of $900 million to DPSG on February 26, 2010. Based upon the terms of the agreement with DPSG, the amount of the upfront payment has been capitalized and will not be amortized, but instead will be tested for impairment at least annually.

Our Business Risks

 

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press releases, and other written and oral statements. These “forward-looking statements” are based on currently available information, operating plans and projections about future events and trends. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Our operations outside of the United States generate approximately 45% of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 12 weeks ended June 12, 2010, favorable foreign currency contributed 2.5 percentage points to net revenue growth, primarily due to appreciation of the Mexican peso, Brazilian real and Canadian dollar, partially offset by depreciation of the Venezuelan bolivar fuerte (bolivar). During the 24 weeks ended June 12, 2010, favorable foreign currency contributed nearly 3 percentage points to net revenue growth, primarily due to appreciation of the Mexican peso, Canadian dollar and Brazilian real, partially offset by depreciation of the Venezuelan bolivar. Currency declines against the U.S. dollar which are not offset could adversely impact our future results. At June 12, 2010, we estimate that an unfavorable 10% change in the exchange rates would have decreased our net unrealized gains on outstanding foreign currency derivatives by $101 million.

In addition, we continue to use the official exchange rate to remeasure the financial statements of our snack and beverage businesses in Venezuela. We use the official rate as we currently intend to remit dividends solely through the government-operated Foreign Exchange Administration Board (CADIVI). As of the beginning of our 2010 fiscal year, the results of our Venezuelan businesses are reported under hyperinflationary accounting. This determination was made based upon Venezuela’s National Consumer Price Index (NCPI) which indicated cumulative inflation in Venezuela in excess of 100% for the three-year period ended November 30, 2009. Consequently, the functional currency of our Venezuelan entities changed from the bolivar to the U.S. dollar. Effective January 11, 2010, the Venezuelan government devalued the bolivar by resetting the official exchange rate from 2.15 bolivars per dollar to 4.3 bolivars per dollar; however, certain activities are permitted to access an exchange rate of 2.6 bolivars per dollar. Effective June 2010, the Central Bank of Venezuela began accepting and approving applications, under certain conditions, for non-CADIVI exchange transactions at the weighted-average implicit exchange rate obtained from the Transaction System for Foreign Currency Denominated Securities (“SITME”). As of June 12, 2010, this rate was 5.3 bolivars per dollar. In 2010, we expect that the majority of our transactions will be remeasured at the 4.3 exchange rate, and as a result of the change to hyperinflationary accounting and the devaluation of the bolivar, we recorded a one-time net charge of $120 million in the first quarter of 2010. In the 12 and 24 weeks ended June 12, 2010, our operations in Venezuela generated less than 1% of our net revenue.

 

35


Table of Contents

We expect to be able to reduce the impact of volatility in our raw material and energy costs through our hedging strategies and ongoing sourcing initiatives. The potential change in fair value of commodity derivative instruments that qualify for hedge accounting, assuming a 10% decrease in the underlying commodity price at June 12, 2010, would have increased our net unrealized losses as of June 12, 2010 by $58 million. The potential change in fair value of commodity derivative instruments that do not qualify for hedge accounting, assuming a 10% decrease in the underlying commodity price at June 12, 2010, would have increased our net losses as of June 12, 2010 by $23 million.

See Financial Instruments in the Notes to the Condensed Consolidated Financial Statements for further discussion of our derivative instruments, including their fair values as of June 12, 2010 and June 13, 2009. Assuming variable rate debt and investment levels as of June 12, 2010, a 1-percentage-point increase in interest rates would have increased full-year net interest expense by $66 million.

Cautionary statements included in Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks in our Annual Report on Form 10-K for the fiscal year ended December 26, 2009 should be considered when evaluating our trends and future results.

 

36


Table of Contents

Results of Operations – Consolidated Review

 

Items Affecting Comparability

Our reported financial results are impacted by the following items in each of the following periods:

 

     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     6/12/10     6/13/09  

Operating profit

        

Mark-to-market net (losses)/gains

   $ (4   $ 100      $ 42      $ 162   

2009 restructuring and impairment charges

   $      $ (11   $      $ (36

PBG/PAS merger and integration charges

   $ (155   $      $ (437   $   

Inventory fair value adjustments

   $ (76   $      $ (357   $   

Venezuela currency devaluation

   $      $      $ (120   $   

Asset write-off

   $      $      $ (145   $   

Foundation contribution

   $      $      $ (100   $   

Bottling equity income

        

Gain on previously held equity interests

   $      $      $ 735      $   

PBG/PAS merger and integration charges

   $      $      $ (9   $   

Interest expense

        

PBG/PAS merger and integration costs

   $      $      $ (30   $   

Net income attributable to PepsiCo

        

Mark-to-market net (losses)/gains

   $ (3   $ 65      $ 26      $ 105   

2009 restructuring and impairment charges

   $      $ (10   $      $ (29

Gain on previously held equity interests

   $      $      $ 958      $   

PBG/PAS merger and integration charges

   $ (119   $      $ (380   $   

Inventory fair value adjustments

   $ (68   $      $ (308   $   

Venezuela currency devaluation

   $      $      $ (120   $   

Asset write-off

   $      $      $ (92   $   

Foundation contribution

   $      $      $ (64   $   

Net income attributable to PepsiCo per common share diluted

        

Mark-to-market net (losses)/gains

   $ (–   $ 0.04      $ 0.02      $ 0.07   

2009 restructuring and impairment charges

   $      $ (0.01   $      $ (0.02

Gain on previously held equity interests

   $      $      $ 0.60      $   

PBG/PAS merger and integration charges

   $ (0.07   $      $ (0.23   $   

Inventory fair value adjustments

   $ (0.04   $      $ (0.19   $   

Venezuela currency devaluation

   $      $      $ (0.07   $   

Asset write-off

   $      $      $ (0.06   $   

Foundation contribution

   $      $      $ (0.04   $   

Mark-to-Market Net Impact

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, fruit, aluminum and other raw materials. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the

 

37


Table of Contents

resulting gains and losses recognized in corporate unallocated expenses. These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity.

For the 12 weeks ended June 12, 2010, we recognized $4 million ($3 million after-tax with a nominal amount per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses. For the 24 weeks ended June 12, 2010, we recognized $42 million ($26 million after-tax or $0.02 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

For the 12 weeks ended June 13, 2009, we recognized $100 million ($65 million after-tax or $0.04 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses. For the 24 weeks ended June 13, 2009, we recognized $162 million ($105 million after-tax or $0.07 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

2009 Restructuring and Impairment Charges

In the 12 and 24 weeks ended June 13, 2009, we incurred charges of $11 million ($10 million after-tax or $0.01 per share) and $36 million ($29 million after-tax or $0.02 per share), respectively, in conjunction with our Productivity for Growth program. The program included actions in all divisions of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio, and simplify the organization for more effective and timely decision-making. These initiatives were completed in the second quarter of 2009.

Gain on Previously Held Equity Interests

In the first quarter of 2010, in connection with our acquisitions of PBG and PAS, we recorded a gain on our previously held equity interests of $958 million ($0.60 per share), comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests.

PBG/PAS Merger and Integration Charges

In the 12 weeks ended June 12, 2010, we incurred merger and integration charges of $155 million related to our acquisitions of PBG and PAS, including $103 million recorded in the PAB segment, $28 million recorded in the Europe segment and $24 million recorded in corporate unallocated expenses. In the 24 weeks ended June 12, 2010, we incurred merger and integration charges of $467 million related to our acquisitions of PBG and PAS, including $296 million recorded in the PAB segment, $29 million recorded in the Europe segment, $112 million recorded in corporate unallocated expenses and $30 million recorded in interest expense. These charges are being incurred to help create a more fully integrated supply chain and go-to-market business model, to improve the effectiveness and efficiency of the distribution of our brands and to enhance our revenue growth. These charges also include closing costs, one-time financing costs and advisory fees related to our acquisitions of PBG and PAS. In addition, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, in bottling equity income. In total, for the 12 and 24 weeks ended June 12, 2010, these charges had an after-tax impact of $119 million (or $0.07 per share) and $380 million (or $0.23 per share), respectively.

 

38


Table of Contents

Inventory Fair Value Adjustments

In the 12 and 24 weeks ended June 12, 2010, we recorded $76 million ($68 million after-tax or $0.04 per share) and $357 million ($308 million after-tax or $0.19 per share), respectively, of incremental costs related to fair value adjustments to the acquired inventory and other related hedging contracts included in PBG’s and PAS’s balance sheets at the acquisition date. Substantially all of these costs were recorded in cost of sales.

Venezuela Currency Devaluation

As of the beginning of our 2010 fiscal year, we recorded a one-time $120 million net charge related to our change to hyperinflationary accounting for our Venezuelan businesses and the related devaluation of the bolivar. $129 million of this net charge was recorded in corporate unallocated expenses, with the balance (income of $9 million) recorded in our PAB segment. In total, this net charge had an after-tax impact of $120 million or $0.07 per share.

Asset Write-Off

In the first quarter of 2010, we recorded a $145 million charge ($92 million after-tax or $0.06 per share) related to a change in scope of one release in our ongoing migration to SAP software. This change was driven, in part, by a review of our North America systems strategy following our acquisitions of PBG and PAS. This change does not impact our overall commitment to continue our implementation of SAP across our global operations over the next few years.

Foundation Contribution

In the first quarter of 2010, we made a $100 million ($64 million after-tax or $0.04 per share) contribution to The PepsiCo Foundation, Inc., in order to fund charitable and social programs over the next several years. This contribution was recorded in corporate unallocated expenses.

Non-GAAP Measures

Certain measures contained in this Form 10-Q are financial measures that are adjusted for items affecting comparability (see “Items Affecting Comparability” for a detailed list and description of each of these items), as well as, in certain instances, adjusted for foreign currency. These measures are not in accordance with Generally Accepted Accounting Principles (GAAP). Items adjusted for currency assume foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our ongoing performance and with how management evaluates our operational results and trends. These measures are not, and should not be viewed as, a substitute for U.S. GAAP reporting measures. See also “Management Operating Cash Flow.”

Volume

Since our divisions each use different measures of physical unit volume, a common servings metric is necessary to reflect our consolidated physical unit volume. For the 12 weeks ended June 12, 2010, total servings increased 7%, as worldwide snacks increased 1% and worldwide beverages increased 11%. For the 24 weeks ended June 12, 2010, total servings increased 4.5%, as worldwide snacks increased 1% and worldwide beverages increased 7%.

 

39


Table of Contents

We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8-ounce-case metric. Most of our beverage volume is sold by our company-owned and franchise-owned bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our direct shipments to retailers and independent distributors. We report our international beverage volume on a monthly basis. Our second quarter includes beverage volume outside of North America for March, April and May. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to independent bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.

Consolidated Results

Total Net Revenue and Operating Profit

 

     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     Change     6/12/10     6/13/09     Change  

Total net revenue

   $ 14,801      $ 10,592      40   $ 24,169      $ 18,855      28

Operating profit

            

FLNA

   $ 845      $ 783      8   $ 1,615      $ 1,480      9

QFNA

     114        132      (13 )%      267        307      (13 )% 

LAF

     233        240      (3 )%      378        404      (6 )% 

PAB

     952        618      54     1,025        1,043      (2 )% 

Europe

     266        257      3     379        355      7

AMEA

     277        237      17     437        373      17

Corporate Unallocated

            

Net impact of mark-to-market on commodity hedges

     (4     100      n/m        42        162      (74 )% 

PBG/PAS merger and integration costs

     (24          n/m        (112          n/m   

Venezuela currency devaluation

                        (129          n/m   

Asset write-off

                        (145          n/m   

Foundation contribution

                        (100          n/m   

Other

     (198     (177   12     (356     (346   3
                                    

Total operating profit

   $ 2,461      $ 2,190      12   $ 3,301      $ 3,778      (13 )% 
                                    

Total operating profit margin

     16.6     20.7   (4.1     13.7     20.0   (6.3

n/m = not meaningful

See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.

 

40


Table of Contents

12 Weeks

On a reported basis, total operating profit increased 12% and operating margin decreased 4.1 percentage points. Operating profit performance was impacted primarily by items affecting comparability (see “Items Affecting Comparability”) which reduced operating profit by 16 percentage points and contributed 2.4 percentage points to the total operating margin decline.

24 Weeks

On a reported basis, total operating profit decreased 13% and operating margin decreased 6.3 percentage points. These declines were driven primarily by items affecting comparability (see “Items Affecting Comparability”) which contributed 34 percentage points to the total operating profit decline and 5.3 percentage points to the total operating margin decline.

 

41


Table of Contents

Other Consolidated Results

 

     12 Weeks Ended     24 Weeks Ended  
     6/12/10     6/13/09     Change     6/12/10     6/13/09     Change  

Bottling equity income

   $ 9      $ 119      $ (110   $ 718      $ 144      $ 574   

Interest expense, net

   $ (170   $ (73   $ (97   $ (318   $ (171   $ (147

Tax rate

     29.9     25.4       17.7     25.1  

Net income attributable to PepsiCo

   $ 1,603      $ 1,660        (3 )%    $ 3,033      $ 2,795        9

Net income attributable to PepsiCo per common share – diluted

   $ 0.98      $ 1.06        (7 )%    $ 1.87      $ 1.78        5

Mark-to-market net losses/ (gains)

            (0.04       (0.02     (0.07  

2009 restructuring and impairment charges

            0.01                 0.02     

Gain on previously held equity interests

                     (0.60         

PBG/PAS merger and integration charges

     0.07                 0.23            

Inventory fair value adjustments

     0.04                 0.19            

Venezuela currency devaluation

                     0.07            

Asset write-off

                     0.06            

Foundation contribution

                     0.04            
                                    

Net income attributable to PepsiCo per common share – diluted, excluding above items*

   $ 1.10 **    $ 1.02 **      8   $ 1.86 **    $ 1.73        7
                                    

Impact of foreign currency translation

         (1           
                        

Growth in net income attributable to PepsiCo per common share – diluted, excluding above items, on a constant currency basis*

         7         7
                        

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

 

42


Table of Contents

12 Weeks

Bottling equity income decreased $110 million, primarily reflecting the consolidation of the financial results of the acquired bottlers in connection with our acquisitions of PBG and PAS.

Net interest expense increased $97 million, primarily reflecting higher average debt balances, partially offset by lower average rates on our debt balances.

The reported tax rate increased 4.5 percentage points compared to the prior year, primarily reflecting the resolution of certain tax matters in the prior year and the impact of the PPACA in the current quarter.

Net income attributable to PepsiCo decreased 3% and net income attributable to PepsiCo per common share decreased 7%. Items affecting comparability (see “Items Affecting Comparability”) decreased both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 15 percentage points.

24 Weeks

Bottling equity income increased $574 million, primarily reflecting the gain on our previously held equity interests in connection with our acquisitions of PBG and PAS, partially offset by the consolidation of the related financial results of the acquired bottlers.

Net interest expense increased $147 million, primarily reflecting higher average debt balances and bridge and term financing costs in connection with our acquisitions of PBG and PAS, partially offset by lower average rates on our debt balances.

The reported tax rate decreased 7.4 percentage points compared to the prior year, primarily reflecting the impact of our acquisitions of PBG and PAS, which includes the reversal of deferred taxes attributable to our previously held equity interests in PBG and PAS, as well as the favorable resolution of certain tax matters in the first quarter of 2010.

Net income attributable to PepsiCo increased 9% and net income attributable to PepsiCo per common share increased 5%. Items affecting comparability (see “Items Affecting Comparability”) decreased both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 2 percentage points.

Results of Operations – Division Review

 

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. For additional information, see Our Divisions and Restructuring, Impairment and Integration Charges in the Notes to the Condensed Consolidated Financial Statements and “Items Affecting Comparability.”

Furthermore, in the discussions of net revenue and operating profit below, “effective net pricing” reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries, and “net pricing” reflects the year-over-year combined impact of list price changes, weight changes per package, discounts and allowances. Additionally, “acquisitions”, except as otherwise noted, reflect all mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees.

 

43


Table of Contents

Net Revenue

12 Weeks Ended

   FLNA     QFNA     LAF     PAB     Europe     AMEA     Total  

June 12, 2010

   $ 3,195      $ 379      $ 1,538      $ 5,548      $ 2,416      $ 1,725      $ 14,801   

June 13, 2009

   $ 3,138      $ 396      $ 1,378      $ 2,618      $ 1,642      $ 1,420      $ 10,592   

% Impact of:

              

Volume(a)

         (2 )%      1     *        *        11     *   

Effective net pricing(b)

     1        (3     5        *        *        4.5        *   

Foreign exchange

     1        1.5        5               4        6        2.5   

Acquisitions

           

  
   

  
    *        *               *   
                                                        

% Change(c)

     2 %      (4 )%      12 %      112 %      47 %      22 %      40 % 
                                                        

 

Net Revenue

24 Weeks Ended

   FLNA     QFNA     LAF     PAB     Europe     AMEA     Total  

June 12, 2010

   $ 6,262      $ 859      $ 2,521      $ 8,313      $ 3,409      $ 2,805      $ 24,169   

June 13, 2009

   $ 6,138      $ 881      $ 2,245      $ 4,706      $ 2,589      $ 2,296      $ 18,855   

% Impact of:

              

Volume(a)

         (1 )%      1     *        *        12     *   

Effective net pricing(b)

     0.5        (3     6        *        *        4        *   

Foreign exchange

     1        2        5               5        6        3   

Acquisitions

                          *        *        0.5        *   
                                                        

% Change(c)

     2 %      (2.5 )%      12 %      77 %      32 %      22 %      28 % 
                                                        

 

(a)

Excludes the impact of acquisitions. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE. Our net revenue excludes nonconsolidated joint venture volume, and, for our beverage businesses, is based on CSE.

 

(b)

Includes the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

 

(c)

Amounts may not sum due to rounding.

 

*

It is impractical to separately determine and quantify the impact of our acquisitions of PBG and PAS from changes in our pre-existing beverage business since we now manage these businesses as an integrated system.

 

44


Table of Contents

Frito-Lay North America

 

     12 Weeks Ended    %     24 Weeks Ended    %  
     6/12/10    6/13/09    Change     6/12/10    6/13/09    Change  

Net revenue

   $ 3,195    $ 3,138    2      $ 6,262    $ 6,138    2   
                                

Impact of foreign currency translation

         (1         (1
                        

Net revenue growth, on a constant currency basis*

         1            1   
                        

Operating profit

   $ 845    $ 783    8      $ 1,615    $ 1,480    9   

2009 restructuring and impairment charges

                      2   
                                

Operating profit, excluding above item*

   $ 845    $ 783    8      $ 1,615    $ 1,482    9   
                                

Impact of foreign currency translation

         (1         (1
                        

Operating profit growth excluding above item, on a constant currency basis*

         7            8   
                        

 

* See “Non-GAAP Measures”

12 Weeks

Pound volume declined 3%, primarily due to the overlap of the 2009 “20% More Free” promotion. Net revenue growth of 2% was driven by effective net pricing and reflected high-single-digit revenue growth in trademark Lay’s and double-digit revenue growth in variety packs, partially offset by a double-digit decline in SunChips. Foreign currency increased net revenue growth by 1 percentage point.

Operating profit grew 8%, reflecting lower commodity costs, primarily cooking oil, as well as the net revenue growth. Foreign currency increased operating profit growth by 1 percentage point.

24 Weeks

Pound volume declined 1%, primarily due to the overlap of the 2009 “20% More Free” promotion. Net revenue growth of 2% was driven by effective net pricing and reflected high-single-digit revenue growth in trademark Lay’s and double-digit revenue growth in variety packs, partially offset by a low-single-digit decline in Doritos. Foreign currency increased net revenue growth by 1 percentage point.

Operating profit grew 9%, reflecting lower commodity costs, primarily cooking oil, as well as the net revenue growth. Foreign currency increased operating profit growth by 1 percentage point.

 

45


Table of Contents

Quaker Foods North America

 

     12 Weeks Ended    %     24 Weeks Ended    %  
     6/12/10    6/13/09    Change     6/12/10    6/13/09    Change  

Net revenue

   $ 379    $ 396    (4   $ 859    $ 881    (2.5
                                

Impact of foreign currency translation

         (1.5         (2
                        

Net revenue growth, on a constant currency basis*

         (6 )**          (4 )** 
                        

Operating profit

   $ 114    $ 132    (13   $ 267    $ 307    (13

2009 restructuring and impairment charges

                      1   
                                

Operating profit, excluding above item*

   $ 114    $ 132    (14 )**    $ 267    $ 308    (13
                                

Impact of foreign currency translation

         (1         (1
                        

Operating profit growth excluding above item, on a constant currency basis*

         (14 )**          (14
                        
* See “Non-GAAP Measures”
** Does not sum due to rounding

12 Weeks

Net revenue declined 4% and volume declined 2%. The volume decline reflects low-single-digit declines in ready-to-eat cereals and mid-single-digit declines in trademark Roni. Unfavorable net pricing and mix also contributed to the net revenue decline, partially offset by favorable foreign currency which positively contributed 1.5 percentage points to the net revenue performance.

Operating profit declined 13%, primarily reflecting the net revenue performance.

24 Weeks

Net revenue declined 2.5% and volume declined 1%. The volume decline reflects low-single-digit declines in ready-to-eat cereals and Oatmeal, partially offset by a mid-single-digit increase in trademark Roni. Unfavorable net pricing and mix also contributed to the net revenue decline, partially offset by favorable foreign currency which positively contributed almost 2 percentage points to the net revenue performance.

Operating profit declined 13%, reflecting the net revenue performance, as well as insurance settlement recoveries recorded in the prior year related to the Cedar Rapids flood, which negatively impacted operating profit performance by 6 percentage points.

 

46


Table of Contents

Latin America Foods

 

     12 Weeks Ended    %     24 Weeks Ended    %  
     6/12/10    6/13/09    Change     6/12/10    6/13/09    Change  

Net revenue

   $ 1,538    $ 1,378    12      $ 2,521    $ 2,245    12   
                                

Impact of foreign currency translation

         (5         (5
                        

Net revenue growth, on a constant currency basis*

         6 **          7   
                        

Operating profit

   $ 233<