PEPSICO, INC. OUR BUSINESS Executive Overview 30 Our Operations 31 Other Relationships 31 Our Business Risks 31 OUR FINANCIAL RESULTS Results of Operations - Consolidated Review
36
Results of Operations - Division Review 38 FLNA 40 QFNA 40 PBNA 40 LatAm 41Europe 41 AMESA 42 APAC 42 Results of Operations - Other Consolidated Results
43
Non-GAAP Measures
43
Items Affecting Comparability
46
Our Liquidity and Capital Resources
49
Return onInvested Capital
52
OUR CRITICAL ACCOUNTING POLICIES AND ESTIMATES Revenue Recognition
53
Goodwill and Other Intangible Assets
54
Income Tax Expense and Accruals
55
Pension and Retiree Medical Plans
56
CONSOLIDATED STATEMENT OF INCOME
59
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
60
CONSOLIDATED STATEMENT OF CASH FLOWS
61
CONSOLIDATED BALANCE SHEET
63
CONSOLIDATED STATEMENT OF EQUITY
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation and Our Divisions
65
Note 2 - Our Significant Accounting Policies
70
Note 3 - Restructuring and Impairment Charges 73 Note 4 - Intangible Assets 75 Note 5 - Income Taxes 78 Note 6 - Share-Based Compensation
81
Note 7 - Pension, Retiree Medical and Savings Plans
85
Note 8 - Debt Obligations
92
Note 9 - Financial Instruments
94
Note 10 - Net Income Attributable to PepsiCo per Common Share
99
Note 11 - Accumulated Other Comprehensive Loss Attributable to PepsiCo
100
Note 12 - Leases
101
Note 13 - Acquisitions and Divestitures
103
Note 14 - Supplemental Financial Information
106
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 108
GLOSSARY 112
29-------------------------------------------------------------------------------- Table of Contents 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 consolidated financial statements and the accompanying notes. Definitions of key terms can be found in the glossary. Unless otherwise noted, 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. Discussion in this Form 10-K includes results of operations and financial condition for 2021 and 2020 and year-over-year comparisons between 2021 and 2020. For discussion on results of operations and financial condition pertaining to 2019 and year-over-year comparisons between 2020 and 2019, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 26, 2020 . OUR BUSINESS Executive Overview PepsiCo is a leading global beverage and convenient food company with a complementary portfolio of brands, including Lays, Doritos, Cheetos,Gatorade , Pepsi-Cola, Mountain Dew, Quaker and SodaStream. Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of beverages and convenient foods, serving customers and consumers in more than 200 countries and territories. As a global company with deep local ties, we faced many of the same challenges in 2021 as our consumers, customers, and competitors across the world, including the second year of the COVID-19 pandemic; a worsening climate crisis; supply chain disruptions; inflationary pressures; shifting consumer preferences and behaviors; a highly competitive operating environment; a rapidly changing retail landscape, including the growth in e-commerce; continued macroeconomic and political volatility; and an evolving regulatory landscape. To meet the challenges of today - and those of tomorrow - we are driven by an approach called PepsiCo Positive (pep+). pep+ is a strategic end-to-end transformation of our business, with sustainability at the center of how the company will strive to create growth and value by operating within planetary boundaries and inspiring positive change for the planet and people. pep+ will guide how we will work to transform our business operations, from sourcing ingredients and making and selling products in a more sustainable way, to leveraging our more than one billion connections with consumers each day to take sustainability mainstream and engage people to make choices that are better for themselves and the planet. pep+ drives action and progress across three key pillars, bringing together a number of industry-leading 2030 sustainability goals under a comprehensive framework: •Positive Agriculture: We are working to spread regenerative practices to restore the Earth across land equal to the company's entire agricultural footprint (approximately 7 million acres), sustainably source key crops and ingredients, and improve the livelihoods of more people in our agricultural supply chain. •Positive Value Chain: We are working to build a circular and inclusive value chain through actions to: achieve net-zero emissions by 2040; become net water positive by 2030; and introduce more sustainable packaging into the value chain. Our packaging goals include cutting virgin plastic per serving, using recycled content in our plastic packaging, and scaling our SodaStream business globally, an innovative platform that almost entirely eliminates the need for beverage packaging, among other levers. Additionally, we are making progress on our diversity, equity and inclusion journey. And we have introduced a new global workforce volunteering program, One Smile at a 30 -------------------------------------------------------------------------------- Table of Contents Time, to encourage, support and empower each one of our approximately 309,000 employees to make positive impacts in their local communities. •Positive Choices: We continue working to evolve our portfolio of beverage and convenient food products so that they are better for the planet and people, including by incorporating more diverse ingredients in both new and existing food products that are better for the planet and/or deliver nutritional benefits, prioritizing chickpeas, plant-based proteins and whole grains; expanding our position in the nuts & seeds category, where PepsiCo is already the global branded leader, including leadership positions inMexico ,China and several Western European markets; and accelerating our reduction of added sugars and sodium through the use of science-based targets across our portfolio and cooking our food offerings with healthier oils. We are also continuing to scale new business models that require little or no single-use packaging, including SodaStream - an icon of a Positive Choice and the largest sparkling water brand in the world by volume. SodaStream, already sold in more than 40 countries, and its new SodaStream Professional platform is expected to expand into functional beverages and reach additional markets by the end of 2022, part of the brand's effort to help consumers avoid plastic bottles. We believe these priorities will position our Company for long-term sustainable growth. See also "Item 1A. Risk Factors" for further information about risks and uncertainties that the Company faces. Our Operations See "Item 1. Business" for information on our divisions and a description of our distribution network, ingredients and other supplies, brands and intellectual property rights, seasonality, customers, competition and human capital. In addition, see Note 1 to our consolidated financial statements for financial information about our divisions and geographic areas. Other Relationships Certain members of our Board of Directors also serve on the boards of certain vendors and customers. These Board members do not participate in our vendor selection and negotiations nor in our customer negotiations. Our transactions with these vendors and customers are in the normal course of business and are consistent with terms negotiated with other vendors and customers. In addition, certain of our employees serve on the boards ofPepsi Bottling Ventures LLC and other affiliated companies of PepsiCo and do not receive incremental compensation for such services. Our Business Risks COVID-19 Our global operations continue to expose us to risks associated with the COVID-19 pandemic, which continues to result in challenging operating environments and has affected almost all of the more than 200 countries and territories in which our products are made, manufactured, distributed or sold. Numerous measures have been implemented around the world to try to reduce the spread of the virus, including travel bans and restrictions, quarantines, curfews, restrictions on public gatherings, shelter in place and safer-at-home orders, business shutdowns and closures. These measures have impacted and will continue to impact us, our customers (including foodservice customers), consumers, employees, bottlers, contract manufacturers, distributors, joint venture partners, suppliers and other third parties with whom we do business, which may continue to result in changes in demand for our products, increases in operating costs (whether as a result of changes to our supply chain or increases in employee costs, including expanded benefits and frontline incentives, costs associated with the provision of personal protective equipment and increased sanitation, or otherwise), or adverse impacts to our supply chain through labor shortages, raw 31 -------------------------------------------------------------------------------- Table of Contents material shortages or reduced availability of air or other commercial transport, port closures or border restrictions, any of which can impact our ability to make, manufacture, distribute and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our business partners to do the same or the inability of a significant portion of our or our business partners' workforce to work because of illness, absenteeism, quarantine, vaccine mandates, or travel or other governmental restrictions, may continue to impact the availability or productivity of our and their employees, many of whom are not able to perform their job functions remotely. Public concern regarding the risk of contracting COVID-19 has impacted and may continue to impact demand from consumers, including due to consumers not leaving their homes or leaving their homes less often than they did prior to the start of the pandemic or otherwise shopping for and consuming food and beverage products in a different manner than they historically have or because some of our consumers have lower discretionary income due to unemployment or reduced or limited work as a result of measures taken in response to the pandemic. Even as governmental restrictions are relaxed and economies gradually, partially, or fully reopen in certain of these jurisdictions and markets, the ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels and shopping and consumption preferences. Changes in consumer purchasing and consumption patterns may increase demand for our products in one quarter, resulting in decreased demand for our products in subsequent quarters, or in a lower-margin sales channel resulting in potentially reduced profit from sales of our products. We continue to see shifts in product and channel preferences as markets move through varying stages of restrictions and re-opening at different times, including changes in at-home consumption, in immediate consumption and away-from-home channels, such as convenience and gas and foodservice. In addition, we continue to see an increase in demand in the e-commerce and online-to-offline channels and any failure to capitalize on this demand could adversely affect our ability to maintain and grow sales or category share and erode our competitive position. Any reduced demand for our products or change in consumer purchasing and consumption patterns, as well as continued economic uncertainty (including supply chain disruptions and labor shortages), can adversely affect our customers' and business partners' financial condition, which can result in bankruptcy filings and/or an inability to pay for our products, reduced or canceled orders of our products, continued or additional closing of restaurants, stores, entertainment or sports complexes, schools or other venues in which our products are sold, or reduced capacity at any of the foregoing, or our business partners' inability to supply us with ingredients or other items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers' or business partners' financial condition have also resulted and may continue to result in our recording additional charges for our inability to recover or collect any accounts receivable, owned or leased assets, including certain foodservice and vending and other equipment, or prepaid expenses. In addition, continued economic uncertainty associated with the COVID-19 pandemic has resulted in volatility in the global capital and credit markets which can impair our ability to access these markets on terms commercially acceptable to us, or at all. While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to mitigate the negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence and spread of new variants of the virus, including the omicron and delta variants, the development and availability of effective treatments and vaccines, the speed at which vaccines are administered, the efficacy of vaccines against the virus and evolving strains or variants of the virus, global economic conditions during and after the pandemic, governmental actions that have been 32 -------------------------------------------------------------------------------- Table of Contents taken, or may be taken in the future, in response to the pandemic and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary. Risks Associated with Commodities and Our SupplyChain Many of the commodities used in the production and transportation of our products are purchased in the open market. The prices we pay for such items are subject to fluctuation, and we manage this risk through the use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, including swaps and futures. During 2021, we experienced higher than anticipated transportation and commodity costs, which we expect to continue in 2022. A number of external factors, including the COVID-19 pandemic, adverse weather conditions, supply chain disruptions (including raw material shortages) and labor shortages, have impacted and may continue to impact transportation and commodity availability and costs. When prices increase, we may or may not pass on such increases to our customers without suffering reduced volume, revenue, margins and operating results. See Note 9 to our consolidated financial statements for further information on how we manage our exposure to commodity prices. Risks Associated with Climate Change Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased legal and regulatory requirements to reduce or mitigate the potential effects of climate change, including regulation of greenhouse gas emissions and potential carbon pricing programs. These new or increased legal or regulatory requirements could result in significant increased costs of compliance and additional investments in facilities and equipment. However, we are unable to predict the scope, nature and timing of any new or increased environmental laws and regulations and therefore cannot predict the ultimate impact of such laws and regulations on our business or financial results. We continue to monitor existing and proposed laws and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations. Risks Associated with International Operations We are subject to risks in the normal course of business that are inherent to international operations. During the periods presented in this report, certain jurisdictions in which our products are made, manufactured, distributed or sold, including in certain developing and emerging markets, operated in a challenging environment, experiencing unstable economic, political and social conditions, civil unrest, natural disasters, debt and credit issues and currency controls or fluctuations. We continue to monitor the economic, operating and political environment in these markets closely and to identify actions to potentially mitigate any unfavorable impacts on our future results. Imposition of Taxes and Regulations on our Products Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased taxes or regulations on the manufacture, distribution or sale of our products or their packaging, ingredients or substances contained in, or attributes of, our products or their packaging, commodities used in the production of our products or their packaging or the recyclability or recoverability of our packaging. These taxes and regulations vary in scope and form. For example, some taxes apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener (e.g., sugar). In addition, COVID-19 has resulted in increased regulatory focus on labeling in certain jurisdictions, including inMexico which enacted product labeling requirements and limitations on the marketing of certain of our products as a result of ingredients or substances contained in such products. Further, some regulations apply to all products using certain types of packaging (e.g., plastic), while others are designed to increase the sustainability of packaging, 33 -------------------------------------------------------------------------------- Table of Contents encourage waste reduction and increased recycling rates or facilitate the waste management process or restrict the sale of products in certain packaging. We sell a wide variety of beverages and convenient foods in more than 200 countries and territories and the profile of the products we sell, the amount of revenue attributable to such products and the type of packaging used vary by jurisdiction. Because of this, we cannot predict the scope or form potential taxes, regulations or other limitations on our products or their packaging may take, and therefore cannot predict the impact of such taxes, regulations or limitations on our financial results. In addition, taxes, regulations and limitations may impact us and our competitors differently. We continue to monitor existing and proposed taxes and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such taxes, regulations or limitations, including advocating alternative measures with respect to the imposition, form and scope of any such taxes, regulations or limitations. Retail Landscape Our industry continues to be affected by disruption of the retail landscape, including the rapid growth in sales through e-commerce websites and mobile commerce applications, including through subscription services, the integration of physical and digital operations among retailers and the international expansion of hard discounters. We have seen and expect to continue to see a further shift to e-commerce, online-to-offline and other online purchasing by consumers, including as a result of the COVID-19 pandemic. We continue to monitor changes in the retail landscape and seek to identify actions we may take to build our global e-commerce and digital capabilities, such as expanding our direct-to-consumer business, and distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results. See also "Item 1A. Risk Factors," "Executive Overview" above and "Market Risks" below for more information about these risks and the actions we have taken to address key challenges. Risk Management Framework The achievement of our strategic and operating objectives involves taking risks and that those risks may evolve over time. To identify, assess, prioritize, address, manage, monitor and communicate these risks across the Company's operations, we leverage an integrated risk management framework. This framework includes the following: •PepsiCo's Board of Directors has oversight responsibility for PepsiCo's integrated risk management framework. One of the Board's primary responsibilities is overseeing and interacting with senior management with respect to key aspects of the Company's business, including risk assessment and risk mitigation of the Company's top risks. The Board receives updates on key risks throughout the year, including risks related to food safety and cybersecurity. During 2021, in addition to COVID-19 discussions as part of risk updates to the Board and the relevant Committees, the Board was provided with updates on COVID-19's impact to our business, financial condition and operations through memos, teleconferences or other appropriate means of communication. In addition, the Board has tasked designated Committees of the Board with oversight of certain categories of risk management, and the Committees report to the Board regularly on these matters. •The Audit Committee of the Board reviews and assesses the guidelines and policies governing PepsiCo's risk management and oversight processes, and assists the Board's oversight of financial, compliance and employee safety risks facing PepsiCo; 34 -------------------------------------------------------------------------------- Table of Contents •The Compensation Committee of the Board reviews PepsiCo's employee compensation policies and practices to assess whether such policies and practices could lead to unnecessary risk-taking behavior; •The Nominating and Corporate Governance Committee assists the Board in its oversight of the Company's governance structure and other corporate governance matters, including succession planning; and •The Sustainability, Diversity and Public Policy Committee of the Board assists the Board in its oversight of PepsiCo's policies, programs and related risks that concern key sustainability (including climate change), diversity, equity and inclusion, and public policy matters. •The PepsiCo Risk Committee (PRC), which is comprised of a cross-functional, geographically diverse, senior management group, including PepsiCo's Chairman of the Board of Directors and Chief Executive Officer, meets regularly to identify, assess, prioritize and address top strategic, financial, operating, compliance, safety, reputational and other risks. The PRC is also responsible for reporting progress on our risk mitigation efforts to the Board; •Division and key market risk committees, comprised of cross-functional senior management teams, meet regularly to identify, assess, prioritize and address division and country-specific business risks; •PepsiCo's Risk Management Office, which manages the overall risk management process, provides ongoing guidance, tools and analytical support to the PRC and the division and key country risk committees, identifies and assesses potential risks and facilitates ongoing communication between the parties, as well as with PepsiCo's Board of Directors, the Audit Committee of the Board and other Committees of the Board; •PepsiCo'sCorporate Audit Department evaluates the ongoing effectiveness of our key internal controls through periodic audit and review procedures; and •PepsiCo's Compliance &Ethics and Law Departments lead and coordinate our compliance policies and practices. Market Risks 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. See "Item 1A. Risk Factors" for further discussion of our market risks. The fair value of our derivatives fluctuates based on market rates and prices. The sensitivity of our derivatives to these market fluctuations is discussed below. See Note 9 to our consolidated financial statements for further discussion of these derivatives and our hedging policies. See "Our Critical Accounting Policies and Estimates" for a discussion of the exposure of our pension and retiree medical plan assets and liabilities to risks related to market fluctuations. 35 -------------------------------------------------------------------------------- Table of Contents Inflationary, deflationary and recessionary conditions impacting these market risks also impact the demand for and pricing of our products. See "Item 1A. Risk Factors" for further discussion. Commodity Prices Our commodity derivatives had a total notional value of$1.6 billion as ofDecember 25, 2021 and$1.1 billion as ofDecember 26, 2020 . At the end of 2021, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have decreased our net unrealized gains in 2021 by$177 million , which would generally be offset by a reduction in the cost of the underlying commodity purchases. Foreign Exchange Our operations outside ofthe United States generated 44% of our consolidated net revenue in 2021, withMexico ,Russia ,Canada ,China , theUnited Kingdom andSouth Africa , collectively, comprising approximately 23% of our consolidated net revenue in 2021. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. Additionally, we are exposed to foreign exchange risk from net investments in foreign subsidiaries, foreign currency purchases, foreign currency assets and liabilities created in the normal course of business. During 2021, favorable foreign exchange contributed 1 percentage point to net revenue growth, primarily due to appreciation in the Mexican peso, Canadian dollar and South African rand. Currency declines against theU.S. dollar which are not offset 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 inArgentina ,Brazil ,China ,Mexico , theMiddle East ,Russia andTurkey , and currency controls or fluctuations in certain of these international markets, continue to, and the threat or imposition of new or increased tariffs or sanctions or other impositions in or related to these international markets may, result in challenging operating environments. Our foreign currency derivatives had a total notional value of$2.8 billion as ofDecember 25, 2021 and$1.9 billion as ofDecember 26, 2020 . At the end of 2021, we estimate that an unfavorable 10% change in the underlying exchange rates would have decreased our net unrealized gains in 2021 by$278 million , which would be significantly offset by an inverse change in the fair value of the underlying exposure. The total notional amount of our debt instruments designated as net investment hedges was$2.1 billion as ofDecember 25, 2021 and$2.7 billion as ofDecember 26, 2020 . Interest Rates Our interest rate derivatives had a total notional value of$2.1 billion as ofDecember 25, 2021 and$3.0 billion as ofDecember 26, 2020 . Assuming year-end 2021 investment levels and variable rate debt, a 1-percentage-point increase in interest rates would have decreased our net interest expense in 2021 by$47 million due to higher cash and cash equivalents and short-term investments levels, as compared with our variable rate debt. OUR FINANCIAL RESULTS Results of Operations - Consolidated Review Volume Physical or unit volume is one of the key metrics management uses internally to make operating and strategic decisions, including the preparation of our annual operating plan and the evaluation of our business performance. We believe volume provides additional information to facilitate the comparison of our historical operating performance and underlying trends, and provides additional transparency on how we evaluate our business because it measures demand for our products at the consumer level. 36 -------------------------------------------------------------------------------- Table of Contents Beverage volume includes volume of concentrate sold to independent bottlers and volume of finished products bearing company-owned or licensed trademarks and allied brand products and joint venture trademarks sold by company-owned bottling operations. Beverage volume also includes volume of finished products bearing company-owned or licensed trademarks sold by our noncontrolled affiliates. Concentrate volume sold to independent bottlers is reported in concentrate shipments and equivalents (CSE), whereas finished beverage product volume is reported in bottler case sales (BCS). Both CSE and BCS convert all beverage volume to an 8-ounce-case metric. Typically, CSE and BCS are not equal in any given period due to seasonality, timing of product launches, product mix, bottler inventory practices and other factors. While our net revenue is not entirely based on BCS volume due to the independent bottlers in our supply chain, we believe that BCS is a better measure of the consumption of our beverage products. PBNA, LatAm,Europe , AMESA and APAC, either independently or in conjunction with third parties, make, market, distribute and sell ready-to-drink tea products through a joint venture with Unilever (under the Lipton brand name), and PBNA, either independently or in conjunction with third parties, makes, markets, distributes and sells ready-to-drink coffee products through a joint venture with Starbucks. In addition, APAC licenses the Tropicana brand for use inChina on co-branded juice products in connection with a strategic alliance with Tingyi. Convenient food volume includes volume sold by our subsidiaries and noncontrolled affiliates of convenient food products bearing company-owned or licensed trademarks. Internationally, we measure convenient food product volume in kilograms, while inNorth America we measure convenient food product volume in pounds. FLNA makes, markets, distributes and sells Sabra refrigerated dips and spreads through a joint venture with Strauss Group. Consolidated Net Revenue and Operating Profit 2021 2020 Change Net revenue$ 79,474 $ 70,372 13 % Operating profit$ 11,162 $ 10,080 11 % Operating margin 14.0 % 14.3 % (0.3) See "Results of Operations - Division Review" for a tabular presentation and discussion of key drivers of net revenue. Operating profit grew 11% and operating margin declined 0.3 percentage points. Operating profit growth was primarily driven by net revenue growth and productivity savings, partially offset by certain operating cost increases, a 14-percentage-point impact of higher commodity costs, and higher advertising and marketing expenses. The operating margin decline primarily reflects higher commodity costs. Lower charges taken as a result of the COVID-19 pandemic compared to the prior year contributed 6 percentage points to operating profit growth. Additionally, lower acquisition and divestiture-related charges included in "Items Affecting Comparability" contributed 3 percentage points to operating profit growth. Juice Transaction In the first quarter of 2022, we sold our Tropicana, Naked and other select juice brands toPAI Partners , while retaining a 39% noncontrolling interest in a newly formed joint venture that will operate acrossNorth America andEurope . These juice businesses delivered approximately$3 billion in net revenue in 2021. In theU.S. , PepsiCo acts as the exclusive distributor for the new joint venture's portfolio of brands for small-format and foodservice customers with chilled direct-store-delivery. See Note 13 to our consolidated financial statements for further information. 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations - Division Review See "Our Business Risks," "Non-GAAP Measures" and "Items Affecting Comparability" for a discussion of items to consider when evaluating our results and related information regarding measures not in accordance withU.S. Generally Accepted Accounting Principles (GAAP). 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" reflect mergers and acquisitions activity, as well as divestitures and other structural changes, including changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees. Net Revenue and Organic Revenue Growth Organic revenue growth is a non-GAAP financial measure. For further information on this measure, see "Non-GAAP Measures." 2021 Impact of Impact of Reported Organic % Change, GAAP Foreign exchange Acquisitions and % Change, Non-GAAP Measure translation divestitures Measure(a) Organic volume(b) Effective net pricing FLNA 8 % (0.5) - 7 % 2 5 QFNA - % (1) - - % (7) 7 PBNA 12 % (0.5) (1) 10 % 5 5 LatAm 17 % (2) - 15 % 4 10 Europe 9 % (0.5) - 9 % 4.5 4 AMESA 33 % (4.5) (17) 12 % 7 4 APAC 34 % (6) (15) 13 % 12 1 Total 13 % (1) (2) 10 % 4 5 (a)Amounts may not sum due to rounding. (b)Excludes the impact of acquisitions and divestitures, including the impact of an extra month of volume for our acquisitions ofPioneer Food Group Ltd. (Pioneer Foods ) in our AMESA division andHangzhou Haomusi Food Co., Ltd. (Be & Cheery) in our APAC division as we aligned the reporting calendars of these acquisitions with those of our divisions. In certain instances, the impact of organic volume growth on net revenue growth differs from the unit volume growth disclosed in the following divisional discussions due to the impacts of acquisitions and divestitures, product mix, nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE. Our net revenue excludes nonconsolidated joint venture volume, and, for our franchise-owned beverage businesses, is based on CSE. 38 -------------------------------------------------------------------------------- Table of Contents Operating Profit, Operating Profit Adjusted for Items Affecting Comparability and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis Operating profit adjusted for items affecting comparability and operating profit growth adjusted for items affecting comparability on a constant currency basis are both non-GAAP financial measures. For further information on these measures see "Non-GAAP Measures" and "Items Affecting Comparability." Operating Profit and Operating Profit Adjusted for Items Affecting Comparability
2021
Items Affecting Comparability(a)
Acquisition and Core,
Reported, GAAP Mark-to-market Restructuring and divestiture-related Non-GAAP
Measure(b) net impact impairment charges charges(c) Measure(b)
FLNA $ 5,633 $ - $ 28 $ 2 $ 5,663
QFNA 578 - - - 578
PBNA 2,442 - 20 11 2,473
LatAm 1,369 - 37 - 1,406
Europe 1,292 - 81 8 1,381
AMESA 858 - 15 10 883
APAC 673 - 7 4 684
Corporate unallocated
expenses (1,683) 19 49 (39) (1,654)
Total $ 11,162 $ 19 $ 237 $ (4) $ 11,414
2020
Items Affecting Comparability(a)
Acquisition and Core,
Reported, Mark-to-market net Restructuring and divestiture-related Non-GAAP
GAAP Measure(b) impact impairment charges charges(c) Measure(b)
FLNA $ 5,340 $ - $ 83 $ 29 $ 5,452
QFNA 669 - 5 - 674
PBNA 1,937 - 47 66 2,050
LatAm 1,033 - 31 - 1,064
Europe 1,353 - 48 - 1,401
AMESA 600 - 14 173 787
APAC 590 - 5 7 602
Corporate unallocated
expenses (1,442) (73) 36 (20) (1,499)
Total $ 10,080 $ (73) $ 269 $ 255 $ 10,531
(a)See "Items Affecting Comparability."
(b)Includes the charges taken as a result of the COVID-19 pandemic. See Note 1
to our consolidated financial statements for further information.
(c)The income amounts primarily relate to gains associated with the contingent
consideration in connection with our acquisition of Rockstar Energy Beverages
(Rockstar). In 2021, this impact is partially offset by divestiture-related
charges associated with the Juice Transaction. See Note 13 to our consolidated
financial statements for further information.
39
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Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting
Comparability on a Constant Currency Basis
2021
Impact of Items Affecting Comparability(a) Impact of
Core Constant
Core Currency
Reported % Change, Restructuring and Acquisition and % Change, Non-GAAP Foreign exchange % Change, Non-GAAP
GAAP Measure Mark-to-market net impact impairment charges divestiture-related charges Measure(b) translation Measure(b)
FLNA 5.5 % - (1) (0.5) 4 % - 3 %
QFNA (14) % - (0.5) - (14) % - (14) %
PBNA 26 % - (2) (4) 21 % (1) 20 %
LatAm 33 % - - - 32 % (4.5) 28 %
Europe (4.5) % - 2.5 1 (1.5) % (1.5) (3) %
AMESA 43 % - - (31) 12 % (2) 10 %
APAC 14 % - 1 (1.5) 14 % (3) 10 %
Corporate unallocated expenses 17 % (7) (1) 1 10 % - 10 %
Total 11 % 1 - (3) 8 % (1) 7 %
(a)See "Items Affecting Comparability" for further information.
(b)Amounts may not sum due to rounding.
FLNA
Net revenue grew 8%, primarily driven by effective net pricing and organic
volume growth. Unit volume grew 2%, primarily reflecting double-digit growth in
variety packs and the impact of our BFY Brands, Inc. (BFY Brands ) acquisition in
the first quarter of 2020, partially offset by a low-single-digit decline in
trademark Tostitos and a double-digit decline in trademark Santitas.
Operating profit increased 5.5%, primarily reflecting the net revenue growth,
productivity savings and a 3-percentage-point impact of lower charges taken as a
result of the COVID-19 pandemic. These impacts were partially offset by certain
operating cost increases, including strategic initiatives and incremental
transportation costs, and a 4-percentage-point impact of higher commodity costs,
primarily packaging material and cooking oil.
QFNA
Net revenue grew slightly and unit volume declined 7%. The net revenue growth
reflects effective net pricing and a 1-percentage-point impact of favorable
foreign exchange, largely offset by a decrease in organic volume. The unit
volume decline was primarily driven by double-digit declines in pancake syrups
and mixes and in ready-to-eat cereals and a high-single-digit decline in
oatmeal, partially offset by growth in Cheetos macaroni and cheese, which was
introduced in the third quarter of 2020, and double-digit growth in lite snacks.
Operating profit declined 14%, primarily reflecting certain operating cost
increases, including incremental transportation costs, and an 8-percentage-point
impact of higher commodity costs, partially offset by productivity savings.
The impact of the COVID-19 pandemic contributed to a current-year decrease in
consumer demand, which had a negative impact on net revenue, unit volume and
operating profit performance compared to the significant COVID-19 related surge
in consumer demand in the prior year.
PBNA
Net revenue increased 12%, primarily driven by effective net pricing and an
increase in organic volume. Unit volume increased 6%, driven by a 7% increase in
non-carbonated beverage (NCB) volume and a 4% increase in CSD volume. The NCB
volume increase primarily reflected double-digit increases in our
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overall water portfolio and our energy portfolio, a low-single-digit increase in
Gatorade sports drinks and a mid-single-digit increase in Lipton ready-to-drink
teas.
Operating profit increased 26%, primarily reflecting the net revenue growth, a
15-percentage-point impact of lower charges taken as a result of the COVID-19
pandemic and productivity savings. These impacts were partially offset by
certain operating cost increases, including incremental transportation costs, an
18-percentage-point impact of higher commodity costs and higher advertising and
marketing expenses. Higher prior-year acquisition and divestiture-related
charges contributed 4 percentage points to operating profit growth.
Changes in consumer behavior as a result of the COVID-19 pandemic contributed to
a current-year increase in consumer demand, which had a positive impact on net
revenue, unit volume and operating profit performance.
In 2020, we received a notice of termination without cause from Vital
Pharmaceuticals, Inc. , which would end our distribution rights of Bang Energy
drinks, effective October 24, 2023 .
LatAm
Net revenue increased 17%, primarily reflecting effective net pricing and
organic volume growth.
Convenient foods unit volume grew 3.5%, primarily reflecting low-single-digit
growth in Brazil and Mexico .
Beverage unit volume grew 8%, primarily reflecting double-digit growth in
Argentina and Chile . Additionally, Brazil experienced low-single-digit growth,
Mexico experienced mid-single-digit growth and Guatemala experienced
high-single-digit growth.
Operating profit increased 33%, primarily reflecting the net revenue growth,
productivity savings and a 4.5-percentage-point impact of favorable foreign
exchange. These impacts were partially offset by certain operating cost
increases, a 30-percentage-point impact of higher commodity costs and higher
advertising and marketing expenses. A current-year recognition of certain
indirect tax credits in Brazil and lower charges taken as a result of the
COVID-19 pandemic contributed 6 percentage points and 4 percentage points,
respectively, to operating profit growth.
Changes in consumer behavior as a result of the COVID-19 pandemic contributed to
a current-year increase in consumer demand, which had a positive impact on net
revenue, unit volume and operating profit performance.
Europe
Net revenue increased 9%, primarily reflecting organic volume growth and
effective net pricing.
Convenient foods unit volume grew 4%, primarily reflecting double-digit growth
in Turkey and mid-single-digit growth in Russia and Poland , partially offset by
a mid-single-digit decline in the United Kingdom . Additionally, the Netherlands
grew slightly and France experienced low-single-digit growth.
Beverage unit volume grew 8%, primarily reflecting double-digit growth in
Russia , Turkey and the United Kingdom and high-single-digit growth in France ,
partially offset by a low-single-digit decline in Germany .
Operating profit decreased 4.5%, primarily reflecting certain operating cost
increases, a 28-percentage-point impact of higher commodity costs and a
2.5-percentage-point impact each from higher restructuring and impairment
charges and a gain on an asset sale in the prior year. These impacts were
partially offset by the net revenue growth and productivity savings.
Additionally, lower charges taken as a result of the COVID-19 pandemic and
favorable settlements of promotional spending accruals compared to the prior
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year positively contributed 5 percentage points and 3 percentage points,
respectively, to operating profit performance.
Changes in consumer behavior as a result of the COVID-19 pandemic contributed to
a current-year increase in consumer demand, which had a positive impact on net
revenue and unit volume performance.
During the fourth quarter of 2021, the implementation of an Enterprise Resource
Planning (ERP) system in the United Kingdom caused a temporary disruption to our
United Kingdom operations which had a negative impact on net revenue, unit
volume and operating profit performance. These issues were largely resolved
within the quarter and the business operations had resumed by year end.
AMESA
Net revenue increased 33%, reflecting a 14-percentage-point impact of our
Pioneer Foods acquisition, which included the impact of an extra month of net
revenue compared to the prior year as we aligned Pioneer Foods' reporting
calendar with that of our AMESA division, as well as organic volume growth and
effective net pricing. Favorable foreign exchange contributed 4.5 percentage
points to net revenue growth.
Convenient foods unit volume grew 38%, primarily reflecting a
35-percentage-point impact of our Pioneer Foods acquisition, which included the
impact of an extra month of unit volume as we aligned Pioneer Foods' reporting
calendar with that of our AMESA division, double-digit growth in India and
Pakistan and high-single-digit growth in the Middle East , partially offset by a
low-single-digit decline in South Africa (excluding our Pioneer Foods
acquisition).
Beverage unit volume grew 20%, primarily reflecting double-digit growth in India
and Pakistan . Additionally, the Middle East experienced double-digit growth and
Nigeria experienced high-single-digit growth.
Operating profit increased 43%, primarily reflecting the net revenue growth, a
31-percentage-point impact of the prior-year acquisition and divestiture-related
charges associated with our Pioneer Foods acquisition and productivity savings.
These impacts were partially offset by certain operating cost increases, a
13-percentage-point impact of higher commodity costs and higher advertising and
marketing expenses. Additionally, lower charges taken as a result of the
COVID-19 pandemic and our Pioneer Foods acquisition contributed 3 percentage
points and 2 percentage points, respectively, to operating profit growth.
Changes in consumer behavior as a result of the COVID-19 pandemic contributed to
a current-year increase in consumer demand, which had a positive impact on net
revenue, unit volume and operating profit performance.
APAC
Net revenue increased 34%, reflecting a 15-percentage-point impact of our Be &
Cheery acquisition, which included the impact of an extra month of net revenue
compared to the prior year as we aligned Be & Cheery's reporting calendar with
that of our APAC division, as well as organic volume growth, a 6-
percentage-point impact of favorable foreign exchange and effective net pricing.
Convenient foods unit volume grew 19%, primarily reflecting a
16-percentage-point impact of our Be & Cheery acquisition, which included the
impact of an extra month of unit volume as we aligned Be & Cheery's reporting
calendar with that of our APAC division, and double-digit growth in China
(excluding our Be & Cheery acquisition) and Thailand . Additionally, Australia ,
Indonesia and Taiwan each experienced low-single-digit growth.
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Beverage unit volume grew 13%, primarily reflecting double-digit growth in
China , partially offset by a low-single-digit decline in Vietnam . Additionally,
the Philippines experienced low-single-digit growth and Thailand experienced
mid-single-digit growth.
Operating profit increased 14%, primarily reflecting the net revenue growth,
productivity savings and a 2- percentage-point contribution from our Be & Cheery
acquisition, partially offset by certain operating cost increases and higher
advertising and marketing expenses. Additionally, impairment charges associated
with an equity method investment reduced operating profit growth by 3 percentage
points. Favorable foreign exchange contributed 3 percentage points to operating
profit growth.
Other Consolidated Results
2021 2020 Change
Other pension and retiree medical benefits income $ 522 $ 117 $ 405
Net interest expense and other $ (1,863) $ (1,128) $ (735)
Annual tax rate 21.8 % 20.9 %
Net income attributable to PepsiCo (a) $ 7,618 $ 7,120 7 %
Net income attributable to PepsiCo per common share - diluted (a)
$ 5.49 $ 5.12 7 % (a)In 2021, lower charges taken as a result of the COVID-19 pandemic contributed 7 percentage points to both net income attributable to PepsiCo growth and net income attributable to PepsiCo per common share growth. See Note 1 to our consolidated financial statements for further information. Other pension and retiree medical benefits income increased$405 million , primarily reflecting lower settlement charges in 2021, the recognition of fixed income gains on plan assets, the impact of plan changes approved in 2020, as discussed in Note 7 to our consolidated financial statements, and the impact of discretionary plan contributions, partially offset by a decrease in the expected rate of return on plan assets. Net interest expense and other increased$735 million , reflecting a charge of$842 million in connection with our cash tender offers. See Note 8 to our consolidated financial statements for further information. This impact was partially offset by lower interest rates on average debt balances. The reported tax rate increased 0.9 percentage points, primarily reflecting the net tax impact of adjustments to uncertain tax positions related to the final assessment from the Internal Revenue Service (IRS) audit for the tax years 2014 through 2016. Non-GAAP Measures Certain financial measures contained in this Form 10-K adjust for the impact of specified items and are not in accordance withU.S. 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-K 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-K 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); charges related to restructuring plans; costs associated with mergers, acquisitions, divestitures and other structural changes; gains associated with divestitures; pension and retiree medical-related amounts (including all settlement and curtailment gains and losses); charges or 43 -------------------------------------------------------------------------------- Table of Contents adjustments related to the enactment of new laws, rules or regulations, such as tax law changes; amounts related to the resolution of tax positions; tax benefits related to reorganizations of our operations; debt redemptions, cash tender or exchange offers; asset impairments (non-cash); and remeasurements of net monetary assets. Previously, certain immaterial pension and retiree medical-related settlement and curtailment gains and losses were not considered items affecting comparability. Pension and retiree medical-related service cost, interest cost, expected return on plan assets, and other net periodic pension costs will continue to be reflected in our core results. See below and "Items Affecting Comparability" for a description of adjustments to ourU.S. GAAP financial measures in this Form 10-K. 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 withU.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 contained in this Form 10-K are discussed below: Cost of sales, gross profit, selling, general and administrative expenses, other pension and retiree medical benefits income, net interest expense and other, provision for income taxes, net income attributable to noncontrolling interests and net income attributable to PepsiCo, each adjusted for items affecting comparability, operating profit and net income attributable to PepsiCo per common share - diluted, each adjusted for items affecting comparability, and the corresponding constant currency growth rates These measures exclude the net impact of mark-to-market gains and losses on centrally managed commodity derivatives that do not qualify for hedge accounting, restructuring and impairment charges related to our 2019 Multi-Year Productivity Plan (2019 Productivity Plan), costs associated with our acquisitions and divestitures, the impact of settlement and curtailment gains and losses related to pension and retiree medical plans, a charge related to cash tender offers and tax expense related to the Tax Cuts and Jobs Act (TCJ Act) (see "Items Affecting Comparability" for a detailed description of each of these items). We also evaluate performance on operating profit and net income attributable to PepsiCo per common share - diluted, each adjusted for items affecting comparability, on a constant currency basis, which measure 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-yearU.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 or that we believe impact comparability with the prior year. Organic revenue growth We define organic revenue growth as a measure that adjusts for the impacts of foreign exchange translation, acquisitions and divestitures, and where applicable, the impact of an additional week of results every five or six years (53rd reporting week), including in our 2022 financial results. Adjusting for acquisitions and divestitures reflects mergers and acquisitions activity, including the impact in 2021 of an extra month of net revenue for our acquisitions ofPioneer Foods in our AMESA division and Be & Cheery in our APAC division as we aligned the reporting calendars of these acquisitions with those of our divisions, as well as divestitures and other structural changes, including changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees. We believe organic revenue growth 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 "Net Revenue and Organic Revenue Growth" in "Results of Operations - Division Review" for further information. 44 -------------------------------------------------------------------------------- Table of Contents 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 acquisitions and 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" for further information. Return on invested capital (ROIC) and net ROIC, excluding items affecting comparability We define ROIC as net income attributable to PepsiCo plus interest expense after-tax divided by the sum of quarterly average debt obligations and quarterly average common shareholders' equity. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by management to calculate ROIC may differ from the methods other companies use to calculate their ROIC. We believe this metric serves as a measure of how well we use our capital to generate returns. In addition, we use net ROIC, excluding items affecting comparability, to compare our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that we believe are not indicative of our ongoing performance and reflects how management evaluates our operating results and trends. We define net ROIC, excluding items affecting comparability, as ROIC, adjusted for quarterly average cash, cash equivalents and short-term investments, after-tax interest income and items affecting comparability. We believe the calculation of ROIC and net ROIC, excluding items affecting comparability, provides useful information to investors and is an additional relevant comparison of our performance to consider when evaluating our capital allocation efficiency. See "Return onInvested Capital " in "Our Liquidity and Capital Resources" for further information. 45 -------------------------------------------------------------------------------- Table of Contents Items Affecting Comparability Our reported financial results in this Form 10-K are impacted by the following items in each of the following years: 2021 Other pension and retiree Net income Selling, general and medical Net interest attributable to Net income administrative Operating benefits
expense and Provision for noncontrolling attributable to
Cost of sales Gross profit expenses profit income other income taxes(a) interests PepsiCo
Reported, GAAP Measure $ 37,075 $ 42,399 $ 31,237 $ 11,162 $ 522 $ (1,863) $ 2,142 $ 61 $ 7,618
Items Affecting Comparability Mark-to-market net impact (39) 39 20 19 - - 5 -
14
Restructuring and impairment charges (29) 29 (208) 237 10 - 41 1 205 Acquisition and divestiture-related charges (1) 1 5 (4) - - 23 - (27) Pension and retiree medical-related impact - - - - 12 - 1 - 11 Charge related to cash tender offers - - - - - 842 165 - 677 Tax expense related to the TCJ Act - - - - - - (190) - 190 Core, Non-GAAP Measure$ 37,006 $ 42,468 $ 31,054$ 11,414 $ 544 $ (1,021) $ 2,187 $ 62 $ 8,688 2020 Other pension and retiree Selling, general and medical Net income administrative Operating benefits Provision for attributable to Cost of sales Gross profit expenses profit income income taxes(a) PepsiCo Reported, GAAP Measure$ 31,797 $ 38,575 $ 28,495$ 10,080 $ 117 $ 1,894 $ 7,120 Items Affecting Comparability Mark-to-market net impact 64 (64) 9 (73) - (15) (58) Restructuring and impairment charges (30) 30 (239) 269 20 58 231 Acquisition and divestiture-related charges (32) 32 (223) 255 - 18 237 Pension and retiree medical-related impact - - - - 205 47 158 Core, Non-GAAP Measure$ 31,799 $ 38,573 $ 28,042$ 10,531 $ 342 $ 2,002 $ 7,688
(a)Provision for income taxes is the expected tax charge/benefit on the underlying item based on the tax laws and income tax rates applicable to the underlying item in its corresponding tax jurisdiction.
2021 2020 Change
Net income attributable to PepsiCo per common share - diluted, GAAP measure
$ 5.49 $ 5.12 7 % Mark-to-market net impact 0.01
(0.04)
Restructuring and impairment charges 0.15
0.17
Acquisition and divestiture-related charges (0.02)
0.17
Pension and retiree medical-related impact 0.01
0.11
Charge related to cash tender offers 0.49
-
Tax expense related to the TCJ Act 0.14
-
Core net income attributable to PepsiCo per common share - diluted, non-GAAP measure
$ 6.26 (a)$ 5.52 (a) 13 % Impact of foreign exchange translation (1.5)
Growth in core net income attributable to PepsiCo per common share - diluted, on a constant currency basis, non-GAAP measure
12 % (a)
(a)Does not sum due to rounding.
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Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These
commodity derivatives include agricultural products, energy and metals.
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.
Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
The 2019 Productivity Plan, publicly announced on February 15, 2019 , will
leverage new technology and business models to further simplify, harmonize and
automate processes; re-engineer our go-to-market and information systems,
including deploying the right automation for each market; and simplify our
organization and optimize our manufacturing and supply chain footprint. To build
on the successful implementation of the 2019 Productivity Plan to date, we
expanded and extended the program through the end of 2026 to take advantage of
additional opportunities within the initiatives of the 2019 Productivity Plan.
We now expect to incur pre-tax charges of approximately $3.15 billion , including
cash expenditures of approximately $2.4 billion , as compared to our previous
estimate of pre-tax charges of approximately $2.5 billion , which included cash
expenditures of approximately $1.6 billion . Plan to date through December 25,
2021 , we have incurred pre-tax charges of $1.0 billion , including cash
expenditures of $776 million . In our 2022 financial results, we expect to incur
pre-tax charges of approximately $350 million , including cash expenditures of
approximately $300 million . These charges will be funded primarily through cash
from operations. We expect to incur the majority of the remaining pre-tax
charges and cash expenditures in our 2022 and 2023 financial results, with the
balance to be incurred through 2026.
See Note 3 to our consolidated financial statements for further information
related to our 2019 Productivity Plan. We regularly evaluate productivity
initiatives beyond the productivity plan and other initiatives discussed above
and in Note 3 to our consolidated financial statements.
Acquisition and Divestiture-Related Charges
Acquisition and divestiture-related charges primarily include fair value
adjustments to the acquired inventory included in the acquisition-date balance
sheets, merger and integration charges and costs associated with divestitures.
Merger and integration charges include liabilities to support socioeconomic
programs in South Africa , closing costs, employee-related costs, gains
associated with contingent consideration, contract termination costs and other
integration costs.
See Note 13 to our consolidated financial statements for further information.
Pension and Retiree Medical-Related Impact
Pension and retiree medical-related impact primarily includes settlement charges
related to lump sum distributions exceeding the total of annual service and
interest costs, as well as curtailment gains related to plan changes.
See Note 7 to our consolidated financial statements for further information.
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Charge Related to Cash Tender Offers
As a result of the cash tender offers for some of our long-term debt, we
recorded a charge primarily representing the tender price paid over the carrying
value of the tendered notes and loss on treasury rate locks used to mitigate the
interest rate risk on the cash tender offers.
See Note 8 to our consolidated financial statements for further information.
Tax Expense Related to the TCJ Act
Tax expense related to the TCJ Act reflects adjustments to the mandatory
transition tax liability under the TCJ Act.
See Note 5 to our consolidated financial statements for further information.
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Our Liquidity and Capital Resources
We believe that our cash generating capability and financial condition, together
with our revolving credit facilities, working capital lines 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, including with respect to our net capital spending plans. Our primary
sources of liquidity include cash from operations, pre-tax cash proceeds of
approximately $3.5 billion from the Juice Transaction, proceeds obtained from
issuances of commercial paper and long-term debt, and cash and cash equivalents.
These sources of cash are available to fund cash outflows that have both a
short- and long-term component, including debt repayments and related interest
payments; payments for acquisitions, including support for socioeconomic
programs in South Africa related to our acquisition of Pioneer Foods ; operating
leases; purchase, marketing, and other contractual commitments, including
capital expenditures and the transition tax liability under the TCJ Act. In
addition, these sources of cash fund other cash outflows including anticipated
dividend payments and share repurchases. We do not have guarantees or
off-balance sheet financing arrangements, including variable interest entities,
that we believe could have a material impact on our liquidity. See "Item 1A.
Risk Factors," "Our Business Risks" and Note 8 to our consolidated financial
statements for further information.
Our sources and uses of cash were not materially adversely impacted by COVID-19
and, to date, we have not identified any material liquidity deficiencies as a
result of the COVID-19 pandemic. Based on the information currently available to
us, we do not expect the impact of the COVID-19 pandemic to have a material
impact on our future liquidity. We will continue to monitor and assess the
impact the COVID-19 pandemic may have on our business and financial results. See
"Item 1A. Risk Factors," "Our Business Risks" and Note 1 to our consolidated
financial statements for further information related to the impact of the
COVID-19 pandemic on our business and financial results.
As of December 25, 2021 , cash, cash equivalents and short-term investments in
our consolidated subsidiaries subject to currency controls or currency exchange
restrictions were not material.
The TCJ Act imposed a one-time mandatory transition tax on undistributed
international earnings, including $18.9 billion held in our consolidated
subsidiaries outside the United States as of December 30, 2017 . As of
December 25, 2021 , our mandatory transition tax liability was $2.9 billion ,
which must be paid through 2026 under the provisions of the TCJ Act; we
currently expect to pay approximately $309 million of this liability in 2022.
Any additional guidance issued by the IRS may impact our recorded amounts for
this transition tax liability. See Note 5 to our consolidated financial
statements for further discussion of the TCJ Act.
As part of our evolving market practices, we work with our suppliers to optimize
our terms and conditions, which include the extension of payment terms. Our
current payment terms with a majority of our suppliers generally range from 60
to 90 days, which we deem to be commercially reasonable. We will continue to
monitor economic conditions and market practice working with our suppliers to
adjust as necessary. We also maintain voluntary supply chain finance agreements
with several participating global financial institutions. Under these
agreements, our suppliers, at their sole discretion, may elect to sell their
accounts receivable with PepsiCo to these participating global financial
institutions. Supplier participation in these financing arrangements is
voluntary. Our suppliers negotiate their financing agreements directly with the
respective global financial institutions and we are not a party to these
agreements. These financing arrangements allow participating suppliers to
leverage PepsiCo's creditworthiness in establishing credit spreads and
associated costs, which generally provides our suppliers with more favorable
terms than they would be able to secure on their own. Neither PepsiCo nor any of
its subsidiaries provide any guarantees to any third party in connection with
these financing arrangements. We have no economic interest in our suppliers'
decision to participate in these agreements. Our obligations to our suppliers,
including amounts due and scheduled payment terms, are not impacted. All
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outstanding amounts related to suppliers participating in such financing
arrangements are recorded within accounts payable and other current liabilities
in our consolidated balance sheet. We were informed by the participating
financial institutions that as of December 25, 2021 and December 26, 2020 , $1.5
billion and $1.2 billion , respectively, of our accounts payable to suppliers who
participate in these financing arrangements are outstanding. These supply chain
finance arrangements did not have a material impact on our liquidity or capital
resources in the periods presented and we do not expect such arrangements to
have a material impact on our liquidity or capital resources for the foreseeable
future.
Furthermore, our cash provided from operating activities is somewhat impacted by
seasonality. Working capital needs are impacted by weekly sales, which are
generally highest in the third quarter due to seasonal and holiday-related sales
patterns and generally lowest in the first quarter. On a continuing basis, we
consider various transactions to increase shareholder value and enhance our
business results, including acquisitions, divestitures, joint ventures,
dividends, share repurchases, productivity and other efficiency initiatives and
other structural changes. These transactions may result in future cash proceeds
or payments.
The table below summarizes our cash activity:
2021 2020
Net cash provided by operating activities$ 11,616 $
10,613
Net cash used for investing activities$ (3,269) $
(11,619)
Net cash (used for)/provided by financing activities
Operating Activities In 2021, net cash provided by operating activities was$11.6 billion , compared to$10.6 billion in the prior year. The increase in operating cash flow primarily reflects favorable working capital comparisons and operating profit performance, partially offset by higher pre-tax pension and retiree medical plan contributions and higher net cash tax payments in the current year. Investing Activities In 2021, net cash used for investing activities was$3.3 billion , primarily reflecting net capital spending of$4.5 billion , partially offset by maturities of short-term investments with maturities greater than three months of$1.1 billion . In 2020, net cash used for investing activities was$11.6 billion , primarily reflecting net cash paid in connection with our acquisitions of Rockstar of$3.85 billion ,Pioneer Foods of$1.2 billion and Be & Cheery of$0.7 billion , net capital spending of$4.2 billion , as well as purchases of short-term investments with maturities greater than three months of$1.1 billion . See Note 1 to our consolidated financial statements for further discussion of capital spending by division; see Note 9 to our consolidated financial statements for further discussion of our investments in debt securities; and see Note 13 to our consolidated financial statements for further discussion of our acquisitions. We regularly review our plans with respect to net capital spending, including in light of the ongoing uncertainty caused by the COVID-19 pandemic on our business, and believe that we have sufficient liquidity to meet our net capital spending needs. Financing Activities In 2021, net cash used for financing activities was$10.8 billion , primarily reflecting the return of operating cash flow to our shareholders largely through dividend payments of$5.8 billion , cash tender offers/debt redemption of$4.8 billion , payments of long-term debt borrowings of$3.5 billion and 50 -------------------------------------------------------------------------------- Table of Contents payments of acquisition-related contingent consideration of$0.8 billion , partially offset by proceeds from issuances of long-term debt of$4.1 billion . In 2020, net cash provided by financing activities was$3.8 billion , primarily reflecting proceeds from issuances of long-term debt of$13.8 billion , partially offset by the return of operating cash flow to our shareholders through dividend payments and share repurchases of$7.5 billion , payments of long-term debt borrowings of$1.8 billion and debt redemptions of$1.1 billion . See Note 8 to our consolidated financial statements for further discussion of debt obligations. We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. OnFebruary 13, 2018 , we announced the 2018 share repurchase program providing for the repurchase of up to$15.0 billion of PepsiCo common stock which commenced onJuly 1, 2018 and expired onJune 30, 2021 . OnFebruary 10, 2022 , we announced the 2022 share repurchase program. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " for further information. In addition, onFebruary 10, 2022 , we announced a 7% increase in our annualized dividend to$4.60 per share from$4.30 per share, effective with the dividend expected to be paid inJune 2022 . We expect to return a total of approximately$7.7 billion to shareholders in 2022, comprising dividends of approximately$6.2 billion and share repurchases of approximately$1.5 billion . Free Cash Flow The table below reconciles net cash provided by operating activities, as reflected on our cash flow statement, to our free cash flow. Free cash flow is a non-GAAP financial measure. For further information on free cash flow, see "Non-GAAP Measures." 2021 2020 Change Net cash provided by operating activities, GAAP measure$ 11,616 $ 10,613 9 % Capital spending (4,625)
(4,240)
Sales of property, plant and equipment 166
55
Free cash flow, non-GAAP measure$ 7,157 $
6,428 11 %
We use free cash flow primarily for acquisitions and financing activities,
including debt repayments, dividends and share repurchases. We expect to
continue to return free cash flow to our shareholders primarily through
dividends and share repurchases while maintaining Tier 1 commercial paper
access, which we believe will facilitate appropriate financial flexibility and
ready access to global capital and credit markets at favorable interest rates.
However, see "Item 1A. Risk Factors" and "Our Business Risks" 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 1A. Risk Factors," "Our Business Risks" and
Note 8 to our consolidated financial statements for further information.
Material Changes in Line Items in Our Consolidated Financial Statements
Material changes in line items in our consolidated statement of income are
discussed in "Results of Operations - Division Review" and "Items Affecting
Comparability."
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Material changes in line items in our consolidated statement of cash flows are
discussed in "Our Liquidity and Capital Resources."
Material changes in line items in our consolidated balance sheet are discussed
below:
Total Assets
In 2021, total assets were $92.4 billion , compared to $92.9 billion in the prior
year. The decrease in total assets is primarily driven by the following line
items:
Change(a) Reference
Cash and cash equivalents $ (2.6) Consolidated Statement of Cash Flows
Short-term investments $ (1.0) Consolidated Statement of Cash Flows
Assets held for sale $ 1.8 Note 13
Property, plant and equipment, net $ 1.0 Note 1, Note 14
Other indefinite-lived intangible assets $ (0.5) Note 4
Other assets $ 0.9 Note 14
Total Liabilities
In 2021, total liabilities were $76.2 billion , compared to $79.4 billion in the
prior year. The decrease in total liabilities is primarily driven by the
following line items:
Change(a) Reference
Accounts payable and other current liabilities$ 1.6 Note 14 Liabilities held for sale$ 0.8 Note 13 Long-term debt obligations$ (4.3) Note 8 Other liabilities (b)$ (2.2) Note 7, Note 9 and Note 12 (a)In billions. (b)Reflects changes primarily related to pension and retiree medical plans, contingent consideration associated with our acquisition of Rockstar and leases. Total Equity Refer to our consolidated statement of equity for material changes in equity line items. Return onInvested Capital ROIC is a non-GAAP financial measure. For further information on ROIC, see "Non-GAAP Measures." 2021 2020 Net income attributable to PepsiCo$ 7,618 $ 7,120 Interest expense 1,988 1,252 Tax on interest expense (441) (278)$ 9,165 $ 8,094 Average debt obligations (a)$ 42,341 $ 41,402 Average common shareholders' equity (b) 14,924 13,536 Average invested capital$ 57,265 $ 54,938 ROIC, non-GAAP measure 16.0 % 14.7 % (a)Includes a quarterly average of short-term and long-term debt obligations. (b)Includes a quarterly average of common stock, capital in excess of par value, retained earnings, accumulated other comprehensive loss and repurchased common stock. 52 -------------------------------------------------------------------------------- Table of Contents The table below reconciles ROIC as calculated above to net ROIC, excluding items affecting comparability. 2021 2020 ROIC, non-GAAP measure 16.0 % 14.7 % Impact of: Average cash, cash equivalents and short-term investments 2.2 3.4 Interest income (0.2) (0.2) Tax on interest income - 0.1 Mark-to-market net impact 0.1 (0.1) Restructuring and impairment charges 0.2 0.3 Acquisition and divestiture-related charges (0.1) 0.4 Pension and retiree medical-related impact (0.1) 0.2 Tax expense related to the TCJ Act 0.3 0.1 Other net tax benefits - 1.0 Core Net ROIC, non-GAAP measure 18.4 % 19.9 % OUR CRITICAL ACCOUNTING POLICIES AND ESTIMATES An appreciation of our critical accounting policies and estimates is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, including those related to the COVID-19 pandemic, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented. We have discussed our critical accounting policies and estimates with our Audit Committee. Our critical accounting policies and estimates are: •revenue recognition; •goodwill and other intangible assets; •income tax expense and accruals; and •pension and retiree medical plans. Revenue Recognition We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of beverage and convenient food products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. The transfer of control of products to our customers is typically based on written sales terms that do not allow for a right of return. However, our policy for DSD, including certain chilled products, is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. As a result, we record reserves, based on estimates, for anticipated damaged and out-of-date products. Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery inthe United States , and generally within 30 to 90 days internationally, and may allow discounts for early payment. We estimate and reserve for our expected credit loss exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable, our analysis of customer data, and forward-looking information (including the expected impact of the global economic uncertainty 53 -------------------------------------------------------------------------------- Table of Contents related to the COVID-19 pandemic), leveraging estimates of creditworthiness and projections of default and recovery rates for certain of our customers. Our policy is to provide customers with product when needed. In fact, our commitment to freshness and product dating serves to regulate the quantity of product shipped or delivered. In addition, DSD products are placed on the shelf by our employees with customer shelf space and storerooms limiting the quantity of product. For product delivered through other distribution networks, we monitor customer inventory levels. As discussed in "Our Customers" in "Item 1. Business," we offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and include payments to customers for performing activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. Sales incentives and discounts also include support provided to our independent bottlers through funding of advertising and other marketing activities. 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, as products are delivered, for the expected payout, which may occur after year end once reconciled and settled. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer and consumer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred. See Note 2 to our consolidated financial statements for further information on our revenue recognition and related policies, including total marketplace spending.Goodwill and Other Intangible Assets We sell products under a number of brand names, many of which were developed by us. Brand development costs are expensed as incurred. We also purchase brands and other intangible assets in acquisitions. In a business combination, the consideration is first assigned to identifiable assets and liabilities, including brands and other intangible assets, based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions, including those related to the COVID-19 pandemic, based on an evaluation of a number of factors, such as marketplace participants, product life cycles, market share, consumer awareness, brand history and future expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash flows. We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow performance and we have the intent and ability to support the brand with marketplace spending for the foreseeable future. If these indefinite-lived brand criteria are not met, brands are amortized over their expected useful lives, which generally range from 20 to 40 years. Determining the expected life of a brand requires management judgment and is based on an evaluation of a number of factors, including market share, consumer awareness, brand history, future expansion expectations and regulatory restrictions, as well as the macroeconomic environment of the countries in which the brand is sold. In connection with previous acquisitions, we reacquired certain franchise rights which provided the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining the useful life of these franchise rights, many factors were considered, including the pre- 54 -------------------------------------------------------------------------------- Table of Contents existing perpetual bottling arrangements, the indefinite period expected for these franchise rights to contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of these franchise rights to us, including legal, regulatory, contractual, competitive, economic or other factors. Therefore, certain of these franchise rights are considered as indefinite-lived. Franchise rights that are not considered indefinite-lived are amortized over the remaining contractual period of the contract in which the right was granted. Indefinite-lived intangible assets and goodwill are not amortized and, as a result, are assessed for impairment at least annually, using either a qualitative or quantitative approach. We perform this annual assessment during our third quarter, or more frequently if circumstances indicate that the carrying value may not be recoverable. Where we use the qualitative assessment, first we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include macroeconomic (including those related to the COVID-19 pandemic), industry and competitive conditions, legal and regulatory environment, historical financial performance and significant changes in the brand or reporting unit. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. In the quantitative assessment for indefinite-lived intangible assets and goodwill, an assessment is performed to determine the fair value of the indefinite-lived intangible asset and the reporting unit, respectively. Estimated fair value is determined using discounted cash flows and requires an analysis of several estimates including future cash flows or income consistent with management's strategic business plans, annual sales growth rates, perpetuity growth assumptions and the selection of assumptions underlying a discount rate (weighted-average cost of capital) based on market data available at the time. Significant management judgment is necessary to estimate the impact of competitive operating, macroeconomic and other factors (including those related to the COVID-19 pandemic) to estimate future levels of sales, operating profit or cash flows. All assumptions used in our impairment evaluations for indefinite-lived intangible assets and goodwill, such as forecasted growth rates (including perpetuity growth assumptions) and weighted-average cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. A deterioration in these assumptions could adversely impact our results. These assumptions could be adversely impacted by certain of the risks described in "Item 1A. Risk Factors" and "Our Business Risks." Amortizable intangible assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on its discounted future cash flows. See Note 2 and Note 4 to our consolidated financial statements for further information. Income Tax Expense and Accruals Our annual tax rate is based on our income, statutory tax rates and tax structure and transactions, including transfer pricing arrangements, available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are subject to challenge and that we likely will not succeed. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances, such as the progress of a tax audit, new tax laws, relevant court cases or tax authority settlements. See "Item 1A. Risk Factors" for further discussion. An estimated annual effective tax rate is applied to our quarterly operating results. In the event there is a significant or unusual item recognized in our quarterly operating results, the tax attributable to that item is 55 -------------------------------------------------------------------------------- Table of Contents separately calculated and recorded at the same time as that item. We consider the tax adjustments from the resolution of prior-year tax matters to be among such items. Tax law requires items to be included in our tax returns at different times than the items are reflected in our consolidated financial statements. As a result, our annual tax rate reflected in our consolidated financial statements is different than that reported in our tax returns (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit on our consolidated financial statements. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax liabilities generally represent tax expense recognized in our consolidated financial statements for which payment has been deferred, or expense for which we have already taken a deduction in our tax return but have not yet recognized as expense in our consolidated financial statements. In 2021, our annual tax rate was 21.8% compared to 20.9% in 2020. See "Other Consolidated Results" for further information. See Note 5 to our consolidated financial statements for further information. Pension and Retiree Medical Plans Our pension plans cover certain employees inthe United States and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. CertainU.S. andCanada retirees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements. Generally, our share of retiree medical costs is capped at specified dollar amounts, which vary based upon years of service, with retirees contributing the remainder of the cost. In addition, we have been phasing out certain subsidies of retiree medical benefits. See "Items Affecting Comparability" and Note 7 to our consolidated financial statements for information about changes and settlements within our pension plans. Our Assumptions The determination of pension and retiree medical expenses and obligations requires the use of assumptions to estimate the amount of benefits that employees earn while working, as well as the present value of those benefits. Annual pension and retiree medical expense amounts are principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the projected benefit obligation due to the passage of time (interest cost), and (3) other gains and losses as discussed in Note 7 to our consolidated financial statements, reduced by (4) the expected return on assets for our funded plans. Significant assumptions used to measure our annual pension and retiree medical expenses include: •certain employee-related demographic factors, such as turnover, retirement age and mortality; •the expected rate of return on assets in our funded plans; •the spot rates along the yield curve used to determine service and interest costs and the present value of liabilities; •for pension expense, the rate of salary increases for plans where benefits are based on earnings; and •for retiree medical expense, health care cost trend rates. 56 -------------------------------------------------------------------------------- Table of Contents Certain assumptions reflect our historical experience and management's best judgment regarding future expectations. All actuarial assumptions are reviewed annually, except in the case of an interim remeasurement due to a significant event such as a curtailment or settlement. Due to the significant management judgment involved, these assumptions could have a material impact on the measurement of our pension and retiree medical expenses and obligations. At each measurement date, the discount rates are based on interest rates for high-quality, long-term corporate debt securities with maturities comparable to those of our liabilities. OurU.S. obligation and pension and retiree medical expense is based on the discount rates determined using the Mercer Above Mean Curve. This curve includes bonds that closely match the timing and amount of our expected benefit payments and reflects the portfolio of investments we would consider to settle our liabilities. See Note 7 to our consolidated financial statements for information about the expected rate of return on plan assets and our plans' investment strategy. Although we review our expected long-term rates of return on an annual basis, our asset returns in a given year do not significantly influence our evaluation of long-term rates of return. The health care trend rate used to determine our retiree medical plans' obligation and expense is reviewed annually. Our review is based on our claims experience, information provided by our health plans and actuaries, and our knowledge of the health care industry. Our review of the trend rate considers factors such as demographics, plan design, new medical technologies and changes in medical carriers. Weighted-average assumptions for pension and retiree medical expense are as follows: 2022 2021 2020 Pension Service cost discount rate 3.1 % 2.6 % 3.4 % Interest cost discount rate 2.4 % 1.9 % 2.8 %
Expected rate of return on plan assets 6.1 % 6.2 % 6.6 % Expected rate of salary increases 3.1 % 3.1 % 3.2 % Retiree medical Service cost discount rate
2.8 % 2.3 % 3.2 %
Interest cost discount rate 2.1 % 1.6 % 2.6 %
Expected rate of return on plan assets 5.7 % 5.4 % 5.8 % Current health care cost trend rate 5.8 % 5.5 % 5.6 %
Based on our assumptions, we expect our total pension and retiree medical
expense to decrease in 2022 primarily reflecting plan changes and related
impacts, and higher discount rates.
Sensitivity of Assumptions
A decrease in each of the collective discount rates or in the expected rate of
return assumptions would increase expense for our benefit plans. A
25-basis-point decrease in each of the above discount rates and expected rate of
return assumptions would individually increase 2022 pre-tax pension and retiree
medical expense as follows:
Assumption Amount
Discount rates used in the calculation of expense $ 37
Expected rate of return $ 49
57-------------------------------------------------------------------------------- Table of Contents Funding We make contributions to pension trusts that provide plan benefits for certain pension plans. These contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and taxation to the employee only upon receipt of plan benefits. Generally, we do not fund our pension plans when our contributions would not be currently tax deductible. As our retiree medical plans are not subject to regulatory funding requirements, we generally fund these plans on a pay-as-you-go basis, although we periodically review available options to make additional contributions toward these benefits. We made discretionary contributions to ourU.S. qualified defined benefit plans of$75 million inJanuary 2022 and expect to make an additional$75 million contribution in the third quarter of 2022. Our pension and retiree medical plan contributions are subject to change as a result of many factors, such as changes in interest rates, deviations between actual and expected asset returns and changes in tax or other benefit laws. We continue to monitor the impact of the COVID-19 pandemic and related global economic conditions and uncertainty on the net unfunded status of our pension and retiree medical plans. We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. See Note 7 to our consolidated financial statements for our past and expected contributions and estimated future benefit payments. 58 -------------------------------------------------------------------------------- Table of Contents Consolidated Statement of IncomePepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 25, 2021 ,December 26, 2020 andDecember 28, 2019 (in millions except per share amounts) 2021 2020 2019 Net Revenue$ 79,474 $ 70,372 $ 67,161 Cost of sales 37,075 31,797 30,132 Gross profit 42,399 38,575 37,029 Selling, general and administrative expenses 31,237 28,495 26,738 Operating Profit 11,162 10,080 10,291 Other pension and retiree medical benefits income/(expense) 522 117 (44) Net interest expense and other (1,863) (1,128) (935) Income before income taxes 9,821 9,069 9,312 Provision for income taxes 2,142 1,894 1,959 Net income 7,679 7,175 7,353
Less: Net income attributable to noncontrolling interests 61
55 39
Net Income Attributable to PepsiCo $ 7,618 $ 5.51 $ 5.14 $ 5.23 Diluted$ 5.49 $ 5.12 $ 5.20 Weighted-average common shares outstanding Basic 1,382 1,385 1,399 Diluted 1,389 1,392 1,407
See accompanying notes to the consolidated financial statements.
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Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 2021 , December 26, 2020 and December 28, 2019
(in millions)
2021 2020 2019
Net income $ 7,679 $ 7,175 $ 7,353
Other comprehensive income/(loss), net of taxes:
Net currency translation adjustment (369) (650) 628
Net change on cash flow hedges 155 7 (90)
Net pension and retiree medical adjustments 770 (532) 283
Other 22 (1) (2)
578 (1,176) 819
Comprehensive income 8,257 5,999 8,172
Less: Comprehensive income attributable to
noncontrolling interests 61 55 39
Comprehensive Income Attributable to PepsiCo
5,944$ 8,133
See accompanying notes to the consolidated financial statements.
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Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 2021 , December 26, 2020 and December 28, 2019
(in millions)
2021 2020 2019
Operating Activities
Net income $ 7,679 $ 7,175 $ 7,353
Depreciation and amortization 2,710 2,548 2,432
Operating lease right-of-use asset amortization 505 478 412
Share-based compensation expense 301 264 237
Restructuring and impairment charges 247 289 370
Cash payments for restructuring charges (256) (255) (350)
Acquisition and divestiture-related charges (4) 255 55
Cash payments for acquisition and divestiture-related charges (176)
(131) (10)
Pension and retiree medical plan expenses 123 408 519
Pension and retiree medical plan contributions (785) (562) (716)
Deferred income taxes and other tax charges and credits 298 361 453
Tax expense/(benefit) related to the TCJ Act 190 - (8)
Tax payments related to the TCJ Act (309) (78) (423)
Change in assets and liabilities:
Accounts and notes receivable (651) (420) (650)
Inventories (582) (516) (190)
Prepaid expenses and other current assets 159 26 (87)
Accounts payable and other current liabilities 1,762 766 735
Income taxes payable 30 (159) (287)
Other, net 375 164 (196)
Net Cash Provided by Operating Activities 11,616 10,613 9,649
Investing Activities
Capital spending (4,625) (4,240) (4,232)
Sales of property, plant and equipment 166 55 170
Acquisitions, net of cash acquired, and investments in noncontrolled affiliates
(61) (6,372) (2,717)
Divestitures and sales of investments in noncontrolled affiliates 169 6 253
Short-term investments, by original maturity:
More than three months - purchases - (1,135) -
More than three months - maturities 1,135 - 16
More than three months - sales - - 62
Three months or less, net (58) 27 19
Other investing, net 5 40 (8)
Net Cash Used for Investing Activities (3,269) (11,619) (6,437)
(Continued on following page)
61-------------------------------------------------------------------------------- Table of Contents Consolidated Statement of Cash Flows (continued)PepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 25, 2021 ,December 26, 2020 andDecember 28, 2019 (in millions) 2021 2020 2019 Financing Activities Proceeds from issuances of long-term debt$ 4,122 $ 13,809 $ 4,621 Payments of long-term debt (3,455) (1,830) (3,970) Cash tender offers/debt redemption (4,844) (1,100) (1,007) Short-term borrowings, by original maturity: More than three months - proceeds 8 4,077 6 More than three months - payments (397) (3,554) (2) Three months or less, net 434 (109) (3) Payments of acquisition-related contingent consideration (773) - - Cash dividends paid (5,815) (5,509) (5,304) Share repurchases - common (106) (2,000) (3,000) Proceeds from exercises of stock options 185 179 329
Withholding tax payments on restricted stock units (RSUs) and performance stock units (PSUs) converted
(92) (96) (114)
Other financing (47) (48) (45)
Net Cash (Used for)/Provided by Financing Activities (10,780) 3,819 (8,489)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(114) (129) 78
(2,547) 2,684 (5,199)
Cash and Cash Equivalents and Restricted Cash, Beginning of Year 8,254
5,570 10,769
Cash and Cash Equivalents and Restricted Cash, End of Year
$ 8,254 $ 5,570
See accompanying notes to the consolidated financial statements.
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Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
December 25, 2021 and December 26, 2020
(in millions except per share amounts)
2021 2020
ASSETS
Current Assets
Cash and cash equivalents $ 5,596 $ 8,185
Short-term investments 392 1,366
Accounts and notes receivable, net 8,680 8,404
Inventories 4,347 4,172
Prepaid expenses and other current assets 980 874
Assets held for sale 1,788 -
Total Current Assets 21,783 23,001
Property, Plant and Equipment, net 22,407 21,369
Amortizable Intangible Assets, net 1,538 1,703
Goodwill 18,381 18,757
Other Indefinite-Lived Intangible Assets 17,127 17,612
Investments in Noncontrolled Affiliates 2,627 2,792
Deferred Income Taxes 4,310 4,372
Other Assets 4,204 3,312
Total Assets $ 92,377 $ 92,918
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt obligations $ 4,308 $ 3,780
Accounts payable and other current liabilities 21,159 19,592
Liabilities held for sale 753 -
Total Current Liabilities 26,220 23,372
Long-Term Debt Obligations 36,026 40,370
Deferred Income Taxes 4,826 4,284
Other Liabilities 9,154 11,340
Total Liabilities 76,226 79,366
Commitments and contingencies
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: 1,383 and 1,380 shares, respectively)
23 23
Capital in excess of par value 4,001 3,910
Retained earnings 65,165 63,443
Accumulated other comprehensive loss (14,898) (15,476) Repurchased common stock, in excess of par value (484 and 487 shares, respectively)
(38,248) (38,446)
Total PepsiCo Common Shareholders' Equity 16,043 13,454
Noncontrolling interests 108 98
Total Equity 16,151 13,552
Total Liabilities and Equity $ 92,377 $ 92,918 See accompanying notes to the consolidated financial statements.
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Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 2021 , December 26, 2020 and December 28, 2019
(in millions except per share amounts)
2021 2020 2019
Shares Amount Shares Amount Shares Amount
Common Stock
Balance, beginning of year 1,380 $ 23 1,391 $ 23 1,409 $ 23
Change in repurchased common stock 3 - (11) - (18) -
Balance, end of year 1,383 23 1,380 23 1,391 23
Capital in Excess of Par Value
Balance, beginning of year 3,910 3,886 3,953
Share-based compensation expense 302 263 235
Stock option exercises, RSUs and PSUs
converted (118) (143) (188)
Withholding tax on RSUs and PSUs converted (92) (96) (114)
Other (1) - -
Balance, end of year 4,001 3,910 3,886
Retained Earnings
Balance, beginning of year 63,443 61,946 59,947
Cumulative effect of accounting changes - (34) 8
Net income attributable to PepsiCo 7,618 7,120 7,314
Cash dividends declared - common (a) (5,896) (5,589) (5,323)
Balance, end of year 65,165 63,443 61,946
Accumulated Other Comprehensive Loss
Balance, beginning of year (15,476) (14,300) (15,119)
Other comprehensive income/(loss)
attributable to PepsiCo 578 (1,176) 819
Balance, end of year (14,898) (15,476) (14,300)
Repurchased Common Stock
Balance, beginning of year (487) (38,446) (476) (36,769) (458) (34,286)
Share repurchases (1) (106) (15) (2,000) (24) (3,000)
Stock option exercises, RSUs and PSUs
converted 4 303 4 322 6 516
Other - 1 - 1 - 1
Balance, end of year (484) (38,248) (487) (38,446) (476) (36,769)
Total PepsiCo Common Shareholders' Equity 16,043 13,454 14,786
Noncontrolling Interests
Balance, beginning of year 98 82 84
Net income attributable to noncontrolling
interests 61 55 39
Distributions to noncontrolling interests (49) (44) (42)
Acquisitions - 5 -
Other, net (2) - 1
Balance, end of year 108 98 82
Total Equity $ 16,151 $ 13,552 $ 14,868
(a) Cash dividends declared per common share were $4.2475 , $4.0225 and $3.7925
for 2021, 2020 and 2019, respectively.
See accompanying notes to the consolidated financial statements.
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Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation and Our Divisions
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with U.S. GAAP and include the consolidated accounts of PepsiCo, Inc.
and the affiliates that we control. In addition, we include our share of the
results of certain other affiliates using the equity method based on our
economic ownership interest, our ability to exercise significant influence over
the operating or financial decisions of these affiliates or our ability to
direct their economic resources. We do not control these other affiliates, as
our ownership in these other affiliates is generally 50% or less. Intercompany
balances and transactions are eliminated. As a result of exchange restrictions
and other operating restrictions, we do not have control over our Venezuelan
subsidiaries. As such, our Venezuelan subsidiaries are not included within our
consolidated financial results for any period presented.
Raw materials, direct labor and plant overhead, as well as purchasing and
receiving costs, costs directly related to production planning, inspection costs
and raw materials handling facilities, are included in cost of sales. The costs
of moving, storing and delivering finished product, including merchandising
activities, are included in selling, general and administrative expenses.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect reported amounts of assets, liabilities,
revenues, expenses and disclosure of contingent assets and liabilities.
Estimates are used in determining, among other items, sales incentives accruals,
tax reserves, share-based compensation, pension and retiree medical accruals,
amounts and useful lives for intangible assets and future cash flows associated
with impairment testing for indefinite-lived intangible assets, goodwill and
other long-lived assets. We evaluate our estimates on an ongoing basis using our
historical experience, as well as other factors we believe appropriate under the
circumstances, such as current economic conditions, and adjust or revise our
estimates as circumstances change. Additionally, the business and economic
uncertainty resulting from the COVID-19 pandemic has made such estimates and
assumptions more difficult to calculate. As future events and their effect
cannot be determined with precision, actual results could differ significantly
from those estimates.
Our fiscal year ends on the last Saturday of each December, resulting in a 53rd
reporting week every five or six years, including in our 2022 financial results.
While our North America results are reported on a weekly calendar basis,
substantially all of our international operations reported on a monthly calendar
basis prior to the fourth quarter of 2021, and beginning in the fourth quarter
of 2021, all of our international operations report on a monthly calendar basis.
This change did not have a material impact on our consolidated financial
statements. The following chart details our quarterly reporting schedule for the
three years presented:
Quarter United States and Canada International
First Quarter 12 weeks January, February
Second Quarter 12 weeks March, April and May
Third Quarter 12 weeks June, July and August
Fourth Quarter 16 weeks September,October, November and December
Unless otherwise noted, tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Certain reclassifications were made to the prior year's consolidated financial statements to conform to the current year presentation.
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Our Divisions
We are organized into seven reportable segments (also referred to as divisions),
as follows:
1)FLNA, which includes our branded convenient food businesses in the United
States and Canada ;
2)QFNA, which includes our branded convenient food businesses, such as cereal,
rice, pasta and other branded food, in the United States and Canada ;
3)PBNA, which includes our beverage businesses in the United States and Canada ;
4)LatAm, which includes all of our beverage and convenient food businesses in
Latin America ;
5)Europe , which includes all of our beverage and convenient food businesses in
Europe ;
6)AMESA, which includes all of our beverage and convenient food businesses in
Africa , the Middle East and South Asia ; and
7)APAC, which includes all of our beverage and convenient food businesses in
Asia Pacific , Australia and New Zealand , and China region.
Through our operations, authorized bottlers, contract manufacturers and other
third parties, we make, market, distribute and sell a wide variety of beverages
and convenient foods, serving customers and consumers in more than 200 countries
and territories with our largest operations in the United States , Mexico ,
Russia , Canada , China , the United Kingdom and South Africa .
The accounting policies for the divisions are the same as those described in
Note 2, except for the following allocation methodologies:
•share-based compensation expense;
•pension and retiree medical expense; and
•derivatives.
Share-Based Compensation Expense
Our divisions are held accountable for share-based compensation expense and,
therefore, this expense is allocated to our divisions as an incremental employee
compensation cost.
The allocation of share-based compensation expense of each division is as
follows:
2021 2020 2019
FLNA 13 % 13 % 13 %
QFNA 1 % 1 % 1 %
PBNA 19 % 18 % 17 %
LatAm 5 % 6 % 7 %
Europe 13 % 16 % 17 %
AMESA 6 % 6 % 3 %
APAC 2 % 2 % 5 %
Corporate unallocated expenses 41 % 38 % 37 %
The expense allocated to our divisions excludes any impact of changes in our
assumptions during the year which reflect market conditions over which division
management has no control. Therefore, any variances between allocated expense
and our actual expense are recognized in corporate unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs measured at fixed discount rates are
reflected in division results. The variance between the fixed discount rate used
to determine the service cost reflected in division results and the discount
rate as disclosed in Note 7 is reflected in corporate unallocated expenses.
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Derivatives
We centrally manage commodity derivatives on behalf of our divisions. These
commodity derivatives include agricultural products, energy and metals.
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. These derivatives hedge underlying commodity price risk
and were not entered into for trading or speculative purposes.
Net Revenue and Operating Profit
Net revenue and operating profit of each division are as follows:
Net Revenue Operating Profit
2021 2020 2019 2021 2020 2019
FLNA $ 19,608 $ 18,189 $ 17,078 $ 5,633 $ 5,340 $ 5,258
QFNA 2,751 2,742 2,482 578 669 544
PBNA 25,276 22,559 21,730 2,442 1,937 2,179
LatAm 8,108 6,942 7,573 1,369 1,033 1,141
Europe 13,038 11,922 11,728 1,292 1,353 1,327
AMESA (a) 6,078 4,573 3,651 858 600 671
APAC (b) 4,615 3,445 2,919 673 590 477
Total division 79,474 70,372 67,161 12,845 11,522 11,597
Corporate unallocated expenses - - - (1,683) (1,442) (1,306)
Total $ 79,474 $ 70,372 $ 67,161 $ 11,162 $ 10,080 $ 10,291
(a)The increase in net revenue reflects our acquisition of Pioneer Foods . See
Note 13 for further information.
(b)The increase in net revenue reflects our acquisition of Be & Cheery. See Note
13 for further information.
Our primary performance obligation is the distribution and sales of beverage and
convenient food products to our customers. The following table reflects the
approximate percentage of net revenue generated between our beverage business
and our convenient food business for each of our international divisions, as
well as our consolidated net revenue:
2021 2020 2019
Beverage(a) Convenient Food Beverage(a) Convenient Food Beverage(a) Convenient Food
LatAm 10 % 90 % 10 % 90 % 10 % 90 %
Europe 55 % 45 % 55 % 45 % 55 % 45 %
AMESA (b) 30 % 70 % 30 % 70 % 40 % 60 %
APAC 20 % 80 % 25 % 75 % 25 % 75 %
PepsiCo 45 % 55 % 45 % 55 % 45 % 55 %
(a)Beverage revenue from company-owned bottlers, which primarily includes our
consolidated bottling operations in our PBNA and Europe segments, is
approximately 40% of our consolidated net revenue. Generally, our finished goods
beverage operations produce higher net revenue, but lower operating margins as
compared to concentrate sold to authorized bottling partners for the manufacture
of finished goods beverages.
(b)The increase in the approximate percentage of net revenue generated by our
convenient food business in 2020 primarily reflects our acquisition of Pioneer
Foods . See Note 13 for further information.
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Operating profit in 2021 and 2020 includes certain pre-tax charges/credits taken
as a result of the COVID-19 pandemic. These pre-tax charges/credits by division
are as follows:
2021
Allowances Inventory
for Expected Write-Downs and Employee Employee
Credit Upfront Payments to Product Compensation Protection
Losses(a) Customers(b) Returns(c) Expense(d) Costs(e) Other(f) Total
FLNA $ (8) $ - $ - $ 35 $ 27 $ 2 $ 56
QFNA (1) - - 2 1 - 2
PBNA (19) (21) - 31 14 (16) (11)
LatAm - - 1 44 15 4 64
Europe (3) (2) - 13 8 5 21
AMESA (1) - (2) 1 3 6 7
APAC - - - 2 2 5 9
Total $ (32) $ (23) $ (1) $ 128 $ 70 $ 6 $ 148
2020
Allowances for Inventory
Expected Write-Downs and Employee Employee
Credit Upfront Payments to Product Compensation Protection
Losses(a) Customers(b) Returns(c) Expense(d) Costs(e) Other(f) Total
FLNA $ 17 $ - $ 8 $ 145 $ 59 $ - $ 229
QFNA 2 - - 9 3 1 15
PBNA 29 56 28 115 50 26 304
LatAm 1 - 19 56 18 8 102
Europe 5 3 11 23 22 24 88
AMESA 2 - 3 9 7 12 33
APAC - - 3 (7) 2 5 3
Total $ 56 $ 59 $ 72 $ 350 $ 161 $ 76 $ 774
(a)Reflects the expected impact of the global economic uncertainty caused by
COVID-19, leveraging estimates of creditworthiness and projections of default
and recovery rates for certain of our customers, including foodservice and
vending businesses. Income amounts represent reductions in the previously
recorded reserves due to improved projected default rates and lower at-risk
receivable balances.
(b)Relates to promotional spending for which benefit is not expected to be
received. Income amounts represent reductions in previously recorded reserves
due to improved projected default rates and lower overall advance balances.
(c)Income amount represents a true-up of inventory write-downs. Includes a
reserve for product returns of $20 million in 2020.
(d)Includes incremental frontline incentive pay, crisis child care and other
leave benefits and labor costs. Income amount includes a social welfare relief
credit of $11 million .
(e)Includes costs associated with personal protective equipment, temperature
scans, cleaning and other sanitization services.
(f)Includes certain reserves for property, plant and equipment, donations of
cash and product, and other costs. Income amount represents adjustments for
changes in estimates of previously recorded amounts.
Corporate Unallocated Expenses
Corporate unallocated expenses include costs of our corporate headquarters,
centrally managed initiatives such as commodity derivative gains and losses,
foreign exchange transaction gains and losses, our ongoing business
transformation initiatives, unallocated research and development costs,
unallocated insurance and benefit programs, tax-related contingent
consideration, certain acquisition and divestiture-related charges, as well as
certain other items.
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Other Division Information
Total assets and capital spending of each division are as follows:
Total Assets Capital Spending
2021 2020 2021 2020 2019
FLNA $ 9,763 $ 8,730 $ 1,411 $ 1,189 $ 1,227
QFNA 1,101 1,021 92 85 104
PBNA 37,801 37,079 1,275 1,245 1,053
LatAm 7,272 6,977 461 390 557
Europe 18,472 17,917 752 730 613
AMESA 6,125 5,942 325 252 267
APAC 5,654 5,770 203 230 195
Total division 86,188 83,436 4,519 4,121 4,016
Corporate (a) 6,189 9,482 106 119 216
Total $ 92,377 $ 92,918 $ 4,625 $ 4,240 $ 4,232
(a)Corporate assets consist principally of certain cash and cash equivalents,
restricted cash, short-term investments, derivative instruments, property, plant
and equipment and tax assets. In 2021, the change in assets was primarily due to
a decrease in cash and cash equivalents and short-term investments. Refer to the
cash flow statement for further information.
Amortization of intangible assets and depreciation and other amortization of
each division are as follows:
Amortization of Depreciation and
Intangible Assets Other Amortization
2021 2020 2019 2021 2020 2019
FLNA $ 11 $ 10 $ 7 $ 594 $ 550 $ 492
QFNA - - - 46 41 44
PBNA 25 28 29 926 899 857
LatAm 4 4 5 283 251 270
Europe 37 40 37 364 350 341
AMESA 5 3 2 181 149 116
APAC 9 5 1 102 91 76
Total division 91 90 81 2,496 2,331 2,196
Corporate - - - 123 127 155
Total $ 91 $ 90 $ 81 $ 2,619 $ 2,458 $ 2,351 Net revenue and long-lived assets by country are as follows:
Net Revenue Long-Lived Assets(a)
2021 2020 2019 2021 2020
United States $ 44,545 $ 40,800 $ 38,644 $ 36,324 $ 36,657
Mexico 4,580 3,924 4,190 1,720 1,708
Russia 3,426 3,009 3,263 3,751 3,644
Canada 3,405 2,989 2,831 2,846 2,794
China (b) 2,679 1,732 1,300 1,745 1,649
United Kingdom 2,102 1,882 1,723 906 874
South Africa (c) 2,008 1,282 405 1,389 1,484
All other countries 16,729 14,754 14,805 13,399 13,423
Total $ 79,474 $ 70,372 $ 67,161 $ 62,080 $ 62,233
(a)Long-lived assets represent property, plant and equipment, indefinite-lived
intangible assets, amortizable intangible assets and investments in
noncontrolled affiliates. See Note 2 and Note 14 for further information on
property, plant and equipment. See Note 2 and Note 4 for further information on
goodwill and other intangible assets. Investments in noncontrolled affiliates
are evaluated for
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impairment upon a significant change in the operating or macroeconomic
environment. These assets are reported in the country where they are primarily
used.
(b)The increase in net revenue reflects our acquisition of Be & Cheery. See Note
13 for further information.
(c)The increase in net revenue reflects our acquisition of Pioneer Foods . See
Note 13 for further information.
Note 2 - Our Significant Accounting Policies
Revenue Recognition
We recognize revenue when our performance obligation is satisfied. Our primary
performance obligation (the distribution and sales of beverage and convenient
food products) is satisfied upon the shipment or delivery of products to our
customers, which is also when control is transferred. Merchandising activities
are performed after a customer obtains control of the product, are accounted for
as fulfillment of our performance obligation to ship or deliver product to our
customers and are recorded in selling, general and administrative expenses.
Merchandising activities are immaterial in the context of our contracts. In
addition, we exclude from net revenue all sales, use, value-added and certain
excise taxes assessed by government authorities on revenue producing
transactions.
The transfer of control of products to our customers is typically based on
written sales terms that do not allow for a right of return. However, our policy
for DSD, including certain chilled products, is to remove and replace damaged
and out-of-date products from store shelves to ensure that consumers receive the
product quality and freshness they expect. Similarly, our policy for certain
warehouse-distributed products is to replace damaged and out-of-date products.
As a result, we record reserves, based on estimates, for anticipated damaged and
out-of-date products.
Our products are sold for cash or on credit terms. Our credit terms, which are
established in accordance with local and industry practices, typically require
payment within 30 days of delivery in the United States , and generally within 30
to 90 days internationally, and may allow discounts for early payment.
We estimate and reserve for our expected credit loss exposure based on our
experience with past due accounts and collectibility, write-off history, the
aging of accounts receivable, our analysis of customer data, and forward-looking
information (including the expected impact of the global economic uncertainty
related to the COVID-19 pandemic), leveraging estimates of creditworthiness and
projections of default and recovery rates for certain of our customers.
We are exposed to concentration of credit risk from our major customers,
including Walmart. We have not experienced credit issues with these customers.
In 2021, sales to Walmart and its affiliates (including Sam's) represented
approximately 13% of our consolidated net revenue, including concentrate sales
to our independent bottlers, which were used in finished goods sold by them to
Walmart.
Total Marketplace Spending
We offer sales incentives and discounts through various programs to customers
and consumers. Total marketplace spending includes sales incentives, discounts,
advertising and other marketing activities. Sales incentives and discounts are
primarily accounted for as a reduction of revenue and include payments to
customers for performing activities on our behalf, such as payments for in-store
displays, payments to gain distribution of new products, payments for shelf
space and discounts to promote lower retail prices. Sales incentives and
discounts also include support provided to our independent bottlers through
funding of advertising and other marketing activities.
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, as products are delivered, for the expected
payout, which may occur after year end once reconciled and settled. These
accruals are based on contract terms and our historical experience with similar
programs and require management judgment with respect to estimating customer and
consumer participation and performance
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levels. Differences between estimated expense and actual incentive costs are
normally insignificant and are recognized in earnings in the period such
differences are determined. In addition, certain advertising and marketing costs
are also based on annual targets and recognized during the year as incurred.
The terms of most of our incentive arrangements do not exceed one year and,
therefore, do not require highly uncertain long-term estimates. Certain
arrangements, such as fountain pouring rights, may extend beyond one year.
Upfront payments to customers under these arrangements are recognized over the
shorter of the economic or contractual life, primarily as a reduction of
revenue, and the remaining balances of $262 million as of December 25, 2021 and
$299 million as of December 26, 2020 are included in prepaid expenses and other
current assets and other assets on our balance sheet.
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 certain advertising and other marketing
activities. Our annual consolidated financial statements are not impacted by
this interim allocation methodology.
Advertising and other marketing activities, reported as selling, general and
administrative expenses, totaled $5.1 billion in 2021, $4.6 billion in 2020 and
$4.7 billion in 2019, including advertising expenses of $3.5 billion in 2021 and
$3.0 billion in both 2020 and 2019. Deferred advertising costs are not expensed
until the year first used and consist of:
•media and personal service prepayments;
•promotional materials in inventory; and
•production costs of future media advertising.
Deferred advertising costs of $53 million and $48 million as of December 25,
2021 and December 26, 2020 , respectively, are classified as prepaid expenses and
other current assets on our balance sheet.
Distribution Costs
Distribution costs, including the costs of shipping and handling activities,
which include certain merchandising activities, are reported as selling, general
and administrative expenses. Shipping and handling expenses were $13.7 billion
in 2021, $11.9 billion in 2020 and $10.9 billion in 2019.
Software Costs
We capitalize certain computer software and software development costs incurred
in connection with developing or obtaining computer software for internal use
when both the preliminary project stage is completed and it is probable that the
software will be used as intended. Capitalized software costs include
(1) external direct costs of materials and services utilized in developing or
obtaining computer software, (2) compensation and related benefits for employees
who are directly associated with the software projects and (3) interest costs
incurred while developing internal-use computer software. Capitalized software
costs are included in property, plant and equipment on our balance sheet and
amortized on a straight-line basis when placed into service over the estimated
useful lives of the software, which approximate five to 10 years. Software
amortization totaled $135 million in 2021, $152 million in 2020 and $166 million
in 2019. Net capitalized software and development costs were $809 million and
$664 million as of December 25, 2021 and December 26, 2020 , respectively.
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Commitments and Contingencies
We are subject to various claims and contingencies related to lawsuits, certain
taxes and environmental matters, as well as commitments under contractual and
other commercial obligations. We recognize liabilities for contingencies and
commitments when a loss is probable and estimable.
Research and Development
We engage in a variety of research and development activities and continue to
invest to accelerate growth and to drive innovation globally. Consumer research
is excluded from research and development costs and included in other marketing
costs. Research and development costs were $752 million , $719 million and $711
million in 2021, 2020 and 2019, respectively, and are reported within selling,
general and administrative expenses.
Goodwill and Other Intangible Assets
Indefinite-lived intangible assets and goodwill are not amortized and, as a
result, are assessed for impairment at least annually, using either a
qualitative or quantitative approach. We perform this annual assessment during
our third quarter, or more frequently if circumstances indicate that the
carrying value may not be recoverable. Where we use the qualitative assessment,
first we determine if, based on qualitative factors, it is more likely than not
that an impairment exists. Factors considered include macroeconomic (including
those related to the COVID-19 pandemic), industry and competitive conditions,
legal and regulatory environment, historical financial performance and
significant changes in the brand or reporting unit. If the qualitative
assessment indicates that it is more likely than not that an impairment exists,
then a quantitative assessment is performed.
In the quantitative assessment for indefinite-lived intangible assets and
goodwill, an assessment is performed to determine the fair value of the
indefinite-lived intangible asset and the reporting unit, respectively.
Estimated fair value is determined using discounted cash flows and requires an
analysis of several estimates including future cash flows or income consistent
with management's strategic business plans, annual sales growth rates,
perpetuity growth assumptions and the selection of assumptions underlying a
discount rate (weighted-average cost of capital) based on market data available
at the time. Significant management judgment is necessary to estimate the impact
of competitive operating, macroeconomic and other factors (including those
related to the COVID-19 pandemic) to estimate future levels of sales, operating
profit or cash flows. All assumptions used in our impairment evaluations for
indefinite-lived intangible assets and goodwill, such as forecasted growth rates
(including perpetuity growth assumptions) and weighted-average cost of capital,
are based on the best available market information and are consistent with our
internal forecasts and operating plans. A deterioration in these assumptions
could adversely impact our results.
Amortizable intangible assets are only evaluated for impairment upon a
significant change in the operating or macroeconomic environment. If an
evaluation of the undiscounted future cash flows indicates impairment, the asset
is written down to its estimated fair value, which is based on its discounted
future cash flows.
See Note 4 for further information.
Other Significant Accounting Policies
Our other significant accounting policies are disclosed as follows:
•Basis of Presentation - Note 1 includes a description of our policies regarding
use of estimates, basis of presentation and consolidation.
•Income Taxes - Note 5.
•Share-Based Compensation - Note 6.
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•Pension, Retiree Medical and Savings Plans - Note 7.
•Financial Instruments - Note 9.
•Cash Equivalents - Cash equivalents are highly liquid investments with original
maturities of three months or less.
•Inventories - Note 14. Inventories are valued at the lower of cost or net
realizable value. Cost is determined using the average; first-in, first-out
(FIFO); or, in limited instances, last-in, first-out (LIFO) methods.
•Property, Plant and Equipment - Note 14. Property, plant and equipment is
recorded at historical cost. Depreciation is recognized on a straight-line basis
over an asset's estimated useful life. Construction in progress is not
depreciated until ready for service.
•Translation of Financial Statements of Foreign Subsidiaries - Financial
statements of foreign subsidiaries are translated into U.S. dollars using
period-end exchange rates for assets and liabilities and average exchange rates
for revenues and expenses. Adjustments resulting from translating net assets are
reported as a separate component of accumulated other comprehensive loss within
common shareholders' equity as currency translation adjustment.
Recently Issued Accounting Pronouncements - Adopted
In 2019, the Financial Accounting Standards Board (FASB) issued guidance to
simplify the accounting for income taxes. The guidance primarily addresses how
to (1) recognize a deferred tax liability after we transition to or from the
equity method of accounting, (2) evaluate if a step-up in the tax basis of
goodwill is related to a business combination or is a separate transaction, (3)
recognize all of the effects of a change in tax law in the period of enactment,
including adjusting the estimated annual tax rate, and (4) include the amount of
tax based on income in the income tax provision and any incremental amount as a
tax not based on income for hybrid tax regimes. We adopted the guidance in the
first quarter of 2021. The adoption did not have a material impact on our
consolidated financial statements or related disclosures.
Note 3 - Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
The 2019 Productivity Plan, publicly announced on February 15, 2019 , will
leverage new technology and business models to further simplify, harmonize and
automate processes; re-engineer our go-to-market and information systems,
including deploying the right automation for each market; and simplify our
organization and optimize our manufacturing and supply chain footprint. To build
on the successful implementation of the 2019 Productivity Plan to date, we
expanded and extended the plan through the end of 2026 to take advantage of
additional opportunities within the initiatives described above. We now expect
to incur pre-tax charges of approximately $3.15 billion , including cash
expenditures of approximately $2.4 billion , as compared to our previous estimate
of pre-tax charges of approximately $2.5 billion , which included cash
expenditures of approximately $1.6 billion . These pre-tax charges are expected
to consist of approximately 55% of severance and other employee-related costs,
10% for asset impairments (all non-cash) resulting from plant closures and
related actions and 35% for other costs associated with the implementation of
our initiatives.
The total expected plan pre-tax charges are expected to be incurred by division
approximately as follows:
FLNA QFNA PBNA LatAm Europe AMESA APAC Corporate
Expected pre-tax charges 15 % 1 % 25 % 10 % 25 % 5 % 4 % 15 %
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A summary of our 2019 Productivity Plan charges is as follows:
2021 2020 2019
Cost of sales $ 29 $ 30 $ 115
Selling, general and administrative expenses 208 239 253
Other pension and retiree medical benefits
expense 10 20 2
Total restructuring and impairment charges $ 247 $
289 $ 370 After-tax amount $ 206 $ 231 $ 303 Impact on net income attributable to PepsiCo per common share$ (0.15) $ (0.17) $ (0.21) Plan to Date 2021 2020 2019 through 12/25/2021 FLNA $ 28 $ 83 $ 22 $ 164 QFNA - 5 2 12 PBNA 20 47 51 158 LatAm 37 31 62 139 Europe 81 48 99 234 AMESA 15 14 38 70 APAC 7 5 47 61 Corporate 49 36 47 139 237 269 368 977 Other pension and retiree medical benefits expense 10 20 2 67 Total$ 247 $ 289 $ 370 $ 1,044 Plan to Date through 12/25/2021 Severance and other employee costs $ 564 Asset impairments 157 Other costs 323 Total $ 1,044 Severance and other employee costs primarily include severance and other termination benefits, as well as voluntary separation arrangements. Other costs primarily include costs associated with the implementation of our initiatives, including contract termination costs, consulting and other professional fees. 74 -------------------------------------------------------------------------------- Table of Contents A summary of our 2019 Productivity Plan activity is as follows: Severance and Other Asset Employee Costs Impairments Other Costs Total Liability as of December 29, 2018 $ 105 $ - $ 1$ 106 2019 restructuring charges 149 92 129 370 Cash payments (a) (138) - (119) (257) Non-cash charges and translation 12 (92) 10 (70) Liability as of December 28, 2019 128 - 21 149 2020 restructuring charges 158 33 98 289 Cash payments (a) (138) - (117) (255) Non-cash charges and translation (26) (33) 3 (56) Liability as of December 26, 2020 122 - 5 127 2021 restructuring charges 120 32 95 247 Cash payments (a) (163) - (93) (256) Non-cash charges and translation (15) (32) - (47) Liability as of December 25, 2021 $ 64 $ - $ 7$ 71 (a)Excludes cash expenditures of$2 million in both 2021 and 2020, and$4 million in 2019, reported in the cash flow statement in pension and retiree medical plan contributions. Substantially all of the restructuring accrual atDecember 25, 2021 is expected to be paid by the end of 2022. Other Productivity Initiatives There were no material charges related to other productivity and efficiency initiatives outside the scope of the 2019 Productivity Plan. We regularly evaluate different productivity initiatives beyond the productivity plan and other initiatives described above. Note 4 - Intangible Assets A summary of our amortizable intangible assets is as follows: 2021 2020 2019 Average Accumulated Accumulated Useful Life (Years) Gross Amortization Net Gross Amortization Net Acquired franchise rights (a) 56 - 60$ 976 $ (187) $ 789 $ 976 $ (173) $ 803 Customer relationships 10 - 24 623 (227) 396 642 (204) 438 Brands (b) 20 - 40 1,151 (989) 162 1,348 (1,099) 249 Other identifiable intangibles 10 - 24 451 (260) 191 474 (261) 213 Total$ 3,201 $ (1,663) $ 1,538 $ 3,440 $ (1,737) $ 1,703 Amortization expense$ 91 $ 90 $ 81 (a)Acquired franchise rights includes our distribution agreement withVital Pharmaceuticals, Inc. , with an expected residual value higher than our carrying value. The distribution agreement's useful life is three years, in accordance with the three-year termination notice issued, and is not reflected in the average useful life above. (b)The change primarily reflects assets reclassified as held for sale in connection with our Juice Transaction. See Note 13 for further information. 75 -------------------------------------------------------------------------------- Table of Contents Amortization is recognized on a straight-line basis over an intangible asset's estimated useful life. Amortization of intangible assets for each of the next five years, based on existing intangible assets as ofDecember 25, 2021 and using average 2021 foreign exchange rates, is expected to be as follows: 2022 2023 2024 2025
2026
Five-year projected amortization
Depreciable and amortizable assets are evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need for revision. Indefinite-Lived Intangible Assets We did not recognize any impairment charges for goodwill in each of the years endedDecember 25, 2021 ,December 26, 2020 andDecember 28, 2019 . We did not recognize any impairment charges for indefinite-lived intangible assets in the year endedDecember 25, 2021 . In 2020, we recognized a pre-tax impairment charge of$41 million related to a coconut water brand in PBNA. We did not recognize any material impairment charges for indefinite-lived intangible assets in the year endedDecember 28, 2019 . As ofDecember 25, 2021 , the estimated fair values of our indefinite-lived reacquired and acquired franchise rights recorded at PBNA exceeded their carrying values. However, there could be an impairment of the carrying value of PBNA's reacquired and acquired franchise rights if future revenues and their contribution to the operating results of PBNA's CSD business do not achieve our expected future cash flows or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value. We have also analyzed the impact of the macroeconomic conditions inRussia on the estimated fair value of our indefinite-lived intangible assets inRussia and have concluded that there are no impairments for the year endedDecember 25, 2021 . The estimated fair value of indefinite-lived intangible assets is dependent on macroeconomic conditions (including a resulting increase in the weighted-average cost of capital used to estimate fair value), future revenues and their contributions to operating results and expected future cash flows (including perpetuity growth assumptions), and significant changes in the decisions regarding assets that do not perform consistent with our expectations. Subsequent toDecember 25, 2021 , we discontinued or repositioned certain juice and dairy brands inRussia in ourEurope segment. As a result, we will recognize pre-tax impairment charges of approximately$0.2 billion in the first quarter of 2022 in selling, general and administrative expenses. For further information on our policies for indefinite-lived intangible assets, see Note 2. 76
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The change in the book value of indefinite-lived intangible assets is as
follows:
Balance, Balance, Balance,
Beginning Translation End of Translation End of
2020 Acquisitions and Other 2020 Acquisitions/(Divestitures) and Other 2021
FLNA (a)
Goodwill $ 299 $ 164 $ 2 $ 465 $ (8) $ 1 $ 458
Brands 162 179 (1) 340 - - 340
Total 461 343 1 805 (8) 1 798
QFNA
Goodwill 189 - - 189 - - 189
Brands 11 - (11) - - - -
Total 200 - (11) 189 - - 189
PBNA (b) (c)
Goodwill 9,898 2,280 11 12,189 (216) 1 11,974
Reacquired franchise rights 7,089 - 18 7,107 - - 7,107
Acquired franchise rights 1,517 16 3 1,536 1 1 1,538
Brands (d) 763 2,400 (41) 3,122 (290) (324) 2,508
Total 19,267 4,696 (9) 23,954 (505) (322) 23,127
LatAm
Goodwill 501 - (43) 458 - (25) 433
Brands 125 - (17) 108 (1) (7) 100
Total 626 - (60) 566 (1) (32) 533
Europe (b)
Goodwill (e) 3,961 (2) (153) 3,806 (28) (78) 3,700
Reacquired franchise rights
(e) 505 - (9) 496 (23) (32) 441
Acquired franchise rights
(e) 157 - 15 172 - (14) 158
Brands (f) 4,181 - (109) 4,072 - 182 4,254
Total 8,804 (2) (256) 8,546 (51) 58 8,553
AMESA (g)
Goodwill 446 560 90 1,096 (2) (31) 1,063
Brands - 183 31 214 - (9) 205
Total 446 743 121 1,310 (2) (40) 1,268
APAC (h)
Goodwill 207 306 41 554 3 7 564
Brands (d) 100 309 36 445 - 31 476
Total 307 615 77 999 3 38 1,040
Total goodwill 15,501 3,308 (52) 18,757 (251) (125) 18,381
Total reacquired franchise
rights 7,594 - 9 7,603 (23) (32) 7,548
Total acquired franchise
rights 1,674 16 18 1,708 1 (13) 1,696
Total brands 5,342 3,071 (112) 8,301 (291) (127) 7,883
Total $ 30,111 $ 6,395 $ (137) $ 36,369 $ (564) $ (297) $ 35,508
(a)Acquisitions/divestitures in 2021 and acquisitions in 2020 primarily reflect
our acquisition of BFY Brands .
(b)Acquisitions/divestitures in 2021 primarily reflects assets reclassified as
held for sale in connection with our Juice Transaction. See Note 13 for further
information.
(c)Acquisitions in 2020 primarily reflects our acquisition of Rockstar. See Note
13 for further information.
(d)Translation and other in 2021 primarily reflects the allocation of the
Rockstar brand to the respective divisions, which was finalized in 2021 as part
of purchase price allocation.
(e)Translation and other primarily reflects the depreciation of the euro in 2021
and depreciation of the Russian ruble in 2020.
(f)Translation and other in 2021 reflects the allocation of the Rockstar brand
from PBNA, which was finalized in 2021 as part of purchase price allocation,
partially offset by the depreciation of the euro. Translation and other in 2020
primarily reflects the depreciation of the Russian ruble.
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(g)Acquisitions in 2020 primarily reflects our acquisition of Pioneer Foods . See
Note 13 for further information.
(h)Acquisitions in 2020 primarily reflects our acquisition of Be & Cheery. See
Note 13 for further information.
Note 5 - Income Taxes
The components of income before income taxes are as follows:
2021 2020 2019
United States $ 3,740 $ 4,070 $ 4,123
Foreign 6,081 4,999 5,189
$ 9,821 $ 9,069 $ 9,312 The provision for income taxes consisted of the following:
2021 2020 2019
Current:
U.S. Federal $ 702 $ 715 $ 652
Foreign 955 932 807
State 44 110 196
1,701 1,757 1,655
Deferred:
U.S. Federal 375 273 325
Foreign (14) (167) (31)
State 80 31 10
441 137 304
$ 2,142 $ 1,894 $ 1,959 A reconciliation of the
2021 2020 2019
U.S. Federal statutory tax rate 21.0 %
21.0 % 21.0 %
State income tax, net of
Lower taxes on foreign results (1.6) (0.8) (0.9)
One-time mandatory transition tax - TCJ Act 1.9
- (0.1)
Other, net (0.5) (0.5) (0.6)
Annual tax rate 21.8 % 20.9 % 21.0 %
Tax Cuts and Jobs Act
In 2021, we recorded $190 million ($0.14 per share) of net tax expense related
to the TCJ Act as a result of adjustments related to the final assessment of the
2014 through 2016 IRS audit. There were no tax amounts recognized in 2020
related to the TCJ Act. In 2019, we recognized a net tax benefit totaling
$8 million ($0.01 per share) related to the TCJ Act.
As of December 25, 2021 , our mandatory transition tax liability was
$2.9 billion , which must be paid through 2026 under the provisions of the TCJ
Act. We reduced our liability through cash payments and application of tax
overpayments by $309 million in 2021, $78 million in 2020 and $663 million in
2019. We currently expect to pay approximately $309 million of this liability in
2022.
The TCJ Act also created a requirement that certain income earned by foreign
subsidiaries, known as global intangible low-tax income (GILTI), must be
included in the gross income of their U.S. shareholder. The FASB allows an
accounting policy election of either recognizing deferred taxes for temporary
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differences expected to reverse as GILTI in future years or recognizing such
taxes as a current-period expense when incurred. We elected to treat the tax
effect of GILTI as a current-period expense when incurred.
Other Tax Matters
In 2021, we received a final assessment from the IRS audit for the tax years
2014 through 2016. The assessment included both agreed and unagreed issues. On
October 29, 2021 , we filed a formal written protest of the assessment and
requested an appeals conference. As a result of the analysis of the 2014 through
2016 final assessment, we remeasured all applicable reserves for uncertain tax
positions for all years open under the statute of limitations, including any
correlating adjustments impacting the mandatory transition tax liability under
the TCJ Act, resulting in a net non-cash tax expense of $112 million in 2021.
On May 19, 2019 , a public referendum held in Switzerland passed the Federal Act
on Tax Reform and AHV Financing (TRAF), effective January 1, 2020 . The enactment
of certain provisions of the TRAF resulted in adjustments to our deferred taxes.
During 2021, no income tax adjustments related to the TRAF were recorded. During
2020, we recorded a net tax benefit of $72 million related to the adoption of
the TRAF in the Swiss Canton of Bern. During 2019, we recorded a net tax expense
of $24 million related to the impact of the TRAF. While the accounting for the
impacts of the TRAF are deemed to be complete, further adjustments to our
financial statements and related disclosures could be made in future quarters,
including in connection with final tax return filings.
Deferred tax liabilities and assets are comprised of the following:
2021 2020
Deferred tax liabilities Debt guarantee of wholly-owned subsidiary$ 578 $ 578 Property, plant and equipment 2,036 1,851 Recapture of net operating losses 504 504 Pension liabilities 216 - Right-of-use assets 450 371 Other 254 159 Gross deferred tax liabilities 4,038 3,463 Deferred tax assets Net carryforwards 4,974 5,008
Intangible assets other than nondeductible goodwill 1,111 1,146 Share-based compensation
98 90
Retiree medical benefits 147 153
Other employee-related benefits 379 373
Pension benefits - 80
Deductible state tax and interest benefits 149 150
Lease liabilities 450 371
Other 842 866
Gross deferred tax assets 8,150 8,237
Valuation allowances (4,628) (4,686)
Deferred tax assets, net 3,522 3,551
Net deferred tax liabilities/(assets) $ 516 $ (88)
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A summary of our valuation allowance activity is as follows:
2021 2020 2019
Balance, beginning of year $ 4,686 $ 3,599 $ 3,753
Provision (9) 1,082 (124)
Other (deductions)/additions (49) 5 (30)
Balance, end of year $ 4,628 $ 4,686 $ 3,599
Reserves
A number of years may elapse before a particular matter, for which we have
established a reserve, is audited and finally resolved. The number of years with
open tax audits varies depending on the tax jurisdiction. Our major taxing
jurisdictions and the related open tax audits are as follows:
Jurisdiction Years Open to Audit Years Currently Under Audit
United States 2014-2020 2014-2019
Mexico 2014-2020 2014-2016
United Kingdom 2018-2020 None
Canada (Domestic) 2016-2020 2016-2017
Canada (International) 2010-2020 2010-2017
Russia 2018-2020 None
Our annual tax rate is based on our income, statutory tax rates and tax planning
strategies and transactions, including transfer pricing arrangements, available
to us in the various jurisdictions in which we operate. Significant judgment is
required in determining our annual tax rate and in evaluating our tax positions.
We establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe that certain positions are subject to challenge
and that we likely will not succeed. We adjust these reserves, as well as the
related interest, in light of changing facts and circumstances, such as the
progress of a tax audit, new tax laws, relevant court cases or tax authority
settlements. Settlement of any particular issue would usually require the use of
cash. Favorable resolution would be recognized as a reduction to our annual tax
rate in the year of resolution.
As of December 25, 2021 , the total gross amount of reserves for income taxes,
reported in other liabilities, was $1.9 billion . We accrue interest related to
reserves for income taxes in our provision for income taxes and any associated
penalties are recorded in selling, general and administrative expenses. The
gross amount of interest accrued, reported in other liabilities, was $326
million as of December 25, 2021 , of which $3 million of tax benefit was
recognized in 2021. The gross amount of interest accrued, reported in other
liabilities, was $338 million as of December 26, 2020 , of which $93 million of
tax expense was recognized in 2020.
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A reconciliation of unrecognized tax benefits is as follows:
2021 2020
Balance, beginning of year$ 1,621 $
1,395
Additions for tax positions related to the current year 222
128
Additions for tax positions from prior years 681
153
Reductions for tax positions from prior years (558)
(22)
Settlement payments (25)
(13)
Statutes of limitations expiration (39) (23) Translation and other (2) 3 Balance, end of year$ 1,900 $ 1,621 Carryforwards and Allowances Operating loss carryforwards totaling$30.0 billion as ofDecember 25, 2021 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows:$0.3 billion in 2022,$26.8 billion between 2023 and 2041 and$2.9 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Undistributed International Earnings As ofDecember 25, 2021 , we had approximately$7 billion of undistributed international earnings. We intend to continue to reinvest$7 billion of earnings outsidethe United States for the foreseeable future and while future distribution of these earnings would not be subject toU.S. federal tax expense, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings. Note 6 - Share-Based Compensation Our share-based compensation program is designed to attract and retain employees while also aligning employees' interests with the interests of our shareholders. PepsiCo has granted stock options, RSUs, PSUs and long-term cash awards to employees under the shareholder-approvedPepsiCo, Inc. Long-Term Incentive Plan (LTIP). Executives who are awarded long-term incentives based on their performance may generally elect to receive their grant in the form of stock options or RSUs, or a combination thereof. Executives who elect stock options receive four stock options for every one RSU that would have otherwise been granted. Certain executive officers and other senior executives do not have a choice and are granted 66% PSUs and 34% long-term cash, each of which are subject to pre-established performance targets. The Company may use authorized and unissued shares to meet share requirements resulting from the exercise of stock options and the vesting of RSUs and PSUs. As ofDecember 25, 2021 , 44 million shares were available for future share-based compensation grants under the LTIP. 81 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our total share-based compensation expense, which is primarily recorded in selling, general and administrative expenses, and excess tax benefits recognized: 2021 2020 2019 Share-based compensation expense - equity awards$ 301 $ 264 $ 237 Share-based compensation expense - liability awards 20 11 8 Restructuring charges 1 (1) (2) Total$ 322
$ 57 $ 48 $ 39 Excess tax benefits related to share-based compensation$ 38
As ofDecember 25, 2021 , there was$372 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of two years. Method of Accounting and Our Assumptions The fair value of share-based award grants is amortized to expense over the vesting period, primarily three years. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, we use historical data to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest. We do not backdate, reprice or grant share-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP. Stock Options A stock option permits the holder to purchase shares of PepsiCo common stock at a specified price. We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. Our weighted-average Black-Scholes fair value assumptions are as follows: 2021 2020 2019 Expected life 7 years 6 years 5 years Risk-free interest rate 1.1 % 0.9 % 2.4 % Expected volatility 14 % 14 % 14 % Expected dividend yield 3.1 % 3.4 % 3.1 % The expected life is the period over which our employee groups are expected to hold their options. It is based on our historical experience with similar grants. The risk-free interest rate is based on the expectedU.S. Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on our stated dividend policy and forecasts of net income, share repurchases and stock price. 82 -------------------------------------------------------------------------------- Table of Contents A summary of our stock option activity for the year endedDecember 25, 2021 is as follows: Weighted-Average Weighted-Average Contractual Aggregate Exercise Life Remaining Intrinsic Options(a) Price (years) Value(a) Outstanding at December 26, 2020 10,640 $ 99.54 Granted 2,157 $ 134.25 Exercised (2,321) $ 79.87 Forfeited/expired (334) $ 125.35 Outstanding at December 25, 2021 10,142 $ 110.54 5.79$ 600,755 Exercisable at December 25, 2021 5,407 $ 93.49 3.47$ 412,524 Expected to vest as of December 25, 2021 4,419 $ 129.78 8.41$ 176,771 (a)In thousands. Restricted Stock Units and Performance Stock Units Each RSU represents our obligation to deliver to the holder one share of PepsiCo common stock when the award vests at the end of the service period. PSUs are awards pursuant to which a number of shares are delivered to the holder upon vesting at the end of the service period based on PepsiCo's performance against specified financial performance metrics. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award. During the vesting period, RSUs and PSUs accrue dividend equivalents that pay out in cash (without interest) if and when the applicable RSU or PSU vests and becomes payable. The fair value of RSUs and PSUs are measured at the market price of the Company's stock on the date of grant. A summary of our RSU and PSU activity for the year endedDecember 25, 2021 is as follows: Aggregate Weighted-Average Weighted-Average Contractual Life Intrinsic RSUs/PSUs(a) Grant-Date Fair Value Remaining (years) Value(a) Outstanding at December 26, 2020 6,127 $ 119.92 Granted 2,636 $ 131.81 Converted (2,229) $ 112.09 Forfeited (557) $ 126.70 Outstanding at December 25, 2021 (b) 5,977 $ 127.45 1.31 $
1,014,854
Expected to vest as ofDecember 25, 2021 (c) 6,016 $ 127.59 1.30$ 1,021,312 (a)In thousands. Outstanding awards are disclosed at target. (b)The outstanding PSUs for which the vesting period has not ended as ofDecember 25, 2021 , at the threshold, target and maximum award levels were zero, 1 million and 2 million, respectively. (c)Represents the number of outstanding awards expected to vest, including estimated performance adjustments on all outstanding PSUs as ofDecember 25, 2021 . Long-Term Cash 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 83 -------------------------------------------------------------------------------- Table of Contents achievement of a specified performance target over a three-year performance period. Long-term cash awards that qualify as liability awards under share-based compensation guidance are valued through the end of the performance period on a mark-to-market basis using the Monte Carlo simulation model. A summary of our long-term cash activity for the year endedDecember 25, 2021 is as follows: Balance Sheet Long-Term Cash Date Fair Contractual Life Remaining Award(a) Value(a) (years) Outstanding at December 26, 2020$ 47,513 Granted 16,507 Vested (16,567) Forfeited (1,661) Outstanding at December 25, 2021 (b)$ 45,792 $ 50,238 1.29
Expected to vest as of
$ 47,771 1.27 (a)In thousands. Outstanding awards are disclosed at target. (b)The outstanding awards for which the vesting period has not ended as ofDecember 25, 2021 , at the threshold, target and maximum award levels based on the achievement of its market conditions were zero,$46 million and$92 million , respectively. (c)Represents the number of outstanding awards expected to vest, based on the most recent valuation as ofDecember 25, 2021 . Other Share-Based Compensation Data The following is a summary of other share-based compensation data: 2021 2020 2019 Stock Options Total number of options granted (a) 2,157 1,847 1,286
Weighted-average grant-date fair value of options granted
$ 8.31 $ 10.89 Total intrinsic value of options exercised (a)$ 153,306 $ 155,096 $ 275,745 Total grant-date fair value of options vested (a)$ 10,605 $ 8,652 $ 9,838 RSUs/PSUs Total number of RSUs/PSUs granted (a) 2,636 2,496 2,754
Weighted-average grant-date fair value of RSUs/PSUs granted
$ 131.21 $ 116.87 Total intrinsic value of RSUs/PSUs converted (a)$ 273,878 $ 303,165 $ 333,951 Total grant-date fair value of RSUs/PSUs vested (a)$ 198,469
(a)In thousands. As ofDecember 25, 2021 andDecember 26, 2020 , there were approximately 299,000 and 287,000 outstanding awards, respectively, consisting primarily of phantom stock units that were granted under the PepsiCo Director Deferral Program and will be settled in shares of PepsiCo common stock pursuant to the LTIP at the end of the applicable deferral period, not included in the tables above. 84 -------------------------------------------------------------------------------- Table of Contents Note 7 - Pension, Retiree Medical and Savings Plans In connection with our Juice Transaction subsequent toDecember 25, 2021 , we transferred pension and retiree medical obligations of approximately$150 million and related assets to the newly formed joint venture. In 2021, we adopted a change to the Canadian defined benefit plans to freeze pension accruals for salaried participants, effectiveJanuary 1, 2024 , and to close the hourly plan to new non-union employees hired on or afterJanuary 1, 2022 . After the effective date, all salaried participants will receive an employer contribution to the defined contribution plan based on age and years of service regardless of employee contribution and will have the opportunity to receive employer contributions to match employee contributions up to defined limits. We also adopted a change to theU.K. defined benefit plan to freeze pension accruals for all participants effectiveMarch 31, 2022 . After the effective date, participants will have the opportunity to receive employer contributions to match employee contributions up to defined limits. Pre-tax pension benefits expense will decrease after the effective dates, partially offset by contributions to defined contribution plans. In 2021, we adopted a change to theU.S. qualified defined benefit plans to transfer certain participants from PepsiCo Employees Retirement Plan A (Plan A) to PepsiCo Employees Retirement Plan I (Plan I), effectiveJanuary 1, 2022 . The benefits offered to the plans' participants were unchanged. There is no material impact to pre-tax pension benefits expense from this transaction. In 2020, lump sum distributions exceeded the total of annual service and interest cost and triggered a pre-tax settlement charge in Plan A of$205 million ($158 million after-tax or$0.11 per share). In 2020, we adopted an amendment to theU.S. defined benefit pension plans to freeze benefit accruals for salaried participants, effectiveDecember 31, 2025 . Since 2011, salaried new hires are not eligible to participate in the defined benefit plan. After the effective date, all salaried participants will receive an employer contribution to the 401(k) savings plan based on age and years of service regardless of employee contribution and will have the opportunity to receive employer contributions to match employee contributions up to defined limits. As a result of this amendment, pre-tax pension benefits expense decreased$70 million in 2021, primarily impacting corporate unallocated expenses. In 2020, we approved an amendment to reorganize theU.S. qualified defined benefit pension plans that resulted in the transfer of certain participants from Plan A to Plan I and to a newly created plan, PepsiCo Employees Retirement Hourly Plan (Plan H), effectiveJanuary 1, 2021 . The benefits offered to the plans' participants were unchanged. The reorganization facilitated a more targeted investment strategy and provided additional flexibility in evaluating opportunities to reduce risk and volatility. There was no material impact to pre-tax pension benefits expense as a result of this reorganization. In 2020, we adopted an amendment, effectiveJanuary 1, 2021 , to enhance the pay credit benefits of certain participants in Plan H. As a result of this amendment, pre-tax pension benefits expense increased$45 million in 2021, primarily impacting service cost expense. In 2019, Plan A purchased a group annuity contract whereby a third-party insurance company assumed the obligation to pay and administer future annuity payments for certain retirees. This transaction triggered a pre-tax settlement charge in 2019 of$220 million ($170 million after-tax or$0.12 per share). Also in 2019, certain former employees who had vested benefits in ourU.S. defined benefit pension plans were offered the option of receiving a one-time lump sum payment equal to the present value of the participant's pension benefit. This transaction triggered a pre-tax settlement charge in 2019 of$53 million ($41 million after-tax or$0.03 per share). Collectively, the group annuity contract and one-time lump sum payments to certain former employees who had vested benefits resulted in settlement charges in 2019 of$273 million ($211 million after-tax or$0.15 per share). 85 -------------------------------------------------------------------------------- Table of Contents Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual return on plan assets and the expected return on plan assets, as well as changes in our assumptions, are determined at each measurement date. These differences are recognized as a component of net gain or loss in accumulated other comprehensive loss. If this net accumulated gain or loss exceeds 10% of the greater of the market-related value of plan assets or plan obligations, a portion of the net gain or loss is included in other pension and retiree medical benefits (expense)/income for the following year based upon the average remaining service life for participants in Plan A (approximately 9 years), Plan H (approximately 11 years) and retiree medical (approximately 9 years), and the remaining life expectancy for participants in Plan I (approximately 27 years). The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost/(credit)) is included in other pension and retiree medical benefits (expense)/income on a straight-line basis over the average remaining service life for participants in both Plan A and Plan H, except that prior service cost/(credit) for salaried participants subject to the freeze is amortized on a straight-line basis over the period up to the effective date of the freeze, or the remaining life expectancy for participants in Plan I. 86 -------------------------------------------------------------------------------- Table of Contents Selected financial information for our pension and retiree medical plans is as follows: Pension Retiree Medical U.S. International 2021 2020 2021 2020 2021 2020 Change in projected benefit obligation Obligation at beginning of year$ 16,753 $ 15,230 $ 4,430 $ 3,753 $ 1,006 $ 988 Service cost 518 434 104 86 33 25 Interest cost 324 435 74 85 15 25 Plan amendments 23 (221) 3 (17) - (25) Participant contributions - - 3 2 - - Experience (gain)/loss (215) 2,042 (178) 467 (17) 81 Benefit payments (976) (378) (106) (92) (83) (89) Settlement/curtailment (220) (808) (99) (24) - - Special termination benefits 9 19 - - - - Other, including foreign currency adjustment - - (56) 170 - 1 Obligation at end of year$ 16,216 $
16,753
Change in fair value of plan assets Fair value at beginning of year$ 15,465 $
14,302
1,052 1,908 387 401 20 47
Employer contributions/funding 580 387 158 120 47 55
Participant contributions - - 3 2 - -
Benefit payments (976) (378) (106) (92) (83) (89)
Settlement (217) (754) (52) (29) - -
Other, including foreign currency adjustment - - (69) 169 - -
Fair value at end of year $ 15,904 $ 15,465 $ 4,624 $ 4,303 $ 299 $ 315
Funded status $ (312) $ (1,288) $ 449 $ (127) $ (655) $ (691)
Amounts recognized
Other assets $ 692 $ 797 $ 564 $ 110 $ - $ -
Other current liabilities (48) (53) (1) (1) (57) (51)
Other liabilities (956) (2,032) (114) (236) (598) (640)
Net amount recognized $ (312) $ (1,288) $ 449 $ (127) $ (655) $ (691)
Amounts included in accumulated other comprehensive loss (pre-tax)
Net loss/(gain) $ 3,550 $ 4,116 $ 696 $ 1,149 $ (220) $ (212)
Prior service (credit)/cost (63) (119) (11) (19) (34) (45)
Total $ 3,487 $ 3,997 $ 685 $ 1,130 $ (254) $ (257) Changes recognized in net (gain)/loss included in other comprehensive loss Net (gain)/loss arising in current year
$ (301) $ 1,009
(265) (409) (95) (75) 14 23
Foreign currency translation
(gain)/loss - - (3) 42 - -
Total $ (566) $ 600 $ (453) $ 235 $ (8) $ 73
Accumulated benefit obligation at end
of year $ 15,489 $ 15,949
The net gain arising in the current year is primarily attributable to the
increase in discount rate offset by actual experience differing from demographic
assumptions.
The amount we report in operating profit as pension and retiree medical cost is
service cost, which is the value of benefits earned by employees for working
during the year.
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The amounts we report below operating profit as pension and retiree medical cost
consist of the following components:
•Interest cost is the accrued interest on the projected benefit obligation due
to the passage of time.
•Expected return on plan assets is the long-term return we expect to earn on
plan investments for our funded plans that will be used to settle future benefit
obligations.
•Amortization of prior service cost/(credit) represents the recognition in the
income statement of benefit changes resulting from plan amendments.
•Amortization of net loss/(gain) represents the recognition in the income
statement of changes in the amount of plan assets and the projected benefit
obligation based on changes in assumptions and actual experience.
•Settlement/curtailment loss/(gain) represents the result of actions that
effectively eliminate all or a portion of related projected benefit obligations.
Settlements are triggered when payouts to settle the projected benefit
obligation of a plan due to lump sums or other events exceed the annual service
and interest cost. Settlements are recognized when actions are irrevocable and
we are relieved of the primary responsibility and risk for projected benefit
obligations. Lump sum payouts are generally higher when interest rates are
lower. Curtailments are recognized when events such as plant closures, the sale
of a business, or plan changes result in a significant reduction of future
service or benefits. Curtailment losses are recognized when an event is probable
and estimable, while curtailment gains are recognized when an event has occurred
(when the related employees terminate or an amendment is adopted).
•Special termination benefits are the additional benefits offered to employees
upon departure due to actions such as restructuring.
The components of total pension and retiree medical benefit costs are as
follows:
Pension Retiree Medical
U.S. International
2021 2020 2019 2021 2020 2019 2021 2020 2019
Service cost $ 518 $ 434 $ 381 $ 104 $ 86 $ 73 $ 33 $ 25 $ 23
Other pension and retiree medical benefits
(income)/expense:
Interest cost $ 324 $ 435
(970) (929) (892) (231) (202) (188) (15) (16) (18)
Amortization of prior service (credits)/cost (31) 12 10 (2) - - (11) (12) (19)
Amortization of net losses/(gains) 224 196 161 77 61 32 (14) (23) (27)
Settlement/curtailment losses/(gains) (a) 40 213 296 (11) 19 12 - - -
Special termination benefits 9 19 1 - - - - - -
Total other pension and retiree medical
benefits (income)/expense $ (404) $ (54) $ 119 $ (93) $ (37) $ (47) $ (25) $ (26) $ (28)
Total $ 114 $ 380 $ 500 $ 11 $ 49 $ 26 $ 8 $ (1) $ (5)
(a)In 2020, U.S. includes a settlement charge of $205 million ($158 million
after-tax or $0.11 per share) related to lump sum distributions exceeding the
total of annual service and interest cost. In 2019, U.S. includes settlement
charges related to the purchase of a group annuity contract of $220 million
($170 million after-tax or $0.12 per share) and a pension lump sum settlement
charge of $53 million ($41 million after-tax or $0.03 per share).
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The following table provides the weighted-average assumptions used to determine
net periodic benefit cost and projected benefit obligation for our pension and
retiree medical plans:
Pension Retiree Medical
U.S. International
2021 2020 2019 2021 2020 2019 2021 2020 2019
Net Periodic Benefit Cost
Service cost discount rate 2.6 % 3.4 % 4.4 % 2.7 % 3.2 % 4.2 % 2.3 % 3.2 % 4.3 %
Interest cost discount rate 2.0 % 2.9 % 4.1 % 1.7 % 2.4 % 3.2 % 1.6 % 2.6 % 3.8 %
Expected return on plan
assets 6.4 % 6.8 % 7.1 % 5.3 % 5.6 % 5.8 % 5.4 % 5.8 % 6.6 %
Rate of salary increases 3.0 % 3.1 % 3.1 % 3.3 % 3.3 % 3.7 %
Projected Benefit
Obligation
Discount rate 2.9 % 2.5 % 3.3 % 2.4 % 2.0 % 2.5 % 2.7 % 2.3 % 3.1 %
Rate of salary increases 3.0 % 3.0 % 3.1 % 3.3 % 3.3 % 3.3 %
The following table provides selected information about plans with accumulated
benefit obligation and total projected benefit obligation in excess of plan
assets:
Pension Retiree Medical
U.S. International
2021 2020 2021 2020 2021 2020
Selected information for plans with accumulated benefit obligation in excess of plan assets (a)
Obligation for service to date $ (1,499) $ (5,537) $ (127) $ (172)
Fair value of plan assets $ 705 $ 4,156 $ 102 $ 123
Selected information for plans with projected benefit obligation in excess of plan
assets (a)
Benefit obligation $ (1,709) $ (9,172) $ (286) $ (2,933) $ (954) $ (1,006)
Fair value of plan assets $ 705 $ 7,088 $ 171 $ 2,696 $ 299 $ 315
(a)The decrease in U.S. pension plans with obligations in excess of plan assets
primarily reflects employer contributions to Plan H.
Of the total projected pension benefit obligation as of December 25, 2021 ,
approximately $810 million relates to plans that we do not fund because the
funding of such plans does not receive favorable tax treatment.
Future Benefit Payments
Our estimated future benefit payments are as follows:
2022 2023 2024 2025 2026 2027 - 2031
Pension $ 1,110 $ 960 $ 960 $ 995 $ 1,030 $ 5,385
Retiree medical (a) $ 95 $ 90 $ 90 $ 85 $ 80 $ 355
(a)Expected future benefit payments for our retiree medical plans do not reflect
any estimated subsidies expected to be received under the 2003 Medicare Act.
Subsidies are expected to be approximately $1 million for each of the years from
2022 through 2026 and approximately $4 million in total for 2027 through 2031.
These future benefit payments to beneficiaries include payments from both funded
and unfunded plans.
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Funding
Contributions to our pension and retiree medical plans were as follows:
Pension Retiree Medical
2021 2020 2019 2021 2020 2019
Discretionary (a) $ 525 $ 339 $ 417 $ - $ - $ -
Non-discretionary 213 168 255 47 55 44
Total $ 738 $ 507 $ 672 $ 47 $ 55 $ 44
(a)Includes $500 million contribution in 2021, $325 million contribution in 2020
and $400 million contribution in 2019 to fund our qualified defined benefit
plans in the United States .
We made a discretionary contribution of $75 million to our U.S. qualified
defined benefit plans in January 2022 and expect to make an additional
$75 million contribution in the third quarter of 2022. In addition, in 2022, we
expect to make non-discretionary contributions of approximately $135 million to
our U.S. and international pension benefit plans and approximately $55 million
for retiree medical benefits.
We continue to monitor the impact of the COVID-19 pandemic and related global
economic conditions and uncertainty on the net unfunded status of our pension
and retiree medical plans. We also regularly evaluate opportunities to reduce
risk and volatility associated with our pension and retiree medical plans.
Plan Assets
Our pension plan investment strategy includes the use of actively managed
accounts and is reviewed periodically in conjunction with plan obligations, an
evaluation of market conditions, tolerance for risk and cash requirements for
benefit payments. This strategy is also applicable to funds held for the retiree
medical plans. Our investment objective includes ensuring that funds are
available to meet the plans' benefit obligations when they become due. Assets
contributed to our pension plans are no longer controlled by us, but become the
property of our individual pension plans. However, we are indirectly impacted by
changes in these plan assets as compared to changes in our projected
obligations. Our overall investment policy is to prudently invest plan assets in
a well-diversified portfolio of equity and high-quality debt securities and real
estate to achieve our long-term return expectations. Our investment policy also
permits the use of derivative instruments, such as futures and forward
contracts, to reduce interest rate and foreign currency risks. Futures contracts
represent commitments to purchase or sell securities at a future date and at a
specified price. Forward contracts consist of currency forwards.
For 2022 and 2021, our expected long-term rate of return on U.S. plan assets is
6.3% and 6.4%, respectively. Our target investment allocations for U.S. plan
assets are as follows:
2022 2021
Fixed income 56 % 51 %
U.S. equity 22 % 24 %
International equity 18 % 21 %
Real estate 4 % 4 %
Actual investment allocations may vary from our target investment allocations
due to prevailing market conditions. We regularly review our actual investment
allocations and periodically rebalance our investments.
The expected return on plan assets is based on our investment strategy and our
expectations for long-term rates of return by asset class, taking into account
volatility and correlation among asset classes and our historical experience. We
also review current levels of interest rates and inflation to assess the
reasonableness of the long-term rates. We evaluate our expected return
assumptions annually to ensure that they are reasonable. To calculate the
expected return on plan assets, our market-related value of assets
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for fixed income is the actual fair value. For all other asset categories, such
as equity securities, we use a method that recognizes investment gains or losses
(the difference between the expected and actual return based on the
market-related value of assets) over a five-year period. This has the effect of
reducing year-to-year volatility.
Plan assets measured at fair value as of year-end 2021 and 2020 are categorized
consistently by Level 1 (quoted prices in active markets for identical assets),
Level 2 (significant other observable inputs) and Level 3 (significant
unobservable inputs) in both years and are as follows:
Fair Value
Hierarchy Level 2021 2020
U.S. plan assets (a)
Equity securities, including preferred stock (b) 1 $ 6,387 $ 7,179
Government securities (c) 2 2,523 2,177
Corporate bonds (c) 2 6,210 5,437
Mortgage-backed securities (c) 2 199 119
Contracts with insurance companies (d) 3 9 9
Cash and cash equivalents (e) 1, 2 352 278
Sub-total U.S. plan assets 15,680 15,199Real estate commingled funds measured at net asset value (f)
478 517
Dividends and interest receivable, net of payables 45 64
Total U.S. plan assets $ 16,203 $ 15,780
International plan assets
Equity securities (b) 1 $ 2,232 $ 2,119
Government securities (c) 2 1,053 937
Corporate bonds (c) 2 400 445
Fixed income commingled funds (g) 1 632 509
Contracts with insurance companies (d) 3 43 50
Cash and cash equivalents 1 34 33
Sub-total international plan assets 4,394 4,093
Real estate commingled funds measured at net asset value (f)
221 202
Dividends and interest receivable 9 8
Total international plan assets $ 4,624 $ 4,303
(a)Includes $299 million and $315 million in 2021 and 2020, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits forU.S. retirees and their beneficiaries. (b)Invested inU.S. and international common stock and commingled funds, and the preferred stock portfolio was invested in domestic and international corporate preferred stock investments. The common and preferred stock investments are based on quoted prices in active markets. The commingled funds are based on the published price of the fund and include one large-cap fund that represents 11% and 13% of totalU.S. plan assets for 2021 and 2020, respectively. (c)These investments are based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets. Corporate bonds ofU.S. -based companies represent 32% and 30% of totalU.S. plan assets for 2021 and 2020, respectively. (d)Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable. The changes in Level 3 amounts were not significant in the years ended December 25, 2021 and December 26, 2020. (e)Includes Level 1 assets of $216 million and $178 million for 2021 and 2020, respectively, and Level 2 assets of $136 million and $100 million for 2021 and 2020, respectively. (f)The real estate commingled funds include investments in limited partnerships. These funds are based on the net asset value of the appraised value of investments owned by these funds as determined by independent third parties using inputs that are not observable. The majority of the funds are redeemable quarterly subject to availability of cash and have notice periods ranging from 45 to 90 days. (g)Based on the published price of the fund. 91
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Retiree Medical Cost Trend Rates
2022 2021
Average increase assumed 6 % 6 %
Ultimate projected increase 4 % 5 %
Year of ultimate projected increase 2046 2040
These assumed health care cost trend rates have an impact on the retiree medical plan expense and obligation, however the cap on our share of retiree medical costs limits the impact. Savings Plan CertainU.S. employees are eligible to participate in a 401(k) savings plan, which is a voluntary defined contribution plan. The plan is designed to help employees accumulate savings for retirement and we make Company matching contributions for certain employees on a portion of employee contributions based on years of service. CertainU.S. salaried employees, who are not eligible to participate in a defined benefit pension plan, are also eligible to receive an employer contribution based on age and years of service regardless of employee contribution. In 2021, 2020 and 2019, our total Company contributions were $246 million, $225 million and $197 million, respectively. Note 8 - Debt Obligations The following table summarizes our debt obligations: 2021(a)
2020(a)
Short-term debt obligations (b) Current maturities of long-term debt $ 3,872 $
3,358
Commercial paper (0.1% and 0.2%) 400
396
Other borrowings (2.2% and 1.7%) 36
26
$ 4,308 $ 3,780
Long-term debt obligations (b)
Notes due 2021 (2.2%) $ - $
3,356
Notes due 2022 (2.4% and 2.5%) 3,868
3,867
Notes due 2023 (1.5% and 1.5%) 3,019
3,017
Notes due 2024 (2.1% and 2.1%) 2,986
3,067
Notes due 2025 (2.7% and 2.7%) 3,230
3,227
Notes due 2026 (3.2% and 3.2%) 2,450
2,492
Notes due 2027-2060 (2.6% and 2.8%) 24,313
24,673
Other, due 2021-2027 (1.3% and 1.3%) 32
29
39,898 43,728
Less: current maturities of long-term debt obligations 3,872 3,358
Total $ 36,026 $ 40,370
(a)Amounts are shown net of unamortized net discounts of $233 million and $260
million for 2021 and 2020, respectively.
(b)The interest rates presented reflect weighted-average effective interest
rates at year-end. Certain of our fixed rate indebtedness have been swapped to
floating rates through the use of interest rate derivative instruments. See Note
9 for further information regarding our interest rate derivative instruments.
As of December 25, 2021 and December 26, 2020, our international debt of $38
million and $29 million, respectively, was related to borrowings from external
parties, including various lines of credit. These lines
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Interest Rate Maturity Date Amount(a)
0.750 % October 2033 € 1,000
1.950 % October 2031 $ 1,250
2.625 % October 2041 $ 750
2.750 % October 2051 $ 1,000
(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 will be used for general
corporate purposes, including the repurchase of outstanding indebtedness and the
repayment of commercial paper.
In 2021, we paid $4.8 billion in cash in connection with the tender of certain
notes redeemed in the following amounts:
Interest Rate Maturity Date Principal Amount Tendered
5.500 % May 2035 $ 8
5.500 % May 2035 $ 1 (a)
5.500 % January 2040 $ 26
3.500 % March 2040 $ 443
4.875 % November 2040 $ 30
4.000 % March 2042 $ 261
3.600 % August 2042 $ 210
4.250 % October 2044 $ 190
4.600 % July 2045 $ 203
4.450 % April 2046 $ 532
3.450 % October 2046 $ 622
4.000 % May 2047 $ 212
3.375 % July 2049 $ 508
3.625 % March 2050 $ 611
3.875 % March 2060 $ 240
(a)Series A.
As a result of the cash tender offers, we recorded a pre-tax charge of
$842 million ($677 million after-tax or $0.49 per share) to net interest expense
and other, primarily representing the tender price paid over the carrying value
of the tendered notes and loss on treasury rate locks used to mitigate the
interest rate risk on the cash tender offers. See Note 9 to our consolidated
financial statements for the mark-to-market impact of treasury rate locks
associated with the cash tender offers.
In 2021, we entered into a new five-year unsecured revolving credit agreement
(Five-Year Credit Agreement), which expires on May 28, 2026. The Five-Year
Credit Agreement enables us and our borrowing subsidiaries to borrow up to
$3.75 billion in U.S. dollars and/or euros, including a $0.75 billion swing line
subfacility for euro-denominated borrowings permitted to be borrowed on a
same-day basis, subject to customary terms and conditions. We may request that
commitments under this agreement be increased up to $4.5 billion (or the
equivalent amount in euros). Additionally, we may, once a year,
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request renewal of the agreement for an additional one-year period. The
Five-Year Credit Agreement replaced our $3.75 billion five year credit
agreement, dated as of June 3, 2019.
Also in 2021, we entered into a new 364-day unsecured revolving credit agreement
(364-Day Credit Agreement), which expires on May 27, 2022. The 364-Day Credit
Agreement enables us and our borrowing subsidiaries to borrow up to
$3.75 billion in U.S. dollars and/or euros, subject to customary terms and
conditions. We may request that commitments under this agreement be increased up
to $4.5 billion (or the equivalent amount in euros). 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 term loan
would mature no later than the anniversary of the then effective termination
date. The 364-Day Credit Agreement replaced our $3.75 billion 364-day credit
agreement, dated as of June 1, 2020.
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 December 25, 2021, there were no outstanding borrowings under the
Five-Year Credit Agreement or the 364-Day Credit Agreement.
In 2020, one of our international consolidated subsidiaries borrowed
21.7 billion South African rand, or approximately $1.3 billion, from our two
unsecured bridge loan facilities (Bridge Loan Facilities) to fund our
acquisition of Pioneer Foods. These borrowings were fully repaid in April 2020
and no further borrowings under these Bridge Loan Facilities are permitted.
In 2021, we paid $750 million to redeem all $750 million outstanding principal
amount of our 1.70% senior notes due 2021 and terminated the associated interest
rate swap with a notional amount of $250 million.
In 2020, we paid $1.1 billion to redeem all $1.1 billion outstanding principal
amount of our 2.15% senior notes due 2020 and terminated associated interest
rate swaps with a notional amount of $0.8 billion.
In 2019, we paid $1.0 billion to redeem all $1.0 billion outstanding principal
amount of our 4.50% senior notes due 2020.
Note 9 - Financial Instruments
Derivatives and Hedging
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. We do not use derivative instruments for trading or speculative
purposes. Our global purchasing programs include fixed-price contracts and
purchase orders and pricing agreements.
Our hedging strategies include the use of derivatives and, in the case of our
net investment hedges, debt instruments. 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. The accounting for qualifying hedges allows changes in a hedging
instrument's fair value to offset corresponding changes in the hedged item in
the same reporting period that the hedged item impacts earnings. Gains or losses
on derivatives designated as cash flow hedges are recorded in accumulated other
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comprehensive loss and reclassified to our income statement when the hedged
transaction affects earnings. If it becomes probable that the hedged transaction
will not occur, we immediately recognize the related hedging gains or losses in
earnings; such gains or losses reclassified during the year ended December 25,
2021 were not material.
Cash flows from derivatives used to manage commodity price, foreign exchange or
interest rate risks are classified as operating activities in the cash flow
statement. We classify both the earnings and cash flow impact from these
derivatives consistent with the underlying hedged item.
Credit Risk
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.
Certain of our agreements with our counterparties require us to post full
collateral on derivative instruments in a net liability position if our credit
rating is at A2 (Moody's Investors Service, Inc. ) or A (S&P Global Ratings ) and
we have been placed on credit watch for possible downgrade or if our credit
rating falls below either of these levels. The fair value of all derivative
instruments with credit-risk-related contingent features that were in a net
liability position as of December 25, 2021 was $247 million. We have posted no
collateral under these contracts and no credit-risk-related contingent features
were triggered as of December 25, 2021.
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
primarily 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 hedge
price fluctuations related to a portion of our anticipated commodity purchases,
primarily for agricultural products, energy and metals. 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.
Our commodity derivatives had a total notional value of $1.6 billion as of
December 25, 2021 and $1.1 billion as of December 26, 2020.
Foreign Exchange
We are exposed to foreign exchange risks in the international markets in which
our products are made, manufactured, distributed or sold. Additionally, we are
exposed to foreign exchange risk from net investments in foreign subsidiaries,
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 on
our income statement as incurred. We also use net investment hedges to partially
offset the effects of foreign currency on our investments in certain of our
foreign subsidiaries.
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Our foreign currency derivatives had a total notional value of $2.8 billion as
of December 25, 2021 and $1.9 billion as of December 26, 2020. The total
notional amount of our debt instruments designated as net investment hedges was
$2.1 billion as of December 25, 2021 and $2.7 billion as of December 26, 2020.
For foreign currency derivatives that do not qualify for hedge accounting
treatment, gains and losses 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 cross-currency interest rate
swaps have terms of no more than twelve years. Our Treasury locks and swap locks
are entered into to protect against unfavorable interest rate changes relating
to forecasted debt transactions.
Our interest rate derivatives had a total notional value of $2.1 billion as of
December 25, 2021 and $3.0 billion as of December 26, 2020.
As of December 25, 2021, approximately 2% of total debt was subject to variable
rates, compared to approximately 3%, after the impact of the related interest
rate derivative instruments, as of December 26, 2020.
Held-to-Maturity Debt Securities
Investments in debt securities that we have the positive intent and ability to
hold until maturity are classified as held-to-maturity. Highly liquid debt
securities with original maturities of three months or less are recorded as cash
equivalents. Our held-to-maturity debt securities consist of U.S. Treasury
securities and commercial paper. As of December 25, 2021, we had no investments
in U.S. Treasury securities. As of December 26, 2020, we had $2.1 billion of
investments in U.S. Treasury securities with $2.0 billion recorded in cash and
cash equivalents and $0.1 billion in short-term investments. As of December 25,
2021, we had $130 million of investments in commercial paper recorded in cash
and cash equivalents. As of December 26, 2020, we had $260 million of
investments in commercial paper with $75 million recorded in cash and cash
equivalents and $185 million in short-term investments. Held-to-maturity debt
securities are recorded at amortized cost, which approximates fair value, and
realized gains or losses are reported in earnings. Our investments mature in
less than one year. As of December 25, 2021 and December 26, 2020, gross
unrecognized gains and losses and the allowance for expected credit losses were
not material.
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Fair Value Measurements
The fair values of our financial assets and liabilities as of December 25, 2021
and December 26, 2020 are categorized as follows:
2021 2020
Fair Value
Hierarchy
Levels(a) Assets(a) Liabilities(a) Assets(a) Liabilities(a)
Index funds (b) 1 $ 337 $ - $ 231 $ -
Prepaid forward contracts (c) 2 $ 21 $ - $ 18 $ -
Deferred compensation (d) 2 $ - $ 505 $ - $ 477
Contingent consideration (e) 3 $ - $ - $ - $ 861
Derivatives designated as fair value
hedging instruments:
Interest rate (f) 2 $ - $ - $ 2 $ -
Derivatives designated as cash flow
hedging instruments:
Foreign exchange (g) 2 $ 29 $ 14 $ 9 $ 71
Interest rate (g) 2 14 264 13 307
Commodity (h) 2 70 5 32 -
$ 113 $ 283 $ 54 $ 378
Derivatives not designated as hedging
instruments:
Foreign exchange (g) 2 $ 19 $ 7 $ 4 $ 8
Commodity (h) 2 35 22 19 7
$ 54 $ 29 $ 23 $ 15
Total derivatives at fair value (i) $ 167 $ 312 $ 79 $ 393
Total $ 525 $ 817 $ 328 $ 1,731
(a)Fair value hierarchy levels are defined in Note 7. Unless otherwise noted,
financial assets are classified on our balance sheet within prepaid expenses and
other current assets and other assets. Financial liabilities are classified on
our balance sheet within accounts payable and other current liabilities and
other liabilities.
(b)Based on the price of index funds. These investments are classified as
short-term investments and are used to manage a portion of market risk arising
from our deferred compensation liability.
(c)Based primarily on the price of our common stock.
(d)Based on the fair value of investments corresponding to employees' investment
elections.
(e)In connection with our acquisition of Rockstar, we recorded a liability for
tax-related contingent consideration payable over up to 15 years, with an option
to accelerate all remaining payments, with estimated maximum payments of
approximately $1.1 billion, using current tax rates. The fair value of the
liability is estimated using probability-weighted, discounted future cash flows
at current tax rates. In the fourth quarter of 2021, we exercised our option to
accelerate all remaining payments. The change in the contingent consideration in
2021 is comprised of the fourth quarter payment of $773 million, a recognized
pre-tax gain of $86 million ($66 million after-tax or $0.05 per share), recorded
in selling, general and administrative expenses, and a fair value decrease of
$2 million, recorded in goodwill as a result of the finalization of purchase
price allocation.
(f)Based on London Interbank Offered Rate forward rates. As of December 25,
2021, we had no hedged fixed-rate debt. As of December 26, 2020, the carrying
amount of hedged fixed-rate debt was $0.2 billion and classified on our balance
sheet within short-term debt obligations. As of December 25, 2021, there were no
fair value hedging adjustments to hedged fixed-rate debt. As of December 26,
2020, the cumulative amount of fair value hedging adjustments to hedged
fixed-rate debt was a $2 million gain. As of December 25, 2021, the cumulative
amount of fair value hedging adjustments on discontinued hedges was a $2 million
net loss, which is being amortized over the remaining life of the related debt
obligations.
(g)Based on recently reported market transactions of spot and forward rates.
(h)Primarily based on recently reported market transactions of swap
arrangements.
(i)Derivative assets and liabilities are presented on a gross basis on our
balance sheet. Amounts subject to enforceable master netting arrangements or
similar agreements which are not offset on the balance sheet as of December 25,
2021 and December 26, 2020 were not material. Collateral received or posted
against our asset or liability positions was not material. Exchange-traded
commodity futures are cash-settled on a daily basis and, therefore, not included
in the table as of December 25, 2021.
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The carrying amounts of our cash and cash equivalents and short-term investments
recorded at amortized cost approximate fair value (classified as Level 2 in the
fair value hierarchy) due to their short-term maturity. The fair value of our
debt obligations as of December 25, 2021 and December 26, 2020 was $43 billion
and $50 billion, respectively, based upon prices of similar instruments in the
marketplace, which are considered Level 2 inputs.
Losses/(gains) on our hedging instruments are categorized as follows:
Fair Value/Non-
designated Hedges Cash Flow and Net Investment Hedges
Losses/(Gains)
Reclassified from
Losses/(Gains) Accumulated Other
Losses/(Gains) Recognized in Comprehensive Loss
Recognized in Accumulated Other into Income
Income Statement(a) Comprehensive Loss Statement(b)
2021 2020 2021 2020 2021 2020
Foreign exchange $ (4) $ - $ (7) $ (9) $ 82 $ (43)
Interest 56 (6) 44 (96) 64 (129)
Commodity (218) 53 (285) (21) (194) 56
Net investment - - (192) 235 - -
Total $ (166) $ 47 $ (440) $ 109 $ (48) $ (116)
(a)Foreign exchange derivative losses/gains are primarily included in selling,
general and administrative expenses. Interest rate derivative losses/gains are
primarily from treasury rate locks, with a total notional value of $3.2 billion,
to mitigate the interest rate risk on the cash tender offers and are included in
net interest expense and other. See Note 8 to our consolidated financial
statements for further information. Commodity derivative losses/gains are
included in either cost of sales or selling, general and administrative
expenses, depending on the underlying commodity.
(b)Foreign exchange derivative losses/gains are primarily included in cost of
sales. Interest rate derivative losses/gains on cross-currency interest rate
swaps are included in selling, general and administrative expenses. Commodity
derivative losses/gains 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
$176 million related to our cash flow hedges from accumulated other
comprehensive loss into net income during the next 12 months.
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Note 10 - 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:
2021 2020 2019
Income Shares(a) Income Shares(a) Income Shares(a)
Basic net income attributable to PepsiCo
per common share $ 5.51 $ 5.14 $ 5.23
Net income available for PepsiCo common
shareholders $ 7,618 1,382 $ 7,120 1,385 $ 7,314 1,399
Dilutive securities:
Stock options, RSUs, PSUs and other (b) - 7 - 7 - 8
Diluted $ 7,618 1,389 $ 7,120 1,392 $ 7,314 1,407
Diluted net income attributable to
PepsiCo per common share $ 5.49 $ 5.12 $ 5.20
(a)Weighted-average common shares outstanding (in millions).
(b)The dilutive effect of these securities is calculated using the treasury
stock method.
The weighted-average amount of antidilutive securities excluded from the
calculation of diluted earnings per common share was immaterial for the years
ended December 25, 2021, December 26, 2020 and December 28, 2019.
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Note 11 - Accumulated Other Comprehensive Loss Attributable to PepsiCo
The changes in the balances of each component of accumulated other comprehensive
loss attributable to PepsiCo are as follows:
Accumulated Other
Currency Pension and Comprehensive Loss
Translation Cash Flow Retiree Attributable to
Adjustment Hedges Medical Other (a) PepsiCoBalance as of December 29, 2018 (b) $ (11,918) $ 87
$ (3,271) $ (17) $ (15,119)
Other comprehensive income/(loss) before
reclassifications (c) 636 (131) (89) (2) 414
Amounts reclassified from accumulated
other comprehensive loss - 14 468 - 482
Net other comprehensive income/(loss) 636 (117) 379 (2) 896
Tax amounts (8) 27 (96) - (77)
Balance as of December 28, 2019 (b) (11,290) (3) (2,988) (19) (14,300)
Other comprehensive (loss)/income before
reclassifications (d) (710) 126 (1,141) (1) (1,726)
Amounts reclassified from accumulated
other comprehensive loss - (116) 465 - 349
Net other comprehensive (loss)/income (710) 10 (676) (1) (1,377)
Tax amounts 60 (3) 144 - 201
Balance as of December 26, 2020 (b) (11,940) 4 (3,520) (20) (15,476)
Other comprehensive (loss)/income before
reclassifications (e) (340) 248 702 22 632
Amounts reclassified from accumulated
other comprehensive loss 18 (48) 299 - 269
Net other comprehensive (loss)/income (322) 200 1,001 22 901
Tax amounts (47) (45) (231) - (323)
Balance as of December 25, 2021 (b) $ (12,309) $ 159
$ (2,750) $ 2 $ (14,898)
(a)The change in 2021 primarily comprises fair value increases in
available-for-sale securities.
(b)Pension and retiree medical amounts are net of taxes of $1,466 million as of
December 29, 2018, $1,370 million as of December 28, 2019, $1,514 million as of
December 26, 2020 and $1,283 million as of December 25, 2021.
(c)Currency translation adjustment primarily reflects the appreciation of the
Russian ruble, Canadian dollar, Mexican peso and Pound sterling.
(d)Currency translation adjustment primarily reflects the depreciation of the
Russian ruble and Mexican peso.
(e)Currency translation adjustment primarily reflects the depreciation of the
Turkish lira, Swiss franc and Mexican peso.
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Table of Contents The following table summarizes the reclassifications from accumulated other comprehensive loss to the income statement:
Amount Reclassified from Accumulated Other Affected Line Item in the Income
Comprehensive Loss Statement
2021 2020 2019
Currency translation:
Selling, general and
Divestitures $ 18 $ - $ - administrative expenses
Cash flow hedges:
Foreign exchange contracts $ 6 $ - $ 1 Net revenue
Foreign exchange contracts 76 (43) 2 Cost of sales
Selling, general and
Interest rate derivatives 64 (129) 7 administrative expenses
Commodity contracts (190) 50 3 Cost of sales
Selling, general and
Commodity contracts (4) 6 1 administrative expensesNet (gains)/losses before tax (48) (116) 14 Tax amounts 11 29 (2) Net (gains)/losses after tax $ (37) $ (87) $ 12
Pension and retiree medical items:
Other pension and retiree medical
Amortization of net prior service credit $ (44) $ -
$ (9) benefits income/(expense)
Other pension and retiree medical
Amortization of net losses 289 238 169 benefits income/(expense)
Other pension and retiree medical
Settlement/curtailment losses 54 227 308 benefits income/(expense)
Net losses before tax 299 465 468
Tax amounts (65) (101) (102)
Net losses after tax $ 234 $ 364 $ 366
Total net losses reclassified for the year,
net of tax $ 215 $ 277 $ 378
Note 12 - Leases
Lessee
We determine whether an arrangement is a lease at inception. We have operating
leases for plants, warehouses, distribution centers, storage facilities, offices
and other facilities, as well as machinery and equipment, including fleet. Our
leases generally have remaining lease terms of up to 20 years, some of which
include options to extend the lease term for up to five years and some of which
include options to terminate the lease within one year. We consider these
options in determining the lease term used to establish our right-of-use assets
and lease liabilities. Our lease agreements do not contain any material residual
value guarantees or material restrictive covenants.
As most of our leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments.
We have lease agreements that contain both lease and non-lease components. For
real estate leases, we account for lease components together with non-lease
components (e.g., common-area maintenance).
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Components of lease cost are as follows:
2021 2020 2019
Operating lease cost (a) $ 563 $ 539 $ 474
Variable lease cost (b) $ 112 $ 111 $ 101
Short-term lease cost (c) $ 469 $ 436 $ 379
(a)Includes right-of-use asset amortization of $505 million, $478 million, and
$412 million in 2021, 2020, and 2019, respectively.
(b)Primarily related to adjustments for inflation, common-area maintenance and
property tax.
(c)Not recorded on our balance sheet.
In 2021, 2020 and 2019, we recognized gains of $42 million, $7 million and
$77 million, respectively, on sale-leaseback transactions with terms under five
years.
Supplemental cash flow information and non-cash activity related to our
operating leases are as follows:
2021 2020 2019
Operating cash flow information:
Cash paid for amounts included in the
measurement of lease liabilities $ 567 $ 555 $ 478
Non-cash activity:
Right-of-use assets obtained in exchange for
lease obligations $ 934 $ 621 $ 479
Supplemental balance sheet information related to our operating leases is as
follows:
Balance Sheet Classification 2021 2020
Right-of-use assets Other assets $ 2,020 $ 1,670
Current lease liabilities Accounts payable and other current
liabilities $ 446 $ 460
Non-current lease liabilities Other liabilities $ 1,598 $ 1,233
Weighted-average remaining lease term and discount rate for our operating leases are as follows:
2021 2020 2019
Weighted-average remaining lease term 7 years 6 years 6 years
Weighted-average discount rate 3 % 4 % 4 %
Maturities of lease liabilities by year for our operating leases are as follows:
2022 $ 511
2023 402
2024 314
2025 245
2026 202
2027 and beyond 677
Total lease payments 2,351
Less: Imputed interest 307
Present value of lease liabilities $ 2,044
LessorWe have various arrangements for certain foodservice and vending equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
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Note 13 - Acquisitions and Divestitures
2020 Acquisitions
On March 23, 2020, we acquired all of the outstanding shares of Pioneer Foods, a
food and beverage company in South Africa with exports to countries across the
globe, for 110.00 South African rand per share in cash. The total consideration
transferred was approximately $1.2 billion and was funded by two unsecured
bridge loan facilities entered into by one of our international consolidated
subsidiaries, which were fully repaid in April 2020.
In connection with our acquisition of Pioneer Foods, we have made certain
commitments to the South Africa Competition Commission, including a commitment
to provide the equivalent of 8.8 billion South African rand, or approximately
$0.5 billion as of the acquisition date, in value for the benefit of our
employees, agricultural development, education, developing Pioneer Foods'
operations and enterprise development programs in South Africa . Included in this
commitment is 2.3 billion South African rand, or approximately $0.1 billion,
relating to the implementation of an employee ownership plan and an
agricultural, entrepreneurship and educational development fund, which is an
irrevocable condition of the acquisition. This commitment was recorded in
selling, general and administrative expenses primarily in the year ended
December 26, 2020 and was primarily settled in the fourth quarter of 2021. The
remaining commitment of 6.5 billion South African rand, or approximately
$0.4 billion as of the acquisition date, relates to capital expenditures and/or
business-related costs which will be incurred and recorded over a five-year
period from the acquisition date.
On April 24, 2020, we acquired Rockstar, an energy drink maker with whom we had
a distribution agreement prior to the acquisition, for an upfront cash payment
of approximately $3.85 billion and contingent consideration related to estimated
future tax benefits associated with the acquisition of approximately
$0.88 billion. In the fourth quarter of 2021, we exercised our option to
accelerate all remaining payments due under the contingent consideration
arrangement. See Note 9 for further information about the contingent
consideration.
On June 1, 2020, we acquired all of the outstanding shares of Be & Cheery, one
of the largest online convenient food companies in China , from Haoxiangni Health
Food Co., Ltd. for cash. The total consideration transferred was approximately
$0.7 billion.
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We accounted for the 2020 transactions as business combinations. We recognized
and measured the identifiable assets acquired and liabilities assumed at their
estimated fair values on the respective dates of acquisition. The purchase price
allocations for each of the 2020 acquisitions were finalized in the second
quarter of 2021. The fair value of identifiable assets acquired and liabilities
assumed in the acquisitions of Pioneer Foods, Rockstar and Be & Cheery and the
resulting goodwill as of the respective acquisition dates is summarized as
follows:
Pioneer Foods Rockstar Be & Cheery
Acquisition date March 23, 2020 April 24, 2020 June 1, 2020
Inventories $ 229 $ 52 $ 45
Property, plant and equipment 379 8 60
Amortizable intangible assets 52 - 98
Nonamortizable intangible assets 183 2,400 309
Other assets and liabilities (53) (9) (24) Net deferred income taxes (117) - (99) Noncontrolling interest (5) - - Total identifiable net assets 668 2,451 389 Goodwill 558 2,278 309 Total purchase price $ 1,226 $ 4,729 $ 698Goodwill is calculated as the excess of the aggregate of the fair value of the consideration transferred over the fair value of the net assets recognized. The goodwill recorded as part of the acquisition of Pioneer Foods primarily reflects synergies expected to arise from our combined brand portfolios and distribution networks, and is not deductible for tax purposes. All of the goodwill is recorded in the AMESA segment. The goodwill recorded as part of the acquisition of Rockstar primarily represents the value of PepsiCo's expected new innovation in the energy category and is deductible for tax purposes. All of the goodwill is recorded in the PBNA segment. The goodwill recorded as part of the acquisition of Be & Cheery primarily reflects growth opportunities for PepsiCo as we leverage Be & Cheery's direct-to-consumer and supply chain capabilities and is not deductible for tax purposes. All of the goodwill is recorded in the APAC segment. Juice Transaction In the first quarter of 2022, we sold our Tropicana, Naked and other select juice brands toPAI Partners for approximately $3.5 billion in cash and a 39% noncontrolling interest in a newly formed joint venture that will operate acrossNorth America andEurope . TheNorth America portion of the transaction was completed on January 24, 2022 and theEurope portion of the transaction was completed on February 1, 2022. In theU.S. , PepsiCo acts as the exclusive distributor for the new joint venture's portfolio of brands for small-format and foodservice customers with chilled direct-store-delivery. In connection with the sale, we entered into a transition services agreement withPAI Partners , under which we will provide certain services to the joint venture to help facilitate an orderly transition of the business following the sale. In return for these services, the new joint venture is required to pay certain agreed upon fees to reimburse us for our actual costs without markup. Subsequent to the transaction close date, the purchase price will be adjusted for net working capital and net debt amounts as of the transaction close date compared to targeted amounts set forth in the purchase agreement. We expect to record a pre-tax gain of approximately $3 billion in our PBNA andEurope segments in the first quarter of 2022 as a result of this transaction. We have reclassified $1.8 billion of assets, primarily accounts receivable, net, and inventories of $0.5 billion, goodwill and other intangible assets of $0.6 billion and property, plant and equipment of 104 -------------------------------------------------------------------------------- Table of Contents $0.5 billion, and liabilities of $0.8 billion, primarily accounts payable and other liabilities of $0.6 billion and deferred income taxes of $0.2 billion, related to the Juice Transaction as held for sale in our consolidated balance sheet as of December 25, 2021. The Juice Transaction does not meet the criteria to be classified as discontinued operations. Acquisition and Divestiture-Related Charges A summary of our acquisition and divestiture-related charges is as follows: 2021 2020 2019 Cost of sales $ 1 $ 32 $ 34 Selling, general and administrative expenses (a) (5) 223 21 Total $ (4) $ 255 $ 55 After-tax amount (b) $ (27)
$ 237 $ 47 Impact on net income attributable to PepsiCo per common share
$ 0.02 $ (0.17) $ (0.03)
(a)The income amount primarily relates to the acceleration payment made in the fourth quarter of 2021 under the contingent consideration arrangement associated with our acquisition of Rockstar, which is partially offset by other acquisition and divestiture-related charges. (b)In 2021, includes a tax benefit related to contributions to socioeconomic programs inSouth Africa . Acquisition and divestiture-related charges primarily include fair value adjustments to the acquired inventory included in the acquisition-date balance sheets (recorded in cost of sales), merger and integration charges and costs associated with divestitures (recorded in selling, general and administrative expenses). Merger and integration charges include liabilities to support socioeconomic programs inSouth Africa , closing costs, employee-related costs, gains associated with contingent consideration, contract termination costs and other integration costs. Acquisition and divestiture-related charges by division are as follows: 2021 2020 2019 Transaction FLNA $ 2 $ 29 $ - BFY Brands PBNA 11 66 - Juice Transaction, Rockstar Europe 8 - 46 Juice Transaction,
SodaStream International Ltd.
AMESA 10 173 7 Pioneer Foods
APAC 4 7 - Be & Cheery
Corporate (a) (39) (20) 2 Rockstar, Juice Transaction
Total $ (4) $ 255 $ 55
(a)In 2021, the income amount primarily relates to the acceleration payment made
in the fourth quarter of 2021 under the contingent consideration arrangement
associated with our acquisition of Rockstar, which is partially offset by
divestiture-related charges associated with the Juice Transaction. In 2020, the
income amount primarily relates to the change in the fair value of the Rockstar
contingent consideration.
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Note 14 - Supplemental Financial Information
Balance Sheet
2021 2020 2019
Accounts and notes receivable
Trade receivables $ 7,172 $ 6,892
Other receivables 1,655 1,713
Total 8,827 8,605
Allowance, beginning of year 201 105 $ 101
Cumulative effect of accounting change - 44 -
Net amounts charged to expense (a) (19) 79 22
Deductions (b) (25) (32) (30)
Other (c) (10) 5 12
Allowance, end of year 147 201 $ 105
Net receivables $ 8,680 $ 8,404
Inventories (d)
Raw materials and packaging $ 1,898 $ 1,720
Work-in-process 151 205
Finished goods 2,298 2,247
Total $ 4,347 $ 4,172
Average
Property, plant and equipment, net (e) Useful Life (Years)
Land $ 1,123 $ 1,171
Buildings and improvements 15 - 44 10,279 10,214
Machinery and equipment, including fleet and
software 5 - 15 31,486 31,276
Construction in progress 3,940 3,679
46,828 46,340
Accumulated depreciation (24,421) (24,971)
Total $ 22,407 $ 21,369
Depreciation expense $ 2,484 $ 2,335 $ 2,257
Other assets
Noncurrent notes and accounts receivable $ 111 $ 109
Deferred marketplace spending 119 130
Pension plans (f) 1,260 910
Right-of-use assets (g) 2,020 1,670
Other 694 493
Total $ 4,204 $ 3,312
Accounts payable and other current liabilities
Accounts payable (h) $ 9,834 $ 8,853
Accrued marketplace spending 3,087 2,935
Accrued compensation and benefits 2,324 2,059
Dividends payable 1,508 1,430
Current lease liabilities (g) 446 460
Other current liabilities 3,960 3,855
Total $ 21,159 $ 19,592
(a)2021 includes reductions in the previously recorded reserves of $32 million,
while 2020 includes an allowance for expected credit losses of $56 million,
related to the COVID-19 pandemic. See Note 1 for further information.
(b)Includes accounts written off.
(c)Includes adjustments related primarily to currency translation and other
adjustments.
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(d)Approximately 7% and 6% of the inventory cost in 2021 and 2020, respectively,
were computed using the LIFO method. The differences between LIFO and FIFO
methods of valuing these inventories were not material. See Note 2 for further
information.
(e)See Note 2 for further information.
(f)See Note 7 for further information.
(g)See Note 12 for further information.
(h)Increase reflects higher production payables due to strong business
performance across a number of our divisions as well as higher commodity prices,
partially offset by liabilities reclassified as held for sale in connection with
our Juice Transaction.
Statement of Cash Flows
2021 2020 2019
Interest paid (a) $ 1,184 $ 1,156 $ 1,076Income taxes paid, net of refunds (b) $ 1,933 $ 1,770 $ 2,226
(a)In 2021, excludes the charge related to cash tender offers. See Note 8 for
further information.
(b)In 2021, 2020 and 2019, includes tax payments of $309 million, $78 million
and $423 million, respectively, related to the TCJ Act.
The following table provides a reconciliation of cash and cash equivalents and
restricted cash as reported within the balance sheet to the same items as
reported in the cash flow statement.
2021 2020
Cash and cash equivalents $ 5,596 $ 8,185 Restricted cash included in other assets (a) 111 69
Total cash and cash equivalents and restricted cash $ 5,707 $ 8,254
(a)Primarily relates to collateral posted against certain of our derivative positions.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
PepsiCo, Inc. :
Opinions on the Consolidated Financial Statements and Internal Control Over
Financial Reporting
We have audited the accompanying Consolidated Balance Sheet of PepsiCo, Inc. and
Subsidiaries (the Company) as of December 25, 2021 and December 26, 2020, the
related Consolidated Statements of Income, Comprehensive Income, Cash Flows, and
Equity for each of the fiscal years in the three-year period ended December 25,
2021, and the related notes (collectively, the consolidated financial
statements). We also have audited the Company's internal control over financial
reporting as of December 25, 2021, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 25, 2021 and December 26, 2020, and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
December 25, 2021, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 25,
2021 based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the Company's consolidated financial statements and an opinion on the Company's
internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board
(United States ) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
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Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in
any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Sales incentive accruals
As discussed in Note 2 to the consolidated financial statements, the Company
offers sales incentives and discounts through various programs to customers and
consumers. A number of the sales incentives are based on annual targets,
resulting in the need to accrue for the expected liability. These incentives are
accrued for in the "Accounts payable and other current liabilities" line on the
balance sheet. These accruals are based on sales incentive agreements,
expectations regarding customer and consumer participation and performance
levels, and historical experience and trends.
We identified the evaluation of certain of the Company's sales incentive
accruals as a critical audit matter. Subjective and complex auditor judgment is
required in evaluating these sales incentive accruals as a result of the timing
difference between when the product is delivered and when the incentive is
settled. This specifically related to (1) forecasted customer and consumer
participation and performance level assumptions underlying the accrual, and (2)
the impact of historical experience and trends.
The following are the primary procedures we performed to address this critical
audit matter. We evaluated the design and tested the operating effectiveness of
certain internal controls related to the sales incentive process, including
controls related to (1) the accrual methodology, (2) assumptions around
forecasted customer and consumer participation, (3) performance levels, and (4)
monitoring of actual sales incentives incurred compared to estimated sales
incentives in respect of historical periods. To evaluate the timing and amount
of certain accrued sales incentives we (1) analyzed the accrual by sales
incentive type as compared to historical trends to identify specific sales
incentives that may require additional testing, (2) recalculated expenses and
closing accruals on a sample basis,
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based on volumes sold and terms of the sales incentives, (3) assessed the
Company's ability to accurately estimate its sales incentive accrual by
comparing previously established accruals to actual settlements, and (4) tested
a sample of settlements or claims that occurred after period end, and compared
them to the recorded sales incentive accrual.
Carrying value of certain reacquired and acquired franchise rights and certain
juice and dairy brands
As discussed in Notes 2 and 4 to the consolidated financial statements, the
Company performs impairment testing of its indefinite-lived intangible assets on
an annual basis during the third quarter of each fiscal year and whenever events
and changes in circumstances indicate that there is a greater than 50%
likelihood that the asset is impaired. The carrying value of indefinite-lived
intangible assets as of December 25, 2021 was $35.5 billion which represents 38%
of total assets, and includes PepsiCo Beverages North America's (PBNA)
reacquired and acquired franchise rights which had a carrying value of $8.6
billion as of December 25, 2021.
We identified the assessment of the carrying value of PBNA's reacquired and
acquired franchise rights and certain of Europe's juice and dairy brands in
Russia as a critical audit matter. Significant auditor judgment is necessary to
assess the impact of competitive operating and macroeconomic factors on future
levels of sales, operating profit and cash flows. The impairment analysis of
these indefinite-lived intangible assets requires significant auditor judgment
to evaluate the Company's forecasted revenue and profitability levels, including
the expected long-term growth rates and the selection of the discount rates to
be applied to the projected cash flows.
The following are the primary procedures we performed to address this critical
audit matter. We evaluated the design and tested the operating effectiveness of
certain internal controls related to the indefinite-lived assets impairment
process, including controls related to the development of forecasted revenue,
profitability levels, and expected long-term growth rates and select the
discount rates to be applied to the projected cash flows. We also evaluated the
sensitivity of the Company's conclusion to changes in assumptions, including the
assessment of changes in assumptions from prior periods. To assess the Company's
ability to accurately forecast, we compared the Company's historical forecasted
results to actual results. We compared the cash flow projections used in the
impairment tests with available external industry data and other internal
information. We involved valuation professionals with specialized skills and
knowledge who assisted in evaluating (1) the long-term growth rates used in the
impairment tests by comparing against economic data and information specific to
the respective assets, including projected long-term nominal Gross Domestic
Product growth in the respective local countries, and (2) the discount rates
used in the impairment tests by comparing them against discount rates that were
independently developed using publicly available market data, including that of
comparable companies.
Unrecognized tax benefits
As discussed in Note 5 to the consolidated financial statements, the Company's
global operating model gives rise to income tax obligations in the United States
and in certain foreign jurisdictions in which it operates. As of December 25,
2021, the Company recorded reserves for unrecognized tax benefits of $1.9
billion. The Company establishes reserves if it believes that certain positions
taken in its tax returns are subject to challenge and the Company likely will
not succeed, even though the Company believes the tax return position is
supportable under the tax law. The Company adjusts these reserves, as well as
the related interest, in light of new information, such as the progress of a tax
examination, new tax law, relevant court rulings or tax authority settlements.
We identified the evaluation of certain of the Company's unrecognized tax
benefits as a critical audit matter because the application of tax law and
interpretation of a tax authority's settlement history is
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complex and involves subjective judgment. Such judgments impact both the timing
and amount of the reserves that are recognized, including judgments about
re-measuring liabilities for positions taken in prior years' tax returns in
light of new information.
The following are the primary procedures we performed to address this critical
audit matter. We evaluated the design and tested the operating effectiveness of
certain internal controls related to the unrecognized tax benefits process,
including controls to (1) identify uncertain income tax positions, (2) evaluate
the tax law and tax authority's settlement history used to estimate the
unrecognized tax benefits, and (3) monitor for new information that may give
rise to changes to the existing unrecognized tax benefits, such as progress of a
tax examination, new tax law or tax authority settlements. We involved tax and
valuation professionals with specialized skills and knowledge, who assisted in
assessing the unrecognized tax benefits by (1) evaluating the Company's tax
structure and transactions, including transfer pricing arrangements, and (2)
assessing the Company's interpretation of existing tax law as well as new and
amended tax laws, tax positions taken, associated external counsel opinions,
information from tax examinations, relevant court rulings and tax authority
settlements.
/s/ KPMG LLP
We have served as the Company's auditor since 1990.
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GLOSSARY
Acquisitions and divestitures: mergers and acquisitions activity, as well as
divestitures and other structural changes, including changes in ownership or
control in consolidated subsidiaries and nonconsolidated equity investees.
Bottler Case Sales (BCS): measure of physical beverage volume shipped to
retailers and independent distributors from both PepsiCo and our independent
bottlers.
Bottler funding: financial incentives we give to our independent bottlers to
assist in the distribution and promotion of our beverage products.
Concentrate Shipments and Equivalents (CSE): measure of our physical beverage
volume shipments to independent bottlers.
Constant currency: 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.
Consumers: people who eat and drink our products.
CSD: carbonated soft drinks.
Customers: authorized independent bottlers, distributors and retailers.
Direct-Store-Delivery (DSD): delivery system used by us and our independent
bottlers to deliver beverages and convenient foods directly to retail stores
where our products are merchandised.
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.
Free cash flow: net cash provided by/used for operating activities less capital
spending, plus sales of property, plant and equipment.
Independent bottlers: customers to whom we have granted exclusive contracts to
sell and manufacture certain beverage products bearing our trademarks within a
specific geographical area.
Mark-to-market net impact: change in market value for commodity derivative
contracts that we purchase to mitigate the volatility in costs of energy and raw
materials that we consume. The market value is determined based on prices on
national exchanges and recently reported transactions in the marketplace.
Organic: a measure that adjusts for the impacts of foreign exchange translation,
acquisitions and divestitures, and where applicable, the impact of the 53rd
reporting week. In excluding the impact of foreign exchange translation, we
assume constant foreign exchange rates used for translation based on the rates
in effect for the comparable prior-year period. See the definition of "Constant
currency" for further information.
Total marketplace spending: includes sales incentives and discounts offered
through various programs to our customers, consumers or independent bottlers, as
well as advertising and other marketing activities.
Transaction gains and losses: the impact on our consolidated financial
statements of exchange rate changes arising from specific transactions.
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Translation adjustment: the impact of converting our foreign affiliates'
financial statements into
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