Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 11, 2016 (24 weeks)
OR
 
    
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to             
Commission file number 1-1183
 
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 June 29, 2016 was 1,439,157,837.

Table of Contents    


PepsiCo, Inc. and Subsidiaries

Table of Contents
Part I Financial Information
Page No.
Item 1.
Condensed Consolidated Financial Statements
 
 
 
 
 
 
Item 2.
Report of Independent Registered Public Accounting Firm
Item 3.
Item 4.
Part II Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.


2
Table of Contents    


PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts, unaudited) 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

Net Revenue
$
15,395

 
$
15,923

 
$
27,257

 
$
28,140

Cost of sales
6,830

 
7,251

 
11,981

 
12,754

Gross profit
8,565

 
8,672

 
15,276

 
15,386

Selling, general and administrative expenses
5,584

 
5,753

 
10,662

 
10,654

Amortization of intangible assets
17

 
19

 
31

 
35

Operating Profit
2,964

 
2,900

 
4,583

 
4,697

Interest expense
(255
)
 
(217
)
 
(501
)
 
(428
)
Interest income and other
22

 
14

 
36

 
29

Income before income taxes
2,731

 
2,697

 
4,118

 
4,298

Provision for income taxes
718

 
703

 
1,160

 
1,073

Net income
2,013

 
1,994

 
2,958

 
3,225

Less: Net income attributable to noncontrolling interests
8

 
14

 
22

 
24

Net Income Attributable to PepsiCo
$
2,005

 
$
1,980

 
$
2,936

 
$
3,201

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
 
Basic
$
1.39

 
$
1.34

 
$
2.03

 
$
2.16

Diluted
$
1.38

 
$
1.33

 
$
2.01

 
$
2.14

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,443

 
1,476

 
1,445

 
1,480

Diluted
1,456

 
1,491

 
1,458

 
1,497

Cash dividends declared per common share
$
0.7525

 
$
0.7025

 
$
1.455

 
$
1.3575

See accompanying notes to the condensed consolidated financial statements.

3
Table of Contents    


Condensed Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited) 
 
12 Weeks Ended 6/11/2016
 
24 Weeks Ended 6/11/2016
 
Pre-tax amounts

Tax amounts

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


 


 
$
2,013

 
 
 
 
 
$
2,958

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
760

 
$
—

 
760

 
$
540

 
$
—

 
540

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net gains to net income
(8
)
 
2

 
(6
)
 
(29
)
 
7

 
(22
)
Net derivative losses
(32
)
 
8

 
(24
)
 
(32
)
 
7

 
(25
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
46

 
(14
)
 
32

 
83

 
(26
)
 
57

Remeasurement of net liabilities and translation
(11
)
 
4

 
(7
)
 
4

 
(44
)
 
(40
)
Unrealized gains/(losses) on securities
3

 
(2
)
 
1

 
(9
)
 
5

 
(4
)
Total other comprehensive income
$
758

 
$
(2
)
 
756

 
$
557

 
$
(51
)
 
506

Comprehensive income
 
 
 
 
2,769

 
 
 
 
 
3,464

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(8
)
 
 
 
 
 
(22
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
2,761

 
 
 
 
 
$
3,442

 
12 Weeks Ended 6/13/2015
 
24 Weeks Ended 6/13/2015
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
1,994

 
 
 
 
 
$
3,225

Other comprehensive income/(loss)
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
474

 
$
—

 
474

 
$
(507
)
 
$
—

 
(507
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net (gains)/losses to net income
(97
)
 
33

 
(64
)
 
82

 
(37
)
 
45

Net derivative gains/(losses)
48

 
(20
)
 
28

 
(107
)
 
44

 
(63
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
58

 
(18
)
 
40

 
109

 
(35
)
 
74

Remeasurement of net liabilities and translation
(16
)
 
5

 
(11
)
 
15

 
(2
)
 
13

Unrealized (losses)/gains on securities
(7
)
 
4

 
(3
)
 
9

 
(4
)
 
5

Total other comprehensive income/(loss)
$
460

 
$
4

 
464

 
$
(399
)
 
$
(34
)
 
(433
)
Comprehensive income
 
 
 
 
2,458

 
 
 
 
 
2,792

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(13
)
 
 
 
 
 
(23
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
2,445

 
 
 
 
 
$
2,769

See accompanying notes to the condensed consolidated financial statements.

4
Table of Contents    


Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

Operating Activities
 
 
 
Net income
$
2,958

 
$
3,225

Depreciation and amortization
1,044

 
1,075

Share-based compensation expense
123

 
144

Restructuring and impairment charges
79

 
61

Cash payments for restructuring charges
(67
)
 
(107
)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)
373

 
—

Excess tax benefits from share-based payment arrangements
(84
)
 
(78
)
Pension and retiree medical plan expenses
124

 
215

Pension and retiree medical plan contributions
(155
)
 
(117
)
Deferred income taxes and other tax charges and credits
119

 
42

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(1,049
)
 
(1,309
)
Inventories
(755
)
 
(862
)
Prepaid expenses and other current assets
(202
)
 
(264
)
Accounts payable and other current liabilities
(73
)
 
197

Income taxes payable
704

 
648

Other, net
(218
)
 
(109
)
Net Cash Provided by Operating Activities
2,921

 
2,761

 
 
 
 
Investing Activities
 
 
 
Capital spending
(919
)
 
(832
)
Sales of property, plant and equipment
47

 
26

Acquisitions and investments in noncontrolled affiliates
(4
)
 
(16
)
Divestitures
75

 
74

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(4,604
)
 
(1,675
)
More than three months - maturities
3,786

 
2,269

Three months or less, net
10

 
(1
)
Other investing, net
1

 
(3
)
Net Cash Used for Investing Activities
(1,608
)
 
(158
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt
2,532

 
2,487

Payments of long-term debt
(3,083
)
 
(2,054
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
35

 
12

More than three months - payments
(11
)
 
(5
)
Three months or less, net
2,795

 
2,240

Cash dividends paid
(2,060
)
 
(1,973
)
Share repurchases - common
(1,329
)
 
(2,130
)
Share repurchases - preferred
(2
)
 
(2
)
Proceeds from exercises of stock options
293

 
250

Excess tax benefits from share-based payment arrangements
84

 
78

Other financing
(4
)
 
(2
)
Net Cash Used for Financing Activities
(750
)
 
(1,099
)
Effect of exchange rate changes on cash and cash equivalents
(13
)
 
(76
)
Net Increase in Cash and Cash Equivalents
550

 
1,428

Cash and Cash Equivalents, Beginning of Year
9,096

 
6,134

Cash and Cash Equivalents, End of Period
$
9,646

 
$
7,562

See accompanying notes to the condensed consolidated financial statements.

5
Table of Contents    


Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)

 
 
 
6/11/2016

 
12/26/2015

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
9,646

 
$
9,096

Short-term investments
3,733

 
2,913

Accounts and notes receivable, less allowance: 6/16 - $146 and 12/15 - $130
7,495

 
6,437

Inventories:
 
 
 
Raw materials
1,512

 
1,312

Work-in-process
325

 
161

Finished goods
1,650

 
1,247

 
3,487

 
2,720

Prepaid expenses and other current assets
1,517

 
1,865

Total Current Assets
25,878

 
23,031

Property, plant and equipment
36,229

 
35,747

Accumulated depreciation
(20,010
)
 
(19,430
)
 
16,219

 
16,317

Amortizable Intangible Assets, net
1,274

 
1,270

Goodwill
14,398

 
14,177

Other nonamortizable intangible assets
12,073

 
11,811

Nonamortizable Intangible Assets
26,471

 
25,988

Investments in Noncontrolled Affiliates
2,002

 
2,311

Other Assets
867

 
750

Total Assets
$
72,711

 
$
69,667

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
4,774

 
$
4,071

Accounts payable and other current liabilities
13,685

 
13,507

Total Current Liabilities
18,459

 
17,578

Long-Term Debt Obligations
30,847

 
29,213

Other Liabilities
5,873

 
5,887

Deferred Income Taxes
5,156

 
4,959

Total Liabilities
60,335

 
57,637

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(188
)
 
(186
)
PepsiCo Common Shareholders’ Equity
 
 
 
Common stock, par value 12/3¢ per share (authorized 3,600 shares, issued, net of repurchased common stock at par value: 1,441 and 1,448 shares, respectively)
24

 
24

Capital in excess of par value
3,940

 
4,076

Retained earnings
51,295

 
50,472

Accumulated other comprehensive loss
(12,813
)
 
(13,319
)
Repurchased common stock, in excess of par value (425 and 418 shares, respectively)
(30,051
)
 
(29,185
)
Total PepsiCo Common Shareholders’ Equity
12,395

 
12,068

Noncontrolling interests
128

 
107

Total Equity
12,376

 
12,030

Total Liabilities and Equity
$
72,711

 
$
69,667

See accompanying notes to the condensed consolidated financial statements.

6
Table of Contents    


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/11/2016
 
6/13/2015
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(186
)
 
(0.7
)
 
(181
)
Redemptions
—

 
(2
)
 
—

 
(2
)
Balance, end of period
(0.7
)
 
(188
)
 
(0.7
)
 
(183
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,448

 
24

 
1,488

 
25

Repurchased common stock
(7
)
 
—

 
(16
)
 
—

Balance, end of period
1,441

 
24

 
1,472

 
25

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

 
 
 
4,115

Share-based compensation expense
 
 
125

 
 
 
145

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(155
)
 
 
 
(170
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(102
)
 
 
 
(112
)
Other
 
 
(4
)
 
 
 
(5
)
Balance, end of period
 
 
3,940

 
 
 
3,973

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
50,472

 
 
 
49,092

Net income attributable to PepsiCo
 
 
2,936

 
 
 
3,201

Cash dividends declared – common
 
 
(2,113
)
 
 
 
(2,025
)
Balance, end of period
 
 
51,295

 
 
 
50,268

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,319
)
 
 
 
(10,669
)
Other comprehensive income/(loss) attributable to PepsiCo
 
 
506

 
 
 
(432
)
Balance, end of period
 
 
(12,813
)
 
 
 
(11,101
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(418
)
 
(29,185
)
 
(378
)
 
(24,985
)
Share repurchases
(14
)
 
(1,369
)
 
(23
)
 
(2,180
)
Stock option exercises, RSUs, PSUs and PEPunits converted
7

 
501

 
7

 
470

Other
—

 
2

 
—

 
4

Balance, end of period
(425
)
 
(30,051
)
 
(394
)
 
(26,691
)
Total PepsiCo Common Shareholders’ Equity
 
 
12,395

 
 
 
16,474

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
107

 
 
 
110

Net income attributable to noncontrolling interests
 
 
22

 
 
 
24

Currency translation adjustment
 
 
—

 
 
 
(1
)
Other, net
 
 
(1
)
 
 
 
(1
)
Balance, end of period
 
 
128

 
 
 
132

Total Equity
 
 
$
12,376

 
 
 
$
16,464

(a)
Includes total tax benefits of $56 million in 2016 and $52 million in 2015.
See accompanying notes to the condensed consolidated financial statements.

7
Table of Contents    


Notes to the Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation and Our Divisions
Basis of Presentation
When used in this report, the terms “we,” “us,” “our,” “PepsiCo” and the “Company” mean PepsiCo, Inc. and its consolidated subsidiaries, collectively.
Our Condensed Consolidated Balance Sheet as of June 11, 2016 and Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 11, 2016 and June 13, 2015, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 11, 2016 and June 13, 2015 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 26, 2015. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 24 weeks ended June 11, 2016 are not necessarily indicative of the results expected for the full year.
Effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela, and therefore we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting. See further unaudited information in “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
While our financial results in the United States and Canada (North America) are reported on a 12-week basis, most of our international operations report on a monthly calendar basis for which the months of March, April and May are reflected in our second quarter results.
Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives and certain advertising and marketing costs in proportion to revenue or volume, as applicable, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Reclassifications were made to the prior year’s amounts to conform to the current year presentation, including the presentation of certain functional support costs associated with the manufacturing and production of our products within cost of sales. These costs were previously included in selling, general and administrative expenses. In the 12 and 24 weeks ended June 13, 2015, these reclassifications resulted in an increase in cost of sales of $84 million and $145 million, respectively, with a corresponding reduction to gross profit and selling, general and administrative expenses in the same periods. These reclassifications reflect changes in how we are classifying costs of certain support functions as a result of ongoing productivity and efficiency initiatives. These reclassifications had no impact on our consolidated net revenue, operating profit, net interest expense, provision for income taxes, net income or earnings per share.

8
Table of Contents    


Our Divisions
We are organized into six reportable segments (also referred to as divisions), as follows:
1)
Frito-Lay North America (FLNA);
2)
Quaker Foods North America (QFNA);
3)
North America Beverages (NAB), which includes all of our beverage businesses in North America;
4)
Latin America, which includes all of our beverage, food and snack businesses in Latin America;
5)
Europe Sub-Saharan Africa (ESSA), which includes all of our beverage, food and snack businesses in Europe and Sub-Saharan Africa; and
6)
Asia, Middle East and North Africa (AMENA), which includes all of our beverage, food and snack businesses in Asia, Middle East and North Africa.
Net revenue and operating profit of each division are as follows:
 
12 Weeks Ended
 
24 Weeks Ended
Net Revenue
6/11/2016


6/13/2015

 
6/11/2016

 
6/13/2015

FLNA
$
3,564

 
$
3,452

 
$
6,982

 
$
6,771

QFNA
561

 
546

 
1,178

 
1,185

NAB
5,145

 
5,113

 
9,506

 
9,411

Latin America (a)
1,717

 
2,224

 
2,759

 
3,638

ESSA
2,660

 
2,813

 
4,019

 
4,309

AMENA
1,748

 
1,775

 
2,813

 
2,826

Total division
$
15,395

 
$
15,923

 
$
27,257

 
$
28,140

 
12 Weeks Ended
 
24 Weeks Ended
Operating Profit
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

FLNA
$
1,083

 
$
1,007

 
$
2,101

 
$
1,927

QFNA (b)
146

 
132

 
312

 
231

NAB
881

 
833

 
1,366

 
1,286

Latin America (a)
242

 
355

 
417

 
574

ESSA
337

 
350

 
404

 
462

AMENA (c)
383

 
373

 
235

 
603

Total division
3,072

 
3,050

 
4,835

 
5,083

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net gains
100

 
39

 
146

 
38

Restructuring and impairment charges
(1
)
 
(1
)
 
(4
)
 
(7
)
Other
(207
)
 
(188
)
 
(394
)
 
(417
)
 
$
2,964

 
$
2,900

 
$
4,583

 
$
4,697

(a)
Effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments using the cost method of accounting. Beginning with the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses.
(b)
Operating profit for QFNA for the 24 weeks ended June 13, 2015 included a pre-tax impairment charge of $65 million associated with our Müller Quaker Dairy (MQD) joint venture investment.
(c)
Operating profit for AMENA for the 24 weeks ended June 11, 2016 includes a pre- and after-tax impairment charge of $373 million to reduce the value of our 5% indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value. Operating profit for AMENA for the 24 weeks ended June 13, 2015 included a pre-tax gain of $39 million associated with refranchising a portion of our bottling operations in India.

9
Table of Contents    


Total assets of each division are as follows:
 
Total Assets
 
6/11/2016


12/26/2015

FLNA
$
5,640

 
$
5,375

QFNA
847

 
872

NAB
29,291

 
28,128

Latin America
4,505

 
4,284

ESSA
12,894

 
12,225

AMENA
5,628

 
5,901

Total division
58,805

 
56,785

Corporate (a)
13,906

 
12,882


$
72,711

 
$
69,667

(a)
Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment, and pension and tax assets.
Note 2 - Recent Accounting Pronouncements - Not Yet Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance is effective in 2020 with early adoption permitted in 2019. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.
In 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition in the income statement of the income tax effects of vested or settled awards. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.
In 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the ability to exercise significant influence is achieved. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the timing of adoption of this guidance.
In 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets, but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

10
Table of Contents    


In 2016, the FASB issued guidance that requires companies to measure investments in certain equity securities at fair value and recognize any changes in fair value in net income. The guidance is effective in 2018 and early adoption is not permitted. We are currently evaluating the impact of this guidance on our financial statements.
In 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our balance sheet. We are currently evaluating the timing of adoption of this guidance.
In 2015, the FASB issued guidance that changes the subsequent measurement for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are currently evaluating the timing of adoption of this guidance.
In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.
Note 3 - Restructuring and Impairment Charges
A summary of our restructuring and impairment charges and other productivity initiatives is as follows:
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

2014 Productivity Plan
$
49

 
$
21

 
$
79

 
$
51

2012 Productivity Plan
—

 
4

 
—

 
10

Total restructuring and impairment charges
49

 
25

 
79

 
61

Other productivity initiatives (a)
(3
)
 
10

 
(2
)
 
10

Total restructuring and impairment charges and other productivity initiatives
$
46

 
$
35

 
$
77

 
$
71

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
2014 Multi-Year Productivity Plan
The multi-year productivity plan we publicly announced on February 13, 2014 (2014 Productivity Plan) includes the next generation of productivity initiatives that we believe will strengthen our food, snack and beverage businesses by: accelerating our investment in manufacturing automation; further optimizing our global manufacturing footprint, including closing certain manufacturing facilities; re-engineering our go-to-market systems in developed markets; expanding shared services; and implementing simplified organization structures to drive efficiency. The 2014 Productivity Plan is in addition to the productivity plan we began implementing in 2012 and is expected to continue the benefits of that plan.

11
Table of Contents    


In the 12 weeks ended June 11, 2016 and June 13, 2015, we incurred restructuring charges of $49 million ($31 million after-tax or $0.02 per share) and $21 million ($16 million after-tax or $0.01 per share), respectively. In the 24 weeks ended June 11, 2016 and June 13, 2015, we incurred restructuring charges of $79 million ($56 million after-tax or $0.04 per share) and $51 million ($39 million after-tax or $0.03 per share), respectively. All of these net charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash) and other costs associated with the implementation of our initiatives, including contract termination costs. The majority of the restructuring accrual at June 11, 2016 is expected to be paid by the end of 2016.
A summary of our 2014 Productivity Plan charges by segment is as follows:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

FLNA (a)
 
$
3

 
$
2

 
$
(1
)
 
$
8

QFNA
 
1

 
—

 
1

 
1

NAB
 
6

 
7

 
13

 
14

Latin America
 
28

 
5

 
28

 
6

ESSA
 
8

 
4

 
27

 
13

AMENA
 
2

 
2

 
7

 
4

Corporate
 
1

 
1

 
4

 
5

 
 
$
49

 
$
21

 
$
79

 
$
51

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
A summary of our 2014 Productivity Plan activity for the 24 weeks ended June 11, 2016 is as follows:
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 26, 2015
$
61

 
$
—

 
$
20

 
$
81

2016 restructuring charges
42

 
16

 
21

 
79

Cash payments
(20
)
 
—

 
(30
)
 
(50
)
Non-cash charges and translation
3

 
(16
)
 
1

 
(12
)
Liability as of June 11, 2016
$
86

 
$
—

 
$
12

 
$
98

2012 Multi-Year Productivity Plan
The multi-year productivity plan we publicly announced on February 9, 2012 (2012 Productivity Plan) included actions in every aspect of our business that we believed would strengthen our complementary food, snack and beverage businesses by: leveraging new technologies and processes across PepsiCo’s operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management. The 2012 Productivity Plan has enhanced PepsiCo’s cost-competitiveness and provided a source of funding for future brand-building and innovation initiatives.
In the 12 weeks ended June 13, 2015, we incurred restructuring charges of $4 million ($3 million after-tax with a nominal amount per share). In the 24 weeks ended June 13, 2015, we incurred restructuring charges of $10 million ($9 million after-tax or $0.01 per share). All of these charges were recorded in selling, general and administrative expenses and primarily related to severance and other employee-related costs and contract termination costs. Cash payments in the 24 weeks ended June 11, 2016 were $17 million. We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual of $20 million at June 11, 2016 is expected to be paid by the end of 2016.

12
Table of Contents    


A summary of our 2012 Productivity Plan charges by segment is as follows:
 
 
 
 
 
 
6/13/2015
 
 
 
 
 
 
12 Weeks Ended
 
 24 Weeks Ended
FLNA
 
 
 
 
 
$
—

 
$
—

QFNA
 
 
 
 
 
—

 
—

NAB
 
 
 
 
 
—

 
1

Latin America
 
 
 
 
 
—

 
—

ESSA
 
 
 
 
 
3

 
6

AMENA
 
 
 
 
 
1

 
1

Corporate
 
 
 
 
 
—

 
2

 
 
 
 
 
 
$
4

 
$
10

Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
6/11/2016
 
12/26/2015
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
838

 
$
(101
)
 
$
737

 
$
820

 
$
(92
)
 
$
728

Reacquired franchise rights
 
106

 
(101
)
 
5

 
105

 
(99
)
 
6

Brands
 
1,302

 
(995
)
 
307

 
1,298

 
(987
)
 
311

Other identifiable intangibles
 
537

 
(312
)
 
225

 
526

 
(301
)
 
225

 
 
$
2,783

 
$
(1,509
)
 
$
1,274

 
$
2,749

 
$
(1,479
)
 
$
1,270


13
Table of Contents    


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

12/26/2015
 
 
6/11/2016
FLNA

 

 

Goodwill
$
267

 
$
11

 
$
278

Brands
22

 
2

 
24


289

 
13

 
302

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 
—

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,754

 
41

 
9,795

Reacquired franchise rights
7,042

 
69

 
7,111

Acquired franchise rights
1,507

 
14

 
1,521

Brands
108

 
—

 
108


18,411

 
124

 
18,535

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
521

 
16

 
537

Brands
137

 
7

 
144


658

 
23

 
681

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,042

 
159

 
3,201

Reacquired franchise rights
488

 
15

 
503

Acquired franchise rights
190

 
4

 
194

Brands
2,212

 
153

 
2,365


5,932

 
331

 
6,263

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
418

 
(6
)
 
412

Brands
105

 
(2
)
 
103


523

 
(8
)
 
515

 
 
 
 
 
 
Total goodwill
14,177

 
221

 
14,398

Total reacquired franchise rights
7,530

 
84

 
7,614

Total acquired franchise rights
1,697

 
18

 
1,715

Total brands
2,584

 
160

 
2,744


$
25,988

 
$
483

 
$
26,471


14
Table of Contents    


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
6/11/2016

 
12/26/2015

Balance, beginning of year
$
1,547

 
$
1,587

Additions for tax positions related to the current year
107

 
248

Additions for tax positions from prior years
14

 
122

Reductions for tax positions from prior years
(35
)
 
(261
)
Settlement payments
(9
)
 
(78
)
Statutes of limitations expiration
(16
)
 
(34
)
Translation and other
(6
)
 
(37
)
Balance, end of period
$
1,602

 
$
1,547

Note 6 - Share-Based Compensation
Beginning in 2016, certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo’s Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period. These qualify as liability awards under share-based compensation guidance and are valued through the end of the performance period on a mark-to-market basis using a Monte Carlo simulation model until actual performance is determined.
The following table summarizes our total share-based compensation expense:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

Share-based compensation expense - equity awards
 
$
54

 
$
68

 
$
123

 
$
144

Share-based compensation expense - liability awards
 
1

 
—

 
3

 
—

Restructuring and impairment charges
 
1

 
1

 
2

 
1

Total
 
$
56

 
$
69

 
$
128

 
$
145

For the 12 weeks ended June 11, 2016 and June 13, 2015, our grants of stock options, restricted stock units (RSUs), performance stock units (PSUs), PepsiCo equity performance units (PEPunits) and long-term cash awards were nominal.
The following table summarizes share-based awards granted under the terms of our 2007 Long-Term Incentive Plan:
 
 
24 Weeks Ended
 
 
6/11/2016
 
6/13/2015
 
 
Granted (a)
 
Weighted-Average Grant Price
 
Granted (a)
 
Weighted-Average Grant Price
Stock options
 
1.5

 
$
98.75

 
1.6

 
$
99.25

RSUs and PSUs
 
2.9

 
$
98.83

 
2.6

 
$
99.25

PEPunits
 
—

 
$
—

 
0.3

 
$
99.25

(a)
In millions. All grant activity is disclosed at target.
We granted long-term cash awards to certain executive officers and other senior executives with an aggregate target value of $17 million during the 24 weeks ended June 11, 2016.

15
Table of Contents    


Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

Expected life
6 years

 
7 years

Risk-free interest rate
1.5
%
 
1.8
%
Expected volatility
12
%
 
15
%
Expected dividend yield
2.7
%
 
2.7
%
Note 7 - Pension and Retiree Medical Benefits
Effective as of the beginning of 2016, we prospectively changed the method we use to estimate the service and interest cost components of pension and retiree medical expense. The pre-tax reduction in net periodic benefit cost associated with this change in the 12 and 24 weeks ended June 11, 2016 was $29 million ($19 million after-tax or $0.01 per share) and $57 million ($37 million after-tax or $0.03 per share), respectively. See “Pension and Retiree Medical Plans” in “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on this change in accounting estimate.
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension

Retiree Medical
 
6/11/2016


6/13/2015


6/11/2016


6/13/2015


6/11/2016


6/13/2015

 
U.S.

International

 
Service cost
$
90


$
100


$
21


$
26


$
7


$
8

Interest cost
112


126


24


29


10


12

Expected return on plan assets
(192
)

(197
)

(42
)

(45
)

(6
)

(6
)
Amortization of prior service credit
—


—


—


—


(8
)

(9
)
Amortization of net losses/(gains)
39


48


10


18


(1
)

1


49


77


13


28


2


6

Settlement/curtailment loss
—

 
—

 
6

 
—

 
—

 
—

Special termination benefits
1


1


—


—


—


—

Total expense
$
50


$
78


$
19


$
28


$
2


$
6


16
Table of Contents    


 
24 Weeks Ended
 
Pension
 
Retiree Medical
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
U.S.
 
International
 
 
Service cost
$
181

 
$
201

 
$
36

 
$
45

 
$
14

 
$
16

Interest cost
223

 
252

 
42

 
51

 
19

 
24

Expected return on plan assets
(384
)
 
(393
)
 
(73
)
 
(78
)
 
(11
)
 
(12
)
Amortization of prior service credit
—

 
(1
)
 
—

 
—

 
(17
)
 
(18
)
Amortization of net losses/(gains)
77

 
95

 
18

 
32

 
(1
)
 
1

 
97

 
154

 
23

 
50

 
4

 
11

Settlement/curtailment loss
—

 
—

 
6

 
—

 
—

 
—

Special termination benefits
1

 
5

 
—

 
—

 
—

 
1

Total expense
$
98

 
$
159

 
$
29

 
$
50

 
$
4

 
$
12

We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. During the first quarter of 2016, we made discretionary contributions of $7 million to our international pension plans. There were no discretionary contributions made in the second quarter of 2016. In addition, there were no discretionary contributions made in the first or second quarters of 2015.
Note 8 - Debt Obligations and Commitments
In the first quarter of 2016, we issued the following senior notes:
Interest Rate

 
Maturity Date
 
Amount

 
Floating rate

 
February 2019
 
$
400

 
1.500
%
 
February 2019
 
600

 
2.850
%
 
February 2026
 
750

 
4.450
%
 
April 2046
 
750

 
 
 
 
 
$
2,500

(a) 
(a)
Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.
The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper.
In the 24 weeks ended June 11, 2016, $3.1 billion of senior notes matured and were paid.
In the second quarter of 2016, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 6, 2021. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.
Also in the second quarter of 2016, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement), which expires on June 5, 2017. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. We may request renewal of this facility for an additional 364-day period or convert any amounts outstanding into a term loan for a period of up to one year, which would mature no later than the anniversary of the then effective termination date. The Five-Year Credit Agreement and the 364-Day Credit Agreement together replaced our $3.7225 billion five-year credit agreement dated as of June 8, 2015 and our $3.7225 billion 364-day credit agreement

17
Table of Contents    


dated as of June 8, 2015. Funds borrowed under the Five-Year Credit Agreement and the 364-Day Credit Agreement may be used for general corporate purposes. Subject to certain conditions, we may borrow, prepay and reborrow amounts under these agreements. As of June 11, 2016, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
As of June 11, 2016, we had $3.6 billion of commercial paper outstanding and $2.7 billion of non-cancelable purchase commitments. For further information on our long-term contractual commitments, see Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
Note 9 - Accumulated Other Comprehensive Loss
The reclassifications from Accumulated Other Comprehensive Loss to the Condensed Consolidated Statement of Income are summarized as follows:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
 
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
Affected Line Item in the Condensed Consolidated Statement of Income
(Gains)/Losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
    Foreign exchange contracts
 
$
1

 
$
(2
)
 
$
1

 
$
(2
)
 
Net revenue
    Foreign exchange contracts
 
(13
)
 
(20
)
 
(34
)
 
(42
)
 
Cost of sales
    Interest rate derivatives
 
1

 
(81
)
 
(2
)
 
112

 
Interest expense
    Commodity contracts
 
2

 
3

 
3

 
8

 
Cost of sales
    Commodity contracts
 
1

 
3

 
3

 
6

 
Selling, general and administrative expenses
    Net (gains)/losses before tax
 
(8
)
 
(97
)
 
(29
)
 
82

 
 
    Tax amounts
 
2

 
33

 
7

 
(37
)
 
 
    Net (gains)/losses after tax
 
$
(6
)
 
$
(64
)
 
$
(22
)
 
$
45

 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and retiree medical items:
 
 
 
 
 
 
 
 
 
 
    Amortization of prior service credit (a)
 
$
(8
)
 
$
(9
)
 
$
(17
)
 
$
(19
)
 
 
    Amortization of net losses (a)
 
48

 
67

 
94

 
128

 
 
    Settlement/curtailment (a)
 
6

 
—

 
6

 
—

 
 
    Net losses before tax
 
46

 
58

 
83

 
109

 
 
    Tax amounts
 
(14
)
 
(18
)
 
(26
)
 
(35
)
 
 
    Net losses after tax
 
$
32

 
$
40

 
$
57

 
$
74

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net losses/(gains) reclassified for the period, net of tax
 
$
26

 
$
(24
)
 
$
35

 
$
119

 
 
(a)
These items are included in the components of net periodic benefit cost for pension and retiree medical plans (see Note 7 for additional details).

18
Table of Contents    


Note 10 - Financial Instruments
Derivatives
We are exposed to market risks arising from adverse changes in:
•
commodity prices, affecting the cost of our raw materials and energy;
•
foreign exchange rates and currency restrictions; and
•
interest rates.
In the normal course of business, we manage commodity price, foreign exchange and interest rate risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging. Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include fixed-price contracts and purchase orders and pricing agreements.
Our hedging strategies include the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity price, foreign exchange or interest rate risks are classified as operating activities in the Condensed Consolidated Statement of Cash Flows. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item.
For cash flow hedges, the effective portion of changes in fair value is deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and 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 contracts and purchase orders, pricing agreements and derivative instruments, which include swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for agricultural products, metals and energy. Ineffectiveness for those derivatives that qualify for hedge accounting treatment was not material for all periods presented. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit.

19
Table of Contents    


Our open commodity derivative contracts had a notional value of $0.8 billion as of June 11, 2016 and $1.0 billion as of December 26, 2015.
Foreign Exchange
We are exposed to foreign exchange risk from foreign currency purchases and foreign currency assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of derivatives, primarily forward contracts with terms of no more than two years. 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 notional value of $1.8 billion as of June 11, 2016 and $2.1 billion as of December 26, 2015. Ineffectiveness for derivatives that qualify for hedge accounting treatment was not material for all periods presented. For foreign currency derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no material net 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 have been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.
The notional values of the interest rate derivative instruments outstanding as of June 11, 2016 and December 26, 2015 were $10.9 billion and $12.5 billion, respectively. Ineffectiveness for derivatives that qualify for cash flow hedge accounting treatment was not material for all periods presented.
As of June 11, 2016, approximately 37% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 33% as of December 26, 2015.
Available-for-Sale Securities
Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as available-for-sale. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale securities are recognized in accumulated other comprehensive loss within common shareholders’ equity. Unrealized gains and losses on our investments in debt securities as of June 11, 2016 and December 26, 2015 were not material. The pre-tax unrealized gains on our investments in marketable equity securities were $104 million and $115 million as of June 11, 2016 and December 26, 2015, respectively.
Changes in the fair value of available-for-sale securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will more likely than

20
Table of Contents    


not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. We recorded no other-than-temporary impairment charges on our available-for-sale securities for the 12 and 24 weeks ended June 11, 2016 and June 13, 2015.
Tingyi-Asahi Beverages Holding Co. Ltd.
During the first quarter of 2016, we concluded that the decline in estimated fair value of our 5% indirect equity interest in TAB was other than temporary based on significant negative economic trends in China and changes in our assumptions associated with TAB’s future financial performance arising from the recent disclosure by TAB’s parent company, Tingyi, regarding the operating results of its beverage business. As a result, we recorded a pre- and after-tax impairment charge of $373 million ($0.26 per share) in the first quarter of 2016 in the AMENA segment. This charge was recorded in selling, general and administrative expenses in our Condensed Consolidated Statement of Income and reduced the value of our 5% indirect equity interest in TAB to its estimated fair value. The estimated fair value was derived using both an income and market approach, and is considered a non-recurring Level 3 measurement within the fair value hierarchy. The carrying value of the investment in TAB was $166 million as of June 11, 2016. We continue to monitor the impact of economic and other developments on the remaining value of our investment in TAB. See further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

21
Table of Contents    


Fair Value Measurements
The fair values of our financial assets and liabilities as of June 11, 2016 and December 26, 2015 are categorized as follows:
 
6/11/2016
 
12/26/2015
 
Assets (a)
 
Liabilities (a)
 
Assets (a)
 
Liabilities (a)
Available-for-sale securities:


 


 


 


Equity securities (b)
$
117

 
$
—

 
$
127

 
$
—

Debt securities (c)
8,950

 
—

 
7,231

 
—

 
$
9,067

 
$
—

 
$
7,358

 
$
—

Short-term investments (d)
$
187

 
$
—

 
$
193

 
$
—

Prepaid forward contracts (e)
$
27

 
$
—

 
$
27

 
$
—

Deferred compensation (f)
$
—

 
$
465

 
$
—

 
$
474

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
Interest rate (g)
$
194

 
$
—

 
$
129

 
$
12

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
20

 
$
27

 
$
76

 
$
6

Interest rate (g)
—

 
308

 
—

 
311

Commodity (i)
4

 
1

 
—

 
7

 
$
24

 
$
336

 
$
76

 
$
324

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
—

 
$
20

 
$
8

 
$
10

Interest rate (g)
44

 
54

 
44

 
56

Commodity (i)
54

 
35

 
12

 
141

 
$
98

 
$
109

 
$
64

 
$
207

Total derivatives at fair value (j)
$
316

 
$
445

 
$
269

 
$
543

Total
$
9,597

 
$
910

 
$
7,847

 
$
1,017

(a)
Unless otherwise noted, financial assets are classified on our Condensed Consolidated Balance Sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our Condensed Consolidated Balance Sheet within accounts payable and 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. These equity securities are classified as investments in noncontrolled affiliates.
(c)
Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of June 11, 2016, $5.5 billion and $3.5 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 26, 2015, $4.5 billion and $2.7 billion of debt securities were classified as cash equivalents and short-term investments, respectively. All of our available-for-sale debt securities have maturities of one year or less.
(d)
Based on the price of index funds. Categorized as a Level 1 asset. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.
(e)
Based primarily on the price of our common stock.
(f)
Based on the fair value of investments corresponding to employees’ investment elections.
(g)
Based on LIBOR forward rates. As of June 11, 2016 and December 26, 2015, amounts related to non-designated instruments are presented on a net basis on our Condensed Consolidated Balance Sheet.
(h)
Based on recently reported market transactions of spot and forward rates.
(i)
Based on recently reported market transactions, primarily swap arrangements.
(j)
Unless otherwise noted, derivative assets and liabilities are presented on a gross basis on our Condensed Consolidated Balance Sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the Condensed Consolidated Balance Sheet as of June 11, 2016 and December 26, 2015 were immaterial. Collateral received against any of our asset positions was immaterial.

22
Table of Contents    


The carrying amounts of our cash and cash equivalents and short-term investments approximate fair value due to their short-term maturity. The fair value of our debt obligations as of June 11, 2016 and December 26, 2015 was $38 billion and $35 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.
Pre-tax losses/(gains) on our derivative instruments are categorized as follows:
 
12 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)
 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

 
6/11/2016

 
6/13/2015

Foreign exchange
$
5

 
$
24

 
$
24

 
$
15

 
$
(12
)
 
$
(22
)
Interest rate
(10
)
 
30

 
13

 
(65
)
 
1

 
(81
)
Commodity
(59
)
 
13

 
(5
)
 
2

 
3

 
6

Total
$
(64
)
 
$
67

 
$
32

 
$
(48
)
 
$
(8
)
 
$
(97
)
 
24 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)

6/11/2016


6/13/2015


6/11/2016


6/13/2015


6/11/2016


6/13/2015

Foreign exchange
$
38

 
$
16

 
$
40

 
$
(26
)
 
$
(33
)
 
$
(44
)
Interest rate
(79
)
 
7

 
(3
)
 
129

 
(2
)
 
112

Commodity
(55
)
 
67

 
(5
)
 
4

 
6

 
14

Total
$
(96
)
 
$
90

 
$
32

 
$
107

 
$
(29
)
 
$
82

(a)
Foreign exchange derivative gains/losses are primarily included in selling, general and administrative expenses. Interest rate derivative gains/losses are primarily from fair value hedges and are included in interest expense. These gains/losses are substantially offset by increases/decreases in the value of the underlying debt, which are also included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
(b)
Foreign exchange derivative gains/losses are primarily included in cost of sales. Interest rate derivative gains/losses are included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
Based on current market conditions, we expect to reclassify net losses of $23 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

23
Table of Contents    


Note 11 - Net Income Attributable to PepsiCo per Common Share
The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:
 
12 Weeks Ended
 
6/11/2016
 
6/13/2015
 
Income
 
Shares (a)
 
Income
 
Shares (a)
Net income attributable to PepsiCo
$
2,005

 
 
 
$
1,980

 
 
Preferred shares:
 
 
 
 
 
 
 
Dividends
—

 
 
 
—

 
 
Redemption premium
(1
)
 
 
 
(1
)
 
 
Net income available for PepsiCo common shareholders
$
2,004

 
1,443

 
$
1,979

 
1,476

Basic net income attributable to PepsiCo per common share
$
1.39

 
 
 
$
1.34

 
 
Net income available for PepsiCo common shareholders
$
2,004

 
1,443

 
$
1,979

 
1,476

Dilutive securities:
 
 
 
 
 
 
 
Stock options, RSUs, PSUs, PEPunits and Other (b)
—

 
12

 
—

 
14

Employee stock ownership plan (ESOP) convertible preferred stock
1

 
1

 
1

 
1

Diluted
$
2,005

 
1,456

 
$
1,980

 
1,491

Diluted net income attributable to PepsiCo per common share
$
1.38

 
 
 
$
1.33

 
 
 
24 Weeks Ended
 
6/11/2016

6/13/2015
 
Income

Shares (a)

Income

Shares (a)
Net income attributable to PepsiCo
$
2,936




$
3,201



Preferred shares:




 


Dividends
—




—



Redemption premium
(2
)



(2
)


Net income available for PepsiCo common shareholders
$
2,934


1,445


$
3,199


1,480

Basic net income attributable to PepsiCo per common share
$
2.03




$
2.16


 
Net income available for PepsiCo common shareholders
$
2,934


1,445


$
3,199


1,480

Dilutive securities:




 

 
Stock options, RSUs, PSUs, PEPunits and Other (b)
—


12


—


16

ESOP convertible preferred stock
2


1


2


1

Diluted
$
2,936


1,458


$
3,201


1,497

Diluted net income attributable to PepsiCo per common share
$
2.01




$
2.14



(a)
Weighted-average common shares outstanding (in millions).
(b)
For the 12 weeks ended June 11, 2016, the calculation of diluted earnings per common share was unadjusted because there were no out-of-the-money options during the period. For the 24 weeks ended June 11, 2016, options to purchase 1.4 million shares were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. These out-of-the-money options had an average exercise price of $98.99. For the 12 and 24 weeks ended June 13, 2015, options to purchase 1.6 million shares were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. These out-of-the-money options had an average exercise price of $99.25.

24
Table of Contents    


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock 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
The critical accounting policies below should be read in conjunction with those outlined in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
Sales Incentives and Advertising and Marketing Costs
We offer sales incentives and discounts through various programs to customers and consumers. These incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management’s 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. Certain advertising and marketing costs are also based on annual targets.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for advertising and other marketing activities.
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.
Pension and Retiree Medical Plans
Effective as of the beginning of 2016, we changed the method we use to estimate the service and interest cost components of net periodic benefit cost for our U.S. and the majority of our significant international pension and retiree medical plans. Historically, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation (or accumulated post-retirement benefit obligation for the retiree medical plans) at the beginning of the period. We have now elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation

25
Table of Contents    


between projected benefit cash flows and the corresponding yield curve spot rates, which we believe will result in a more precise measurement of service and interest costs. This change does not affect the measurement of our benefit obligation. We have accounted for this change in estimate on a prospective basis as of the beginning of 2016. The pre-tax reduction in net periodic benefit cost associated with this change in the 12 and 24 weeks ended June 11, 2016 was $29 million ($19 million after-tax or $0.01 per share) and $57 million ($37 million after-tax or $0.03 per share), respectively. We expect this change to result in a pre-tax reduction in net periodic benefit cost of approximately $125 million for the full year 2016.
For our pension benefits, the 2016 weighted-average discount rates for service and interest costs under the full yield curve approach adopted as of the beginning of 2016 are 4.5% and 3.8%, respectively. For our retiree medical benefits, the 2016 weighted-average discount rates for service and interest costs under the new methodology are 4.3% and 3.3%, respectively. Under the prior methodology, the expense discount rate would have been 4.4% and 4.2% for our pension and retiree medical benefits, respectively.
Our Business Risks
This Quarterly Report on Form 10-Q (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 (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 “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or 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 statement. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo’s products, as a result of changes in consumer preferences or otherwise; changes in, or failure to comply with, applicable laws and regulations; imposition of new or increased taxes, disagreements with tax authorities or additional tax liabilities; PepsiCo’s ability to compete effectively; PepsiCo’s ability to grow its business in developing and emerging markets or unstable political conditions, civil unrest or other developments and risks in the markets where PepsiCo’s products are made, manufactured, distributed or sold; unfavorable economic conditions in the countries in which PepsiCo operates; increased costs, disruption of supply or shortages of raw materials and other supplies; failure to realize anticipated benefits from PepsiCo’s productivity initiatives or global operating model; business disruptions; product contamination or tampering or issues or concerns with respect to product quality, safety and integrity; damage to PepsiCo’s reputation or brand image; failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo’s existing operations or to complete or manage divestitures or refranchisings; changes in estimates and underlying assumptions regarding future performance that could result in an impairment charge; PepsiCo’s ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; loss of any key customer or changes to the retail landscape; any downgrade or potential downgrade of PepsiCo’s credit ratings; the ability to protect information systems against, or effectively respond to, cyber attacks or other cyber incidents or other disruption; PepsiCo’s ability to implement shared services or utilize information technology systems and networks effectively; fluctuations or other changes in exchange rates; potential impacts of climate change or water scarcity, or legal, regulatory or market measures to address climate change or water scarcity; failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages; infringement of intellectual property rights; potential liabilities and costs from litigation or legal proceedings; and other factors that may adversely affect the price of PepsiCo’s common

26
Table of Contents    


stock and financial performance including those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” of this Form 10-Q. 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 obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
In the 24 weeks ended June 11, 2016, our operations outside of North America reflect the months of January through May. In the 24 weeks ended June 11, 2016, our operations outside of the U.S. generated 39% of our net revenue, with Mexico, Canada, Russia, the United Kingdom and Brazil comprising approximately 18% of our net revenue. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. In each of the 12 and 24 weeks ended June 11, 2016, unfavorable foreign exchange negatively impacted net revenue performance by 4 percentage points, primarily due to the Mexican peso, Russian ruble, Brazilian real, Canadian dollar and the Argentine peso. Currency declines against the U.S. dollar could adversely impact our future financial results.
In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Russia, China, Brazil, Greece and the Middle East, and currency fluctuations in certain of these international markets continue to result in challenging operating environments. We are also monitoring the economic and political developments related to the recent referendum in the United Kingdom to leave the European Union, and the potential impact, if any, for the ESSA segment and our other businesses. Also, regulatory initiatives, including the imposition or proposed imposition of new or increased taxes or other measures that could limit sales of our products, continue to intensify and could adversely affect our business, financial condition or results of operations.
We continue to monitor the economic, operating and political environment in Russia closely. In the 24 weeks ended June 11, 2016 and June 13, 2015, total net revenue generated by our operations in Russia represented 4% of our net revenue. As of June 11, 2016, our long-lived assets in Russia were $4.0 billion.
Conditions in Venezuela, including restrictive exchange control regulations and lack of access to U.S. dollars through official currency exchange markets, have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. The exchange restrictions and other conditions have significantly impacted our ability to effectively manage our businesses in Venezuela, including limiting our ability to import certain raw materials and to settle U.S. dollar-denominated obligations, and have restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future.
As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela. Therefore, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments in our Venezuelan subsidiaries and joint venture using the cost method of accounting. We reduced the value of the cost method investments to their estimated fair values, resulting in a full impairment. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of the second quarter of 2016.
Beginning with the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses. We do not have any guarantees related to our Venezuelan entities, and our ongoing contractual commitments to our Venezuelan businesses are not material. We will recognize income from dividends and sales of inventory to our Venezuelan entities, which have not been and are not expected to be material, to

27
Table of Contents    


the extent cash in U.S. dollars is received. We did not receive any cash in U.S. dollars from our Venezuelan entities during 2016. We will continue to monitor the conditions in Venezuela and their impact on our accounting and disclosures.
See Note 10 to our condensed consolidated financial statements for a discussion of our financial instruments, including their fair values as of June 11, 2016 and December 26, 2015. Cautionary statements included above and in “Item 1A. Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, should be considered when evaluating our trends and future results.
Results of Operations – Consolidated Review
Consolidated Results
Volume
Since our divisions each use different measures of physical unit volume (i.e., kilos, gallons, pounds and case sales), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products. For each of the 12 and 24 weeks ended June 11, 2016, total servings increased 2%. For each of the 12 and 24 weeks ended June 13, 2015, total servings increased slightly. Servings growth in 2016 reflects an adjustment to 2015 results for divestitures and other structural changes, including the deconsolidation of our Venezuelan businesses effective as of the end of the third quarter of 2015.
We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8-ounce-case metric. Most of our beverage volume is sold by our Company-owned and franchise-owned bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our direct shipments to retailers and independent distributors. We report the majority of our international beverage volume on a monthly basis. Our second quarter includes beverage volume outside of North America for the months of March, April and May. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to independent bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.

28
Table of Contents    


Total Net Revenue and Operating Profit
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
Change
 
6/11/2016

 
6/13/2015

 
Change
Total net revenue
$
15,395

 
$
15,923

 
(3
)%
 
$
27,257

 
$
28,140

 
(3
)%
Operating profit
 
 
 
 
 
 
 
 
 
 
 
FLNA
$
1,083

 
$
1,007

 
8
 %
 
$
2,101

 
$
1,927

 
9
 %
QFNA
146

 
132

 
11
 %
 
312

 
231

 
35
 %
NAB
881

 
833

 
6
 %
 
1,366

 
1,286

 
6
 %
Latin America
242

 
355

 
(32
)%
 
417

 
574

 
(27
)%
ESSA
337

 
350

 
(4
)%
 
404

 
462

 
(13
)%
AMENA
383

 
373

 
3
 %
 
235

 
603

 
(61
)%
Corporate Unallocated
 
 
 
 
 
 
 
 
 
 
 
Mark-to-market net gains
100

 
39

 
 
 
146

 
38

 
 
Restructuring and impairment charges
(1
)
 
(1
)
 
 
 
(4
)
 
(7
)
 
 
Other
(207
)
 
(188
)
 
 
 
(394
)
 
(417
)
 
 
 
$
(108
)
 
$
(150
)
 
(28
)%
 
$
(252
)
 
$
(386
)
 
(35
)%
Total operating profit
$
2,964

 
$
2,900

 
2
 %
 
$
4,583

 
$
4,697

 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
Total operating profit margin
19.2
%
 
18.2
%
 
1.0

 
16.8
%
 
16.7
%
 
0.1

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 2% and operating profit margin increased 1.0 percentage point. Operating profit growth was primarily driven by planned cost reductions across a number of expense categories, effective net pricing and volume growth. These impacts were partially offset by certain operating cost increases, unfavorable foreign exchange and higher advertising and marketing expenses. In addition, the deconsolidation of our Venezuelan businesses reduced operating profit growth by 2.5 percentage points. Commodity inflation had a nominal impact on operating profit growth, with inflation in the ESSA and Latin America segments largely offset by deflation in the NAB, FLNA, QFNA and AMENA segments. Other corporate unallocated expenses increased 10%, primarily due to a contribution to The PepsiCo Foundation, Inc. to fund charitable and social programs and higher foreign exchange transaction losses, partially offset by decreased corporate expenses, including pension expense reflecting the reduction in net periodic benefit cost associated with the change to the full yield curve approach. Items affecting comparability (see “Items Affecting Comparability”) increased operating profit growth by 1 percentage point and total operating profit margin by 0.2 percentage points.
24 Weeks
On a reported basis, total operating profit decreased 2% and operating profit margin increased 0.1 percentage points. Operating profit performance was primarily driven by certain operating cost increases, higher advertising and marketing expenses and unfavorable foreign exchange, as well as the deconsolidation of our Venezuelan businesses, which negatively impacted operating profit performance by 2 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories, effective net pricing and volume growth. The impact of recording an impairment charge in the QFNA segment in the prior year and ceasing the operations of our MQD joint venture positively contributed 2 percentage

29
Table of Contents    


points to operating profit performance. Commodity deflation positively contributed 1 percentage point to operating profit performance, primarily attributable to deflation in the NAB, FLNA, QFNA and AMENA segments, partially offset by inflation in the Latin America and ESSA segments. Other corporate unallocated expenses decreased 6%, primarily due to lower corporate expenses including pension expense, partially offset by the contributions to The PepsiCo Foundation, Inc. and higher foreign exchange transaction losses. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted operating profit performance by 6 percentage points, primarily reflecting an impairment charge to reduce our 5% indirect equity interest in TAB to its estimated fair value, and decreased total operating profit margin by 1.0 percentage point.
Other Consolidated Results 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016

 
6/13/2015

 
Change
 
6/11/2016

 
6/13/2015

 
Change
Interest expense, net
$
(233
)
 
$
(203
)
 
$
(30
)
 
$
(465
)
 
$
(399
)
 
$
(66
)
Tax rate
26.3
%
 
26.1
%
 
 
 
28.2
%
 
25.0
%
 
 
Net income attributable to PepsiCo
$
2,005

 
$
1,980

 
1
%
 
$
2,936

 
$
3,201

 
(8
)%
Net income attributable to PepsiCo per common share - diluted
$
1.38

 
$
1.33

 
4
%
 
$
2.01

 
$
2.14

 
(6
)%
Mark-to-market net gains
(0.04
)
 
(0.02
)
 
 
 
(0.06
)
 
(0.02
)
 
 
Restructuring and impairment charges
0.02

 
0.01

 
 
 
0.04

 
0.03

 
 
Charge related to the transaction with Tingyi
—

 
—

 
 
 
0.26

 
—

 
 
Net income attributable to PepsiCo per common share - diluted, excluding above items (a)
$
1.35

(b) 
$
1.32

 
2
%
 
$
2.24

(b) 
$
2.15

 
4
 %
Impact of foreign exchange translation
 
 
 
 
3.5

 
 
 
 
 
4

Growth in net income attributable to PepsiCo per common share - diluted, excluding above items, on a constant currency basis (a)
 
 
 
 
6
%
(b) 
 
 
 
 
8
 %
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.
12 Weeks
Net interest expense increased $30 million, primarily reflecting higher average debt balances, partially offset by higher gains on the market value of investments used to economically hedge a portion of our deferred compensation costs and higher interest income due to higher average cash balances.
The reported tax rate increased 0.2 percentage points, primarily reflecting unfavorable income mix shift.
Net income attributable to PepsiCo increased 1% and net income attributable to PepsiCo per common share increased 4%. The deconsolidation of our Venezuelan businesses reduced both net income attributable to PepsiCo and net income attributable to PepsiCo per common share growth by 3 percentage points. In addition, items affecting comparability (see “Items Affecting Comparability”) positively contributed 1 percentage point to both net income attributable to PepsiCo and net income attributable to PepsiCo per common share.

30
Table of Contents    


24 Weeks
Net interest expense increased $66 million, primarily reflecting higher average debt balances and lower gains on the market value of investments used to economically hedge a portion of our deferred compensation costs, partially offset by higher interest income due to higher average cash balances.
The reported tax rate increased 3.2 percentage points, primarily reflecting the impairment charge to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value which had no corresponding tax benefit.
Net income attributable to PepsiCo decreased 8% and net income attributable to PepsiCo per common share decreased 6%. The deconsolidation of our Venezuelan businesses negatively impacted both net income attributable to PepsiCo and net income attributable to PepsiCo per common share performance by 2 percentage points. In addition, items affecting comparability (see “Items Affecting Comparability”) negatively impacted both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 10 percentage points.
Non-GAAP Measures
Certain financial measures contained in this Form 10-Q adjust for the impact of specified items and are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). We use non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance and as a factor in determining compensation for certain employees. We believe presenting non-GAAP financial measures in this Form 10-Q provides additional information to facilitate comparison of our historical operating results and trends in our underlying operating results, and provides additional transparency on how we evaluate our business. We also believe presenting these measures in this Form 10-Q allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.
We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Examples of items for which we may make adjustments include: amounts related to mark-to-market gains or losses (non-cash); gains or losses associated with mergers, acquisitions, divestitures and other structural changes; charges related to restructuring programs; asset impairments (non-cash); amounts related to the resolution of tax positions; pension and retiree medical related items; and remeasurements of net monetary assets. See below and “Items Affecting Comparability” for a description of adjustments to our U.S. GAAP financial measures in this Form 10-Q. 
Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.
The following non-GAAP financial measures are contained in this Form 10-Q:
•
operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, adjusted for items affecting comparability, and the corresponding constant currency growth rates;
•
organic revenue; and
•
free cash flow.

31
Table of Contents    


Operating Profit, Adjusted for Items Affecting Comparability, and Net Income Attributable to PepsiCo per Common Share - Diluted, Adjusted for Items Affecting Comparability
Operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, adjusted for items affecting comparability, each excludes the net impact of mark-to-market gains on centrally managed commodities that do not qualify for hedge accounting, restructuring and impairment charges related to our 2014 and 2012 Productivity Plans, and a charge related to the transaction with Tingyi (see “Items Affecting Comparability” for a detailed description of each of these items). We also evaluate performance on these measures on a constant currency basis, which measures our financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior-year average foreign exchange rates. We believe these measures provide useful information in evaluating the results of our business because they exclude items that we believe are not indicative of our ongoing performance.
Organic Revenue
We define organic revenue as net revenue adjusted for the impact of foreign exchange translation, as well as the impact from acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation, for the comparable period. The Venezuela deconsolidation impact excludes the results of our Venezuelan businesses for 2015. We believe organic revenue provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior year. See “Organic Revenue Growth.”
In addition, our fiscal 2016 results will include an extra week of results (the 53rd reporting week). Organic revenue will exclude the impact of the 53rd reporting week in the fourth quarter of 2016.
Free Cash Flow
We define free cash flow as net cash provided by operating activities less capital spending, plus sales of property, plant and equipment. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure.
See “Free Cash Flow” in “Our Liquidity and Capital Resources.”

32
Table of Contents    


Items Affecting Comparability
Our reported financial results in this Form 10-Q are impacted by the following items in each of the following periods: 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/11/2016
 
6/13/2015
 
6/11/2016
 
6/13/2015
Operating profit
 
 
 
 
 
 
 
Mark-to-market net gains/(losses) recognized in cost of sales
$
63

 
$
2

 
$
81

 
$
(16
)
Mark-to-market net gains recognized in selling, general and administrative expenses
37

 
37

 
65

 
54

Mark-to-market net impact
$
100

 
$
39

 
$
146

 
$
38

Restructuring and impairment charges
$
(49
)
 
$
(25
)
 
$
(79
)
 
$
(61
)
Charge related to the transaction with Tingyi
$
—

 
$
—

 
$
(373
)
 
$
—

Provision for income taxes
 
 
 
 
 
 
 
Mark-to-market net impact
$
35

 
$
12

 
$
52

 
$
12

Restructuring and impairment charges
$
(15
)
 
$
(6
)
 
$
(20
)
 
$
(13
)
Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Restructuring and impairment charges
$
(3
)
 
$
—

 
$
(3
)
 
$
—

Net income attributable to PepsiCo
 
 
 
 
 
 
 
Mark-to-market net impact
$
65

 
$
27

 
$
94

 
$
26

Restructuring and impairment charges
$
(31
)
 
$
(19
)
 
$
(56
)
 
$
(48
)
Charge related to the transaction with Tingyi
$
—

 
$
—

 
$
(373
)
 
$
—

Net income attributable to PepsiCo per common share – diluted
 
 
 
 
 
 
 
Mark-to-market net impact
$
0.04

 
$
0.02

 
$
0.06

 
$
0.02

Restructuring and impairment charges
$
(0.02
)
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.03
)
Charge related to the transaction with Tingyi
$
—

 
$
—

 
$
(0.26
)
 
$
—

Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, metals and energy. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.

33
Table of Contents    


Restructuring and Impairment Charges
In connection with our 2014 Productivity Plan, we expect to incur pre-tax charges of approximately $990 million, of which approximately $705 million represents cash expenditures, summarized by period as follows:
 
Charges
 
Cash
Expenditures
 
2013
$
53

 
$
—

 
2014
357

 
175

(b) 
2015
169

 
165

(b) 
First quarter 2016
30

 
22

 
Second quarter 2016
49

 
28

 
 
658

 
390

 
Remainder of 2016 (expected)
65

 
98

 
2017 - 2019 (expected)
267

 
217

 
 
$
990

(a) 
$
705

 
(a)
This total pre-tax charge is expected to consist of approximately $525 million of severance and other employee-related costs, approximately $120 million for asset impairments (all non-cash) resulting from plant closures and related actions, and approximately $345 million for other costs associated with the implementation of our initiatives, including contract termination costs. This charge is expected to impact reportable segments approximately as follows: FLNA 11%, QFNA 2%, NAB 35%, Latin America 15%, ESSA 25%, AMENA 5% and Corporate 7%.
(b)
In 2015 and 2014, cash expenditures included $2 million and $10 million, respectively, reported on the Consolidated Statement of Cash Flows in pension and retiree medical plan contributions.
See Note 3 to our condensed consolidated financial statements for further information related to our 2014 and 2012 Productivity Plans.
Charge Related to the Transaction with Tingyi
In the first quarter of 2016, we recorded a pre- and after-tax impairment charge of $373 million ($0.26 per share) in the AMENA segment to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value. See Note 10 to our condensed consolidated financial statements for further information.
Results of Operations – Division Review
The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Accordingly, volume growth measures exclude the 2015 results of divestitures and other structural changes, including our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015. See “Non-GAAP Measures” and “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding non-GAAP measures.
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 and divestitures,” 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. The impact of the structural change related to the deconsolidation of our Venezuelan businesses is presented separately.

34
Table of Contents    


Net Revenue

 

 

 
 
 

 

 

 
12 Weeks Ended

FLNA

QFNA

NAB
 
Latin America

ESSA

AMENA

Total
6/11/2016

$
3,564

 
$
561

 
$
5,145

 
$
1,717

 
$
2,660

 
$
1,748

 
$
15,395

6/13/2015

$
3,452

 
$
546

 
$
5,113

 
$
2,224

 
$
2,813

 
$
1,775

 
$
15,923

% Impact of:

 
 
 
 
 
 
 
 
 
 
 
 
 
Volume (a)

2
 %
 
3
 %
 
(1
)%
 
1
 %
 
2.5
 %
 
7
 %
 
2
 %
Effective net pricing (b)

1

 
—

 
2

 
7

 
1

 
(3
)
 
2

Foreign exchange translation

—

 
(0.5
)
 
—

 
(12
)
 
(9
)
 
(5
)
 
(4
)
Acquisitions and divestitures

—

 
—

 
—

 
(0.5
)
 
—

 
—

 
—

Venezuela deconsolidation (c)
 
—

 
—

 
—

 
(19
)
 
—

 
—

 
(2.5
)
Reported Growth (d)

3
 %
 
3
 %
 
1
 %
 
(23
)%
 
(5
)%
 
(1.5
)%
 
(3
)%
Net Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24 Weeks Ended
 
FLNA
 
QFNA
 
NAB
 
Latin America
 
ESSA
 
AMENA
 
Total
6/11/2016
 
$
6,982

 
$
1,178

 
$
9,506

 
$
2,759

 
$
4,019

 
$
2,813

 
$
27,257

6/13/2015
 
$
6,771

 
$
1,185

 
$
9,411

 
$
3,638

 
$
4,309

 
$
2,826

 
$
28,140

% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Volume (a)
 
2
 %
 
0.5
 %
 
—
 %
 
2
 %
 
2
 %
 
6
 %
 
2
 %
Effective net pricing (b)
 
2

 
—

 
1

 
7

 
1

 
(1
)
 
2

Foreign exchange translation
 
(0.5
)
 
(1
)
 
(0.5
)
 
(15
)
 
(9
)
 
(5
)
 
(4
)
Acquisitions and divestitures
 
—

 
—

 
—

 
(0.5
)
 
—

 
—

 
—

Venezuela deconsolidation (c)
 
—

 
—

 
—

 
(18
)
 
—

 
—

 
(2
)
Reported Growth (d)
 
3
 %
 
(1
)%
 
1
 %
 
(24
)%
 
(7
)%
 
—
 %
 
(3
)%
(a)
Excludes the impact of acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation. 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, as well as the mix of beverage volume sold by our Company-owned and franchise-owned bottlers. 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)
Represents the impact of the exclusion of the 2015 results of our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015.
(d)
Amounts may not sum due to rounding.

35
Table of Contents    


Organic Revenue Growth
Organic revenue is a non-GAAP financial measure. For further information on organic revenue see “Non-GAAP Measures.”
12 Weeks Ended 6/11/2016

FLNA

QFNA

NAB
 
Latin America

ESSA

AMENA

Total
Reported Growth

3
%
 
3
%
 
1
%
 
(23
)%
 
(5
)%
 
(1.5
)%
 
(3
)%
% Impact of:

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange translation

—

 
0.5

 
—

 
12

 
9

 
5

 
4

Acquisitions and divestitures

—

 
—

 
—

 
0.5

 
—

 
—

 
—

Venezuela deconsolidation (a)
 
—

 
—

 
—

 
19

 
—

 
—

 
2.5

Organic Growth (b)

4
%
 
3
%
 
1
%
 
9
 %
 
3
 %
 
4
 %
 
3
 %
24 Weeks Ended 6/11/2016
 
FLNA
 
QFNA
 
NAB
 
Latin America
 
ESSA
 
AMENA
 
Total
Reported Growth
 
3
%
 
(1
)%
 
1
%
 
(24
)%
 
(7
)%
 
—
 %
 
(3
)%
% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange translation
 
0.5

 
1

 
0.5

 
15

 
9

 
5

 
4

Acquisitions and divestitures
 
—

 
—

 
—

 
0.5

 
—

 
—

 
—

Venezuela deconsolidation (a)
 
—

 
—

 
—

 
18

 
—

 
—

 
2

Organic Growth (b)
 
4
%
 
—
 %
 
1.5
%
 
9
 %
 
3
 %
 
5
 %
 
3
 %
(a)
Represents the impact of the exclusion of the 2015 results of our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015.
(b)
Amounts may not sum due to rounding.

36
Table of Contents    


Frito-Lay North America  
 
12 Weeks Ended
 
%
 
 
24 Weeks Ended
 
%
 
 
6/11/2016

 
6/13/2015

 
Change
 
 
6/11/2016

 
6/13/2015

 
Change
 
Net revenue
$
3,564

 
$
3,452

 
3
 
 
$
6,982

 
$
6,771

 
3
 
Impact of foreign exchange translation
 
 
 
 
—
 
 
 
 
 
 
0.5
 
Net revenue growth, on a constant currency basis  (a)
 
 
 
 
4
(b) 
 
 
 
 
 
4
(b) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
1,083

 
$
1,007

 
8
 
 
$
2,101

 
$
1,927

 
9
 
Restructuring and impairment charges
3

 
2

 
 
 
 
(1
)
 
8

 
 
 
Operating profit excluding above item (a)
$
1,086

 
$
1,009

 
8
 
 
$
2,100

 
$
1,935

 
9
 
Impact of foreign exchange translation
 
 
 
 
—
 
 
 
 
 
 
0.5
 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
8
 
 
 
 
 
 
9
(b) 
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.

12 Weeks

Net revenue grew 3% and volume grew 2%. Net revenue growth was primarily driven by the volume growth and effective net pricing. The volume growth reflects high-single-digit growth in variety packs, mid-single-digit growth in trademark Cheetos and Fritos and double-digit growth in trademark Smartfood. These gains were partially offset by a double-digit decline in nuts and seeds.

Operating profit grew 8%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 4 percentage points to operating profit growth, primarily fuel and cooking oil. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses.

24 Weeks

Net revenue grew 3% and volume grew 2%. The net revenue growth was driven by effective net pricing and the volume growth. The volume growth reflects double-digit growth in trademark Smartfood, mid-single-digit growth in variety packs and low-single-digit growth in trademark Doritos, Cheetos and Fritos. These gains were partially offset by a low-single-digit decline in trademark Lay’s.
Operating profit grew 9%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 4.5 percentage points to operating profit growth, primarily cooking oil and fuel. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses.

37
Table of Contents    


Quaker Foods North America
 
 
12 Weeks Ended
 
%
 
 
24 Weeks Ended
 
%
 
 
6/11/2016

 
6/13/2015

 
Change
 
 
6/11/2016

 
6/13/2015

 
Change
 
Net revenue
$
561

 
$
546

 
3
 
 
$
1,178

 
$
1,185

 
(1
)
 
Impact of foreign exchange translation
 
 
 
 
0.5
 
 
 
 
 
 
1

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
3
(b) 
 
 
 
 
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
146

 
$
132

 
11
 
 
$
312

 
$
231

 
35

 
Restructuring and impairment charges
1

 
—

 
 
 
 
1

 
1

 
 
 
Operating profit excluding above item (a)
$
147

 
$
132

 
11
 
 
$
313

 
$
232

 
35

 
Impact of foreign exchange translation
 
 
 
 
—
 
 
 
 
 
 
1

 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
11
 
 
 
 
 
 
35

(b) 
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.

12 Weeks

Net revenue grew 3%, primarily reflecting volume growth of 3%. The volume growth was driven by double-digit growth in bars, mid-single-digit growth in Aunt Jemima syrup and mix and low-single-digit growth in oatmeal.

Operating profit increased 11%, reflecting lower commodity costs, which contributed 10 percentage points to operating profit growth, planned cost reductions across a number of expense categories and the volume growth. In addition, the impact of ceasing the operations of our MQD joint venture contributed 5 percentage points to operating profit growth. These impacts were partially offset by unfavorable net pricing and mix, higher advertising and marketing expenses and certain operating cost increases, including strategic initiatives.

24 Weeks

Net revenue declined 1% and volume increased 0.5%. The net revenue performance primarily reflects unfavorable foreign exchange, which negatively impacted net revenue performance by 1 percentage point. The volume growth was driven by low-single-digit growth in Aunt Jemima syrup and mix and mid-single-digit growth in bars, partially offset by a low-single-digit decline in ready-to-eat cereals and a mid-single-digit decline in regional grains.

Operating profit increased 35%, driven by the impact of recording an impairment charge in the prior year and ceasing the operations of our MQD joint venture, which contributed 34 percentage points to operating profit growth. In addition, operating profit growth reflects lower commodity costs, which contributed 7 percentage points to operating profit growth, and planned cost reductions across a number of expense categories. These impacts were partially offset by higher advertising and marketing expenses, unfavorable net pricing and mix and certain operating cost increases, including strategic initiatives.

38
Table of Contents    


North America Beverages
 
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
6/11/2016

 
6/13/2015

 
Change
 
6/11/2016

 
6/13/2015

 
Change
Net revenue
$
5,145

 
$
5,113

 
1
 
$
9,506

 
$
9,411

 
1
Impact of foreign exchange translation
 
 
 
 
—
 
 
 
 
 
0.5
Net revenue growth, on a constant currency basis (a)
 
 
 
 
1
 
 
 
 
 
1.5
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
881

 
$
833

 
6
 
$
1,366

 
$
1,286

 
6
Restructuring and impairment charges
6

 
7

 
 
 
13

 
15

 
 
Operating profit excluding above item (a)
$
887

 
$
840

 
6
 
$
1,379

 
$
1,301

 
6
Impact of foreign exchange translation
 
 
 
 
—
 
 
 
 
 
—
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
6
 
 
 
 
 
6
(a)
See “Non-GAAP Measures.”

12 Weeks

Net revenue increased 1%, primarily reflecting effective net pricing, partially offset by a decline in volume. Unfavorable foreign exchange slightly reduced net revenue growth.

Volume decreased 1%, driven by a 4% decline in carbonated soft drink (CSD) volume, partially offset by a 3% increase in non-carbonated beverage volume. The non-carbonated beverage volume increase primarily reflected a mid-single-digit increase in our overall water portfolio and a high-single-digit increase in Lipton ready-to-drink teas, partially offset by a low-single-digit decline in Gatorade sports drinks.

Operating profit increased 6%, primarily reflecting the effective net pricing and planned cost reductions across a number of expense categories, as well as lower commodity costs which contributed 5.5 percentage points to operating profit growth. These impacts were partially offset by certain operating cost increases and the volume decline. Favorable settlements of promotional spending accruals compared to the prior year and certain insurance adjustments contributed 3 percentage points and 1 percentage point, respectively, to operating profit growth.

24 Weeks

Net revenue increased 1%, primarily reflecting effective net pricing. Unfavorable foreign exchange reduced net revenue growth by one-half of a percentage point.

Volume increased slightly, reflecting a 5% increase in non-carbonated beverage volume, mostly offset by a 3% decline in CSD volume. The non-carbonated beverage volume increase primarily reflected a high-single-digit increase in our overall water portfolio, a double-digit increase in Lipton ready-to-drink teas, and a low-single-digit increase in Gatorade sports drinks.

Operating profit increased 6%, primarily reflecting planned cost reductions across a number of expense categories and the net revenue growth, as well as lower commodity costs which contributed 7 percentage points to operating profit growth. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses. Favorable settlements of promotional spending accruals and certain insurance adjustments each contributed 1 percentage point to operating profit growth.

39
Table of Contents    


Latin America
 
12 Weeks Ended
 
%
 
 
24 Weeks Ended
 
%
 
 
6/11/2016

 
6/13/2015

 
Change
 
 
6/11/2016

 
6/13/2015

 
Change
 
Net revenue
$
1,717

 
$
2,224

 
(23
)
 
 
$
2,759

 
$
3,638

 
(24
)
 
Impact of foreign exchange translation
 
 
 
 
12

 
 
 
 
 
 
15

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
(10
)
(b) 
 
 
 
 
 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
242

 
$
355

 
(32
)
 
 
$
417

 
$
574

 
(27
)
 
Restructuring and impairment charges
28

 
5

 
 
 
 
28

 
6

 
 
 
Operating profit excluding above item (a)
$
270

 
$
360

 
(25
)
 
 
$
445

 
$
580

 
(23
)
 
Impact of foreign exchange translation
 
 
 
 
13

 
 
 
 
 
 
17

 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
(12
)
 
 
 
 
 
 
(7
)
(b) 
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.

12 Weeks

Net revenue decreased 23%, reflecting the impact of the deconsolidation of our Venezuelan businesses, effective as of the end of the third quarter of 2015, and unfavorable foreign exchange, which negatively impacted net revenue performance by 19 percentage points and 12 percentage points, respectively. These impacts were partially offset by effective net pricing and net volume growth.

Snacks volume grew 2%, reflecting a mid-single-digit increase in Mexico, partially offset by a mid-single-digit decline in Brazil.

Beverage volume decreased 2%, reflecting a double-digit decline in Argentina and a low-single-digit decline in Mexico, partially offset by a high-single-digit increase in Guatemala and low-single-digit increases in Brazil and Honduras.

Operating profit decreased 32%, reflecting certain operating cost increases, as well as the deconsolidation of our Venezuelan businesses, which negatively impacted operating profit performance by 21 percentage points. Additionally, operating profit performance reflects higher commodity costs, which negatively impacted operating profit performance by 19 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials, driven by a strong U.S. dollar, as well as higher advertising and marketing expenses. These impacts were partially offset by the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. Unfavorable foreign exchange translation and items affecting comparability in the above table (see “Items Affecting Comparability”) negatively impacted operating profit performance by 13 percentage points and 7 percentage points, respectively.

24 Weeks

Net revenue decreased 24%, reflecting the impact of the deconsolidation of our Venezuelan businesses and unfavorable foreign exchange, which negatively impacted net revenue performance by 18 percentage points and 15 percentage points, respectively. These impacts were partially offset by effective net pricing and net volume growth.

40
Table of Contents    


Snacks volume grew 2%, reflecting a mid-single-digit increase in Mexico, partially offset by a low-single-digit decline in Brazil.

Beverage volume decreased slightly, reflecting a double-digit decline in Argentina and a low-single-digit decline in Mexico, partially offset by a mid-single-digit increase in Brazil and a high-single-digit increase in Guatemala.

Operating profit decreased 27%, reflecting certain operating cost increases, as well as higher commodity costs, which negatively impacted operating profit performance by 20 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials, driven by a strong U.S. dollar. Additionally, operating profit performance reflects the deconsolidation of our Venezuelan businesses, which negatively impacted operating profit performance by 16 percentage points. These impacts were partially offset by the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. Unfavorable foreign exchange translation and items affecting comparability in the above table negatively impacted operating profit performance by 17 percentage points and 4 percentage points, respectively.

41
Table of Contents    


Europe Sub-Saharan Africa

 
12 Weeks Ended
 
%
 
 
24 Weeks Ended
 
%
 
 
6/11/2016

 
6/13/2015

 
Change
 
 
6/11/2016

 
6/13/2015

 
Change
 
Net revenue
$
2,660

 
$
2,813

 
(5
)
 
 
$
4,019

 
$
4,309

 
(7
)
 
Impact of foreign exchange translation
 
 
 
 
9

 
 
 
 
 
 
9

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
3

(b) 
 
 
 
 
 
3

(b) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
337

 
$
350

 
(4
)
 
 
$
404

 
$
462

 
(13
)
 
Restructuring and impairment charges
8

 
7

 
 
 
 
27

 
19

 
 
 
Operating profit excluding above item (a)
$
345

 
$
357

 
(4
)
 
 
$
431

 
$
481

 
(10
)
 
Impact of foreign exchange translation
 
 
 
 
6

 
 
 
 
 
 
6

 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
2.5

(b) 
 
 
 
 
 
(5
)
(b) 
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.

12 Weeks

Net revenue decreased 5%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 9 percentage points. The net revenue decline was partially offset by volume growth and effective net pricing.

Snacks volume grew 3%, primarily reflecting mid-single-digit growth in Turkey and Spain and low-single-digit growth in the Netherlands, partially offset by low-single-digit declines in Russia and the United Kingdom. Additionally, South Africa experienced low-single-digit growth.

Beverage volume grew 4%, primarily reflecting double-digit growth in Nigeria and high-single-digit growth in the United Kingdom and Poland, partially offset by a low-single-digit decline in Russia. Additionally, France experienced slight growth and Germany and Turkey experienced low-single-digit growth.

Operating profit decreased 4%, reflecting higher commodity costs, which negatively impacted operating profit performance by 16 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials led by a strong U.S. dollar. Additionally, operating profit performance was negatively impacted by certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by planned cost reductions across a number of expense categories, the volume growth and the effective net pricing. Additionally, unfavorable foreign exchange translation negatively impacted operating profit performance by 6 percentage points.

24 Weeks

Net revenue decreased 7%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 9 percentage points. The net revenue decline was partially offset by volume growth and effective net pricing.

Snacks volume grew 2%, primarily reflecting mid-single-digit growth in Turkey and low-single-digit growth in Spain and the Netherlands, partially offset by low-single-digit declines in Russia and the United Kingdom. Additionally, South Africa experienced slight growth.

42
Table of Contents    



Beverage volume grew 3%, primarily reflecting double-digit growth in Nigeria, high-single-digit growth in the United Kingdom and mid-single-digit growth in Poland, partially offset by a low-single-digit decline in Russia. Additionally, Germany, Turkey and France experienced low-single-digit growth.

Operating profit decreased 13%, reflecting higher commodity costs, which negatively impacted operating profit performance by 20 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials led by a strong U.S. dollar. Additionally, operating profit performance was negatively impacted by certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by planned cost reductions across a number of expense categories, the volume growth and the effective net pricing. Additionally, unfavorable foreign exchange translation and items affecting comparability in the above table (see “Items Affecting Comparability”) negatively impacted operating profit performance by 6 percentage points and 2 percentage points, respectively.

43
Table of Contents    


Asia, Middle East and North Africa 

 
12 Weeks Ended
 
%
 
 
24 Weeks Ended
 
%
 
 
6/11/2016

 
6/13/2015

 
Change
 
 
6/11/2016

 
6/13/2015

 
Change
 
Net revenue
$
1,748

 
$
1,775

 
(1.5
)
 
 
$
2,813

 
$
2,826

 
—

 
Impact of foreign exchange translation
 
 
 
 
5

 
 
 
 
 
 
5

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
4

(b) 
 
 
 
 
 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
383

 
$
373

 
3

 
 
$
235

 
$
603

 
(61
)
 
Restructuring and impairment charges
2

 
3

 
 
 
 
7

 
5

 
 
 
Charge related to the transaction with Tingyi
—

 
—

 
 
 
 
373

 
—

 
 
 
Operating profit excluding above items (a)
$
385

 
$
376

 
3

 
 
$
615

 
$
608

 
1

 
Impact of foreign exchange translation
 
 
 
 
4

 
 
 
 
 
 
3

 
Operating profit growth excluding above items, on a constant currency basis (a)
 
 
 
 
7

 
 
 
 
 
 
4.5

(b) 
(a)
See “Non-GAAP Measures.”
(b)
Does not sum due to rounding.

12 Weeks

Net revenue decreased 1.5%, reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 5 percentage points, as well as unfavorable net pricing. These impacts were partially offset by volume growth.

Snack volume grew 4%, reflecting double-digit growth in China, high-single-digit growth in Australia and mid-single-digit growth in Pakistan, partially offset by a low-single-digit decline in India. Additionally, the Middle East experienced low-single-digit growth.

Beverage volume grew 5%, driven by double-digit growth in India, Pakistan and the Philippines and mid-single-digit growth in the Middle East, partially offset by a high-single-digit decline in China.

Operating profit increased 3%, reflecting the volume growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 3 percentage points to operating profit growth. These impacts were partially offset by the unfavorable net pricing, certain operating cost increases, including strategic initiatives, and higher advertising and marketing expenses. Unfavorable foreign exchange reduced operating profit growth by 4 percentage points.

24 Weeks

Net revenue declined slightly, reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 5 percentage points, as well as unfavorable net pricing. These impacts were partially offset by volume growth.

Snack volume grew 4.5%, reflecting double-digit growth in China and mid-single-digit growth in the Middle East, partially offset by a low-single-digit decline in India. Additionally, Australia experienced mid-single-digit growth.

44
Table of Contents    


Beverage volume grew 5%, driven by double-digit growth in India, Pakistan and the Philippines, partially offset by a mid-single-digit decline in China. Additionally, the Middle East experienced mid-single-digit growth.

Operating profit decreased 61%, primarily reflecting an impairment charge to reduce our investment in TAB to its estimated fair value, reflected in items affecting comparability in the above table (see “Items Affecting Comparability”). Excluding the items affecting comparability, operating profit increased 1%, primarily reflecting the volume growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which positively contributed 3 percentage points to operating profit performance. These impacts were partially offset by certain operating cost increases, as well as the impact of a gain in the prior year from the refranchising of a portion of our beverage business in India, which negatively impacted operating profit performance by 6 percentage points. In addition, operating profit performance was negatively impacted by higher advertising and marketing expenses and the unfavorable net pricing. Unfavorable foreign exchange negatively impacted operating profit performance by 3 percentage points.

45
Table of Contents    


Our Liquidity and Capital Resources
We believe that our cash generating capability and financial condition, together with our revolving credit facilities and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs. Our primary sources of cash available to fund cash outflows, such as our anticipated share repurchases, dividend payments and scheduled debt maturities, include cash from operations and proceeds obtained from issuances of commercial paper and long-term debt. However, there can be no assurance that volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us, or at all. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
As of June 11, 2016, we had cash, cash equivalents and short-term investments in our consolidated subsidiaries of $12.6 billion outside the U.S. As of June 11, 2016, cash, cash equivalents and short-term investments in our consolidated subsidiaries subject to currency controls or currency exchange restrictions were not material. To the extent foreign earnings are repatriated, such amounts would be subject to certain tax liabilities, both in the U.S. and in various applicable foreign jurisdictions.
Operating Activities
During the 24 weeks in 2016, net cash provided by operating activities was $2.9 billion, compared to $2.8 billion in the prior-year period, primarily reflecting favorable working capital comparisons (comprised of changes in accounts and notes receivable, inventories, prepaid expenses and other current assets, and accounts payable and other current liabilities, each adjusted for the effects of currency translation) to the prior year.
Investing Activities
During the 24 weeks in 2016, net cash used for investing activities was $1.6 billion, primarily reflecting net capital spending of $0.9 billion and net purchases of debt securities greater than three months of $0.8 billion. See Note 10 to our condensed consolidated financial statements for further discussion of our investments in debt securities.
We expect 2016 net capital spending to be approximately $3 billion, within our long-term capital spending target of less than or equal to 5% of net revenue.
Financing Activities
During the 24 weeks in 2016, net cash used for financing activities was $0.8 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $3.4 billion, and net payments from long-term debt borrowings of $0.6 billion, partially offset by net proceeds from short-term borrowings of $2.8 billion and proceeds from exercises of stock options of $0.3 billion.
We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 11, 2015, we announced a new share repurchase program providing for the repurchase of up to $12.0 billion of PepsiCo common stock commencing from July 1, 2015 and expiring on June 30, 2018. In addition, on February 11, 2016, we announced a 7.1% increase in our annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend paid in June 2016. We expect to return a total of $7 billion to shareholders in 2016 through share repurchases of approximately $3 billion and dividends of approximately $4 billion. See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a description of our share repurchase program.

46
Table of Contents    


Free Cash Flow
Free cash flow is a non-GAAP financial measure. For further information on free cash flow see “Non-GAAP Measures.”
The table below reconciles net cash provided by operating activities, as reflected in our cash flow statement, to our free cash flow.  
 
24 Weeks Ended

%
 
6/11/2016


6/13/2015


Change
Net cash provided by operating activities
$
2,921


$
2,761


6
Capital spending
(919
)

(832
)


Sales of property, plant and equipment
47


26



Free cash flow (a)
$
2,049


$
1,955


5
(a)
See “Non-GAAP Measures.” In addition, when evaluating free cash flow, we also consider the following items impacting comparability: $7 million in discretionary pension contributions in the 24 weeks ended June 11, 2016; $67 million and $110 million of payments related to restructuring charges in the 24 weeks ended June 11, 2016 and June 13, 2015, respectively; and net cash tax benefits related to restructuring charges of $3 million and $5 million in the 24 weeks ended June 11, 2016 and June 13, 2015, respectively.
Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases while maintaining Tier 1 commercial paper access, which we believe will ensure appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, for certain factors that may impact our credit ratings or our operating cash flows.
Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether or not as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, and Note 8 to our condensed consolidated financial statements.

47
Table of Contents    


Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
PepsiCo, Inc.:
We have reviewed the accompanying Condensed Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of June 11, 2016, the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and twenty-four weeks ended June 11, 2016 and June 13, 2015, and the related Condensed Consolidated Statements of Cash Flows and Equity for the twenty-four weeks ended June 11, 2016 and June 13, 2015. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 26, 2015, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the fiscal year then ended not presented herein; and in our report dated February 11, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of December 26, 2015, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.

/s/ KPMG LLP

New York, New York
July 7, 2016

48
Table of Contents    


ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” and Note 10 to our condensed consolidated financial statements. In addition, see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
ITEM 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During our second fiscal quarter of 2016, we continued migrating certain of our financial processing systems to an enterprise-wide systems solution. These systems implementations are part of our ongoing global business transformation initiative, and we plan to continue implementing such systems throughout other parts of our businesses over the course of the next few years. In connection with these implementations and resulting business process changes, we continue to enhance the design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting.
Except as described above, there were no changes in our internal control over financial reporting during our second fiscal quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

49
Table of Contents    


PART II OTHER INFORMATION

ITEM 1. Legal Proceedings.
The following information should be read in conjunction with the discussion set forth under Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 19, 2016.
We and our subsidiaries are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. Management believes that the final outcome of the foregoing will not have a material adverse effect on our financial condition, results of operations or cash flows. See also “Item 1. Business – Regulatory Environment and Environmental Compliance” and, under “Item 1A. Risk Factors,” “Changes in, or failure to comply with, laws and regulations applicable to our products or our business operations could adversely affect our business, financial condition or results of operations.”, “Imposition of new taxes, disagreements with tax authorities or additional tax liabilities could adversely affect our business, financial condition or results of operations.”, “Our business, financial condition or results of operations could be adversely affected if we are unable to grow our business in developing and emerging markets or as a result of unstable political conditions, civil unrest or other developments and risks in the markets where our products are made, manufactured, distributed or sold.”, “Climate change or water scarcity, or legal, regulatory or market measures to address climate change or water scarcity, may negatively affect our business and operations or damage our reputation.” and “Potential liabilities and costs from litigation or legal proceedings could have an adverse impact on our business, financial condition or results of operations.” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
ITEM 1A. Risk Factors.
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.

50
Table of Contents    


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

A summary of our common stock repurchases (in millions, except average price per share) during the second quarter of 2016 is set forth in the table below.

Issuer Purchases of Common Stock
 
Period
 
Total
Number of
Shares
Repurchased (a)
 
Average Price
Paid Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Shares That May
Yet Be
Purchased
Under the Plans
or Programs
3/19/2016
 









$
9,688

 
 
 
 
 
 
 
 

3/20/2016 - 4/16/2016
 
2.4


$
102.78


2.4


(243
)
 
 
 
 
 
 
 
 
9,445

4/17/2016 - 5/14/2016
 
2.1


$
104.08


2.1


(214
)
 
 
 
 
 
 
 
 
9,231

5/15/2016 - 6/11/2016
 
2.4


$
101.88


2.4


(248
)
Total
 
6.9


$
102.85


6.9


$
8,983

(a)
All shares were repurchased in open market transactions pursuant to the $12 billion repurchase program authorized by our Board of Directors and publicly announced on February 11, 2015, which commenced on July 1, 2015 and expires on June 30, 2018. Such shares may be repurchased in open market transactions, in privately negotiated transactions, in accelerated stock repurchase transactions or otherwise.


51
Table of Contents    


In connection with our merger with The Quaker Oats Company (Quaker) in 2001, shares of our convertible preferred stock were authorized and issued to an ESOP fund established by Quaker. The preferences, limitations and relative rights of the shares of convertible preferred stock are set forth in Exhibit A to our amended and restated articles of incorporation. Quaker made the final award to the ESOP in June 2001. The Company does not have any authorized, but unissued, “blank check preferred stock.” PepsiCo repurchases shares of its convertible preferred stock from the ESOP in connection with share redemptions by ESOP participants.
The following table summarizes our convertible preferred share repurchases during the second quarter of 2016.
Issuer Purchases of Convertible Preferred Stock 
Period
 
Total
Number of
Shares
Repurchased
 
Average Price
Paid per Share
 
Total Number 
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Shares That May
Yet Be
Purchased
Under the Plans
or Programs
3/20/2016 - 4/16/2016
 
1,000

 
$
517.59

 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
4/17/2016 - 5/14/2016
 
—

 
$
—

 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
5/15/2016 - 6/11/2016
 
1,000

 
$
512.67

 
N/A
 
N/A
Total
 
2,000

 
$
515.13

 
N/A
 
N/A
ITEM 6. Exhibits.
See “Index to Exhibits” on page 54.

52
Table of Contents    


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
            PepsiCo, Inc.    
 
 
 
(Registrant)
 
 
 
 
 
Date:
July 7, 2016
/s/ Marie T. Gallagher                        
 
 
 
Marie T. Gallagher
 
 
 
Senior Vice President and Controller
 
 
 
 
 
Date:
July 7, 2016
/s/ Tony West                       
 
 
 
Tony West
 
 
 
Executive Vice President, Government Affairs, General Counsel and Corporate Secretary
 
 
 
(Duly Authorized Officer)
 

53
Table of Contents    


INDEX TO EXHIBITS
ITEM 6
EXHIBITS
 
Exhibit 3.1
Articles of Incorporation of PepsiCo, Inc., as amended and restated, effective as of May 9, 2011, which are incorporated herein by reference to Exhibit 3.1 to PepsiCo, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2011.
Exhibit 3.2
By-Laws of PepsiCo, Inc., as amended and restated, effective as of January 11, 2016, which are incorporated herein by reference to Exhibit 3.2 to PepsiCo, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2016.
Exhibit 10.1
PepsiCo, Inc. Long-Term Incentive Plan (as amended and restated May 4, 2016), which is incorporated herein by reference to Exhibit B to PepsiCo’s Proxy Statement for its 2016 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on March 18, 2016.

Exhibit 10.2
Five-Year Credit Agreement, dated as of June 6, 2016, among PepsiCo, Inc., as borrower, the lenders named therein, and Citibank, N.A., as administrative agent, which is incorporated herein by reference to Exhibit 10.1 to PepsiCo, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2016.
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges.
Exhibit 15
Letter re: Unaudited Interim Financial Information.
Exhibit 31
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101
The following materials from PepsiCo, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 11, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Statement of Cash Flows, (iv) the Condensed Consolidated Balance Sheet, (v) the Condensed Consolidated Statement of Equity, and (vi) Notes to the Condensed Consolidated Financial Statements.

54