10-Q
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 March 19, 2016 (12 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 April 8, 2016 was 1,444,417,034.

Table of Contents    


PepsiCo, Inc. and Subsidiaries

Table of Contents
Part I Financial Information
Page No.
Item 1.
Condensed Consolidated Financial Statements
 
Condensed Consolidated Statement of Income –
   12 Weeks Ended March 19, 2016 and March 21, 2015
 
Condensed Consolidated Statement of Comprehensive Income –
12 Weeks Ended March 19, 2016 and March 21, 2015
 
Condensed Consolidated Statement of Cash Flows –
12 Weeks Ended March 19, 2016 and March 21, 2015
 
Condensed Consolidated Balance Sheet –
March 19, 2016 and December 26, 2015
 
Condensed Consolidated Statement of Equity –
12 Weeks Ended March 19, 2016 and March 21, 2015
 
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
 
3/19/2016

 
3/21/2015

Net Revenue
$
11,862

 
$
12,217

Cost of sales
5,151

 
5,503

Gross profit
6,711

 
6,714

Selling, general and administrative expenses
5,078

 
4,901

Amortization of intangible assets
14

 
16

Operating Profit
1,619

 
1,797

Interest expense
(246
)
 
(211
)
Interest income and other
14

 
15

Income before income taxes
1,387

 
1,601

Provision for income taxes
442

 
370

Net income
945

 
1,231

Less: Net income attributable to noncontrolling interests
14

 
10

Net Income Attributable to PepsiCo
$
931

 
$
1,221

Net Income Attributable to PepsiCo per Common Share
 
 

Basic
$
0.64

 
$
0.82

Diluted
$
0.64

 
$
0.81

Weighted-average common shares outstanding
 
 
 
Basic
1,446

 
1,484

Diluted
1,459

 
1,503

Cash dividends declared per common share
$
0.7025

 
$
0.655

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 3/19/2016
 
Pre-tax amounts

Tax amounts

After-tax amounts
Net income


 


 
$
945

Other comprehensive loss
 
 
 
 
 
Currency translation adjustment
$
(220
)
 
$
—

 
(220
)
Cash flow hedges:
 
 
 
 
 
Reclassification of net gains to net income
(21
)
 
5

 
(16
)
Net derivative losses
—

 
(1
)
 
(1
)
Pension and retiree medical:
 
 
 
 
 
Reclassification of net losses to net income
37

 
(12
)
 
25

Remeasurement of net liabilities and translation
15

 
(48
)
 
(33
)
Unrealized losses on securities
(12
)
 
7

 
(5
)
Total other comprehensive loss
$
(201
)
 
$
(49
)
 
(250
)
Comprehensive income
 
 
 
 
695

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(14
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
681

 
12 Weeks Ended 3/21/2015
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
1,231

Other comprehensive loss
 
 
 
 
 
Currency translation adjustment
$
(981
)
 
$
—

 
(981
)
Cash flow hedges:
 
 
 
 
 
Reclassification of net losses to net income
179

 
(70
)
 
109

Net derivative losses
(155
)
 
64

 
(91
)
Pension and retiree medical:
 
 
 
 
 
Reclassification of net losses to net income
51

 
(17
)
 
34

Remeasurement of net liabilities and translation
31

 
(7
)
 
24

Unrealized gains on securities
16

 
(8
)
 
8

Total other comprehensive loss
$
(859
)
 
$
(38
)
 
(897
)
Comprehensive income
 
 
 
 
334

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(10
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
324

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)
 
12 Weeks Ended
 
3/19/2016

 
3/21/2015

Operating Activities
 
 
 
Net income
$
945

 
$
1,231

Depreciation and amortization
481

 
496

Share-based compensation expense
69

 
76

Restructuring and impairment charges
30

 
36

Cash payments for restructuring charges
(30
)
 
(47
)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp.(Tingyi)
373

 
—

Excess tax benefits from share-based payment arrangements
(75
)
 
(38
)
Pension and retiree medical plan expenses
60

 
104

Pension and retiree medical plan contributions
(93
)
 
(83
)
Deferred income taxes and other tax charges and credits
19

 
(19
)
Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(349
)
 
(435
)
Inventories
(530
)
 
(414
)
Prepaid expenses and other current assets
(255
)
 
(262
)
Accounts payable and other current liabilities
(661
)
 
(689
)
Income taxes payable
318

 
294

Other, net
(171
)
 
20

Net Cash Provided by Operating Activities
131

 
270

 
 
 
 
Investing Activities
 
 
 
Capital spending
(389
)
 
(270
)
Sales of property, plant and equipment
25

 
11

Acquisitions and investments in noncontrolled affiliates
—

 
(9
)
Divestitures
55

 
68

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(2,556
)
 
(647
)
More than three months - maturities
1,446

 
1,164

Three months or less, net
7

 
3

Net Cash (Used for)/Provided by Investing Activities
(1,412
)
 
320

 

(Continued on following page)

5
Table of Contents    


Condensed Consolidated Statement of Cash Flows (continued)
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/19/2016

 
3/21/2015

Financing Activities
 
 
 
Proceeds from issuances of long-term debt
$
2,532

 
$
—

Payments of long-term debt
(1,251
)
 
(2,052
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
—

 
10

More than three months - payments
(9
)
 
(2
)
Three months or less, net
480

 
3,729

Cash dividends paid
(1,038
)
 
(978
)
Share repurchases - common
(619
)
 
(1,124
)
Share repurchases - preferred
(2
)
 
(1
)
Proceeds from exercises of stock options
165

 
171

Excess tax benefits from share-based payment arrangements
75

 
38

Other financing
(2
)
 
(1
)
Net Cash Provided by/(Used for) Financing Activities
331

 
(210
)
Effect of exchange rate changes on cash and cash equivalents
(22
)
 
(104
)
Net (Decrease)/Increase in Cash and Cash Equivalents
(972
)
 
276

Cash and Cash Equivalents, Beginning of Year
9,096

 
6,134

Cash and Cash Equivalents, End of Period
$
8,124

 
$
6,410

See accompanying notes to the condensed consolidated financial statements.


6
Table of Contents    


Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions)
 
(Unaudited)
 
 
 
3/19/2016

 
12/26/2015

Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
8,124

 
$
9,096

Short-term investments
4,020

 
2,913

Accounts and notes receivable, less allowance: 3/16 - $136 and 12/15 - $130
6,707

 
6,437

Inventories:
 
 
 
Raw materials
1,418

 
1,312

Work-in-process
277

 
161

Finished goods
1,524

 
1,247

 
3,219

 
2,720

Prepaid expenses and other current assets
1,896

 
1,865

Total Current Assets
23,966

 
23,031

Property, Plant and Equipment
35,664

 
35,747

Accumulated Depreciation
(19,559
)
 
(19,430
)
 
16,105

 
16,317

Amortizable Intangible Assets, net
1,266

 
1,270

Goodwill
14,132

 
14,177

Other Nonamortizable Intangible Assets
11,783

 
11,811

Nonamortizable Intangible Assets
25,915

 
25,988

Investments in Noncontrolled Affiliates
1,935

 
2,311

Other Assets
832

 
750

Total Assets
$
70,019

 
$
69,667


 
(Continued on following page)

7
Table of Contents    


Condensed Consolidated Balance Sheet (continued)
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)
 
 
 
3/19/2016

 
12/26/2015

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
4,018

 
$
4,071

Accounts payable and other current liabilities
12,824

 
13,507

Total Current Liabilities
16,842

 
17,578

Long-term Debt Obligations
31,068

 
29,213

Other Liabilities
5,811

 
5,887

Deferred Income Taxes
5,067

 
4,959

Total Liabilities
58,788

 
57,637

Commitments and Contingencies
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(187
)
 
(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: 1,446 and 1,448 shares, respectively)
24

 
24

Capital in excess of par value
3,906

 
4,076

Retained earnings
50,383

 
50,472

Accumulated other comprehensive loss
(13,569
)
 
(13,319
)
Repurchased common stock, in excess of par value (420 and 418 shares, respectively)
(29,487
)
 
(29,185
)
Total PepsiCo Common Shareholders’ Equity
11,257

 
12,068

Noncontrolling interests
120

 
107

Total Equity
11,231

 
12,030

Total Liabilities and Equity
$
70,019

 
$
69,667


See accompanying notes to the condensed consolidated financial statements.


8
Table of Contents    


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/19/2016
 
3/21/2015
 
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
—

 
(1
)
 
—

 
(1
)
Balance, end of period
(0.7
)
 
(187
)
 
(0.7
)
 
(182
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,448

 
24

 
1,488

 
25

Repurchased common stock
(2
)
 
—

 
(9
)
 
—

Balance, end of period
1,446

 
24

 
1,479

 
25

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

 
 
 
4,115

Share-based compensation expense
 
 
70

 
 
 
76

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(139
)
 
 
 
(36
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(99
)
 
 
 
(22
)
Other
 
 
(2
)
 
 
 
(4
)
Balance, end of period
 
 
3,906

 
 
 
4,129

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
50,472

 
 
 
49,092

Net income attributable to PepsiCo
 
 
931

 
 
 
1,221

Cash dividends declared – common
 
 
(1,020
)
 
 
 
(978
)
Balance, end of period
 
 
50,383

 
 
 
49,335

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,319
)
 
 
 
(10,669
)
Other comprehensive loss attributable to PepsiCo
 
 
(250
)
 
 
 
(897
)
Balance, end of period
 
 
(13,569
)
 
 
 
(11,566
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(418
)
 
(29,185
)
 
(378
)
 
(24,985
)
Share repurchases
(7
)
 
(664
)
 
(12
)
 
(1,166
)
Stock option exercises, RSUs, PSUs and PEPunits converted
5

 
360

 
3

 
235

Other
—

 
2

 
—

 
3

Balance, end of period
(420
)
 
(29,487
)
 
(387
)
 
(25,913
)
Total PepsiCo Common Shareholders’ Equity
 
 
11,257

 
 
 
16,010

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
107

 
 
 
110

Net income attributable to noncontrolling interests
 
 
14

 
 
 
10

Other, net
 
 
(1
)
 
 
 
—

Balance, end of period
 
 
120

 
 
 
120

Total Equity
 
 
$
11,231

 
 
 
$
15,989

(a)
Includes total tax benefits of $53 million in 2016 and $29 million in 2015.
See accompanying notes to the condensed consolidated financial statements.

9
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 March 19, 2016 and Condensed Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the 12 weeks ended March 19, 2016 and March 21, 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 weeks ended March 19, 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 results in the United States and Canada (North America) are reported on a 12-week basis, the majority of our international operations report on a monthly calendar basis for which the months of January and February are reflected in our first 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. These reclassifications resulted in an increase in cost of sales of $61 million in the quarter ended March 21, 2015, with a corresponding reduction to gross profit and selling, general and administrative expenses in the same period. 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.

10
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/(loss) of each division are as follows:
 
12 Weeks Ended
 
Net Revenue
 
Operating Profit/(Loss)
 
3/19/2016


3/21/2015

 
3/19/2016

 
3/21/2015

FLNA
$
3,418

 
$
3,319

 
$
1,018

 
$
920

QFNA (a)
617

 
639

 
166

 
99

NAB
4,361

 
4,298

 
485

 
453

Latin America (b)
1,042

 
1,414

 
175

 
219

ESSA
1,359

 
1,496

 
67

 
112

AMENA (c)
1,065

 
1,051

 
(148
)
 
230

Total division
11,862

 
12,217

 
1,763

 
2,033

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net gains/(losses)
 
 
 
 
46

 
(1
)
Restructuring and impairment charges
 
 
 
 
(3
)
 
(6
)
Other
 
 
 
 
(187
)
 
(229
)
 
$
11,862

 
$
12,217

 
$
1,619

 
$
1,797

(a)
Operating profit for QFNA for the 12 weeks ended March 21, 2015 includes a pre-tax impairment charge of $65 million associated with our Müller Quaker Dairy (MQD) joint venture investment.
(b)
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.
(c)
Operating loss for AMENA for the 12 weeks ended March 19, 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 12 weeks ended March 21, 2015 includes a pre-tax gain of $39 million associated with refranchising a portion of our bottling operations in India.

11
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Total assets of each division are as follows:
 
Total Assets
 
3/19/2016


12/26/2015

FLNA
$
5,441

 
$
5,375

QFNA
868

 
872

NAB
29,002

 
28,128

Latin America
4,237

 
4,284

ESSA
11,764

 
12,225

AMENA
5,526

 
5,901

Total division
56,838

 
56,785

Corporate (a)
13,181

 
12,882


$
70,019

 
$
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 accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. 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 investment becomes qualified for equity method accounting. 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 evaluating the timing of adoption of this guidance.
In 2016, the FASB issued guidance that primarily 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.
In 2016, the FASB issued guidance that generally requires companies to measure investments in other entities, except those accounted for under the equity method, 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 evaluating the timing of adoption of this guidance.

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In 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or 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 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 new 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. We have 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 to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. 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
 
3/19/2016

 
3/21/2015

2014 Productivity Plan
$
30

 
$
30

2012 Productivity Plan
—

 
6

Total restructuring and impairment charges
30

 
36

Other productivity initiatives
1

 
—

Total restructuring and impairment charges and other productivity initiatives
$
31

 
$
36

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.
In the 12 weeks ended March 19, 2016 and March 21, 2015, we incurred restructuring charges of $30 million ($25 million after-tax or $0.02 per share) and $30 million ($24 million after-tax or $0.02 per share), respectively, in conjunction with our 2014 Productivity Plan. 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 March 19, 2016 is expected to be paid by the end of 2016.

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A summary of our 2014 Productivity Plan charges is as follows:
 
 
12 Weeks Ended
 
 
3/19/2016

 
3/21/2015

FLNA (a)
 
$
(4
)
 
$
6

QFNA
 
—

 
1

NAB
 
7

 
7

Latin America
 
—

 
1

ESSA
 
19

 
9

AMENA
 
5

 
2

Corporate
 
3

 
4

 
 
$
30

 
$
30

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
A summary of our 2014 Productivity Plan activity in 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
8

 
11

 
11

 
30

Cash payments
(9
)
 
—

 
(13
)
 
(22
)
Non-cash charges and translation
2

 
(11
)
 
—

 
(9
)
Liability as of March 19, 2016
$
62

 
$
—

 
$
18

 
$
80

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 March 21, 2015, we incurred restructuring charges of $6 million ($5 million after-tax with a nominal amount per share) in conjunction with our 2012 Productivity Plan, including $1 million in NAB, $3 million in ESSA and $2 million in Corporate. Cash payments in the 12 weeks ended March 19, 2016 were $8 million. 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. We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual of $28 million at March 19, 2016 is expected to be paid by the end of 2016.

14
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Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
3/19/2016
 
12/26/2015
Amortizable intangible assets, net
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
833

 
$
(97
)
 
$
736

 
$
820

 
$
(92
)
 
$
728

Reacquired franchise rights
 
106

 
(100
)
 
6

 
105

 
(99
)
 
6

Brands
 
1,296

 
(990
)
 
306

 
1,298

 
(987
)
 
311

Other identifiable intangibles
 
521

 
(303
)
 
218

 
526

 
(301
)
 
225

 
 
$
2,756

 
$
(1,490
)
 
$
1,266

 
$
2,749

 
$
(1,479
)
 
$
1,270


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

12/26/2015
 
 
3/19/2016
FLNA

 

 

Goodwill
$
267

 
$
8

 
$
275

Brands
22

 
2

 
24


289

 
10

 
299

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 
—

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,754

 
31

 
9,785

Reacquired franchise rights
7,042

 
51

 
7,093

Acquired franchise rights
1,507

 
10

 
1,517

Brands
108

 
—

 
108


18,411

 
92

 
18,503

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
521

 
(10
)
 
511

Brands
137

 
(4
)
 
133


658

 
(14
)
 
644

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,042

 
(64
)
 
2,978

Reacquired franchise rights
488

 
(8
)
 
480

Acquired franchise rights
190

 
—

 
190

Brands
2,212

 
(76
)
 
2,136


5,932

 
(148
)
 
5,784

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
418

 
(10
)
 
408

Brands
105

 
(3
)
 
102


523

 
(13
)
 
510

 
 
 
 
 
 
Total goodwill
14,177

 
(45
)
 
14,132

Total reacquired franchise rights
7,530

 
43

 
7,573

Total acquired franchise rights
1,697

 
10

 
1,707

Total brands
2,584

 
(81
)
 
2,503


$
25,988

 
$
(73
)
 
$
25,915


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Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
3/19/2016

 
12/26/2015

Balance, beginning of year
$
1,547

 
$
1,587

Additions for tax positions related to the current year
40

 
248

Additions for tax positions from prior years
6

 
122

Reductions for tax positions from prior years
(33
)
 
(261
)
Settlement payments
(3
)
 
(78
)
Statutes of limitations expiration
(14
)
 
(34
)
Translation and other
(7
)
 
(37
)
Balance, end of period
$
1,536

 
$
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
 
 
3/19/2016

 
3/21/2015

Share-based compensation expense - equity awards
 
$
69

 
$
76

Share-based compensation expense - liability awards
 
2

 
—

Restructuring and impairment charges
 
1

 
—

Total
 
$
72

 
$
76

The following table summarizes share-based awards granted under the terms of our 2007 Long-Term Incentive Plan:
 
 
12 Weeks Ended
 
 
3/19/2016
 
3/21/2015
 
 
Granted (a)
 
Weighted-Average Grant Price
 
Granted (a)
 
Weighted-Average Grant Price
Stock options
 
1.5

 
$
98.75

 
1.6

 
$
99.25

Restricted stock units (RSUs) and Performance stock units (PSUs)
 
2.9

 
$
98.74

 
2.6

 
$
99.25

PepsiCo equity performance units (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 $16 million during the 12 weeks ended March 19, 2016.

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Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
12 Weeks Ended
 
3/19/2016

 
3/21/2015

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 first quarter of 2016 was $28 million ($18 million after-tax or $0.01 per share). 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
 
3/19/2016


3/21/2015


3/19/2016


3/21/2015


3/19/2016


3/21/2015

 
U.S.

International

 
Service cost
$
91


$
101


$
15


$
19


$
7


$
8

Interest cost
111


126


18


22


9


12

Expected return on plan assets
(192
)

(196
)

(31
)

(33
)

(5
)

(6
)
Amortization of prior service credit
—


(1
)

—


—


(9
)

(9
)
Amortization of net loss
38


47


8


14


—


—


48


77


10


22


2


5

Special termination benefits
—


4


—


—


—


1

Total expense
$
48


$
81


$
10


$
22


$
2


$
6

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.
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.

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The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper.

In the 12 weeks ended March 19, 2016, $1.3 billion of senior notes matured and were paid.
As of March 19, 2016, we had $1.2 billion of commercial paper outstanding and $2.6 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
 
 
 
 
3/19/2016

 
3/21/2015

 
Affected Line Item in the Condensed Consolidated Statement of Income
(Gains)/Losses on cash flow hedges:
 
 
 
 
 
 
    Foreign exchange contracts
 
$
(21
)
 
$
(22
)
 
Cost of sales
    Interest rate derivatives
 
(3
)
 
193

 
Interest expense
    Commodity contracts
 
1

 
5

 
Cost of sales
    Commodity contracts
 
2

 
3

 
Selling, general and administrative expenses
    Net (gains)/losses before tax
 
(21
)
 
179

 
 
    Tax amounts
 
5

 
(70
)
 
 
    Net (gains)/losses after tax
 
$
(16
)
 
$
109

 
 
 
 
 
 
 
 
 
Pension and retiree medical items:
 
 
 
 
 
 
    Amortization of prior service credit (a)
 
$
(9
)
 
$
(10
)
 
 
    Amortization of net losses (a)
 
46

 
61

 
 
    Net losses before tax
 
37

 
51

 
 
    Tax amounts
 
(12
)
 
(17
)
 
 
    Net losses after tax
 
$
25

 
$
34

 
 
 
 
 
 
 
 
 
Total net losses reclassified for the period, net of tax
 
$
9

 
$
143

 

(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).

19
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.

20
Table of Contents    


Our open commodity derivative contracts had a notional value of $0.9 billion as of March 19, 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 $1.9 billion as of March 19, 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 has 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 March 19, 2016 and December 26, 2015 were $11.9 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 March 19, 2016, approximately 31% of total debt, after the impact of the related interest rate derivative instruments, was exposed 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 March 19, 2016 and December 26, 2015 were not material. The pre-tax unrealized gains on our investments in marketable equity securities were $102 million and $115 million as of March 19, 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

21
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 weeks ended March 19, 2016 and March 21, 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) for the 12 weeks ended March 19, 2016 in the AMENA segment to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value. This charge was recorded in selling, general and administrative expenses in our Condensed Consolidated Statement of Income. The estimated fair value of the investment in TAB of $166 million as of March 19, 2016 was derived using both an income and market approach, and is considered a non-recurring Level 3 measurement within the fair value hierarchy. We will 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.


22
Table of Contents    


Fair Value Measurements
The fair values of our financial assets and liabilities as of March 19, 2016 and December 26, 2015 are categorized as follows:
 
3/19/2016
 
12/26/2015
 
Assets (a)
 
Liabilities (a)
 
Assets (a)
 
Liabilities (a)
Available-for-sale securities:


 


 


 


Equity securities (b)
$
113

 
$
—

 
$
127

 
$
—

Debt securities (c)
7,958

 
—

 
7,231

 
—

 
$
8,071

 
$
—

 
$
7,358

 
$
—

Short-term investments (d)
$
185

 
$
—

 
$
193

 
$
—

Prepaid forward contracts (e)
$
27

 
$
—

 
$
27

 
$
—

Deferred compensation (f)
$
—

 
$
467

 
$
—

 
$
474

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
Interest rate (g)
$
185

 
$
—

 
$
129

 
$
12

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
38

 
$
14

 
$
76

 
$
6

Interest rate (g)
—

 
295

 
—

 
311

Commodity (i)
—

 
4

 
—

 
7

 
$
38

 
$
313

 
$
76

 
$
324

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
3

 
$
29

 
$
8

 
$
10

Interest rate (g)
45

 
55

 
44

 
56

Commodity (i)
24

 
105

 
12

 
141

 
$
72

 
$
189

 
$
64

 
$
207

Total derivatives at fair value (j)
$
295

 
$
502

 
$
269

 
$
543

Total
$
8,578

 
$
969

 
$
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 March 19, 2016, $4.2 billion and $3.8 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 March 19, 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 March 19, 2016 and December 26, 2015 were immaterial. Collateral received against any of our asset positions was immaterial.

23
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 March 19, 2016 and December 26, 2015 was $37 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)

3/19/2016


3/21/2015


3/19/2016


3/21/2015


3/19/2016


3/21/2015

Foreign exchange
$
33


$
(8
)

$
16


$
(41
)

$
(21
)

$
(22
)
Interest rate
(69
)

(23
)

(16
)

194


(3
)

193

Commodity
4


54


—


2


3


8

Total
$
(32
)

$
23


$
—


$
155


$
(21
)

$
179

(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 gains of $3 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.
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
 
3/19/2016

3/21/2015
 
Income

Shares (a)

Income

Shares (a)
Net income attributable to PepsiCo
$
931




$
1,221



Preferred shares:







Redemption premium
(1
)



(1
)


Net income available for PepsiCo common shareholders
$
930


1,446


$
1,220


1,484

Basic net income attributable to PepsiCo per common share
$
0.64




$
0.82



Net income available for PepsiCo common shareholders
$
930


1,446


$
1,220


1,484

Dilutive securities:







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


12


—


18

Employee stock ownership plan (ESOP) convertible preferred stock
1


1


1


1

Diluted
$
931


1,459


$
1,221


1,503

Diluted net income attributable to PepsiCo per common share
$
0.64




$
0.81



(a)
Weighted-average common shares outstanding (in millions).
(b)
For the 12 weeks ended March 19, 2016 and March 21, 2015, options to purchase 2.9 million shares and 1.6 million shares, respectively, 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 average exercise prices of $98.99 and $99.25 for the 12 weeks ended March 19, 2016 and March 21, 2015, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is 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 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

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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 beginning in 2016. The pre-tax reduction in net periodic benefit cost associated with this change in the first quarter of 2016 was $28 million ($18 million after-tax or $0.01 per share). 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 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 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; 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 stock and financial performance including those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial

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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 Quarterly Report on 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 first quarter of 2016, our operations outside of North America reflect the months of January and February. In the 12 weeks ended March 19, 2016, our operations outside of the U.S. generated 34% of our net revenue, with Mexico, Canada, Russia, the United Kingdom and Brazil comprising approximately 15% 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 the 12 weeks ended March 19, 2016, unfavorable foreign exchange negatively impacted net revenue performance by 4.5 percentage points, primarily due to the Mexican peso, Brazilian real, Russian ruble, 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. 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 12 weeks ended March 19, 2016 and March 21, 2015, total net revenue generated by our operations in Russia represented 3% of our net revenue. As of March 19, 2016, our long-lived assets in Russia were $3.5 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 first 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 the extent cash in U.S. dollars is received. We did not receive any cash in U.S. dollars from our Venezuelan entities in the first quarter of 2016. We will continue to monitor the conditions in Venezuela and their impact on our accounting and disclosure.

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See Note 10 to our condensed consolidated financial statements for a discussion of our financial instruments, including their fair values as of March 19, 2016 and March 21, 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
Items Affecting Comparability
Our reported financial results are impacted by the following items in each of the following periods: 
 
12 Weeks Ended
 
3/19/2016
 
3/21/2015
Operating profit
 
 
 
 
Mark-to-market net gains/(losses)
$
46

 
$
(1
)
Restructuring and impairment charges
$
(30
)
 
$
(36
)
Charge related to the transaction with Tingyi
$
(373
)
 
$
—

Net income attributable to PepsiCo
 
 
 
 
Mark-to-market net gains/(losses)
$
29

 
$
(1
)
Restructuring and impairment charges
$
(25
)
 
$
(29
)
Charge related to the transaction with Tingyi
$
(373
)
 
$
—

Net income attributable to PepsiCo per common share – diluted
 
 
 
 
Mark-to-market net gains/(losses)
$
0.02

 
$
(—
)
Restructuring and impairment charges
$
(0.02
)
 
$
(0.02
)
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.
In the 12 weeks ended March 19, 2016, we recognized $46 million ($29 million after-tax or $0.02 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses, with an $18 million net gain recognized in cost of sales and a $28 million net gain recognized in selling, general and administrative expenses.
In the 12 weeks ended March 21, 2015, we recognized $1 million ($1 million after-tax with a nominal amount per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses, with an $18 million net loss recognized in cost of sales and a $17 million net gain recognized in selling, general and administrative expenses.

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Restructuring and Impairment Charges
2014 Multi-Year Productivity Plan
In the 12 weeks ended March 19, 2016 and March 21, 2015, we incurred restructuring charges of $30 million ($25 million after-tax or $0.02 per share) and $30 million ($24 million after-tax or $0.02 per share), respectively, in conjunction with the 2014 Productivity Plan. See Note 3 to our condensed consolidated financial statements for further information.
We expect to incur pre-tax charges of approximately $990 million, of which approximately $705 million represents cash expenditures related to the 2014 Productivity Plan, summarized by period as follows:
 
Charges
 
Cash
Expenditures
 
2013
$
53

 
$
—

 
2014
357

 
175

(b) 
2015
169

 
165

(b) 
First quarter 2016
30

 
22

 
 
609

 
362

 
Remainder of 2016 (expected)
99

 
97

 
2017 - 2019 (expected)
282

 
246

 
 
$
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.
2012 Multi-Year Productivity Plan
In the 12 weeks ended March 21, 2015, we incurred restructuring charges of $6 million ($5 million after-tax with a nominal amount per share) in conjunction with the 2012 Productivity Plan. See Note 3 to our condensed consolidated financial statements for further information.
Charge Related to the Transaction with Tingyi
In the 12 weeks ended March 19, 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.

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Non-GAAP Measures
Certain measures contained in this Form 10-Q are financial measures that are adjusted for items affecting comparability (see “Items Affecting Comparability” for a detailed list and description of each of these items), as well as, in certain instances, adjusted for foreign exchange. These measures are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Items adjusted for currency assume foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. 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 investors should consider these non-GAAP measures in evaluating our results as they are indicative of our ongoing performance and reflect how management evaluates our operational results and trends. These measures are not, and should not be viewed as, a substitute for U.S. GAAP reporting measures. See “Organic Revenue Growth” and “Free Cash Flow.”
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 the 12 weeks ended March 19, 2016, total servings increased 2%. For the 12 weeks ended March 21, 2015, total servings increased 1%. Servings growth in 2016 reflects an adjustment to the first quarter 2015 results for divestitures and other structural changes, including our Venezuelan businesses, which were deconsolidated 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 first quarter includes beverage volume outside of North America for the months of January and February. 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.

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Consolidated Results
Total Net Revenue and Operating Profit/(Loss)
 
12 Weeks Ended
 
3/19/2016

 
3/21/2015

 
Change
Total net revenue
$
11,862

 
$
12,217

 
(3
)%
Operating profit/(loss)
 
 
 
 
 
FLNA
$
1,018

 
$
920

 
11
 %
QFNA
166

 
99

 
68
 %
NAB
485

 
453

 
7
 %
Latin America
175

 
219

 
(20
)%
ESSA
67

 
112

 
(40
)%
AMENA
(148
)
 
230

 
(164
)%
Corporate Unallocated
 
 
 
 
 
Mark-to-market net gains/(losses)
46

 
(1
)
 
 
Restructuring and impairment charges
(3
)
 
(6
)
 
 
Other
(187
)
 
(229
)
 
 
 
$
(144
)