10-Q 1 d219776d10q.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 September 3, 2011 (36 weeks)

OR

 

    

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-1183

LOGO

 

 

PepsiCo, Inc.

  

(Exact Name of Registrant as Specified in its Charter)

 

        North Carolina        

     13-1584302  

(State or Other Jurisdiction of

Incorporation or Organization)

  

(I.R.S. Employer

Identification No.)

700 Anderson Hill Road, Purchase, New York

     10577  

(Address of Principal Executive Offices)

   (Zip Code)

                                 914-253-2000                                 

(Registrant’s Telephone Number, Including Area Code)

 

  

N/A

  

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

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

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

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

 

Large accelerated filer  X 

  

Accelerated filer     

Non-accelerated filer     

(Do not check if a smaller reporting company)

  

Smaller reporting company     

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

Number of shares of Common Stock outstanding as of October 5, 2011: 1,563,410,224


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 36 Weeks Ended September  3, 2011 and September 4, 2010

     3   

Condensed Consolidated Statement of Cash Flows – 36 Weeks Ended September  3, 2011 and September 4, 2010

     4-5   

Condensed Consolidated Balance Sheet – September 3, 2011 and December 25, 2010

     6-7   

Condensed Consolidated Statement of Equity – 36 Weeks Ended September 3, 2011 and September  4, 2010

     8   

Condensed Consolidated Statement of Comprehensive Income – 12 and 36 Weeks Ended September  3, 2011 and September 4, 2010

     9   

Notes to the Condensed Consolidated Financial Statements

     10-27   

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

     28-47   

Report of Independent Registered Public Accounting Firm

     48   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4. Controls and Procedures

     49   

Part II Other Information

  

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     50   

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

     51-52   

Item 4. (Removed and Reserved)

     52   

Item 6. Exhibits

     52   

 

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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     36 Weeks Ended  
     9/3/11     9/4/10     9/3/11     9/4/10  

Net Revenue

   $ 17,582      $ 15,514      $ 46,346      $ 39,683   

Cost of sales

     8,452        7,008        21,862        18,216   

Selling, general and administrative expenses

     6,186        5,676        16,995        15,288   

Amortization of intangible assets

     38        30        103        78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     2,906        2,800        7,386        6,101   

Bottling equity income

            10               728   

Interest expense

     (205 )      (169     (584 )      (495

Interest income and other

     (4 )      18        33        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,697        2,659        6,835        6,360   

Provision for income taxes

     686        729        1,775        1,383   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,011        1,930        5,060        4,977   

Less: Net income attributable to noncontrolling interests

     11        8        32        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to PepsiCo

   $ 2,000      $ 1,922      $ 5,028      $ 4,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to PepsiCo per Common Share

        

Basic

   $ 1.27      $ 1.21      $ 3.18      $ 3.11   

Diluted

   $ 1.25      $ 1.19      $ 3.14      $ 3.06   

Cash dividends declared per common share

   $ 0.515      $ 0.48      $ 1.51      $ 1.41   

See accompanying notes to the condensed consolidated financial statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, unaudited)

 

     36 Weeks Ended  
     9/3/11     9/4/10  

Operating Activities

    

Net income

   $ 5,060      $ 4,977   

Depreciation and amortization

     1,877        1,580   

Stock-based compensation expense

     222        191   

Cash payments for restructuring charges

     (1 )      (29

Merger and integration costs

     174        545   

Cash payments for merger and integration costs

     (293 )      (272

Gain on previously held equity interests in The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS)

            (958

Asset write-off

            145   

Non-cash foreign exchange loss related to Venezuela devaluation

            120   

Excess tax benefits from share-based payment arrangements

     (56 )      (73

Pension and retiree medical plan contributions

     (185 )      (1,350

Pension and retiree medical plan expenses

     389        310   

Bottling equity income, net of dividends

            37   

Deferred income taxes and other tax charges and credits

     132        291   

Change in accounts and notes receivable

     (1,643 )      (1,287

Change in inventories

     (466 )      224   

Change in prepaid expenses and other current assets

     (54 )      (14

Change in accounts payable and other current liabilities

     142        762   

Change in income taxes payable

     936        787   

Other, net

     (400 )      (198
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     5,834        5,788   
  

 

 

   

 

 

 

Investing Activities

    

Capital spending

     (1,962 )      (1,670

Sales of property, plant and equipment

     46        55   

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

Acquisition of Wimm-Bill-Dann Foods OJSC (WBD), net of cash and cash equivalents acquired

     (2,428 )        

Investment in WBD

     (164 )        

Other acquisitions and investments in noncontrolled affiliates

     (160 )      (36

Divestitures

     10          

Cash restricted for pending acquisitions

            (8

Short-term investments, by original maturity

    

More than three months – purchases

            (8

More than three months – maturities

     14        21   

Three months or less, net

     (48 )      (53

Other investing, net

     (3 )      (12
  

 

 

   

 

 

 

Net Cash Used for Investing Activities

     (4,695 )      (5,444
  

 

 

   

 

 

 

(Continued on following page)

 

 

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

(in millions, unaudited)

 

     36 Weeks Ended  
     9/3/11     9/4/10  

Financing Activities

    

Proceeds from issuances of long-term debt

   $ 3,000      $ 4,215   

Payments of long-term debt

     (1,596 )      (73

Debt repurchase

     (771 )        

Short-term borrowings, by original maturity

    

More than three months – proceeds

     224        55   

More than three months – payments

     (274 )      (27

Three months or less, net

     106        3,351   

Cash dividends paid

     (2,349 )      (2,218

Share repurchases – common

     (1,929 )      (4,418

Share repurchases – preferred

     (5 )      (3

Proceeds from exercises of stock options

     724        700   

Excess tax benefits from share-based payment arrangements

     56        73   

Acquisition of noncontrolling interests

     (1,327 )      (159

Other financing

     (2 )      (6
  

 

 

   

 

 

 

Net Cash (Used for)/Provided by Financing Activities

     (4,143 )      1,490   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     144        (200

Net (Decrease)/Increase in Cash and Cash Equivalents

     (2,860     1,634   

Cash and Cash Equivalents, Beginning of Year

     5,943        3,943   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 3,083      $ 5,577   
  

 

 

   

 

 

 

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.

 

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

 

     (Unaudited)        
     9/3/11     12/25/10  

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 3,083      $ 5,943   

Short-term investments

     452        426   

Accounts and notes receivable, less allowance: 9/11 – $147, 12/10 – $144

     8,330        6,323   

Inventories

    

Raw materials

     2,152        1,654   

Work-in-process

     237        128   

Finished goods

     1,816        1,590   
  

 

 

   

 

 

 
     4,205        3,372   

Prepaid expenses and other current assets

     1,764        1,505   
  

 

 

   

 

 

 

Total Current Assets

     17,834        17,569   

Property, Plant and Equipment

     36,262        33,041   

Accumulated Depreciation

     (15,525     (13,983
  

 

 

   

 

 

 
     20,737        19,058   

Amortizable Intangible Assets, net

     2,426        2,025   

Goodwill

     16,272        14,661   

Other Nonamortizable Intangible Assets

     15,433        11,783   
  

 

 

   

 

 

 

Nonamortizable Intangible Assets

     31,705        26,444   

Investments in Noncontrolled Affiliates

     1,500        1,368   

Other Assets

     1,176        1,689   
  

 

 

   

 

 

 

Total Assets

   $ 75,378      $ 68,153   
  

 

 

   

 

 

 

 

(Continued on following page)

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (continued)

(in millions except per share amounts)

 

     (Unaudited)        
     9/3/11     12/25/10  

Liabilities and Equity

    

Current Liabilities

    

Short-term obligations

   $ 5,070      $ 4,898   

Accounts payable and other current liabilities

     11,524        10,923   

Income taxes payable

     971        71   
  

 

 

   

 

 

 

Total Current Liabilities

     17,565        15,892   

Long-term Debt Obligations

     21,781        19,999   

Other Liabilities

     6,859        6,729   

Deferred Income Taxes

     5,170        4,057   
  

 

 

   

 

 

 

Total Liabilities

     51,375        46,677   

Commitments and Contingencies

    

Preferred Stock, no par value

     41        41   

Repurchased Preferred Stock

     (155     (150

PepsiCo Common Shareholders’ Equity

    

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

    

Authorized 3,600 shares, issued 9/11 and 12/10 – 1,865 shares

     31        31   

Capital in excess of par value

     4,406        4,527   

Retained earnings

     39,714        37,090   

Accumulated other comprehensive loss

     (2,800     (3,630

Less: repurchased common stock, at cost: 9/11 – 297 shares, 12/10 – 284 shares

     (17,660     (16,745
  

 

 

   

 

 

 

Total PepsiCo Common Shareholders’ Equity

     23,691        21,273   

Noncontrolling interests

     426        312   
  

 

 

   

 

 

 

Total Equity

     24,003        21,476   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 75,378      $ 68,153   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions, unaudited)

 

     36 Weeks Ended  
     9/3/11     9/4/10  
     Shares     Amount     Shares     Amount  

Preferred Stock

     0.8      $ 41        0.8      $ 41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Repurchased Preferred Stock

        

Balance, beginning of year

     (0.6     (150     (0.6     (145

Redemptions

     (–     (5     (–     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

     (0.6     (155     (0.6     (148
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock

        

Balance, beginning of year

     1,865        31        1,782        30   

Shares issued in connection with our acquisitions of PBG and PAS

                   83        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

     1,865        31        1,865        31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital in Excess of Par Value

        

Balance, beginning of year

       4,527          250   

Stock-based compensation expense

       222          191   

Stock option exercises/RSUs converted(a)

       (303       (399

Withholding tax on RSUs converted

       (54       (57

Equity issued in connection with our acquisitions of PBG and PAS

                4,451   

Other

       14          99   
    

 

 

     

 

 

 

Balance, end of period

       4,406          4,535   
    

 

 

     

 

 

 

Retained Earnings

        

Balance, beginning of year

       37,090          33,805   

Net income attributable to PepsiCo

       5,028          4,955   

Cash dividends declared – common

       (2,388       (2,270

Cash dividends declared – preferred

       (1       (1

Cash dividends declared – RSUs

       (15       (9

Other

                7   
    

 

 

     

 

 

 

Balance, end of period

       39,714          36,487   
    

 

 

     

 

 

 

Accumulated Other Comprehensive Loss

        

Balance, beginning of year

       (3,630       (3,794

Currency translation adjustment

       870          (291

Cash flow hedges, net of tax:

        

Net derivative losses

       (63       (123

Reclassification of net losses to net income

       11          39   

Pension and retiree medical, net of tax:

        

Reclassification of losses to net income

       49          210   

Remeasurement of net liabilities

                (406

Unrealized (losses)/gains on securities, net of tax

       (20       7   

Other

       (17         
    

 

 

     

 

 

 

Balance, end of period

       (2,800       (4,358
    

 

 

     

 

 

 

Repurchased Common Stock

        

Balance, beginning of year

     (284     (16,745     (217     (13,383

Share repurchases

     (30     (1,970     (68     (4,418

Stock option exercises

     15        948        17        1,029   

Other

     2        107        (15     122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

     (297     (17,660     (283     (16,650
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Common Shareholders’ Equity

       23,691          20,045   
    

 

 

     

 

 

 

Noncontrolling Interests

        

Balance, beginning of year

       312          638   

Net income attributable to noncontrolling interests

       32          22   

Contributions from/(distributions to) noncontrolling interests, net

       13          (347

Currency translation adjustment

       69          (14

Other, net

                (1
    

 

 

     

 

 

 

Balance, end of period

       426          298   
    

 

 

     

 

 

 

Total Equity

     $ 24,003        $ 20,236   
    

 

 

     

 

 

 

 

(a)

Includes total tax benefits of $35 million in 2011 and $50 million in 2010.

See accompanying notes to the condensed consolidated financial statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(in millions, unaudited)

 

     12 Weeks Ended     36 Weeks Ended  
     9/3/11     9/4/10     9/3/11     9/4/10  

Net Income

   $ 2,011      $ 1,930      $ 5,060      $ 4,977   

Other Comprehensive (Loss)/Income

        

Currency translation adjustment

     (515 )      290        939        (305

Cash flow hedges, net of tax:

        

Net derivative losses

     (46 )      (37     (63 )      (123

Reclassification of net losses to net income

     4        16        11        39   

Pension and retiree medical, net of tax:

        

Reclassification of losses/(gains) to net income

     26        (1     49        210   

Remeasurement of net liabilities

            (406            (406

Unrealized (losses)/gains on securities, net of tax

     (18 )      6        (20 )      7   

Other

                   (17 )        
  

 

 

   

 

 

   

 

 

   

 

 

 
     (549 )      (132     899        (578
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

     1,462        1,798        5,959        4,399   

Comprehensive income attributable to noncontrolling interests

     (8 )      (8     (101 )      (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to PepsiCo

   $ 1,454      $ 1,790      $ 5,858      $ 4,391   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation and Our Divisions

 

Basis of Presentation

Our Condensed Consolidated Balance Sheet as of September 3, 2011 and the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 36 weeks ended September 3, 2011 and September 4, 2010, and the Condensed Consolidated Statements of Cash Flows and Equity for the 36 weeks ended September 3, 2011 and September 4, 2010 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 25, 2010 and in our Current Report on Form 8-K dated March 31, 2011. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 36 weeks 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 June, July and August are reflected in our third quarter results.

On February 26, 2010, we completed our acquisitions of PBG and 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 of 2010, consistent with our monthly international reporting calendar. 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. Additionally, 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, comprising $735 million which was 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. Our share of income or loss from noncontrolled affiliates is reflected as a component of selling, general and administrative expenses. See also Acquisitions and “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In the first quarter of 2011, Quaker Foods North America (QFNA) changed its method of accounting for certain U.S. inventories from the last-in, first-out (LIFO) method to the average cost method. This change is considered preferable by management as we believe that the average cost method of accounting for all U.S. foods inventories will improve our financial reporting by better matching revenues and expenses and better reflecting the current value of inventory. In addition, the change from the LIFO method to the average cost method will enhance the comparability of QFNA’s financial results with our other food businesses, as well as with peer companies where the average cost method is widely used. The impact of this change on consolidated net income in the first quarter of 2011 was approximately $9 million (or less than a penny per share). Prior periods were not restated as the impact of the change on previously issued financial statements was not considered material.

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

 

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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, 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 in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Certain reclassifications were made to the prior year’s amounts to conform to the 2011 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 25, 2010 and our Current Report on Form 8-K dated March 31, 2011, in which we reclassified historical segment information on a basis consistent with our current segment reporting structure.

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);

 

  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 (also referred to as divisions), as follows:

 

   

FLNA,

 

   

QFNA,

 

   

LAF,

 

   

PAB,

 

   

Europe, and

 

   

AMEA.

 

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     12 Weeks Ended     36 Weeks Ended  
     9/3/11     9/4/10     9/3/11     9/4/10  

Net Revenue

        

FLNA

   $ 3,173      $ 3,050      $ 9,167      $ 8,906   

QFNA

     614        601        1,837        1,866   

LAF

     1,841        1,542        4,757        4,063   

PAB

     5,947        5,792        16,107        14,105   

Europe(a)

     3,909        2,848        9,329        6,390   

AMEA

     2,098        1,681        5,149        4,353   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 17,582      $ 15,514      $ 46,346      $ 39,683   
  

 

 

   

 

 

   

 

 

   

 

 

 
     12 Weeks Ended     36 Weeks Ended  
     9/3/11     9/4/10     9/3/11     9/4/10  

Operating Profit

        

FLNA

   $ 918      $ 866      $ 2,545      $ 2,394   

QFNA

     177        167        558        521   

LAF

     275        238        720        616   

PAB

     992        1,017        2,533        2,042   

Europe

     514        432        984        826   

AMEA

     285        235        730        657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total division

     3,161        2,955        8,070        7,056   

Corporate Unallocated

        

Net impact of mark-to-market on commodity hedges

     (53     16        (31     58   

Merger and integration costs

     (10     (16     (64     (128

Venezuela currency devaluation

                          (129

Asset write-off

                          (145

Foundation contribution

                          (100

Other

     (192     (155     (589     (511
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,906      $ 2,800      $ 7,386      $ 6,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Total Assets  
     9/3/11      12/25/10  

FLNA

   $ 6,185       $ 6,027   

QFNA

     1,242         1,217   

LAF

     4,288         4,053   

PAB

     32,641         31,622   

Europe(a)

     21,180         13,032   

AMEA

     6,163         5,569   
  

 

 

    

 

 

 

Total division

     71,699         61,520   

Corporate(b)

     3,679         6,394   

Investments in bottling affiliates

             239   
  

 

 

    

 

 

 
   $ 75,378       $ 68,153   
  

 

 

    

 

 

 

 

(a) 

Change in 2011 relates primarily to our acquisition of WBD.

 

(b) 

Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments and property, plant and equipment.

 

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Acquisitions

 

PBG and PAS

On February 26, 2010, 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. The acquisitions were accounted for as business combinations, and, accordingly, the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. Our fair market valuations of the identifiable assets acquired and liabilities assumed have been completed and the final valuations did not materially differ from those fair values reported as of December 25, 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 36 weeks ended September 4, 2010.

 

     (unaudited)
36 Weeks Ended
 
     9/4/10  

Net Revenue

   $ 41,427   

Net Income Attributable to PepsiCo

   $ 4,491   

Net Income Attributable to PepsiCo per Common Share – Diluted

   $ 2.75   

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 date 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;

 

   

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 acquisition date fair values and changes in certain expenses resulting therefrom; and

 

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

The unaudited pro forma results do not reflect future events that either have occurred or 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.

WBD

On February 3, 2011, we acquired the ordinary shares, including shares underlying American Depositary Shares (ADSs) and Global Depositary Shares (GDSs), of WBD, a company incorporated in the Russian Federation, which represented in the aggregate approximately 66% of WBD’s outstanding ordinary shares, pursuant to the purchase agreement dated December 1, 2010 between PepsiCo and certain selling shareholders of WBD for approximately $3.8 billion in cash. The acquisition of those shares increased our total ownership to approximately 77%, giving us a controlling interest in WBD. Under the guidance on accounting for business combinations, once a controlling interest is obtained, we are required to recognize and measure 100% of the identifiable assets acquired, liabilities assumed and noncontrolling interests at their full fair values. As a result, the total consideration transferred was approximately $5.8 billion, which included the $3.8 billion of cash (or $2.4 billion, net of cash and cash equivalents acquired), the fair value of our previously held equity interest in WBD of $0.7 billion and the fair value of the remaining noncontrolling interests in WBD of $1.3 billion. The preliminary estimates of the fair value of the identifiable assets acquired and liabilities assumed in WBD as of the acquisition date include goodwill and other intangible assets of $4.9 billion; property, plant and equipment of $1.3 billion; debt obligations of $1.1 billion; and other net assets of $0.7 billion, all of which are recorded in our Europe segment. 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 discussed above as valuations are finalized. We expect to finalize these amounts as soon as possible but no later than by the end of 2011.

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 Merger and Integration Charges for details on the expenses incurred during 2011.

On March 10, 2011, we commenced our tender offers in Russia and the U.S. for all remaining outstanding ordinary shares and ADSs of WBD for 3,883.70 Russian rubles per ordinary share and 970.925 Russian rubles per ADS, respectively. The Russian offer was made to all holders of ordinary shares and the U.S. offer was made to all holders of ADSs. We completed the Russian offer on May 19, 2011 and the U.S. offer on May 16, 2011. After completion of the offers, we paid approximately $1.3 billion for WBD’s ordinary shares (including shares underlying ADSs) and increased our total ownership of WBD to approximately 98.6%.

On June 30, 2011, we elected to exercise our squeeze-out rights under Russian law with respect to all remaining WBD ordinary shares not already owned by us. Therefore, under Russian law, all remaining WBD shareholders were required to sell their ordinary shares (including those underlying ADSs) to us at the same price that was offered to WBD shareholders in the Russian tender offer. Accordingly, all registered holders of ordinary shares on August 15, 2011 (including

 

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the ADS depository) received 3,883.70 Russian rubles per ordinary share. After completion of the squeeze-out in September 2011 (during our fourth quarter), we paid approximately $79 million for WBD’s ordinary shares (including shares underlying ADSs) and increased our total ownership to 100% of WBD.

Intangible Assets

 

 

     9/3/11     12/25/10  

Amortizable intangible assets, net

    

Acquired franchise rights

   $ 967      $ 949   

Reacquired franchise rights

     110        110   

Brands

     1,538        1,463   

Other identifiable intangibles

     1,159        747   
  

 

 

   

 

 

 
     3,774        3,269   

Accumulated amortization

     (1,348     (1,244
  

 

 

   

 

 

 
   $ 2,426      $ 2,025   
  

 

 

   

 

 

 

 

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

 

     Balance
12/25/10
     Acquisitions      Translation
and Other
     Balance
9/3/11
 

FLNA

           

Goodwill

   $ 313       $       $ 4       $ 317   

Brands

     31                 1         32   
  

 

 

    

 

 

    

 

 

    

 

 

 
     344                 5         349   
  

 

 

    

 

 

    

 

 

    

 

 

 

QFNA

           

Goodwill

     175                         175   
  

 

 

    

 

 

    

 

 

    

 

 

 

LAF

           

Goodwill

     497         18         9         524   

Brands

     143                 3         146   
  

 

 

    

 

 

    

 

 

    

 

 

 
     640         18         12         670   
  

 

 

    

 

 

    

 

 

    

 

 

 

PAB

           

Goodwill

     9,946         57         9         10,012   

Reacquired franchise rights

     7,283         79         25         7,387   

Acquired franchise rights

     1,565                 2         1,567   

Brands

     182         11         3         196   

Other

     10                         10   
  

 

 

    

 

 

    

 

 

    

 

 

 
     18,986         147         39         19,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe (a)

           

Goodwill

     3,040         1,240         240         4,520   

Reacquired franchise rights

     793                 36         829   

Acquired franchise rights

     227                 20         247   

Brands

     1,380         3,300         162         4,842   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,440         4,540         458         10,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

AMEA

           

Goodwill

     690                 34         724   

Brands

     169                 8         177   
  

 

 

    

 

 

    

 

 

    

 

 

 
     859                 42         901   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total goodwill

     14,661         1,315         296         16,272   

Total reacquired franchise rights

     8,076         79         61         8,216   

Total acquired franchise rights

     1,792                 22         1,814   

Total brands

     1,905         3,311         177         5,393   

Total other

     10                         10   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,444       $ 4,705       $ 556       $ 31,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Net increases in 2011 relate primarily to our acquisition of WBD.

 

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Stock-Based Compensation

 

For the 12 weeks ended September 3, 2011, we recognized stock-based compensation expense of $77 million ($76 million recorded as stock-based compensation expense and $1 million included in merger and integration charges). For the 36 weeks ended September 3, 2011, we recognized stock-based compensation expense of $232 million ($222 million recorded as stock-based compensation expense and $10 million included in merger and integration charges). For the 12 weeks ended September 4, 2010, we recognized stock-based compensation expense of $77 million ($72 million recorded as stock-based compensation expense and $5 million included in merger and integration charges). For the 36 weeks ended September 4, 2010, we recognized stock-based compensation expense of $236 million ($191 million recorded as stock-based compensation expense and $45 million included in merger and integration charges).

For the 12 weeks ended September 3, 2011, our grants of stock options and restricted stock units (RSU) were nominal. For the 36 weeks ended September 3, 2011, we granted 6.8 million stock options at a weighted-average grant price of $64.28 and 5.2 million RSUs at a weighted-average grant price of $63.88, under the terms of our 2007 Long-Term Incentive Plan. For the 12 weeks ended September 4, 2010, our grants of stock options and RSUs were nominal. For the 36 weeks ended September 4, 2010, we granted 12.2 million stock options and 4.7 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:

 

     36 Weeks Ended  
     9/3/11     9/4/10  

Expected life

     6 yrs.        5 yrs.   

Risk free interest rate

     2.5     2.3

Expected volatility(a)

     16     17

Expected dividend yield

     2.9     2.8

 

 

(a) 

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

 

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Pension and Retiree Medical Benefits

 

The components of net periodic benefit cost for pension and retiree medical plans are as follows:

 

     12 Weeks Ended  
     Pension     Retiree Medical  
     9/3/11     9/4/10     9/3/11     9/4/10     9/3/11     9/4/10  
     U.S.     International        

Service cost

   $ 80      $ 73      $ 22      $ 19      $ 12      $ 13   

Interest cost

     127        123        28        26        20        22   

Expected return on plan assets

     (163     (158     (32     (31     (3       

Amortization of prior service cost/(benefit)

     3        3        1        1        (6     (5

Amortization of experience loss

     34        30        10        6        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     81        71        29        21        25        32   

Settlement/Curtailment gain

                                        (62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expense

   $ 81      $ 71      $ 29      $ 21      $ 25      $ (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     36 Weeks Ended  
     Pension     Retiree Medical  
     9/3/11     9/4/10     9/3/11     9/4/10     9/3/11     9/4/10  
     U.S.     International        

Service cost

   $ 242      $ 203      $ 62      $ 52      $ 35      $ 39   

Interest cost

     379        341        77        70        61        65   

Expected return on plan assets

     (487     (433     (89     (84     (10       

Amortization of prior service cost/(benefit)

     10        8        2        2        (19     (13

Amortization of experience loss

     101        80        26        16        8        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     245        199        78        56        75        95   

Settlement/Curtailment gain

     (9     (2                          (62

Special termination benefits

     10        23                      1        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expense

   $ 246      $ 220      $ 78      $ 56      $ 76      $ 34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Income Taxes

 

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

 

     9/3/11     12/25/10  

Balance, beginning of year

   $ 2,022      $ 1,731   

Additions for tax positions related to the current year

     143        204   

Additions for tax positions from prior years

     74        517   

Reductions for tax positions from prior years

     (66     (391

Settlement payments

     (87     (30

Statute of limitations expiration

     (3     (7

Translation and other

     1        (2
  

 

 

   

 

 

 

Balance, end of period

   $ 2,084      $ 2,022   
  

 

 

   

 

 

 

 

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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  
     9/3/11      9/4/10  
     Income      Shares(a)      Income      Shares(a)  

Net income attributable to PepsiCo

     $2,000            $1,922      

Preferred shares:

           

Dividends

                         

Redemption premium

     (1)                 
  

 

 

       

 

 

    

Net income available for PepsiCo common shareholders

     $1,999         1,578         $1,922         1,588   
  

 

 

       

 

 

    

Basic net income attributable to PepsiCo per common share

     $1.27            $1.21      
  

 

 

       

 

 

    

Net income available for PepsiCo common shareholders

     $1,999         1,578         $1,922         1,588   

Dilutive securities:

           

Stock options and RSUs(b)

             20                 23   

ESOP convertible preferred stock

     1         1                 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     $2,000         1,599         $1,922         1,612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income attributable to PepsiCo per common share

     $1.25            $1.19      
  

 

 

       

 

 

    
     36 Weeks Ended  
     9/3/11      9/4/10  
     Income     Shares(a)      Income     Shares(a)  

Net income attributable to PepsiCo

   $ 5,028         $ 4,955     

Preferred shares:

         

Dividends

     (1        (1  

Redemption premium

     (4        (2  
  

 

 

      

 

 

   

Net income available for PepsiCo common shareholders

   $ 5,023        1,581       $ 4,952        1,593   
  

 

 

      

 

 

   

Basic net income attributable to PepsiCo per common share

   $ 3.18         $ 3.11     
  

 

 

      

 

 

   

Net income available for PepsiCo common shareholders

   $ 5,023        1,581       $ 4,952        1,593   

Dilutive securities:

         

Stock options and RSUs(b)

            21                24   

ESOP convertible preferred stock

     5        1         3        1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 5,028        1,603       $ 4,955        1,618   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net income attributable to PepsiCo per common share

   $ 3.14         $ 3.06     
  

 

 

      

 

 

   

 

(a) 

Weighted-average common shares outstanding (in millions).

 

(b)

Options to purchase 22.1 million and 21.2 million shares, respectively, for the 12 and 36 weeks in 2011 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 $67.67 and $67.46, respectively. Options to purchase 31.9 million and 25.1 million shares, respectively, for the 12 and 36 weeks in 2010 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 36 weeks in 2010 had average exercise prices of $66.85 and $67.13, respectively.

 

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Table of Contents

Debt Obligations and Commitments

 

In the second quarter of 2011, we issued $750 million of floating rate notes maturing in 2013, which bear interest at a rate equal to the three-month London Inter-Bank Offered Rate (LIBOR) plus 8 basis points, and $1.0 billion of 2.500% senior notes maturing in 2016. The net proceeds from the issuance of these notes were used for general corporate purposes.

In the third quarter of 2011, we issued $500 million of 0.800% senior notes maturing in 2014 and $750 million of 3.000% senior notes maturing in 2021. The net proceeds from the issuance of these notes will be used for general corporate purposes.

In the third quarter of 2011, we entered into a new four-year unsecured revolving credit agreement (Four-Year Credit Agreement) which expires in June 2015. Effective August 8, 2011, commitments under this agreement were increased to enable us to borrow up to $2.925 billion, subject to customary terms and conditions. We may request to increase the commitments under this agreement to up to $3.5 billion. Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.

Also, in the third quarter of 2011, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires in June 2012. Effective August 8, 2011, commitments under this agreement were increased to enable us to borrow up to $2.925 billion, subject to customary terms and conditions. We may request to increase the commitments under this agreement to up to $3.5 billion. We may request renewal of this facility for an additional 364-day period or convert any amounts outstanding into a term loan for a period of up to one year, which would mature no later than June 2013.

The Four-Year Credit Agreement and the 364-Day Credit Agreement, together replaced our $2 billion unsecured revolving credit agreement, our $2.575 billion 364-day unsecured revolving credit agreement and our $1.080 billion amended PBG credit facility. Funds borrowed under the Four-Year Credit Agreement and the 364-Day Credit Agreement may be used for general corporate purposes, including but not limited to repayment of outstanding commercial paper issued by us and our subsidiaries, working capital, capital investments and/or acquisitions.

In the third quarter of 2011, we paid $784 million in a cash tender offer to repurchase $766 million (aggregate principal amount) of certain WBD debt obligations. As a result of this debt repurchase, we recorded a $16 million charge to interest expense in the third quarter, primarily representing the premium paid in the tender offer.

As of September 3, 2011, we had $2.8 billion of commercial paper outstanding.

 

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Long-Term Contractual Commitments(a)

 

     Payments Due by Period  
     Total      2011      2012 –
2013
     2014 –
2015
     2016 and
beyond
 

Long-term debt obligations(b)

   $ 21,226       $       $ 4,043       $ 4,866       $ 12,317   

Interest on debt obligations(c)

     7,538         244         1,564         1,161         4,569   

Operating leases

     1,942         154         755         435         598   

Purchasing commitments

     3,198         567         2,089         451         91   

Marketing commitments

     2,501         53         573         539         1,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,405       $ 1,018       $ 9,024       $ 7,452       $ 18,911   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Reflects non-cancelable commitments as of September 3, 2011 based on foreign exchange rates in effect on that date and excludes any reserves for uncertain tax positions as we are unable to reasonably predict the ultimate amount or timing of settlement.

 

(b)

Excludes $1.5 billion related to current maturities of long-term debt, as well as $555 million related to the fair value step-up of debt acquired in connection with our acquisitions of PBG and PAS.

 

(c) 

Interest payments on floating-rate debt are estimated using interest rates effective as of September 3, 2011.

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, sugar and other sweeteners, oranges and orange juice. Non-cancelable marketing commitments are primarily for sports marketing. Bottler funding to independent bottlers is not reflected in our long-term contractual commitments as it is negotiated on an annual basis. Accrued liabilities for pension and retiree medical plans are not reflected in our long-term contractual commitments because they do not represent expected future cash outflows. See Pension and Retiree Medical Benefits for additional information regarding our pension and retiree medical obligations.

Merger and Integration Charges

 

In the 12 weeks ended September 3, 2011, we incurred merger and integration charges of $61 million ($53 million after-tax or $0.03 per share) related to our acquisitions of PBG, PAS and WBD, including $24 million recorded in the PAB segment, $11 million recorded in the Europe segment, $10 million recorded in corporate unallocated expenses and $16 million recorded in interest expense. In the 36 weeks ended September 3, 2011, we incurred merger and integration charges of $174 million ($147 million after-tax or $0.09 per share) related to our acquisitions of PBG, PAS and WBD, including $77 million recorded in the PAB segment, $17 million recorded in the Europe segment, $64 million recorded in corporate unallocated expenses and $16 million recorded in interest expense. All of these net charges, other than the interest expense portion, were recorded in selling, general and administrative expenses. These charges also include closing costs and advisory fees related to our acquisition of WBD. Substantially all cash payments related to the above charges are expected to be paid by the end of 2011.

In the 12 weeks ended September 4, 2010, we incurred merger and integration charges of $69 million related to our acquisitions of PBG and PAS, including $38 million recorded in the PAB segment, $15 million recorded in the Europe segment and $16 million recorded in corporate unallocated expenses. In the 36 weeks ended September 4, 2010, we incurred merger and

 

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integration charges of $536 million related to our acquisitions of PBG and PAS, including $334 million recorded in the PAB segment, $44 million recorded in the Europe segment, $128 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 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 of $51 million ($0.03 per share) and $431 million ($0.27 per share) for the 12 and 36 weeks ended September 4, 2010, respectively.

A summary of our merger and integration activity in 2011 is as follows:

 

     Severance and Other
Employee Costs
    Other Costs     Total  

Liability as of December 25, 2010

   $ 179      $ 25      $ 204   

2011 merger and integration charges

     54        120        174   

Cash payments

     (148     (145     (293

Non-cash charges

     (20     7        (13
  

 

 

   

 

 

   

 

 

 

Liability as of September 3, 2011

   $ 65      $ 7      $ 72   
  

 

 

   

 

 

   

 

 

 

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. Ineffectiveness of our hedges is not material. 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.

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, primarily with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for aluminum, fuel and natural gas. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. We

 

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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 gains of $2 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 $586 million as of September 3, 2011 and $577 million as of September 4, 2010. These contracts resulted in net unrealized gains of $11 million as of September 3, 2011 and $7 million as of September 4, 2010.

Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $537 million as of September 3, 2011 and $254 million as of September 4, 2010. These contracts resulted in net losses of $6 million as of September 3, 2011 and $3 million as of September 4, 2010.

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.

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.

Our foreign currency derivatives had a total face value of $2.5 billion as of September 3, 2011 and $1.4 billion as of September 4, 2010. The contracts that qualify for hedge accounting resulted in net unrealized losses of $11 million as of September 3, 2011 and $5 million as of September 4, 2010. During the next 12 months, we expect to reclassify net losses of $10 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 losses of $14 million as of September 3, 2011 and a net gain of $1 million as of September 4, 2010. 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.

 

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The notional amounts of the interest rate derivative instruments outstanding as of September 3, 2011 and September 4, 2010 were $8.9 billion and $9.2 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 $16 million related to these hedges from accumulated other comprehensive loss into net income.

As of September 3, 2011, approximately 40% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to 43% as of December 25, 2010.

Fair Value Measurements

The fair values of our financial assets and liabilities as of September 3, 2011 and September 4, 2010 are categorized as follows:

 

     2011      2010  
     Assets(a)      Liabilities(a)      Assets(a)      Liabilities(a)  

Available-for-sale securities(b)

   $ 61       $       $ 88       $   

Short-term investments – index funds(c)

   $ 159       $       $ 147       $   

Deferred compensation(d)

   $       $ 519       $       $ 553   

Derivatives designated as hedging instruments:

           

Forward exchange contracts(e)

   $ 12       $ 23       $ 19       $ 24   

Interest rate derivatives(f)

     428         56         402         91   

Commodity contracts – other(g)

     27         16         45         12   

Commodity contracts – futures(h)

     1         1         1         27   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 468       $ 96       $ 467       $ 154   

Derivatives not designated as hedging instruments:

           

Forward exchange contracts(e)

   $ 5       $ 19       $ 6       $ 5   

Interest rate derivatives(f)

     104         140         56         97   

Commodity contracts – other(g)

     24         29         6         8   

Commodity contracts – futures(h)

             1                 1   

Prepaid forward contracts(i)

     38                 48           
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 171       $ 189       $ 116       $ 111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives at fair value

   $ 639       $ 285       $ 583       $ 265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 859       $ 804       $ 818       $ 818   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.

 

(b)

Based on the price of common stock. Categorized as a Level 1 asset.

 

(c) 

Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability. Categorized as a Level 1 asset.

 

(d)

Based on the fair value of investments corresponding to employees’ investment elections. As of September 3, 2011 and September 4, 2010, $43 million and $147 million, respectively, are categorized as Level 1 liabilities. The remaining balances are categorized as Level 2 liabilities.

 

(e) 

Based on observable market transactions of spot and forward rates.

 

(f) 

Based on LIBOR and recently reported transactions in the marketplace.

 

(g)

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

 

(h) 

Based on average prices on futures exchanges. Categorized as a Level 1 asset or liability.

 

(i)

Based primarily on the price of our common stock.

The fair value of our debt obligations as of September 3, 2011 was $29.4 billion, based upon prices of similar instruments in the marketplace.

 

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

 

     12 Weeks Ended  
     Fair Value/Non-
designated Hedges
    Cash Flow Hedges  
     Losses/(Gains)
Recognized in
Income Statement(a)
    (Gains)/Losses
Recognized in
Accumulated Other
Comprehensive Loss
    Losses/(Gains)
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement(b)
 
     9/3/11        9/4/10      9/3/11        9/4/10        9/3/11        9/4/10   
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Forward exchange contracts

   $ 7      $ 5      $(9)      $ 17      $ 9      $ 10   

Interest rate derivatives

     (84     (135   42        62        4          

Prepaid forward contracts

     3        (2                          

Commodity contracts

     29        (15   40        (32     (12     12   
  

 

 

   

 

 

   

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (45   $ (147   $73      $ 47      $ 1      $ 22   
  

 

 

   

 

 

   

 

   

 

 

   

 

 

   

 

 

 
     36 Weeks Ended  
     Fair Value/Non-
designated Hedges
   Cash Flow Hedges  
     Losses/(Gains)
Recognized in
Income Statement(a)
   Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
    Losses/(Gains)
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement(b)
 
     9/3/11        9/4/10      9/3/11        9/4/10        9/3/11        9/4/10   
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Forward exchange contracts

   $ 8        $–    $ 28      $ 9      $ 30      $ 32   

Interest rate derivatives

     (162     (195)      71        98        10          

Prepaid forward contracts

     1        (4)                             

Commodity contracts

     (17     (58)      (15     26        (37     28   
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (170     $(257)    $ 84      $ 133      $ 3      $ 60   
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Interest rate gains/losses are included in interest expense in our income statement. All other gains/losses are included in corporate unallocated expenses.

 

(b)

Interest rate losses are included in interest expense in our income statement. All other gains/losses are included in cost of sales in our income statement.

 

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Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are currently evaluating the impact of adopting this guidance on our financial statements.

In September 2011, the FASB amended its guidance regarding the disclosure requirements for employers participating in multiemployer pension and other postretirement benefit plans (multiemployer plans) to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans. The new accounting guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans. The provisions of this new guidance are effective for annual periods beginning with fiscal years ending after December 15, 2011, with early adoption permitted. We have reviewed our level of participation in multiemployer plans and determined that the impact of adopting this guidance is not material to our financial statements.

 

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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 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, based on annual targets.

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.

Our Business Risks

 

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “believe,” “expect,” “intend,” “estimate,” “project,” “anticipate,” “will” and variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statements. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no

 

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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 generated approximately 50% of our net revenue in the 36 weeks ended September 3, 2011. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 12 weeks ended September 3, 2011, favorable foreign currency increased net revenue growth by 3.5 percentage points, primarily due to appreciation of the euro, Mexican peso, Russian ruble and Canadian dollar. During the 36 weeks ended September 3, 2011, favorable foreign currency increased net revenue growth by nearly 3 percentage points, primarily due to appreciation of the euro, Mexican peso, Canadian dollar and Brazilian real. Currency declines against the U.S. dollar which are not offset could adversely impact our future results.

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.

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 September 3, 2011 and September 4, 2010. Cautionary statements included in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 25, 2010 and in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks included in Exhibit 99.1 to our Current Report on Form 8-K dated March 31, 2011, should be considered when evaluating our trends and future results.

 

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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     36 Weeks Ended  
     9/3/11     9/4/10     9/3/11     9/4/10  

Operating profit

        

Mark-to-market net (losses)/gains

   $ (53   $ 16      $ (31   $ 58   

Merger and integration charges

   $ (45   $ (69   $ (158   $ (506

Inventory fair value adjustments

   $ (3   $ (17   $ (41   $ (374

Venezuela currency devaluation

   $      $      $      $ (120

Asset write-off

   $      $      $      $ (145

Foundation contribution

   $      $      $      $ (100

Bottling equity income

        

Gain on previously held equity interests

   $      $      $      $ 735   

Merger and integration charges

   $      $      $      $ (9

Interest expense

        

Merger and integration charges

   $ (16   $      $ (16   $ (30

Net income attributable to PepsiCo

        

Mark-to-market net (losses)/gains

   $ (34   $ 10      $ (20   $ 36   

Gain on previously held equity interests

   $      $      $      $ 958   

Merger and integration charges

   $ (53   $ (51   $ (147   $ (431

Inventory fair value adjustments

   $ (2   $ (11   $ (25   $ (319

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

   $ (0.02   $ 0.01      $ (0.01   $ 0.02   

Gain on previously held equity interests

   $      $      $      $ 0.60   

Merger and integration charges

   $ (0.03   $ (0.03   $ (0.09   $ (0.27

Inventory fair value adjustments

   $ (–   $ (0.01   $ (0.02   $ (0.20

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 aluminum, fuel, natural gas and other raw materials. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the 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. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility which remains in corporate unallocated expenses.

For the 12 weeks ended September 3, 2011, we recognized $53 million ($34 million after-tax or $0.02 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses. For the 36 weeks ended September 3, 2011, we recognized $31 million ($20 million

 

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after-tax or $0.01 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses.

For the 12 weeks ended September 4, 2010, we recognized $16 million ($10 million after-tax or $0.01 per share) of market-to-market net gains on commodity hedges in corporate unallocated expenses. For the 36 weeks ended September 4, 2010, we recognized $58 million ($36 million after-tax or $0.02 per share) of market-to-market net gains on commodity hedges in corporate unallocated expenses.

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.

Merger and Integration Charges

In the 12 weeks ended September 3, 2011, we incurred merger and integration charges of $61 million ($53 million after-tax or $0.03 per share) related to our acquisitions of PBG, PAS and WBD, including $24 million recorded in the PAB segment, $11 million recorded in the Europe segment, $10 million recorded in corporate unallocated expenses and $16 million recorded in interest expense. In the 36 weeks ended September 3, 2011, we incurred merger and integration charges of $174 million ($147 million after-tax or $0.09 per share) related to our acquisitions of PBG, PAS and WBD, including $77 million recorded in the PAB segment, $17 million recorded in the Europe segment, $64 million recorded in corporate unallocated expenses and $16 million recorded in interest expense. These charges also include closing costs and advisory fees related to our acquisition of WBD.

In the 12 weeks ended September 4, 2010, we incurred merger and integration charges of $69 million related to our acquisitions of PBG and PAS, including $38 million recorded in the PAB segment, $15 million recorded in the Europe segment and $16 million recorded in corporate unallocated expenses. In the 36 weeks ended September 4, 2010, we incurred merger and integration charges of $536 million related to our acquisitions of PBG and PAS, including $334 million recorded in the PAB segment, $44 million recorded in the Europe segment, $128 million recorded in corporate unallocated expenses and $30 million recorded in interest expense. 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. In total, these charges had an after-tax impact of $51 million ($0.03 per share) and $431 million ($0.27 per share) for the 12 and 36 weeks ended September 4, 2010, respectively.

Inventory Fair Value Adjustments

In the 12 and 36 weeks ended September 3, 2011, we recorded $3 million ($2 million after-tax with a nominal impact per share) and $41 million ($25 million after-tax or $0.02 per share), respectively, of incremental costs in cost of sales related to fair value adjustments to the acquired inventory included in WBD’s balance sheet at the acquisition date and other related hedging contracts included in PBG’s and PAS’s balance sheets at the acquisition date.

 

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In the 12 and 36 weeks ended September 4, 2010, we recorded $17 million ($11 million after-tax or $0.01 per share) and $374 million ($319 million after-tax or $0.20 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 U.S. 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 September 3, 2011, total servings increased 4.5%. For the 36 weeks ended September 3, 2011, total servings increased 6%.

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

 

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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 third quarter includes beverage volume outside of North America for June, July and August. 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     36 Weeks Ended  
     9/3/11     9/4/10     Change     9/3/11     9/4/10     Change  

Total net revenue

   $ 17,582      $ 15,514        13   $ 46,346      $ 39,683        17

Operating profit

            

FLNA

   $ 918      $ 866        6   $ 2,545      $ 2,394        6

QFNA

     177        167        6     558        521        7

LAF

     275        238        15     720        616        17

PAB

     992        1,017        (2.5 )%      2,533        2,042        24

Europe

     514        432        19     984        826        19

AMEA

     285        235        21     730        657        11

Corporate Unallocated

            

Mark-to-market net (losses)/gains

     (53     16        n/m        (31     58        n/m   

Merger and integration charges

     (10     (16     (28 )%      (64     (128     (50 )% 

Venezuela currency devaluation

                                 (129     n/m   

Asset write-off

                                 (145     n/m   

Foundation contribution

                                 (100     n/m   

Other

     (192     (155     24     (589     (511     15
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating profit

   $ 2,906      $ 2,800        4   $ 7,386      $ 6,101        21
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating profit margin

     16.5     18.0     (1.5     15.9     15.4     0.5   

n/m = not meaningful

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

12 Weeks

On a reported basis, total operating profit increased 4% and operating margin decreased 1.5 percentage points. Operating profit performance was primarily driven by the net revenue growth,

 

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partially offset by higher commodity costs. Items affecting comparability (see “Items Affecting Comparability”) reduced total operating profit growth by 1 percentage point and total operating margin by 0.1 percentage points.

36 Weeks

On a reported basis, total operating profit increased 21% and operating margin increased 0.5 percentage points. Operating profit growth was primarily driven by the net revenue growth, partially offset by higher commodity costs. Items affecting comparability (see “Items Affecting Comparability”) contributed 17 percentage points to the total operating profit growth and 2.5 percentage points to the total operating margin increase.

 

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Other Consolidated Results

 

     12 Weeks Ended     36 Weeks Ended  
     9/3/11     9/4/10     Change     9/3/11     9/4/10     Change  

Bottling equity income

   $      $ 10      $ (10   $      $ 728      $ (728

Interest expense, net

   $ (209   $ (151   $ (58   $ (551   $ (469   $ (82

Tax rate

     25.4     27.4       26.0     21.7  

Net income attributable to PepsiCo

   $ 2,000      $ 1,922        4   $ 5,028      $ 4,955        1.5

Net income attributable to PepsiCo per common share – diluted

   $ 1.25      $ 1.19        5   $ 3.14      $ 3.06        2

Mark-to-market net losses/(gains)

     0.02        (0.01       0.01        (0.02  

Gain on previously held equity interests

                            (0.60  

Merger and integration charges

     0.03        0.03          0.09        0.27     

Inventory fair value adjustments

            0.01          0.02        0.20     

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*

   $ 1.31 **    $ 1.22        7   $ 3.26      $ 3.08        6
  

 

 

   

 

 

     

 

 

   

 

 

   

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

 

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12 Weeks

Net interest expense increased $58 million, primarily reflecting higher average debt balances and losses in the market value of investments used to economically hedge a portion of our deferred compensation costs, partially offset by lower average rates on our debt balances.

The reported tax rate decreased 2.0% compared to the prior year, primarily reflecting the impact of adjustments to previous estimates of geographic earnings mix in the quarter.

Net income attributable to PepsiCo increased 4% 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.

36 Weeks

Bottling equity income decreased $728 million, primarily reflecting the gain in the prior year on our previously held equity interests in connection with our acquisitions of PBG and PAS.

Net interest expense increased $82 million, primarily reflecting higher average debt balances, partially offset by lower average rates on our debt balances.

The reported tax rate increased 4.3% compared to the prior year, primarily reflecting the prior year non-taxable gain and reversal of deferred taxes attributable to our previously held equity interests in connection with our acquisitions of PBG and PAS.

Net income attributable to PepsiCo increased 1.5% and net income attributable to PepsiCo per common share increased 2%. Items affecting comparability (see “Items Affecting Comparability”) decreased both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 3 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 Merger 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.

 

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Net Revenue                                           

12 Weeks Ended

   FLNA     QFNA     LAF     PAB     Europe     AMEA     Total  

September 3, 2011

   $ 3,173      $ 614      $ 1,841      $ 5,947      $ 3,909      $ 2,098      $ 17,582   

September 4, 2010

   $ 3,050      $ 601      $ 1,542      $ 5,792      $ 2,848      $ 1,681      $ 15,514   

% Impact of:

              

Volume(a)

     (1 )%      (4.5 )%      3.5         (1 )%      11     1

Effective net pricing(b)

     4        6        8        2        4        9        4   

Foreign exchange

     1        1        8        1        9        5        3.5   

Acquisitions

                                 26               5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Change(c)

     4     2     19     3     37     25     13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net Revenue                                           

36 Weeks Ended

   FLNA     QFNA     LAF     PAB     Europe     AMEA     Total  

September 3, 2011

   $ 9,167      $ 1,837      $ 4,757      $ 16,107      $ 9,329      $ 5,149      $ 46,346   

September 4, 2010

   $ 8,906      $ 1,866      $ 4,063      $ 14,105      $ 6,390      $ 4,353      $ 39,683   

% Impact of:

              

Volume(a)

         (5 )%      4     *        *        10     *   

Effective net pricing(b)

     2        3        7        *        *        5        *   

Foreign exchange

     0.5        1        7        1        6        3        3   

Acquisitions

                          *        *               *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Change(c)

     3     (2 )%      17     14     46     18     17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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Frito-Lay North America

 

     12 Weeks Ended      %     36 Weeks Ended      %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10      Change  

Net revenue

   $ 3,173       $ 3,050         4      $ 9,167       $ 8,906         3   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (1           (0.5
        

 

 

         

 

 

 

Net revenue growth, on a constant currency basis*

           3              2 ** 
        

 

 

         

 

 

 

Operating profit

   $ 918       $ 866         6      $ 2,545       $ 2,394         6   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (1           (0.5
        

 

 

         

 

 

 

Operating profit growth, on a constant currency basis*

           5.5 **            6 ** 
        

 

 

         

 

 

 

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

12 Weeks

Net revenue increased 4% and pound volume grew 1%. The volume increase primarily reflects double-digit growth in our Sabra joint venture, partially offset by a high-single-digit decline in dips. Net revenue growth also benefited from effective net pricing.

Operating profit grew 6%, primarily reflecting the net revenue growth, partially offset by higher commodity costs.

36 Weeks

Net revenue increased 3% and pound volume grew 1%. Pound growth primarily reflects double-digit growth in our Sabra joint venture and high-single-digit growth in variety packs, partially offset by a mid-single-digit decline in dips. Net revenue growth also benefited from effective net pricing.

Operating profit grew 6%, primarily reflecting the net revenue growth.

 

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Quaker Foods North America

 

     12 Weeks Ended      %     36 Weeks Ended      %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10      Change  

Net revenue

   $ 614       $ 601         2      $ 1,837       $ 1,866         (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (1           (1
        

 

 

         

 

 

 

Net revenue growth, on a constant currency basis*

           1              (2 )** 
        

 

 

         

 

 

 

Operating profit

   $ 177       $ 167         6      $ 558       $ 521         7   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (1           (1
        

 

 

         

 

 

 

Operating profit growth, on a constant currency basis*

           5              6   
        

 

 

         

 

 

 

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

12 Weeks

Net revenue increased 2% and volume declined 4.5%. The volume decline primarily reflects double-digit declines in ready-to-eat cereals and Chewy granola bars. The impact of positive net pricing, driven primarily by price increases taken in the fourth quarter of 2010, was partially offset by negative mix. Favorable foreign currency contributed 1 percentage point to net revenue growth.

Operating profit grew 6%, primarily reflecting the net revenue growth, partially offset by higher commodity costs. Favorable foreign currency contributed 1 percentage point to operating profit growth.

36 Weeks

Net revenue declined 2% and volume declined 5%. The volume decline primarily reflects double-digit declines in ready-to-eat cereals and Chewy granola bars, as well as mid-single-digit declines in Aunt Jemima syrup and mix. The impact of positive net pricing, driven primarily by price increases taken in the fourth quarter of 2010, was partially offset by negative mix. Favorable foreign currency positively contributed 1 percentage point to the net revenue performance.

Operating profit grew 7%, reflecting the favorable effective net pricing and lower selling and distribution costs. Additionally, a change in accounting methodology for inventory contributed 3 percentage points to the operating profit growth (see Basis of Presentation in the notes to the condensed consolidated financial statements). Favorable foreign currency contributed 1 percentage point to operating profit growth.

 

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Latin America Foods

 

     12 Weeks Ended      %     36 Weeks Ended      %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10      Change  

Net revenue

   $ 1,841       $ 1,542         19      $ 4,757       $ 4,063         17   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (8           (7
        

 

 

         

 

 

 

Net revenue growth, on a constant currency basis*

           12 **            10   
        

 

 

         

 

 

 

Operating profit

   $ 275       $ 238         15      $ 720       $ 616         17   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (7           (6
        

 

 

         

 

 

 

Operating profit growth, on a constant currency basis*

           8              11   
        

 

 

         

 

 

 

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

12 Weeks

Volume grew 3.5%, primarily reflecting high-single-digit growth in Brazil. Additionally, Gamesa in Mexico grew at a low-single-digit rate and Sabritas in Mexico grew slightly.

Net revenue increased 19%, primarily reflecting favorable effective net pricing and the volume growth. Favorable foreign currency contributed 8 percentage points to net revenue growth.

Operating profit increased 15%, primarily reflecting the net revenue growth, partially offset by higher commodity costs. Favorable foreign currency contributed 7 percentage points to operating profit growth.

36 Weeks

Volume grew 4%, primarily reflecting mid-single-digit growth in Brazil. Additionally, Gamesa and Sabritas in Mexico each grew at a low-single-digit rate.

Net revenue increased 17%, primarily reflecting favorable effective net pricing and the volume growth. Favorable foreign currency contributed 7 percentage points to net revenue growth.

Operating profit increased 17%, primarily reflecting the net revenue growth, partially offset by higher selling and distribution costs and higher commodity costs. Additionally, an unfavorable legal settlement in the prior year increased operating profit growth by 2 percentage points. Favorable foreign currency contributed 6 percentage points to operating profit growth.

 

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PepsiCo Americas Beverages

 

     12 Weeks Ended      %     36 Weeks Ended     %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10     Change  

Net revenue

   $ 5,947       $ 5,792         3      $ 16,107       $ 14,105        14   
  

 

 

    

 

 

      

 

 

    

 

 

   

Impact of foreign currency translation

           (1          (1
        

 

 

        

 

 

 

Net revenue growth, on a constant currency basis*

           1.5 **           13   
        

 

 

        

 

 

 

Operating profit

   $ 992       $ 1,017         (2.5   $ 2,533       $ 2,042        24   

Merger and integration charges

     24         38           77         334     

Inventory fair value adjustments

     3         17           16         334     

Venezuela currency devaluation

                               (9  
  

 

 

    

 

 

      

 

 

    

 

 

   

Operating profit excluding above items*

   $ 1,019       $ 1,072         (5   $ 2,626       $ 2,701        (3
  

 

 

    

 

 

      

 

 

    

 

 

   

Impact of foreign currency translation

           (1          (1
        

 

 

        

 

 

 

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

           (6          (4
        

 

 

        

 

 

 

 

*

See “Non-GAAP Measures”

**

Does not sum due to rounding

12 Weeks

Volume increased slightly, primarily reflecting a 2.5% volume increase in Latin America, partially offset by a 1% volume decline in North America. The volume decline in North America was driven by a 5% decline in CSD volume, partially offset by a 5% increase in non-carbonated beverage volume. The non-carbonated beverage volume growth primarily reflected a high-single-digit increase in Gatorade sports drinks and a double-digit increase in our base Aquafina water business.

Net revenue increased 3%, primarily driven by effective net pricing. Favorable foreign currency contributed 1 percentage point to net revenue growth.

Reported operating profit decreased 2.5%, mainly driven by higher commodity costs and higher selling and distribution costs, partially offset by the net revenue growth. Additionally, the items affecting comparability in the above table (see “Items Affecting Comparability”) favorably impacted the reported operating profit performance. Excluding the items affecting comparability, operating profit decreased 5%. Favorable foreign currency positively contributed 1 percentage point to the operating profit performance.

 

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36 Weeks

Volume increased 3%, primarily reflecting volume from incremental brands related to our acquisition of PBG’s operations in Mexico, as well as incremental volume related to our DPSG manufacturing and distribution agreement, each of which contributed 1 percentage point to volume growth. North America volumes, excluding the impact of the incremental DPSG volume, decreased slightly, as a 3.5% decline in CSD volume was partially offset by a 4.5% increase in non-carbonated beverage volume. The non-carbonated beverage volume growth primarily reflected a double-digit increase in Gatorade sports drinks and high-single-digit growth in our base Aquafina water business.

Net revenue increased 14%, primarily reflecting the incremental finished goods revenue related to our acquisitions of PBG and PAS. Favorable foreign currency contributed 1 percentage point to net revenue growth.

Reported operating profit increased 24%, primarily reflecting the items affecting comparability in the above table (see “Items Affecting Comparability”). Excluding these items, operating profit decreased 3%, mainly driven by higher commodity costs and higher selling and distribution costs, partially offset by the net revenue growth. Operating profit performance also benefited from the impact of more-favorable settlements of promotional spending accruals in the current year and certain insurance adjustments in the second quarter, which collectively contributed 2 percentage points to the reported operating profit growth.

 

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Europe

 

     12 Weeks Ended      %     36 Weeks Ended      %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10      Change  

Net revenue

   $ 3,909       $ 2,848         37      $ 9,329       $ 6,390         46   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (9           (6
        

 

 

         

 

 

 

Net revenue growth, on a constant currency basis*

           28              40   
        

 

 

         

 

 

 

Operating profit

   $ 514       $ 432         19      $ 984       $ 826         19   

Merger and integration charges

     11         15           17         44      

Inventory fair value adjustments

                       25         40      
  

 

 

    

 

 

      

 

 

    

 

 

    

Operating profit excluding above items*

   $ 525       $ 447         17      $ 1,026       $ 910         13   
  

 

 

    

 

 

      

 

 

    

 

 

    

Impact of foreign currency translation

           (8           (6
        

 

 

         

 

 

 

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

           9              7   
        

 

 

         

 

 

 

 

*

See “Non-GAAP Measures”

12 Weeks

Snacks volume grew 35%, primarily reflecting our acquisition of WBD, which contributed 30 percentage points to volume growth. Double-digit increases in Turkey and France and a high-single-digit increase in Russia (ex-WBD) were partially offset by a high-single-digit decline in Spain and a low-single-digit decrease in the Netherlands. Additionally, Walkers in the United Kingdom experienced low-single-digit growth.

Beverage volume increased 13%, primarily reflecting our acquisition of WBD, which contributed 17 percentage points to volume growth. A double-digit decrease in Russia (ex-WBD) was partially offset by double-digit gains in Turkey. Additionally, the United Kingdom grew in the low-single-digit range.

Net revenue grew 37%, primarily reflecting our acquisition of WBD, which contributed 26 percentage points to net revenue growth. Net revenue also benefited from effective net pricing in the quarter. Favorable foreign currency contributed 9 percentage points to net revenue growth.

Reported operating profit increased 19%, primarily reflecting the favorable effective net pricing and lower advertising and marketing expenses, offset by higher commodity costs and selling and distribution costs. Additionally, the accelerated timing of concentrate shipments into the second quarter in connection with our global SAP implementation reduced operating profit growth by nearly 4 percentage points. Our acquisition of WBD contributed 13 percentage points to the reported operating profit growth and reflected net charges of $4 million included in items affecting

 

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comparability in the above table (see “Items Affecting Comparability”). Excluding the items affecting comparability in the above table, operating profit increased 17%. Favorable foreign currency contributed 8 percentage points to operating profit growth.

36 Weeks

Snacks volume grew 35%, primarily reflecting our acquisition of WBD, which contributed 30 percentage points to volume growth. Double-digit growth in Turkey, South Africa and Russia (ex-WBD) was partially offset by a mid-single-digit decline in Spain. Additionally, Walkers in the United Kingdom experienced low-single-digit growth.

Beverage volume increased 21%, primarily reflecting our acquisition of WBD, which contributed 19 percentage points to volume growth, and incremental brands related to our acquisitions of PBG and PAS, which contributed 1 percentage point to volume growth. A double-digit increase in Turkey, mid-single-digit growth in Germany and a low-single-digit increase in the United Kingdom were offset by a high-single-digit decline in Russia (ex-WBD).

Net revenue grew 46%, primarily reflecting our acquisition of WBD, which contributed 28 percentage points to net revenue growth, and the incremental finished goods revenue related to our acquisitions of PBG and PAS. Favorable foreign currency contributed 6 percentage points to net revenue growth.

Reported operating profit increased 19%, primarily reflecting the net revenue growth, offset by higher commodity costs. The impact of more-favorable settlements of promotional spending accruals in the current year contributed 2.5 percentage points to operating profit growth. Our acquisition of WBD contributed 13 percentage points to the reported operating profit growth and reflected net charges of $19 million included in items affecting comparability in the above table (see “Items Affecting Comparability”). Excluding the items affecting comparability in the above table, operating profit increased 13%. Favorable foreign currency contributed 6 percentage points to operating profit growth.

 

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Asia, Middle East & Africa

 

     12 Weeks Ended      %     36 Weeks Ended      %  
     9/3/11      9/4/10      Change     9/3/11      9/4/10      Change  

Net revenue

   $ 2,098       $ 1,681         25