PEPSICO, INC. --------------------------------------------------------------------------------
OUR BUSINESS Executive Overview 42 Our Operations 42 Other Relationships 43 Our Business Risks 43 OUR FINANCIAL RESULTS Results of Operations - Consolidated Review
47
Results of Operations - Division Review 48 FLNA 51 QFNA 52 PBNA 52 LatAm 53Europe 53 AMESA 54 APAC 55 Results of Operations - Other Consolidated Results
56
Non-GAAP Measures
57
Items Affecting Comparability
59
Our Liquidity and Capital Resources
63
Return onInvested Capital
66
OUR CRITICAL ACCOUNTING POLICIES Revenue Recognition
67
Goodwill and Other Intangible Assets
68
Income Tax Expense and Accruals
69
Pension and Retiree Medical Plans
70
Consolidated Statement of Income
73
Consolidated Statement of Comprehensive Income
74
Consolidated Statement of Cash Flows
75
Consolidated Balance Sheet
76
Consolidated Statement of Equity
77
Notes to Consolidated Financial Statements Note 1 - Basis of Presentation and Our Divisions
78
Note 2 - Our Significant Accounting Policies
82
Note 3 - Restructuring and Impairment Charges
86
Note 4 - Property, Plant and Equipment and Intangible Assets
90
Note 5 - Income Taxes
93
Note 6 - Share-Based Compensation
97
Note 7 - Pension, Retiree Medical and Savings Plans
100
Note 8 - Debt Obligations
107
Note 9 - Financial Instruments
109
Note 10 - Net Income Attributable to PepsiCo per Common Share
114
Note 11 - Preferred Stock
114
Note 12 - Accumulated Other Comprehensive Loss Attributable to PepsiCo 115 Note 13 - Leases
116
Note 14 - Acquisitions and Divestitures
118
Note 15 - Supplemental Financial Information
120
Note 16 - Selected Quarterly Financial Data (unaudited)
121
Report of Independent Registered Public Accounting Firm 123
GLOSSARY 127
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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. OUR BUSINESS Executive Overview PepsiCo is a leading global food and beverage company with a complementary portfolio of brands, includingFrito-Lay ,Gatorade , Pepsi-Cola, Quaker and Tropicana. Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories Everything we do is driven by an approach we call Winning with Purpose. Winning with Purpose is our guide for achieving accelerated, sustainable growth that includes our mission, to Create More Smiles with Every Sip and Every Bite; our vision, to Be the Global Leader inConvenient Foods and Beverages by Winning with Purpose; andThe PepsiCo Way , seven behaviors that define our shared culture. Winning with Purpose is designed to help us meet the needs of our shareholders, customers, consumers, partners and communities, while caring for our planet and inspiring our associates. This strategy is also designed to address key challenges facing our Company, including: 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 adapt to these challenges, we intend to continue to focus on becoming Faster, Stronger, and Better: • Faster by winning in the marketplace, being more consumer-centric and accelerating investment for topline growth. This includes broadening our
portfolios to win locally in convenient foods and beverages, fortifying
our North American businesses, and accelerating our international
expansion, with disciplined focus on markets where we see a strong
likelihood of prevailing over our competition.
• Stronger by continuing to transform our capabilities, cost, and culture by
leveraging scale and technology in global markets across our operations
and winning locally. This includes continuing to focus on driving savings
through holistic cost management to reinvest to succeed in the
marketplace, developing and scaling core capabilities through technology,
and building differentiated talent and culture.
• Better by continuing to focus our sustainability agenda on helping tobuild a more sustainable food system and investing in six priority areas:
next generation agriculture, water stewardship, plastic packaging,
products, climate change, and people.
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 and competition. In addition, see Note 1
to our consolidated financial statements for financial information about our
divisions and geographic areas.
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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 We are subject to risks in the normal course of business. During the periods presented in this report, certain jurisdictions in which our products are made, manufactured, distributed or sold 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. In addition, 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, some regulations apply to all products using certain types of packaging (e.g., plastic), while others are designed to increase the sustainability of packaging, encourage waste reduction and increased recycling rates or facilitate waste management process or restrict the sale of products in certain packaging. We sell a wide variety of beverages, foods and snacks 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 varies 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. In addition, 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 continue to monitor changes in the retail landscape and to identify actions we may take to build our global e-commerce and digital capabilities, distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results. During the fourth quarter of 2017, the TCJ Act was enacted inthe United States . Our provisional measurement period ended in the fourth quarter of 2018 and while our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by theIRS impacted, and may continue to impact, our recorded amounts afterDecember 29, 2018 . For further information, see "Our Liquidity and Capital Resources," "Our Critical Accounting Policies" and Note 5 to our consolidated financial statements. 43
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OnMay 19, 2019 , a public referendum held inSwitzerland passed the TRAF, effectiveJanuary 1, 2020 . The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of$24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent toDecember 28, 2019 is expected to result in adjustments to our consolidated financial statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results. See "Our Critical Accounting Policies" and Note 5 to our consolidated financial statements for further information. 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 cybersecurity. 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;
• The Compensation Committee of the Board reviews PepsiCo'semployee
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 Public Policy and Sustainability Committee of the Board assists
the Board in its oversight of PepsiCo's policies, programs and
related risks that concern key sustainability 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 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 country 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
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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 &
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, and see "Our Liquidity and Capital Resources" for further information on our non-cancelable purchasing commitments. 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" for a discussion of the exposure of our pension and retiree medical plan assets and liabilities to risks related to market fluctuations. 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$1.1 billion as ofDecember 28, 2019 andDecember 29, 2018 . At the end of 2019, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses in 2019 by$106 million . Foreign Exchange Our operations outside ofthe United States generated 42% of our consolidated net revenue in 2019, withMexico ,Russia ,Canada , theUnited Kingdom ,China andBrazil , collectively, comprising approximately 22% of our consolidated net revenue in 2019. 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, as well as the proposed acquisition ofPioneer Foods . During 2019, unfavorable foreign exchange reduced net revenue growth by 2 percentage points, reflecting declines in the euro, Turkish lira, Brazilian real, Russian ruble and Argentine peso. Currency declines against theU.S. dollar which are not offset could adversely impact our future financial results. 45
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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. We also continue to monitor the economic and political developments related to theUnited Kingdom's withdrawal from theEuropean Union , including how theUnited Kingdom will interact with otherEuropean Union countries following its departure, as well as the economic, operating and political environment inRussia and the potential impact for theEurope segment and our other businesses. Our foreign currency derivatives had a total notional value of$1.9 billion as ofDecember 28, 2019 and$2.0 billion as ofDecember 29, 2018 . At the end of 2019, we estimate that an unfavorable 10% change in the underlying exchange rates would have increased our net unrealized losses in 2019 by$135 million . The total notional amount of our debt instruments designated as net investment hedges was$2.5 billion as ofDecember 28, 2019 and$0.9 billion as ofDecember 29, 2018 . Interest Rates Our interest rate derivatives had a total notional value of$5.0 billion as ofDecember 28, 2019 and$10.5 billion as ofDecember 29, 2018 . Assuming year-end 2019 investment levels and variable rate debt, a 1-percentage-point increase in interest rates would have decreased our net interest expense in 2019 by$25 million due to higher cash and cash equivalents as compared with our variable rate debt. 46
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OUR FINANCIAL RESULTS Results of Operations - Consolidated Review Volume Beverage volume reflects sales of concentrate and beverage products bearing company-owned or licensed trademarks to authorized bottlers, independent distributors and retailers. Concentrate beverage volume is sold to franchised-owned bottlers and independent distributors. Finished goods beverage volume is sold to retailers and independent distributors and includes direct shipments to retailers. Beverage volume is measured in bottler case sales (BCS), which converts all beverage volume to an 8-ounce-case metric. We believe that BCS is a valuable measure as it quantifies the sell-through of our beverage products at the customer level. In our franchised-owned business, beverage revenue is based on concentrate shipments and equivalents (CSE), representing physical concentrate volume shipments to such customers. As a result, for our franchise-owned businesses, BCS and CSE are not typically equal during any given period due to seasonality, timing of product launches, product mix, bottler inventory practices and other factors. Sales of products from our unconsolidated joint ventures are reflected in our reported volume. 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. Food and snack volume is reported on a system-wide basis, which includes our own sales and the sales by our noncontrolled affiliates of snacks bearing company-owned or licensed trademarks. In addition, FLNA makes, markets, distributes and sells Sabra refrigerated dips and spreads through a joint venture with Strauss Group. Servings Since our divisions each use different measures of physical unit volume (i.e., kilos, gallons, pounds and case sales), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions' physical volume measures are converted into servings based onU.S. Food and Drug Administration guidelines for single-serving sizes of our products. In 2019, total servings increased 4% compared to 2018, primarily reflecting our acquisition of SodaStream. In 2018, total servings increased 1% compared to 2017. Consolidated Net Revenue and Operating Profit Change 2019 2018 2017 2019 2018 Net revenue$ 67,161 $ 64,661 $ 63,525 4 % 2 % Operating profit$ 10,291 $ 10,110 $ 10,276 2 % (2 )% Operating profit margin 15.3 % 15.6 % 16.2 % (0.3 ) (0.5 )
See "Results of Operations - Division Review" for a tabular presentation and discussion of key drivers of net revenue.
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2019
Operating profit grew 2% and operating profit margin declined 0.3 percentage points. Operating profit growth was driven by productivity savings of more than$1 billion and net revenue growth, partially offset by certain operating cost increases, a 5-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. The operating profit margin decline primarily reflects higher advertising and marketing expenses. Favorable mark-to-market net impact on commodity derivatives included in corporate unallocated expenses (see "Items Affecting Comparability") contributed 3 percentage points to operating profit growth. Gains on the refranchising of a portion of our beverage business inThailand and our entire beverage bottling operations and snack distribution operations in CHS in the prior year reduced operating profit growth by 2 percentage points. 2018 Operating profit decreased 2% and operating profit margin declined 0.5 percentage points. The operating profit performance was driven by certain operating cost increases and a 6-percentage-point impact of higher commodity costs, partially offset by productivity savings of more than$1 billion and net revenue growth. The impact of refranchising a portion of our beverage business inJordan in 2017 and a 2017 gain associated with the sale of our minority stake in Britvic negatively impacted operating profit performance by 2.5 percentage points. These impacts were offset by a 2-percentage-point positive impact of refranchising a portion of our beverage business inThailand and our entire beverage bottling operations and snack distribution operations in CHS in 2018. Items affecting comparability (see "Items Affecting Comparability") negatively impacted operating profit performance by 3 percentage points and decreased operating profit margin by 0.5 percentage points, primarily due to higher mark-to-market net impact on commodity derivatives included in corporate unallocated expenses. Results of Operations - Division Review During the fourth quarter of 2019, we realigned certain of our reportable segments to be consistent with a recent strategic realignment of our organizational structure and how our Chief Executive Officer assesses the performance of, and allocates resources to, our reportable segments. Our historical segment reporting presented in this report has been retrospectively revised to reflect the new organizational structure. See "Our Operations" in "Item 1. Business" for further information. See "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 all mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees. 48
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Net Revenue and Organic Revenue Growth
Organic revenue growth is a non-GAAP financial measure. For further information
on organic revenue growth, see "Non-GAAP Measures."
2019
Impact of Impact of
Organic
Reported Foreign Acquisitions % Change, Effective
% Change, GAAP exchange and Non-GAAP net
Measure translation divestitures Measure(a) Volume(b) pricing
FLNA 4.5 % - - 4.5 % 2 3
QFNA 1 % - - 1 % - 1
PBNA 3 % - (1 ) 3 % (1 ) 4
LatAm 3 % 4 - 7 % - 7
Europe 7 % 5 (6 ) 5.5 % (1 ) 6
AMESA - % 2 4 6 % 4 2.5
APAC 4.5 % 3 2 9 % 7 2
Total 4 % 2 (1 ) 4.5 % 0.5 4
2018
Impact of Impact of
Reported Sales and Organic
% Change, Foreign Acquisitions certain % Change,
GAAP exchange and other Non-GAAP
Measure translation divestitures taxes Measure(a) Volume(b) Effective net pricing
FLNA 3.5 % - - - 3 % 1 2
QFNA (1.5 )% - - - (2 )% (0.5 ) (1 )
PBNA 1 % - - - 0.5 % (1 ) 2
LatAm 2 % 6 - - 8 % 1 7
Europe 4 % 2 - 0.5 7 % 5 3
AMESA (0.5 )% 2 4 - 5 % 1.5 4
APAC (3 )% (1 ) 11 0.5 8 % 6 2
Total 2 % 1 1 - 4 % 1 3
(a) Amounts may not sum due to rounding.
(b) Excludes the impact of acquisitions and divestitures. In certain instances,
volume growth varies from the amounts disclosed in the following divisional
discussions due to nonconsolidated joint venture volume, and, for our
beverage businesses, temporary timing differences between BCS and CSE, as
well as the mix of beverage volume sold by our company-owned andfranchise-owned bottlers. Our net revenue excludes nonconsolidated joint
venture volume, and, for our franchise-owned beverage businesses, is based on
CSE.
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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
2019
Items Affecting Comparability(a)
Inventory fair
value
adjustments and
Restructuring and merger and
Reported, GAAP Mark-to-market net impairment integration Core,
Measure impact charges charges Non-GAAP Measure
FLNA $ 5,258 $ - $ 22 $ - $ 5,280
QFNA 544 - 2 - 546
PBNA 2,179 - 51 - 2,230
LatAm 1,141 - 62 - 1,203
Europe 1,327 - 99 46 1,472
AMESA 671 - 38 7 716
APAC 477 - 47 - 524
Corporate unallocated
expenses (1,306 ) (112 ) 47 2 (1,369 )
Total $ 10,291 $ (112 ) $ 368 $ 55 $ 10,602
2018
Items Affecting Comparability(a)
Merger and
Reported, Mark-to-market Restructuring and integration Core,
GAAP Measure net impact impairment charges charges Non-GAAP Measure
FLNA $ 5,008 $ - $ 36 $ - $ 5,044
QFNA 637 - 7 - 644
PBNA 2,276 - 88 - 2,364
LatAm 1,049 - 40 - 1,089
Europe 1,256 - 59 57 1,372
AMESA 661 - 18 - 679
APAC 619 - 14 - 633
Corporate unallocated
expenses (1,396 ) 163 10 18 (1,205 )
Total $ 10,110 $ 163 $ 272 $ 75 $ 10,620
2017
ItemsAffecting Comparability(a)
Reported, Restructuring and Core,
GAAP Measure Mark-to-market net impact impairment charges Non-GAAP Measure
FLNA $ 4,793 $ - $ 54 $ 4,847
QFNA 640 - 9 649
PBNA 2,700 - 43 2,743
LatAm 924 - 56 980
Europe 1,199 - 53 1,252
AMESA 789 - 2 791
APAC 401 - (5 ) 396
Corporate unallocated expenses (1,170 ) (15 ) 17 (1,168 )
Total $ 10,276 $ (15 ) $ 229 $ 10,490 (a) See "Items Affecting Comparability."
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Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
2019
Impact of Items Affecting Comparability(a) Impact of
Core Constant
Inventory fair Core Currency
Reported % Restructuring value adjustments % Change, Foreign % Change,
Change, GAAP Mark-to-market net and impairment and merger and Non-GAAP exchange Non-GAAP
Measure impact charges integration charges Measure(b) translation Measure(b)
FLNA 5 % - - - 5 % - 5 %
QFNA (15 )% - (0.5 ) - (15 )% - (15 )%
PBNA (4 )% - (1 ) - (6 )% - (6 )%
LatAm 9 % - 2 - 10 % 2 13 %
Europe 6 % - 2 (1 ) 7 % 5 13 %
AMESA 1.5 % - 3 1 5.5 % 2.5 8 %
APAC (23 )% - 6 - (17 )% 2 (16 )%
Corporate
unallocated
expenses (6 )% 22 (3 ) 1 14 % - 14 %
Total 2 % (3 ) 1 - - % 1 1 %
2018
Impact of Items Affecting Comparability(a) Impact of
Core Constant
Core Currency
Reported Merger and % Change, % Change,
% Change, GAAP Mark-to-market net Restructuring integration Non-GAAP Foreign exchange Non-GAAP
Measure impact and impairment charges charges Measure(b) translation Measure(b)
FLNA 4.5 % - - - 4 % - 4 %
QFNA - % - - - (1 )% - (1 )%
PBNA (16 )% - 2 - (14 )% - (14 )%
LatAm 13 % - (2 ) - 11 % 2 13 %
Europe 5 % - - 4 10 % 3 13 %
AMESA (16 )% - 2 - (14 )% - (14 )%
APAC 54 % - 5 - 60 % (2 ) 58 %
Corporate
unallocated
expenses 19 % (15 ) 1 (1.5 ) 3 % - 3 %
Total (2 )% 2 - 1 1 % 0.5 2 %
(a) See "Items Affecting Comparability" for further information.
(b) Amounts may not sum due to rounding.
FLNA
2019
Net revenue grew 4.5% and volume grew 1%. The net revenue growth was driven by effective net pricing and volume growth. The volume growth reflects mid-single-digit growth in trademark Doritos, Cheetos and Ruffles and low-single-digit growth in variety packs, partially offset by a double-digit decline in trademark Santitas. Operating profit grew 5%, primarily reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases and higher advertising and marketing expenses. Additionally, a prior-year bonus extended to certainU.S. employees in connection with the TCJ Act contributed 1 percentage point to operating profit growth. 51
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2018
Net revenue grew 3.5%, primarily reflecting effective net pricing and volume growth. Volume grew 1%, reflecting mid-single-digit growth in variety packs and low-single-digit growth in trademark Doritos, partially offset by a double-digit decline in trademark Santitas. Operating profit grew 4.5%, primarily reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases and a 1-percentage-point impact of a bonus extended to certainU.S. employees related to the TCJ Act. QFNA 2019 Net revenue grew 1% and volume was flat. The net revenue growth primarily reflects favorable mix. The volume performance was driven by double-digit growth in trademark Gamesa and mid-single-digit growth in Aunt Jemima mixes and syrups, offset by a mid-single-digit decline in oatmeal and a low-single-digit decline in ready-to-eat cereals. Operating profit decreased 15%, reflecting certain operating cost increases, a 5-percentage-point impact of higher commodity costs, and higher advertising and marketing expenses. These impacts were partially offset by productivity savings. 2018 Net revenue declined 1.5% and volume declined 0.5%. The net revenue performance reflects unfavorable net pricing and mix and the volume decline. The volume decline was driven by a double-digit decline in trademark Gamesa and a mid-single-digit decline in ready-to-eat cereals, partially offset by mid-single-digit growth in oatmeal. Operating profit decreased slightly, reflecting certain operating cost increases, the net revenue performance and a 3-percentage-point impact of higher commodity costs. These impacts were partially offset by productivity savings, lower advertising and marketing expenses and a 1-percentage-point positive contribution from insurance settlement recoveries related to the 2017 earthquake inMexico . PBNA 2019 Net revenue grew 3%, driven by effective net pricing, partially offset by a decline in volume. Acquisitions contributed 1 percentage point to the net revenue growth. Volume decreased 1%, driven by a 3% decline in CSD volume, partially offset by a 2% increase in non-carbonated beverage (NCB) volume. The NCB volume increase primarily reflected a mid-single-digit increase in our overall water portfolio, partially offset by a low-single-digit decrease in our juice and juice drinks portfolio. Operating profit decreased 4%, reflecting certain operating cost increases, higher advertising and marketing expenses, an 8-percentage-point impact of higher commodity costs and the volume decline. These impacts were partially offset by the effective net pricing and productivity savings. Year-over-year gains on asset sales negatively contributed 1 percentage point to operating profit performance. A gain associated with an insurance recovery positively contributed 1 percentage point to current-year operating profit performance and was offset by less-favorable insurance adjustments compared to the prior year, which negatively impacted the current-year operating profit performance by 1 percentage point. Additionally, a prior-year bonus extended to certainU.S. employees in connection with the TCJ Act positively contributed 2 percentage points to operating profit performance. 52
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2018
Net revenue grew 1%, driven by effective net pricing, partially offset by a decline in volume. Volume decreased 1%, driven by a 3% decline in CSD volume, partially offset by a 2% increase in non-carbonated beverage volume. The non-carbonated beverage volume increase primarily reflected a high-single-digit increase in our overall water portfolio. Additionally, a low-single-digit increase inGatorade sports drinks was offset by a low-single-digit decline in our juice and juice drinks portfolio. Operating profit decreased 16%, reflecting certain operating cost increases, including increased transportation costs, a 7-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. These impacts were partially offset by productivity savings and the net revenue growth. Higher gains on asset sales positively contributed 1.5 percentage points to operating profit performance. A bonus extended to certainU.S. employees related to the TCJ Act negatively impacted operating profit performance by 1.5 percentage points and was partially offset by 2017 costs related to hurricanes which positively contributed 1 percentage point to operating profit performance. LatAm 2019 Net revenue increased 3%, primarily reflecting effective net pricing, partially offset by a 4-percentage-point impact of unfavorable foreign exchange. Snacks volume experienced a slight decline, reflecting a high-single-digit decline inBrazil , partially offset by low-single-digit growth inMexico . Beverage volume grew 4%, reflecting high-single-digit growth inBrazil andGuatemala , partially offset by a mid-single-digit decline inArgentina and a low-single-digit decline inColombia . Additionally,Honduras experienced low-single-digit growth andMexico andChile each experienced mid-single-digit growth. Operating profit increased 9%, reflecting the effective net pricing and productivity savings, partially offset by certain operating cost increases and a 10-percentage-point impact of higher commodity costs largely due to transaction-related foreign exchange. Unfavorable foreign exchange and higher restructuring and impairment charges each reduced operating profit growth by 2 percentage points. 2018 Net revenue grew 2%, reflecting effective net pricing, partially offset by a 6-percentage-point impact of unfavorable foreign exchange. Snacks volume grew 1%, reflecting low-single-digit growth inMexico , partially offset by a mid-single-digit decline inBrazil . Beverage volume declined 1%, reflecting a high-single-digit decline inBrazil , a low-single-digit decline inMexico and a mid-single-digit decline inArgentina , partially offset by double-digit growth inColombia , mid-single-digit growth inGuatemala and low-single-digit growth inHonduras . Operating profit increased 13%, reflecting the net revenue growth, productivity savings and a 4-percentage-point impact of insurance settlement recoveries related to the 2017 earthquake inMexico . These impacts were partially offset by certain operating cost increases, a 14-percentage-point impact of higher commodity costs and higher advertising and marketing expenses.Europe 2019 Net revenue increased 7%, reflecting an 8-percentage-point impact of our SodaStream acquisition and effective net pricing, partially offset by a 5-percentage-point impact of unfavorable foreign exchange. 53
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Snacks volume grew 1%, primarily reflecting mid-single-digit growth inPoland andFrance and low-single-digit growth inSpain andthe Netherlands , partially offset by a mid-single-digit decline inTurkey and a slight decline in theUnited Kingdom . Additionally,Russia experienced slight growth. Beverage volume grew 23%, primarily reflecting a 24-percentage-point impact of our SodaStream acquisition, mid-single-digit growth inPoland and low-single-digit growth in theUnited Kingdom andGermany , partially offset by a mid-single-digit decline inRussia , a high-single-digit decline inTurkey and a slight decline inFrance . Operating profit increased 6%, reflecting the net revenue growth, productivity savings and a 10-percentage-point net impact of our SodaStream acquisition. These impacts were partially offset by certain operating cost increases, a 10-percentage-point impact of higher commodity costs largely due to transaction-related foreign exchange, higher advertising and marketing expenses, and a 4-percentage-point impact of a prior-year gain on the refranchising of our entire beverage bottling operations and snack distribution operations in CHS. Unfavorable foreign exchange reduced operating profit growth by 5 percentage points. 2018 Net revenue increased 4%, reflecting volume growth and effective net pricing, partially offset by a 2-percentage-point impact of unfavorable foreign exchange. Snacks volume grew 4%, reflecting high-single-digit growth inPoland andFrance and mid-single-digit growth inthe Netherlands , partially offset by a low-single-digit decline in theUnited Kingdom . Additionally,Spain ,Russia , andTurkey each experienced low-single-digit growth. Beverage volume grew 6%, reflecting double-digit growth inGermany andPoland and high-single-digit growth inFrance , partially offset by a low-single-digit decline in theUnited Kingdom . Additionally,Russia andTurkey each experienced mid-single-digit growth. Operating profit increased 5%, reflecting the net revenue growth, productivity savings and a 4-percentage-point net impact of refranchising our entire beverage bottling operations and snack distribution operations in CHS. These impacts were partially offset by certain operating cost increases and a 9-percentage-point impact of higher commodity costs. Additionally, a 2017 gain on the sale of our minority stake in Britvic and the merger and integration charges related to our acquisition of SodaStream reduced operating profit growth by 8 percentage points and 4 percentage points, respectively. AMESA 2019 Net revenue decreased slightly, reflecting a 3-percentage-point impact of refranchising a portion of our beverage business inIndia , partially offset by volume growth and effective net pricing. Snacks volume grew 7%, reflecting double-digit growth inPakistan and high-single-digit growth in theMiddle East andIndia , partially offset by a low-single-digit decline inSouth Africa . Beverage volume grew 4%, reflecting high-single-digit growth inIndia andNigeria , partially offset by low-single-digit declines in theMiddle East andPakistan . Operating profit increased 1.5%, reflecting productivity savings, the volume growth and the effective net pricing. These impacts were partially offset by certain operating cost increases, a 5-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. Higher restructuring and impairment charges and unfavorable foreign exchange reduced operating profit growth by 3 percentage points and 2.5 percentage points, respectively. 54
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2018
Net revenue decreased 0.5%, reflecting a 4-percentage-point impact of the 2017 refranchising of a portion of our beverage business inJordan , partially offset by effective net pricing and volume growth. Snacks volume grew 2.5%, reflecting double-digit growth inIndia andPakistan , partially offset by a mid-single-digit decline in theMiddle East and a low-single-digit decline inSouth Africa . Beverage volume grew 1%, reflecting mid-single-digit growth inIndia , high-single-digit growth inNigeria and low-single-digit growth inPakistan , partially offset by a mid-single-digit decline in theMiddle East . Operating profit decreased 16%, reflecting a 22-percentage-point impact of the 2017 refranchising of a portion of our beverage business inJordan , certain operating cost increases and a 6-percentage-point impact of higher commodity costs. These impacts were partially offset by the effective net pricing and productivity savings. APAC 2019 Net revenue increased 4.5%, reflecting volume growth and effective net pricing, partially offset by a 3-percentage-point impact of unfavorable foreign exchange and a 2-percentage-point impact of the prior-year refranchising of a portion of our beverage business inThailand . Snacks volume grew 6%, reflecting double-digit growth inChina and mid-single-digit growth inThailand , partially offset by a low-single-digit decline inIndonesia . Additionally,Australia andTaiwan each experienced low-single-digit growth. Beverage volume grew 4%, reflecting double-digit growth inVietnam andThailand and mid-single-digit growth inthe Philippines . Additionally,China experienced low-single-digit growth. Operating profit decreased 23%, primarily reflecting a 23-percentage-point impact of the gain on the prior-year refranchising of a portion of our beverage business inThailand . Additionally, certain operating cost increases and higher advertising and marketing expenses negatively impacted operating profit performance. These impacts were partially offset by the net revenue growth and productivity savings. Higher restructuring and impairment charges negatively impacted operating profit performance by 6 percentage points. 2018 Net revenue decreased 3%, reflecting an 11-percentage-point impact of refranchising a portion of our beverage business inThailand , partially offset by net volume growth and effective net pricing. Snacks volume grew 7%, reflecting double-digit growth inChina , partially offset by a slight decline inTaiwan . Additionally,Thailand experienced high-single-digit growth andIndonesia andAustralia each experienced low-single-digit growth. Beverage volume declined slightly, reflecting a double-digit decline inthe Philippines , partially offset by double-digit growth inVietnam , low-single-digit growth inChina and mid-single-digit growth inThailand . Operating profit increased 54%, reflecting a 35-percentage-point net impact of refranchising a portion of our beverage business inThailand . The net volume growth, productivity savings and the effective net pricing also contributed to operating profit growth. These impacts were partially offset by higher advertising and marketing expenses and certain operating cost increases. Higher restructuring and impairment charges reduced operating profit growth by 5 percentage points. 55
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Other Consolidated Results
Change
2019 2018 2017 2019 2018
Other pension and retiree medical
benefits (expense)/income $ (44 ) $ 298 $ 233 $ (342 ) $ 65
Net interest expense $ (935 ) $ (1,219 ) $ (907 ) $ 284 $ (312 )
Annual tax rate (a) 21.0 % (36.7 )% 48.9 %
Net income attributable to PepsiCo
(42 )% 158 % Net income attributable to PepsiCo per common share - diluted$ 5.20 $ 8.78 $ 3.38 (41 )% 160 % Mark-to-market net impact (0.06 ) 0.09 (0.01 ) Restructuring and impairment charges 0.21 0.18 0.16 Inventory fair value adjustments and merger and integration charges 0.03 0.05 - Pension-related settlement charges 0.15 - -
Net tax related to the TCJ Act (a) (0.01 ) (0.02 ) 1.70 Other net tax benefits (a)
- (3.55 ) -
Charges related to cash tender and
exchange offers - 0.13 -
Net income attributable to PepsiCo
per common share - diluted, excluding
above items (b) $ 5.53 (c) $ 5.66 $ 5.23 (2 )% 8 %
Impact of foreign exchange
translation 1 1
Growth in net income attributable to
PepsiCo per common share - diluted,
excluding above items, on a constant
currency basis (b) (1 )% 9 %
(a) See Note 5 to our consolidated financial statements for further information.
(b) See "Non-GAAP Measures."
(c) Does not sum due to rounding.
2019
Other pension and retiree medical benefits expense increased$342 million , primarily reflecting settlement charges of$220 million related to the purchase of a group annuity contract and settlement charges of$53 million related to one-time lump sum payments to certain former employees who had vested benefits. Net interest expense decreased$284 million reflecting the prior-year charge of$253 million in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes, as well as gains on the market value of investments used to economically hedge a portion of our deferred compensation liability. This decrease also reflects lower interest expense due to lower average debt balances. These impacts were partially offset by lower interest income due to lower average cash balances. The reported tax rate increased 57.7 percentage points, primarily reflecting the prior-year other net tax benefits related to the reorganization of our international operations, which increased the current-year reported tax rate by 47 percentage points. Additionally, the prior-year favorable conclusion of certain international tax audits and the favorable resolution with theIRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, increased the current-year reported tax rate by 8 percentage points. See Note 5 to our consolidated financial statements for further information. Net income attributable to PepsiCo decreased 42% and net income attributable to PepsiCo per common share decreased 41%. Items affecting comparability (see "Items Affecting Comparability") negatively impacted 56
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both net income attributable to PepsiCo performance and net income attributable to PepsiCo per common share performance by 38 percentage points. 2018 Other pension and retiree medical benefits income increased$65 million , reflecting the impact of the$1.4 billion discretionary pension contribution to the PepsiCo Employees Retirement Plan A (Plan A) inthe United States , as well as the recognition of net asset gains, partially offset by higher amortization of net losses. Net interest expense increased$312 million reflecting a charge of$253 million in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes. This increase also reflects higher interest rates on debt balances, as well as losses on the market value of investments used to economically hedge a portion of our deferred compensation liability. These impacts were partially offset by higher interest income due to higher interest rates on cash balances. The reported tax rate decreased 85.6 percentage points, reflecting both other net tax benefits related to the reorganization of our international operations, which reduced the reported tax rate by 45 percentage points, and the 2017 provisional net tax expense related to the TCJ Act, which reduced the 2018 reported tax rate by 25 percentage points. Additionally, the favorable conclusion of certain international tax audits and the favorable resolution with theIRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, reduced the reported tax rate by 7 percentage points. See Note 5 to our consolidated financial statements for further information. Net income attributable to PepsiCo increased 158% and net income attributable to PepsiCo per common share increased 160%. Items affecting comparability (see "Items Affecting Comparability") positively contributed 150 percentage points to net income attributable to PepsiCo growth and 152 percentage points to net income attributable to PepsiCo per common share growth. 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; amounts associated with mergers, acquisitions, divestitures and other structural changes; pension and retiree medical related items; charges or adjustments related to the enactment of new laws, rules or regulations, such as significant 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. 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. 57
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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 expense/income, interest expense, provision for/benefit from income taxes, net income attributable to noncontrolling interests and net income attributable to PepsiCo, each adjusted for items affecting comparability, operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, adjusted for items affecting comparability, 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 and 2014 Productivity Plans, inventory fair value adjustments and merger and integration charges primarily associated with our acquisition of SodaStream, pension-related settlement charges, net tax related to the TCJ Act, other net tax benefits and charges related to cash tender and exchange offers (see "Items Affecting Comparability" for a detailed description of each of these items). We also evaluate performance on operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, 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. Organic revenue growth We define organic revenue growth as net revenue growth adjusted for the impact of foreign exchange translation, as well as the impact from acquisitions, divestitures and other structural changes. Starting in 2018, our reported results reflected the accounting policy election taken in conjunction with the adoption of the revenue recognition guidance to exclude from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions not already excluded. Our 2018 organic revenue growth excluded the impact of approximately$75 million of these taxes previously recognized in net revenue. 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. Free cash flow We define free cash flow as net cash provided by operating activities less capital spending, plus sales of property, plant and equipment. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure. 58
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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. Items Affecting Comparability Our reported financial results in this Form 10-K are impacted by the following items in each of the following years: 2019 Other pension and Net income retiree medical attributable to Net income Selling, general and Operating benefits Provision for noncontrolling attributable to Cost of sales Gross profit administrative expenses profit (expense)/income income taxes(a) interests PepsiCo
Reported, GAAP Measure$ 30,132 $ 37,029 $ 26,738$ 10,291 $ (44 )$ 1,959 $ 39 $ 7,314 Items Affecting Comparability Mark-to-market net impact 57 (57 ) 55 (112 ) - (25 ) - (87 ) Restructuring and impairment charges (115 ) 115 (253 ) 368 2 67 5 298 Inventory fair value adjustments and merger and integration charges (34 ) 34 (21 ) 55 - 8 - 47 Pension-related settlement charges - - - - 273 62 - 211 Net tax related to the TCJ Act - - - - - 8 - (8 ) Core, Non-GAAP Measure$ 30,040 $ 37,121 $ 26,519$ 10,602 $ 231$ 2,079 $ 44 $ 7,775 59
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2018
Other
pension and
retiree Net income
medical attributable to Net income
Selling, general and benefits (Benefit from)/provision noncontrolling attributable to
Cost of sales Gross profit administrativeexpenses Operating profit income Interest expense for income taxes(a)
interests PepsiCo
Reported, GAAP
Measure $ 29,381 $ 35,280 $ 25,170 $ 10,110 $ 298 $ 1,525 $ (3,370 ) $ 44 $ 12,515
Items Affecting
Comparability
Mark-to-market
net impact (83 ) 83 (80 ) 163 - - 38 - 125
Restructuring
and impairment
charges (3 ) 3 (269 ) 272 36 - 56 1 251
Merger and
integration
charges - - (75 ) 75 - - - - 75
Net tax related
to the TCJ Act - - - - - - 28 - (28 )
Other net tax
benefits - - - - - - 5,064 - (5,064 )
Charges related
to cash tender
and exchange
offers - - - - - (253 ) 62 - 191
Core, Non-GAAP
Measure $ 29,295 $ 35,366 $ 24,746
$ 10,620 $ 334 $ 1,272 $ 1,878 $ 45 $ 8,065
2017
Other
pension and
retiree
medical Net income
Selling, general and Operating benefits Provision for attributable to
Cost of sales Gross profit administrative expenses profit income income taxes(a) PepsiCo
Reported, GAAP Measure $ 28,796 $ 34,729 $ 24,453 $ 10,276 $ 233 $ 4,694 $ 4,857
Items Affecting
Comparability
Mark-to-market net
impact 8 (8 ) 7 (15 ) - (7 ) (8 )
Restructuring and
impairment charges - - (229 ) 229 66 71 224
Provisional net tax
related to the TCJ Act - - - - - (2,451 ) 2,451
Core, Non-GAAP Measure $ 28,804 $ 34,721 $ 24,231 $ 10,490 $ 299 $ 2,307 $ 7,524
(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.
Mark-to-Market Net Impact We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products 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 onFebruary 15, 2019 , will leverage new technology and business models to further simplify, harmonize and automate processes; re-engineer our go-to-market and 60
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information systems, including deploying the right automation for each market; and simplify our organization and optimize our manufacturing and supply chain footprint. In connection with this plan, we expect to incur pre-tax charges of approximately$2.5 billion , of which we have incurred$508 million plan to date throughDecember 28, 2019 and cash expenditures of approximately$1.6 billion , of which we have incurred approximately$261 million plan to date throughDecember 28, 2019 . We expect to incur pre-tax charges of approximately$450 million and cash expenditures of approximately$400 million in our 2020 financial results, with the balance to be reflected in our 2021 through 2023 financial results. 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 2020 and 2021 results. 2014 Multi-Year Productivity Plan The 2014 Productivity Plan was completed in 2019. The total plan pre-tax charges and cash expenditures approximated the previously disclosed plan estimates of$1.3 billion and$960 million , respectively. See Note 3 to our consolidated financial statements for further information related to our 2019 and 2014 Productivity Plans. We regularly evaluate productivity initiatives beyond the productivity plans and other initiatives discussed above and in Note 3 to our consolidated financial statements. Inventory Fair Value Adjustments and Merger and Integration Charges In 2019, we recorded inventory fair value adjustments and merger and integration charges of$55 million ($47 million after-tax or$0.03 per share), including$46 million in ourEurope segment,$7 million in our AMESA segment and$2 million in corporate unallocated expenses. These charges are primarily related to fair value adjustments to the acquired inventory included in SodaStream's balance sheet at the acquisition date, as well as merger and integration charges, including employee-related costs. In 2018, we recorded merger and integration charges of$75 million ($0.05 per share), including$57 million in ourEurope segment and$18 million in corporate unallocated expenses, related to our acquisition of SodaStream. These charges include closing costs, advisory fees and employee-related costs. See Note 14 to our consolidated financial statements for further information. Pension-Related Settlement Charges In 2019, we recorded pension settlement charges of$273 million ($211 million after-tax or$0.15 per share), reflecting settlement charges of$220 million ($170 million after-tax or$0.12 per share) related to the purchase of a group annuity contract and settlement charges of$53 million ($41 million after-tax or$0.03 per share) related to one-time lump sum payments to certain former employees who had vested benefits. See Note 7 to our consolidated financial statements for further information. Net Tax Related to the TCJ Act During the fourth quarter of 2017, the TCJ Act was enacted inthe United States . Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced theU.S. corporate income tax rate from 35% to 21%, effectiveJanuary 1, 2018 . In 2017, we recorded a provisional net tax expense of$2.5 billion ($1.70 per share) associated with the enactment of the TCJ Act. We recognized net tax benefits of$8 million ($0.01 per share) and$28 million ($0.02 per share) in 2019 and 2018, respectively, related to the TCJ Act. See Note 5 to our consolidated financial statements for further information. 61
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Other Net Tax Benefits In 2018, we reorganized our international operations, including the intercompany transfer of certain intangible assets. As a result, we recognized other net tax benefits of$4.3 billion ($3.05 per share). Also in 2018, we recognized non-cash tax benefits associated with both the conclusion of certain international tax audits and our agreement with theIRS resolving all open matters related to the audits of taxable years 2012 and 2013. The conclusion of certain international tax audits and the resolution with theIRS , collectively, resulted in non-cash tax benefits totaling$717 million ($0.50 per share). See Note 5 to our consolidated financial statements for further information. Charges Related to Cash Tender and Exchange Offers In 2018, we recorded a pre-tax charge of$253 million ($191 million after-tax or$0.13 per share) to interest expense in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes. See Note 8 to our consolidated financial statements for further information. 62
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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, bridge loan 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. Our primary sources of cash available to fund cash outflows, such as our anticipated share repurchases, dividend payments, debt repayments, the proposed acquisition ofPioneer Foods and the transition tax liability under the TCJ Act, include cash from operations, proceeds obtained from issuances of commercial paper, bridge loan facilities and long-term debt and cash and cash equivalents. However, there can be no assurance that volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us, or at all. See Note 8 to our consolidated financial statements for a description of our revolving credit facilities and bridge loan facilities. See also "Item 1A. Risk Factors" and "Our Business Risks" for further discussion. As ofDecember 28, 2019 , 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 mandatory one-time transition tax on undistributed international earnings, including$18.9 billion held in our consolidated subsidiaries outsidethe United States as ofDecember 30, 2017 . As ofDecember 28, 2019 , our mandatory transition tax liability was$3.3 billion , which must be paid through 2026 under the provisions of the TCJ Act; we currently expect to pay approximately$0.1 billion of this liability in 2020. See "Credit Facilities and Long-Term Contractual Commitments." Any additional guidance issued by theIRS may impact our recorded amounts for this transition tax liability. See Note 5 to our consolidated financial statements for further discussion of the TCJ Act. Furthermore, our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by weekly sales, which are generally highest in the third quarter due to seasonal and holiday-related sales patterns, and generally lowest in the first quarter. On a continuing basis, we consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, joint ventures, dividends, share repurchases, productivity and other efficiency initiatives, and other structural changes. These transactions may result in future cash proceeds or payments. The table below summarizes our cash activity: 2019 2018
2017
Net cash provided by operating activities$ 9,649 $ 9,415 $ 10,030 Net cash (used for)/provided by investing activities$ (6,437 ) $ 4,564 $ (4,403 ) Net cash used for financing activities$ (8,489 ) $ (13,769
)
Operating Activities During 2019, net cash provided by operating activities was$9.6 billion , compared to$9.4 billion in the prior year. The operating cash flow performance primarily reflects lower pre-tax pension and retiree medical plan contributions in the current year, partially offset by higher net cash tax payments in the current year. During 2018, net cash provided by operating activities was$9.4 billion , compared to$10.0 billion in 2017. The operating cash flow performance primarily reflects discretionary contributions of$1.5 billion to our pension and retiree medical plans in 2018, partially offset by lower net cash tax payments in 2018. Investing Activities During 2019, net cash used for investing activities was$6.4 billion , primarily reflecting$4.1 billion of net capital spending, as well as$1.9 billion of the remaining cash paid in connection with our acquisition of SodaStream. 63
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During 2018, net cash provided by investing activities was$4.6 billion , primarily reflecting net maturities and sales of debt securities with maturities greater than three months of$8.7 billion , partially offset by net capital spending of$3.1 billion and$1.2 billion of cash paid, net of cash and cash equivalents acquired, in connection with our acquisition of SodaStream. 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. We expect 2020 net capital spending to be approximately$5 billion . Financing Activities During 2019, net cash used for financing activities was$8.5 billion , primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of$8.3 billion , payments of long-term debt borrowings of$4.0 billion and debt redemptions of$1.0 billion , partially offset by proceeds from issuances of long-term debt of$4.6 billion . During 2018, net cash used for financing activities was$13.8 billion , primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of$6.9 billion , payments of long-term debt borrowings of$4.0 billion , cash tender and exchange offers of$1.6 billion and net payments of short-term borrowings of$1.4 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 will expire onJune 30, 2021 . OnFebruary 13, 2020 , we announced a 7% increase in our annualized dividend to$4.09 per share from$3.82 per share, effective with the dividend expected to be paid inJune 2020 . We expect to return a total of approximately$7.5 billion to shareholders in 2020 through share repurchases of approximately$2 billion and dividends of approximately$5.5 billion . Free Cash Flow Free cash flow is a non-GAAP financial measure. For further information on free cash flow see "Non-GAAP Measures." The table below reconciles net cash provided by operating activities, as reflected in our cash flow statement, to our free cash flow.
% Change
2019 2018 2017 2019 2018
Net cash provided by operating activities $ 9,649 $ 9,415 $ 10,030 2.5 (6 )
Capital spending (4,232 ) (3,282 ) (2,969 )
Sales of property, plant and equipment 170 134 180 Free cash flow
$ 5,587 $ 6,267 $ 7,241
(11 ) (13 )
We use free cash flow primarily for financing activities, including debt
repayments, dividends and share repurchases. We expect to continue to return
free cash flow to our shareholders through dividends and share repurchases while
maintaining Tier 1 commercial paper access, which we believe will 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
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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
discussion.
Credit Facilities and Long-Term Contractual Commitments
See Note 8 to our consolidated financial statements for a description of our
credit facilities.
The following table summarizes our long-term contractual commitments by period:
Payments Due by Period(a)
2021 - 2023 - 2025 and
Total 2020 2022 2024 beyond
Recorded Liabilities:
Long-term debt obligations (b) $ 29,142 $ - $ 7,156 $ 3,110 $ 18,876
Operating leases (c) 1,763 501 654 300 308
One-time mandatory transition tax -
TCJ Act (d) 3,317 75 617 888 1,737
Other:
Interest on debt obligations (e) 12,403 996 1,730
1,388 8,289 Purchasing commitments (f) 2,032 874 844 213 101 Marketing commitments (g) 1,308 403 548 188 169
Total contractual commitments
(a) Based on year-end foreign exchange rates.
(b) Excludes
related to the fair value adjustments for debt acquired in acquisitions and
interest rate swaps and payments of
discounts.
(c) Primarily reflects building leases. See Note 13 to our consolidated financial
statements for further information on operating leases.
(d) Reflects our transition tax liability as of
paid through 2026 under the provisions of the TCJ Act.
(e) Interest payments on floating-rate debt are estimated using interest rates
effective as of
as of
(f) Reflects non-cancelable commitments, primarily for the purchase of
commodities and outsourcing services in the normal course of business and
does not include purchases that we are likely to make based on our plans, but
are not obligated to incur.
(g) Reflects non-cancelable commitments, primarily for sports marketing in the
normal course of business.
Reserves for uncertain tax positions are excluded from the table above as we are
unable to reasonably predict the ultimate amount or timing of any such
settlements. Bottler funding to independent bottlers is not reflected in the
table above as it is negotiated on an annual basis. Accrued liabilities for
pension and retiree medical plans are not reflected in the table above. See Note
7 to our consolidated financial statements for further information regarding our
pension and retiree medical obligations.
Off-Balance-Sheet Arrangements
We do not have guarantees or other off-balance-sheet financing arrangements,
including variable interest entities, that we believe could have a material
impact on our financial condition or liquidity.
We coordinate, on an aggregate basis, the contract negotiations of raw material
requirements, including sweeteners, aluminum cans and plastic bottles and
closures for us and certain of our independent bottlers. Once we have negotiated
the contracts, the bottlers order and take delivery directly from the supplier
and pay the suppliers directly. Consequently, transactions between our
independent bottlers and suppliers are not reflected in our consolidated
financial statements. As the contracting party, we could be liable to these
suppliers in the event of any nonpayment by our independent bottlers, but we
consider this exposure to be remote.
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Return on Invested Capital ROIC is a non-GAAP financial measure. For further information on ROIC, see "Non-GAAP Measures."
2019 2018 2017
Net income attributable to PepsiCo (a) $ 7,314 $ 12,515 $ 4,857
Interest expense 1,135 1,525 1,151
Tax on interest expense (252 ) (339 ) (415 )
$ 8,197 $ 13,701 $ 5,593
Average debt obligations (b) $ 31,975 $ 38,169 $ 38,707
Average common shareholders' equity (c) 14,317 11,368 12,004
Average invested capital $ 46,292 $ 49,537 $ 50,711
Return on invested capital 17.7 % 27.7 % 11.0 %
(a) Results include the impact of the TCJ Act. Additionally, our 2018 results
included other net tax benefits related to the reorganization of our
international operations. See Note 5 to our consolidated financial statements
for further information.
(b) Average debt obligations includes a quarterly average of short-term and
long-term debt obligations.
(c) Average common shareholders' equity includes a quarterly average of common
stock, capital in excess of par value, retained earnings, accumulated other
comprehensive loss and repurchased common stock.
The table below reconciles ROIC as calculated above to net ROIC, excluding items
affecting comparability.
2019 2018 2017
ROIC 17.7 % 27.7 % 11.0 %
Impact of:
Average cash, cash equivalents and short-term
investments 3.0 7.8 7.6
Interest income (0.5 ) (0.6 ) (0.5 )
Tax on interest income 0.1 0.1 0.2
Mark-to-market net impact (0.2 ) 0.2 -
Restructuring and impairment charges 0.5 0.4 0.3
Inventory fair value adjustments and merger and integration charges 0.1 0.1
-
Pension-related settlement charges 0.5 -
-
Net tax related to the TCJ Act (1.0 ) (1.1 )
4.5
Other net tax benefits 2.2 (9.7 )
0.1
Charges related to cash tender and exchange offers (0.1 ) (0.1 )
-
Charges related to the transaction with Tingyi (a) - - (0.1 ) Venezuela impairment charges (a) - - (0.2 ) Net ROIC, excluding items affecting comparability 22.3 % 24.8 %
22.9 %
(a) See "Item 6. Selected Financial Data" for further information.
OUR CRITICAL ACCOUNTING POLICIES
An appreciation of our critical accounting policies is necessary to understand
our financial results. These policies may require management to make difficult
and subjective judgments regarding uncertainties, 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. Other than our accounting for
pension and retiree medical plans, our critical accounting policies do not
involve a choice between alternative methods of accounting. 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 with our Audit Committee.
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Our critical accounting policies 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 products and food and snack 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 and 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 bad debt exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable and our analysis of customer data. 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. 67
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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 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-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, 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, 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 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 and weighted-average cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain of the risks described in "Item 1A. Risk Factors" and "Our Business Risks." 68
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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 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 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 more likely than not that some portion or all of the deferred tax assets will not 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. During the fourth quarter of 2017, the TCJ Act was enacted inthe United States . Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced theU.S. corporate income tax rate from 35% to 21%, effectiveJanuary 1, 2018 . As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of$2.5 billion ($1.70 per share) in the fourth quarter of 2017. We recorded a net tax benefit of$28 million ($0.02 per share) in 2018, related to the TCJ Act. Our provisional measurement period ended in the fourth quarter of 2018 and while our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by theIRS impacted, and may continue to impact, our recorded amounts afterDecember 29, 2018 . In 2019, we recognized a net tax benefit totaling$8 million ($0.01 per share) related to the TCJ Act, including the impact of additional guidance issued by theIRS in the first quarter of 2019 and adjustments related to the filing of our 2018 U.S. federal tax return. See further information in "Items Affecting Comparability." OnMay 19, 2019 , a public referendum held inSwitzerland passed the TRAF, effectiveJanuary 1, 2020 . The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of$24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent toDecember 28, 2019 is expected to result in adjustments to our consolidated financial 69
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statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results. In 2019, our annual tax rate was 21.0% compared to (36.7)% in 2018, as discussed in "Other Consolidated Results." The tax rate increased 57.7 percentage points compared to 2018, primarily reflecting the prior-year other net tax benefits related to the reorganization of our international operations, which increased the current-year reported tax rate by 47 percentage points. Additionally, the prior-year favorable conclusion of certain international tax audits and the favorable resolution with theIRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, increased the current-year reported tax rate by 8 percentage points. 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. 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). EffectiveJanuary 1, 2017 , theU.S. qualified defined benefit pension plans were reorganized into Plan A and the PepsiCo Employees Retirement Plan I (Plan I) to facilitate a targeted investment strategy over time and provide additional flexibility in evaluating opportunities to reduce risk and volatility. Actuarial gains and losses associated with Plan A are amortized over the average remaining service life of the active participants, while the actuarial gains and losses associated with Plan I are amortized over the remaining life expectancy of the inactive participants. As a result of these changes, the pre-tax net periodic benefit cost decreased by$42 million ($27 million after-tax, reflecting tax rates effective for the 2017 tax year, or$0.02 per share) in 2017, primarily impacting corporate unallocated expenses. See "Items Affecting Comparability" and Note 7 to our consolidated financial statements. 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. 70
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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 return on assets in our funded plans;
• for pension expense, the rate of salary increases for plans where benefits
are based on earnings;
• for retiree medical expense, health care cost trend rates; and
• for pension and retiree medical expense, the spot rates along the yield
curve used to determine service and interest costs and the present value
of liabilities.
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. Our U.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'
liability 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:
2020 2019 2018
Pension
Service cost discount rate 3.4 % 4.4 % 3.7 %
Interest cost discount rate 2.8 % 3.9 % 3.2 %Expected rate of return on plan assets 6.6 % 6.8 % 6.9 % Expected rate of salary increases 3.2 % 3.2 % 3.2 % Retiree medical Service cost discount rate
3.2 % 4.3 % 3.6 %
Interest cost discount rate 2.6 % 3.8 % 3.0 %
Expected rate of return on plan assets 5.8 % 6.6 % 6.5 % Current health care cost trend rate 5.6 % 5.7 % 5.8 %
In 2019, we incurred pension settlement charges related to the purchase of a group annuity contract of$220 million and one-time lump sum settlements of$53 million to certain former employees who had vested benefits. In addition, based on our assumptions, we expect our total pension and retiree medical expense to decrease in 2020 primarily driven by the recognition of fixed income gains on plan assets and the impact of approved plan contributions, primarily offset by the decrease in discount rates. 71
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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 2020 pre-tax pension and retiree
medical expense as follows:
Assumption Amount
Discount rates used in the calculation of expense
$ 44
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 Plan A inthe United States of$150 million inJanuary 2020 ,$400 million in 2019 and$1.4 billion in 2018. Our pension and retiree medical contributions are subject to change as a result of many factors, such as changes in interest rates, deviations between actual and expected asset returns and changes in tax or other benefit laws. We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. See Note 7 to our consolidated financial statements for our past and expected contributions and estimated future benefit payments. 72
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Consolidated Statement of IncomePepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 (in millions except per share amounts) 2019 2018 2017 Net Revenue$ 67,161 $ 64,661 $ 63,525 Cost of sales 30,132 29,381 28,796 Gross profit 37,029 35,280 34,729
Selling, general and administrative expenses 26,738 25,170
24,453
Operating Profit 10,291 10,110
10,276
Other pension and retiree medical benefits (expense)/income (44 ) 298 233 Interest expense (1,135 ) (1,525 ) (1,151 ) Interest income and other 200 306 244 Income before income taxes 9,312 9,189 9,602 Provision for/(benefit from) income taxes (See Note 5) 1,959 (3,370 ) 4,694 Net income 7,353 12,559
4,908
Less: Net income attributable to noncontrolling interests 39 44 51 Net Income Attributable to PepsiCo$ 7,314 $ 12,515 $ 4,857 Net Income Attributable to PepsiCo per Common Share Basic$ 5.23 $ 8.84 $ 3.40 Diluted$ 5.20 $ 8.78 $ 3.38 Weighted-average common shares outstanding Basic 1,399 1,415 1,425 Diluted 1,407 1,425 1,438
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See accompanying notes to the consolidated financial statements.
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Consolidated Statement of Comprehensive IncomePepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 (in millions) 2019 2018 2017 Net income$ 7,353 $ 12,559 $ 4,908 Other comprehensive income/(loss), net of taxes: Net currency translation adjustment 628 (1,641 )
1,109
Net change on cash flow hedges (90 ) 40 (36 )
Net pension and retiree medical
adjustments 283 (467 ) (159 )
Net change on available-for-sale
securities (2 ) 6 (68 )
Other - - 16
819 (2,062 ) 862
Comprehensive income 8,172 10,497 5,770
Comprehensive income attributable to
noncontrolling interests (39 ) (44 ) (51 )
Comprehensive Income Attributable to
PepsiCo $ 8,133 $ 10,453 $ 5,719 --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
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Consolidated Statement of Cash FlowsPepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 (in millions) 2019 2018 2017 Operating Activities Net income$ 7,353 $ 12,559 $ 4,908 Depreciation and amortization 2,432 2,399 2,369 Share-based compensation expense 237 256 292 Restructuring and impairment charges 370 308 295 Cash payments for restructuring charges (350 ) (255 ) (113 ) Pension and retiree medical plan expenses 519 221 221 Pension and retiree medical plan contributions (716 ) (1,708 ) (220 ) Deferred income taxes and other tax charges and credits 453 (531 ) 619 Net tax related to the TCJ Act (8 ) (28 ) 2,451 Tax payments related to the TCJ Act (423 ) (115 ) - Other net tax benefits related to international reorganizations (2 ) (4,347 ) - Change in assets and liabilities: Accounts and notes receivable (650 ) (253 ) (202 ) Inventories (190 ) (174 ) (168 ) Prepaid expenses and other current assets (87 ) 9 20 Accounts payable and other current liabilities 735 882 201 Income taxes payable (287 ) 448 (338 ) Other, net 263 (256 ) (305 ) Net Cash Provided by Operating Activities 9,649 9,415 10,030 Investing Activities Capital spending (4,232 ) (3,282 ) (2,969 ) Sales of property, plant and equipment 170 134 180 Acquisition of SodaStream, net of cash and cash equivalents acquired (1,939 )
(1,197 ) - Other acquisitions and investments in noncontrolled affiliates
(778 ) (299 ) (61 )
Divestitures 253 505 267
Short-term investments, by original maturity:
More than three months - purchases - (5,637 ) (18,385 )
More than three months - maturities 16 12,824 15,744
More than three months - sales 62 1,498 790
Three months or less, net 19 16 2
Other investing, net (8 ) 2 29Financing Activities Proceeds from issuances of long-term debt 4,621 - 7,509 Payments of long-term debt (3,970 ) (4,007 ) (4,406 ) Debt redemption/cash tender and exchange offers (1,007 ) (1,589 ) - Short-term borrowings, by original maturity: More than three months - proceeds 6 3 91 More than three months - payments (2 ) (17 ) (128 ) Three months or less, net (3 ) (1,352 ) (1,016 ) Cash dividends paid (5,304 ) (4,930 ) (4,472 ) Share repurchases - common (3,000 ) (2,000 ) (2,000 ) Share repurchases - preferred - (2 ) (5 ) Proceeds from exercises of stock options 329
281 462 Withholding tax payments on restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo equity performance units (PEPunits) converted
(114 ) (103 ) (145 )
Other financing (45 ) (53 ) (76 )
Net Cash Used for Financing Activities (8,489 ) (13,769 ) (4,186 )
Effect of exchange rate changes on cash and cash
equivalents and restricted cash 78
(98 ) 47
(5,199 ) 112 1,488
Cash and Cash Equivalents and Restricted Cash,
Beginning of Year 10,769 10,657 9,169 Cash and Cash Equivalents and Restricted Cash, End of Year
$ 5,570 $
10,769
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See accompanying notes to the consolidated financial statements.
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Consolidated Balance SheetPepsiCo, Inc. and SubsidiariesDecember 28, 2019 andDecember 29, 2018 (in millions except per share amounts) 2019 2018 ASSETS Current Assets Cash and cash equivalents$ 5,509 $ 8,721 Short-term investments 229 272 Restricted cash - 1,997 Accounts and notes receivable, net 7,822
7,142
Inventories 3,338
3,128
Prepaid expenses and other current assets 747
633
Total Current Assets 17,645
21,893
Property, Plant and Equipment, net 19,305
17,589
Amortizable Intangible Assets, net 1,433
1,644
Goodwill 15,501
14,808
Other indefinite-lived intangible assets 14,610
14,181
Indefinite-Lived Intangible Assets 30,111
28,989
Investments in Noncontrolled Affiliates 2,683 2,409 Deferred Income Taxes 4,359 4,364 Other Assets 3,011 760 Total Assets$ 78,547 $ 77,648 LIABILITIES AND EQUITY Current Liabilities Short-term debt obligations$ 2,920 $ 4,026 Accounts payable and other current liabilities 17,541 18,112 Total Current Liabilities 20,461 22,138 Long-Term Debt Obligations 29,148 28,295 Deferred Income Taxes 4,091 3,499 Other Liabilities 9,979 9,114 Total Liabilities 63,679 63,046 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: 1,391 and 1,409 shares, respectively) 23
23
Capital in excess of par value 3,886
3,953
Retained earnings 61,946
59,947
Accumulated other comprehensive loss (14,300 )
(15,119 ) Repurchased common stock, in excess of par value (476 and 458 shares, respectively)
(36,769 ) (34,286 )
Total PepsiCo Common Shareholders' Equity 14,786 14,518
Noncontrolling interests 82 84
Total Equity 14,868 14,602
Total Liabilities and Equity $ 78,547 $ 77,648 --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
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Consolidated Statement of EquityPepsiCo, Inc. and Subsidiaries Fiscal years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 (in millions) 2019 2018 2017 Shares Amount Shares Amount Shares Amount Preferred Stock Balance, beginning of year - $ - 0.8$ 41 0.8$ 41 Conversion to common stock - - (0.1 ) (6 ) - - Retirement of preferred stock - - (0.7 ) (35 ) - - Balance, end of year - - - - 0.8 41 Repurchased Preferred Stock Balance, beginning of year - - (0.7 ) (197 ) (0.7 ) (192 ) Redemptions - - - (2 ) - (5 ) Retirement of preferred stock - - 0.7 199 - - Balance, end of year - - - - (0.7 ) (197 ) Common Stock Balance, beginning of year 1,409 23 1,420 24 1,428 24 Shares issued in connection with preferred stock conversion to common stock - - 1 - - - Change in repurchased common stock (18 ) - (12 ) (1 ) (8 ) - Balance, end of year 1,391 23 1,409 23 1,420 24 Capital in Excess of Par Value Balance, beginning of year 3,953 3,996 4,091 Share-based compensation expense 235 250 290 Equity issued in connection with preferred stock conversion to common stock - 6 - Stock option exercises, RSUs, PSUs and PEPunits converted (188 ) (193 ) (236 ) Withholding tax on RSUs, PSUs and PEPunits converted (114 ) (103 ) (145 ) Other - (3 ) (4 ) Balance, end of year 3,886 3,953 3,996 Retained Earnings Balance, beginning of year 59,947 52,839 52,518 Cumulative effect of accounting changes 8 (145 ) - Net income attributable to PepsiCo 7,314 12,515 4,857 Cash dividends declared - common (a) (5,323 ) (5,098 ) (4,536 ) Retirement of preferred stock - (164 ) - Balance, end of year 61,946 59,947 52,839 Accumulated Other Comprehensive Loss Balance, beginning of year (15,119 ) (13,057 ) (13,919 ) Other comprehensive income/(loss) attributable to PepsiCo 819 (2,062 ) 862 Balance, end of year (14,300 ) (15,119 ) (13,057 ) Repurchased Common Stock Balance, beginning of year (458 ) (34,286 ) (446 ) (32,757 ) (438 ) (31,468 ) Share repurchases (24 ) (3,000 ) (18 ) (2,000 ) (18 ) (2,000 ) Stock option exercises, RSUs, PSUs and PEPunits converted 6 516 6 469 10 708 Other - 1 - 2 - 3 Balance, end of year (476 ) (36,769 ) (458 ) (34,286 ) (446 ) (32,757 ) Total PepsiCo Common Shareholders' Equity 14,786 14,518 11,045
Noncontrolling Interests Balance, beginning of year 84 92 104 Net income attributable to noncontrolling interests 39 44 51 Distributions to noncontrolling interests (42 ) (49 ) (62 ) Other, net 1 (3 ) (1 ) Balance, end of year 82 84 92 Total Equity$ 14,868 $ 14,602 $ 10,981
-------------------------------------------------------------------------------- (a) Cash dividends declared per common share were$3.7925 ,$3.5875 and$3.1675 for 2019, 2018 and 2017, respectively. See accompanying notes to the consolidated financial statements. 77
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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 withU.S. GAAP and include the consolidated accounts ofPepsiCo, 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 brands, 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. As future events and their effect cannot be determined with precision, actual results could differ significantly from these estimates. Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. While ourNorth America results are reported on a weekly calendar basis, substantially all of our international operations report on a monthly calendar basis. Certain operations in ourEurope segment report on a weekly calendar basis. 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 years' consolidated financial statements to conform to the current year presentation. Our Divisions During the fourth quarter of 2019, we realigned our ESSA and AMENA reportable segments to be consistent 78
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with a recent strategic realignment of our organizational structure and how our Chief Executive Officer assesses the performance of, and allocates resources to, our reportable segments. As a result, our beverage, food and snack businesses inNorth Africa , theMiddle East andSouth Asia that were part of our former AMENA segment and our businesses in Sub-Saharan Africa that were part of our former ESSA segment are now reported together as our AMESA segment. The remaining beverage, food and snack businesses that were part of our former AMENA segment are now reported together as our APAC segment and our beverage, food and snack businesses inEurope are now reported as ourEurope segment. These changes did not impact our FLNA, QFNA, PBNA or LatAm reportable segments or our consolidated financial results. Our historical segment reporting presented in this report has been retrospectively revised to reflect the new organizational structure. We are organized into seven reportable segments (also referred to as divisions), as follows: 1) FLNA, which includes our branded food and snack businesses inthe United States andCanada ; 2) QFNA, which includes our cereal, rice, pasta and other branded food businesses inthe United States andCanada ;
3) PBNA, which includes our beverage businesses in
4) LatAm, which includes all of our beverage, food and snack businesses in
Latin America ;
5)
Europe ; 6) AMESA, which includes all of our beverage, food and snack businesses inAfrica , theMiddle East andSouth Asia ; and 7) APAC, which includes all of our beverage, food and snack businesses inAsia Pacific ,Australia and New Zealand andChina region. Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories with our largest operations inthe United States ,Mexico ,Russia ,Canada , theUnited Kingdom ,China andBrazil . 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.
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The allocation of share-based compensation expense of each division is as
follows:
2019 2018 2017
FLNA 13 % 13 % 13 %
QFNA 1 % 1 % 1 %
PBNA 17 % 18 % 18 %
LatAm 7 % 8 % 7 %
Europe 17 % 9 % 9 %
AMESA 3 % 4 % 5 %
APAC 5 % 4 % 4 %Corporate unallocated expenses 37 % 43 % 43 %
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.
Derivatives
We centrally manage commodity derivatives on behalf of our divisions. These
commodity derivatives include energy, agricultural products 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 of each division are as follows:
Net Revenue Operating Profit
2019(a) 2018(a) 2017 2019 2018 2017
FLNA $ 17,078 $ 16,346 $ 15,798 $ 5,258 $ 5,008 $ 4,793
QFNA 2,482 2,465 2,503 544 637 640
PBNA 21,730 21,072 20,936 2,179 2,276 2,700
LatAm 7,573 7,354 7,208 1,141 1,049 924
Europe 11,728 10,973 10,522 1,327 1,256 1,199
AMESA 3,651 3,657 3,674 671 661 789
APAC 2,919 2,794 2,884 477 619 401
Total division 67,161 64,661 63,525 11,597 11,506 11,446
Corporate unallocated expenses - - - (1,306 ) (1,396 ) (1,170 )
Total $ 67,161 $ 64,661 $ 63,525 $ 10,291 $ 10,110 $ 10,276 (a) Our primary performance obligation is the distribution and sales of beverage
products and food and snack products to our customers, with our food and
snack business representing approximately 55% of our consolidated net
revenue. Internationally, LatAm's food and snack business is approximately
90% of the segment's net revenue,
snack business are approximately 55% and 45%, respectively, of the segment's
net revenue, AMESA's beverage business and food and snack business are
approximately 40% and 60%, respectively, of the segment's net revenue and
APAC's beverage business and food and snack business are approximately 25%
and 75%, respectively, of the segment's net revenue. 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
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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. See Note 2 for further
information.
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, and certain other items.
Other Division Information
Total assets and capital spending of each division are as follows:
Total Assets Capital Spending
2019 2018 2019 2018 2017
FLNA $ 7,519 $ 6,577 $ 1,227 $ 840 $ 665
QFNA 941 870 104 53 44
PBNA 31,449 29,878 1,053 945 904
LatAm 7,007 6,458 557 492 481
Europe 17,814 16,887 613 466 463
AMESA 3,672 3,252 267 198 181
APAC 4,113 3,704 195 138 145
Total division 72,515 67,626 4,016 3,132 2,883
Corporate (a) 6,032 10,022 216 150 86
Total $ 78,547 $ 77,648 $ 4,232 $ 3,282 $ 2,969 (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 2019, the change in assets was
primarily due to a decrease in cash and cash equivalents and restricted cash.
Refer to the cash flow statement for additional information.
Amortization of intangible assets and depreciation and other amortization of each division are as follows:
Amortization of Depreciation and
Intangible Assets Other Amortization
2019 2018 2017 2019 2018 2017
FLNA $ 7 $ 7 $ 7 $ 492 $ 457 $ 449
QFNA - - - 44 45 47
PBNA 29 31 31 857 821 780
LatAm 5 5 5 270 253 245
Europe 37 23 22 341 319 317
AMESA 2 2 2 116 169 170
APAC 1 1 1 76 80 99
Total division 81 69 68 2,196 2,144 2,107
Corporate - - - 155 186 194
Total $ 81 $ 69 $ 68 $ 2,351 $ 2,330 $ 2,301
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Net revenue and long-lived assets by country are as follows:
Net Revenue Long-Lived Assets(a)
2019 2018 2017 2019 2018
United States $ 38,644 $ 37,148 $ 36,546 $ 30,601 $ 29,169
Mexico 4,190 3,878 3,650 1,666 1,404
Russia 3,263 3,191 3,232 4,314 3,926
Canada 2,831 2,736 2,691 2,695 2,565
United Kingdom 1,723 1,743 1,650 827 759
China 1,300 1,164 963 705 509
Brazil 1,295 1,335 1,427 590 639
All other countries 13,915 13,466 13,366 12,134 11,660
Total $ 67,161 $ 64,661 $ 63,525 $ 53,532 $ 50,631 (a) Long-lived assets represent property, plant and equipment, indefinite-lived
intangible assets, amortizable intangible assets and investments in
noncontrolled affiliates. These assets are reported in the country where they
are primarily used.
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 products and food and snack 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. 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 and 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. As a result of the implementation of the revenue recognition guidance adopted in the first quarter of 2018, which did not have a material impact on our accounting policies, we recorded an adjustment in the first quarter of 2018 of$137 million to beginning retained earnings to reflect marketplace spending that our customers and independent bottlers expect to be entitled to in line with revenue recognition. In addition, starting in 2018, we excluded from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions. The impact of these taxes previously recognized in net revenue and cost of sales was approximately$75 million for the fiscal year endedDecember 30, 2017 , with no impact on operating profit. 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 bad debt exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable and our analysis of customer data. Bad debt expense is classified within selling, general and administrative expenses on our income statement. 82
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We are exposed to concentration of credit risk from our major customers, including Walmart. In 2019, 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. We have not experienced credit issues with these customers. 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 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 a 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$272 million as ofDecember 28, 2019 and$218 million as ofDecember 29, 2018 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$4.7 billion in 2019,$4.2 billion in 2018 and$4.1 billion in 2017, including advertising expenses of$3.0 billion in 2019,$2.6 billion in 2018 and$2.4 billion in 2017. 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$55 million and$47 million as ofDecember 28, 2019 andDecember 29, 2018 , respectively, are classified as prepaid expenses and other current assets on our balance sheet. 83
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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$10.9 billion in 2019,$10.5 billion in 2018 and$9.9 billion in 2017. 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$166 million in 2019,$204 million in 2018 and$224 million in 2017. Net capitalized software and development costs were$572 million and$577 million as ofDecember 28, 2019 andDecember 29, 2018 , respectively. 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$711 million ,$680 million and$737 million in 2019, 2018 and 2017, 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, 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 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 84
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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.
• Property, Plant and Equipment - Note 4.
• Income Taxes - Note 5.
• Share-Based Compensation - Note 6.
• 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 15. 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.
• Translation of Financial Statements of Foreign Subsidiaries - Financial
statements of foreign subsidiaries are translated into
period-end exchange rates for assets and liabilities and weighted-average
exchange rates for revenues and expenses. Adjustments resulting from
translating net assets are reported as a separate component of accumulated
other comprehensive loss within common shareholders' equity as currency
translation adjustment.
Recently Issued Accounting Pronouncements - Adopted In 2018, theFinancial Accounting Standards Board (FASB) issued guidance related to the TCJ Act for the optional reclassification of the residual tax effects, arising from the change in corporate tax rate, in accumulated other comprehensive loss to retained earnings. The reclassification is the difference between the amount previously recorded in other comprehensive income at the historicalU.S. federal tax rate that remains in accumulated other comprehensive loss at the time the TCJ Act was effective and the amount that would have been recorded using the newly enacted rate. This guidance became effective during the first quarter of 2019; however, we did not elect to make the optional reclassification. In 2017, the FASB issued guidance to amend and simplify the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. Under this guidance, certain of our derivatives used to hedge commodity price risk that did not previously qualify for hedge accounting treatment can now qualify prospectively. We adopted this guidance during the first quarter of 2019; the adoption did not have a material impact on our consolidated financial statements or disclosures. See Note 9 for further information. In 2016, the FASB issued guidance on leases, with amendments issued in 2018. The guidance requires lessees to recognize most leases on the balance sheet, but does not change the manner in which expenses are recorded 85
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in the income statement. For lessors, the guidance modifies the classification
criteria and the accounting for sales-type and direct financing leases. The two
permitted transition methods under the guidance are the modified retrospective
transition approach, which requires application of the guidance for all
comparative periods presented, and the cumulative effect adjustment approach,
which requires prospective application at the adoption date.
We utilized a comprehensive approach to assess the impact of this guidance on
our consolidated financial statements and related disclosures, including the
increase in the assets and liabilities on our balance sheet and the impact on
our current lease portfolio from both a lessor and lessee perspective. We
completed our comprehensive review of our lease portfolio, including significant
leases by geography and by asset type that were impacted by the new guidance,
and enhanced our controls. In addition, we implemented a new software platform,
and corresponding controls, for administering our leases and facilitating
compliance with the new guidance.
We adopted the guidance prospectively during the first quarter of 2019. As part
of our adoption, we elected not to reassess historical lease classification,
recognize short-term leases on our balance sheet, nor separate lease and
non-lease components for our real estate leases. In addition, we utilized the
portfolio approach to group leases with similar characteristics and did not use
hindsight to determine lease term. The adoption did not have a material impact
on our consolidated financial statements, resulting in an increase of 2% to each
of our total assets and total liabilities on our balance sheet, and had an
immaterial increase to retained earnings as of the beginning of 2019. See Note
13 for further information.
Recently Issued Accounting Pronouncements - Not Yet Adopted
In 2019, the 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 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.
The guidance is effective in the first quarter of 2021 with early adoption
permitted. We are currently evaluating the impact of this guidance on our
consolidated financial statements and the timing of adoption.
In 2016, the FASB issued guidance that changes the impairment model used to
measure credit losses for most financial assets. For our trade, certain other
receivables and certain other financial instruments, we will be required to use
a new forward-looking expected credit loss model that will replace the existing
incurred credit loss model, which would generally result in earlier recognition
of allowances for credit losses. We will adopt the guidance when it becomes
effective in the first quarter of 2020. The guidance is not expected to have a
material impact on our consolidated financial statements or disclosures.
Note 3 - Restructuring and Impairment Charges
A summary of our restructuring and impairment charges and other productivity
initiatives is as follows:
2019 2018 2017
2019 Productivity Plan $ 370 $ 138 $ -
2014 Productivity Plan - 170 295
Total restructuring and impairment
charges 370 308 295
Other productivity initiatives 3 8 16
Total restructuring and impairment
charges and other productivity
initiatives $ 373 $ 316 $ 311
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2019 Multi-Year Productivity Plan The 2019 Productivity Plan, publicly announced onFebruary 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. In connection with this plan, we expect to incur pre-tax charges of approximately$2.5 billion and cash expenditures of approximately$1.6 billion . These pre-tax charges are expected to consist of approximately 70% of severance and other employee-related costs, 15% for asset impairments (all non-cash) resulting from plant closures and related actions, and 15% for other costs associated with the implementation of our initiatives. We expect to complete this plan by 2023. 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 11 % 2 % 30 % 10 % 25 % 8 %
5 % 9 %
A summary of our 2019 Productivity Plan charges is as follows:
2019 2018
Cost of sales $ 115 $ 3
Selling, general and administrative expenses 253 100
Other pension and retiree medical benefits expense 2 35
Total restructuring and impairment charges
$ 303 $ 109
Net income attributable to PepsiCo per common share
Plan to Date
2019 2018 through 12/28/2019
FLNA $ 22 $ 31 $ 53
QFNA 2 5 7
PBNA 51 40 91
LatAm 62 9 71
Europe 99 6 105
AMESA 38 3 41
APAC 47 2 49
Corporate 47 7 54
368 103 471Other pension and retiree medical benefits expense 2 35
37
Total $ 370 $ 138 $ 508
Plan to Date
through 12/28/2019
Severance and other employee costs $ 286
Asset impairments 92
Other costs (a) 130
Total $ 508
(a) Includes other costs associated with the implementation of our initiatives,
including contract termination costs, consulting and other professional fees.
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A summary of our 2019 Productivity Plan activity is as follows:
Severance and Other Asset
Employee Costs Impairments Other Costs Total
2018 restructuring charges $ 137 $ - $ 1 $ 138
Non-cash charges and
translation (32 ) - - (32 )
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
(a) Excludes cash expenditures of
in pension and retiree medical contributions.
Substantially all of the restructuring accrual atDecember 28, 2019 is expected to be paid by the end of 2020. 2014 Multi-Year Productivity Plan The 2014 Productivity Plan, publicly announced onFebruary 13, 2014 , included the next generation of productivity initiatives that we believed would strengthen our beverage, food and snack businesses by: accelerating our investment in manufacturing automation; further optimizing our global manufacturing footprint, including closing certain manufacturing facilities; re-engineering our go-to-market systems in developed markets; expanding shared services; and implementing simplified organization structures to drive efficiency. To build on the 2014 Productivity Plan, in the fourth quarter of 2017, we expanded and extended the plan through the end of 2019 to take advantage of additional opportunities within the initiatives described above that further strengthened our beverage, food and snack businesses. The 2014 Productivity Plan was completed in 2019. In 2019, there were no material pre-tax charges related to this plan and all cash payments were paid at year end. The total plan pre-tax charges and cash expenditures approximated the previously disclosed plan estimates of$1.3 billion and$960 million , respectively. These total plan pre-tax charges consisted of 59% of severance and other employee costs, 15% of asset impairments and 26% of other costs, including costs associated with the implementation of our initiatives, including certain consulting and other contract termination costs. These total plan pre-tax charges were incurred by division as follows: FLNA 14%, QFNA 3%, PBNA 29%, LatAm 15%,Europe 23%, AMESA 3%, APAC 3% and Corporate 10%. A summary of our 2014 Productivity Plan charges is as follows: 2018 2017
Selling, general and administrative expenses
$ 143 $ 224
Net income attributable to PepsiCo per common share
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2018 2017
FLNA $ 8 $ 67
QFNA 2 11
PBNA 51 54
LatAm 30 63
Europe 53 53
AMESA 15 2
APAC (a) 12 (5 )
Corporate (b) (1 ) 50
Total $ 170 $ 295 (a) Income amount primarily reflects a gain on the sale of property, plant and
equipment.
(b) Income amount primarily relates to other pension and retiree medical
benefits.
A summary of our 2014 Productivity Plan activity is as follows:
Severance
and Other Asset
Employee Costs Impairments Other Costs Total
Liability as of December
31, 2016 $ 88 $ - $ 8 $ 96
2017 restructuring charges 280 21 (6 ) (a) 295
Cash payments (91 ) - (22 ) (113 )
Non-cash charges and
translation (65 ) (21 ) 34 (52 )
Liability as of December
30, 2017 212 - 14 226
2018 restructuring charges 86 28 56 170
Cash payments (b) (203 ) - (52 ) (255 )
Non-cash charges and
translation (4 ) (28 ) 5 (27 )
Liability as of December
29, 2018 91 - 23 114
Cash payments (77 ) - (16 ) (93 )
Non-cash charges and
translation (14 ) - (7 ) (21 )
Liability as of December
28, 2019 $ - $ - $ - $ -
(a) Income amount represents adjustments for changes in estimates and a gain on
the sale of property, plant, and equipment.
(b) Excludes cash expenditures of
in pension and retiree medical plan contributions.
Other Productivity Initiatives
There were no material charges related to other productivity and efficiency
initiatives outside the scope of the 2019 and 2014 Productivity Plans.
We regularly evaluate different productivity initiatives beyond the productivity
plans and other initiatives described above.
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Note 4 - Property, Plant and Equipment and Intangible Assets A summary of our property, plant and equipment is as follows:
Average
Useful Life
(Years) 2019 2018 2017
Property, plant and equipment, net
Land $ 1,130 $ 1,078
Buildings and improvements 15 - 44 9,314 8,941
Machinery and equipment, including fleet and software 5 - 15 29,390 27,715
Construction in progress 3,169 2,430
43,003 40,164
Accumulated depreciation (23,698 ) (22,575 )
Total $ 19,305 $ 17,589
Depreciation expense $
2,257
Property, plant and equipment is recorded at historical cost. Depreciation and
amortization are recognized on a straight-line basis over an asset's estimated
useful life. Land is not depreciated and construction in progress is not
depreciated until ready for service.
A summary of our amortizable intangible assets is as follows:
2019 2018 2017
Average
Useful Life Accumulated Accumulated
(Years) Gross Amortization Net Gross Amortization Net
Amortizable intangible
assets, net
Acquired franchise
rights 56 - 60 $ 846 $ (158 ) $ 688 $ 838 $ (140 ) $ 698
Reacquired franchise
rights 5 - 14 106 (105 ) 1 106 (105 ) 1
Brands 20 - 40 1,326 (1,066 ) 260 1,306 (1,032 ) 274
Other identifiable
intangibles (a) 10 - 24 810 (326 ) 484 959 (288 ) 671
Total $ 3,088 $ (1,655 ) $ 1,433 $ 3,209 $ (1,565 ) $ 1,644 Amortization expense$ 81 $ 69 $ 68
(a) The change from 2018 to 2019 primarily reflects revisions to the purchase
price allocation for our acquisition of SodaStream.
Amortization of intangible assets for each of the next five years, based on
existing intangible assets as of
2020 2021 2022 2023 2024
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 28, 2019 ,December 29, 2018 andDecember 30, 2017 . We did not recognize any material impairment charges for indefinite-lived intangible assets in each of the years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 . As ofDecember 28, 2019 , 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 90
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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 andBrazil on the estimated fair value of our indefinite-lived intangible assets in these countries and have concluded that there were no impairments for the year endedDecember 28, 2019 . However, there could be an impairment of the carrying value of certain brands in these countries, including juice and dairy brands inRussia , if there is a deterioration in these conditions, if future revenues and their contributions to the operating results do not achieve our expected future cash flows (including perpetuity growth assumptions), if there are significant changes in the decisions regarding assets that do not perform consistent with our expectations, or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value. For further information on our policies for indefinite-lived intangible assets, see Note 2. 91
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The change in the book value of indefinite-lived intangible assets is as
follows:
Balance, Balance, Balance,
Beginning Acquisitions/ Translation End of Acquisitions/ Translation End of
2018 (Divestitures) and Other 2018 (Divestitures) and Other 2019
FLNA
Goodwill $ 280 $ 28 $ (11 ) $ 297 $ (3 ) $ 5 $ 299
Brands 25 138 (2 ) 161 - 1 162
Total 305 166 (13 ) 458 (3 ) 6 461
QFNA
Goodwill 175 9 - 184 6 (1 ) 189
Brands - 25 - 25 (14 ) - 11
Total 175 34 - 209 (8 ) (1 ) 200
PBNA (a)
Goodwill 9,854 - (41 ) 9,813 66 19 9,898
Reacquired franchise
rights 7,126 - (68 ) 7,058 - 31 7,089
Acquired franchise
rights 1,525 - (15 ) 1,510 - 7 1,517
Brands 353 - - 353 418 (8 ) 763
Total 18,858 - (124 ) 18,734 484 49 19,267
LatAm
Goodwill 555 - (46 ) 509 - (8 ) 501
Brands 141 - (14 ) 127 - (2 ) 125
Total 696 - (60 ) 636 - (10 ) 626
Europe (b) (c)
Goodwill 3,202 526 (367 ) 3,361 440 160 3,961
Reacquired franchise
rights 549 (1 ) (51 ) 497 - 8 505
Acquired franchise
rights 195 (25 ) (9 ) 161 - (4 ) 157
Brands 2,545 1,993 (350 ) 4,188 (139 ) 132 4,181
Total 6,491 2,493 (777 ) 8,207 301 296 8,804
AMESA
Goodwill 437 - - 437 11 (2 ) 446
Total 437 - - 437 11 (2 ) 446
APAC
Goodwill 241 - (34 ) 207 - - 207
Brands 111 - (10 ) 101 - (1 ) 100
Total 352 - (44 ) 308 - (1 ) 307
Total goodwill 14,744 563 (499 ) 14,808 520 173 15,501
Total reacquired
franchise rights 7,675 (1 ) (119 ) 7,555 - 39 7,594
Total acquired
franchise rights 1,720 (25 ) (24 ) 1,671 - 3 1,674
Total brands 3,175 2,156 (376 ) 4,955 265 122 5,342
Total $ 27,314 $ 2,693 $ (1,018 ) $ 28,989 $ 785 $ 337 $ 30,111 (a) The change in acquisitions/(divestitures) in 2019 is primarily related to our
acquisition of
(b) The change in acquisitions/(divestitures) in 2019 and 2018 is primarily
related to our acquisition of SodaStream. See Note 14 for further
information.
(c) The change in translation and other in 2019 primarily reflects the
appreciation of the Russian ruble. The change in translation and other in
2018 primarily reflects the depreciation of the Russian ruble, euro and Pound
sterling.
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Note 5 - Income Taxes
The components of income before income taxes are as follows:
2019 2018 2017
United States $ 4,123 $ 3,864 $ 3,452
Foreign 5,189 5,325 6,150
$ 9,312 $ 9,189 $ 9,602 The provision for/(benefit from) income taxes consisted of the following:
2019 2018 2017
Current:
Foreign 807 378 724
State 196 63 136
1,655 878 5,785
Deferred:
Foreign (31 ) (4,379 ) (9 )
State 10 (9 ) 77
304 (4,248 ) (1,091 )
$ 1,959 $ (3,370 ) $ 4,694 A reconciliation of the
2019 2018 2017
U.S. Federal statutory tax rate 21.0 % 21.0 % 35.0 % State income tax, net of U.S. Federal tax benefit 1.6 0.5 0.9 Lower taxes on foreign results (0.9 ) (2.2 ) (9.4 ) One-time mandatory transition tax - TCJ Act (0.1 ) 0.1 41.4 Remeasurement of deferred taxes - TCJ Act - (0.4 ) (15.9 ) International reorganizations - (47.3 ) - Tax settlements - (7.8 ) - Other, net (0.6 ) (0.6 ) (3.1 ) Annual tax rate 21.0 % (36.7 )% 48.9 % Tax Cuts and Jobs Act During the fourth quarter of 2017, the TCJ Act was enacted inthe United States . Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced theU.S. corporate income tax rate from 35% to 21%, effectiveJanuary 1, 2018 . In 2017, theSEC issued guidance related to the TCJ Act which allowed recording of provisional tax expense using a measurement period, not to exceed one year, when information necessary to complete the accounting for the effects of the TCJ Act is not available. We elected to apply the measurement period provisions of this guidance to certain income tax effects of the TCJ Act when it became effective in the fourth quarter of 2017. As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of$2.5 billion ($1.70 per share) in the fourth quarter of 2017. Included in the provisional net tax expense of$2.5 billion recognized in 2017, was a provisional mandatory one-time transition tax of approximately$4 billion on undistributed international earnings, included in other liabilities. This provisional mandatory one-time transition tax was partially offset by a provisional$1.5 billion benefit resulting from the required 93
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remeasurement of our deferred tax assets and liabilities to the new, lowerU.S. corporate income tax rate, effectiveJanuary 1, 2018 . The effect of the remeasurement was recorded in the fourth quarter of 2017, consistent with the enactment date of the TCJ Act, and reflected in our provision for income taxes. The provisional measurement period allowed by theSEC ended in the fourth quarter of 2018. As a result, in 2018, we recognized a net tax benefit of$28 million ($0.02 per share) related to the TCJ Act, primarily reflecting the impact of the final analysis of certain foreign exchange gains or losses, substantiation of foreign tax credits, as well as cash and cash equivalents as ofNovember 30, 2018 , the tax year-end of our foreign subsidiaries, partially offset by additional transition tax guidance issued by theUnited States Department of Treasury , as well as the TCJ Act impact of both the conclusion of certain international tax audits and the resolution with theIRS of all open matters related to the audits of taxable years 2012 and 2013, each discussed below. While our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by theIRS impacted, and may continue to impact, our recorded amounts afterDecember 29, 2018 . In 2019, we recognized a net tax benefit totaling$8 million ($0.01 per share) related to the TCJ Act, including the impact of additional guidance issued by theIRS in the first quarter of 2019 and adjustments related to the filing of our 2018 U.S. federal tax return. As ofDecember 28, 2019 , our mandatory transition tax liability was$3.3 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$663 million in 2019 and$150 million in 2018. We currently expect to pay approximately$0.1 billion of this liability in 2020. 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 theirU.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. During the first quarter of 2018, we elected to treat the tax effect of GILTI as a current-period expense when incurred. Other Tax Matters OnMay 19, 2019 , a public referendum held inSwitzerland passed the TRAF, effectiveJanuary 1, 2020 . The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of$24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent toDecember 28, 2019 is expected to result in adjustments to our consolidated financial statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results. In 2018, we reorganized certain of our international operations, including the intercompany transfer of certain intangible assets. As a result, we recognized other net tax benefits of$4.3 billion ($3.05 per share) in 2018. The related deferred tax asset of$4.4 billion is being amortized over a period of 15 years beginning in 2019. Additionally, the reorganization generated significant net operating loss carryforwards and related deferred tax assets that are not expected to be realized, resulting in the recording of a full valuation allowance. 94
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Deferred tax liabilities and assets are comprised of the following:
2019 2018
Deferred tax liabilities
Debt guarantee of wholly-owned subsidiary $ 578 $ 578
Property, plant and equipment 1,583 1,303
Recapture of net operating losses 335 414
Right-of-use assets 345 -
Other 167 71
Gross deferred tax liabilities 3,008 2,366
Deferred tax assets
Net carryforwards 4,168 4,353
Intangible assets other than nondeductible goodwill 793 985 Share-based compensation
94 106
Retiree medical benefits 154 167
Other employee-related benefits 350 303
Pension benefits 104 221
Deductible state tax and interest benefits 126 110
Lease liabilities 345 -
Other 741 739
Gross deferred tax assets 6,875 6,984
Valuation allowances (3,599 ) (3,753 )
Deferred tax assets, net 3,276 3,231
Net deferred tax assets $ (268 ) $ (865 ) A summary of our valuation allowance activity is as follows:
2019 2018 2017
Balance, beginning of year
(124 ) 2,639 33
Other (deductions)/additions (30 ) (49 ) 20
Balance, end of year
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 2014-2018 2014-2016 Mexico 2017-2018 None United Kingdom 2017-2018 2017 Canada (Domestic) 2015-2018 2015-2016 Canada (International) 2010-2018 2010-2016 Russia 2016-2018 None In 2018, we recognized a non-cash tax benefit of$364 million ($0.26 per share) resulting from the conclusion of certain international tax audits. Additionally, in 2018, we recognized non-cash tax benefits of$353 million ($0.24 per share) as a result of our agreement with theIRS resolving all open matters related to the audits 95
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of taxable years 2012 and 2013, including the associated state impact. The conclusion of certain international tax audits and the resolution with theIRS , collectively, resulted in non-cash tax benefits totaling$717 million ($0.50 per share) in 2018. 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 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 ofDecember 28, 2019 , the total gross amount of reserves for income taxes, reported in other liabilities, was$1.4 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$250 million as ofDecember 28, 2019 , of which$84 million of tax expense was recognized in 2019. The gross amount of interest accrued, reported in other liabilities, was$179 million as ofDecember 29, 2018 , of which$64 million of tax benefit was recognized in 2018. A reconciliation of unrecognized tax benefits is as follows: 2019 2018 Balance, beginning of year$ 1,440 $ 2,212
Additions for tax positions related to the current year 179 142 Additions for tax positions from prior years
93 197
Reductions for tax positions from prior years (201 ) (822 )
Settlement payments (74 ) (233 )
Statutes of limitations expiration (47 ) (42 )
Translation and other 5 (14 )
Balance, end of year $ 1,395 $ 1,440
Carryforwards and Allowances
Operating loss carryforwards totaling $24.7 billion at year-end 2019 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: $0.2 billion in
2020, $20.3 billion between 2021 and 2039 and $4.2 billion may be carried
forward indefinitely. We establish valuation allowances for our deferred tax
assets if, based on the available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Undistributed International Earnings
In 2018, we repatriated $20.4 billion of cash, cash equivalents and short-term
investments held in our foreign subsidiaries without such funds being subject to
further U.S. federal income tax liability, related to the TCJ Act. As of
December 28, 2019 , we had approximately $6 billion of undistributed
international earnings. We intend to continue to reinvest $6 billion of earnings
outside the United States for the foreseeable future and while future
distribution of these earnings would not be subject to U.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.
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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, PEPunits 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, PSUs and PEPunits. As ofDecember 28, 2019 , 59 million shares were available for future share-based compensation grants under the LTIP. The following table summarizes our total share-based compensation expense and excess tax benefits recognized: 2019 2018
2017
Share-based compensation expense - equity awards
$ 292 Share-based compensation expense - liability awards 8 20 13 Restructuring charges (2 ) (6 ) (2 ) Total (a)$ 243 $ 270
$ 39 $ 45 $ 89 (b) Excess tax benefits related to share-based compensation$ 50 $ 48 $ 115
(a) Primarily recorded in selling, general and administrative expenses.
(b) Reflects tax rates effective for the 2017 tax year.
As ofDecember 28, 2019 , there was$284 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. 97
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Our weighted-average Black-Scholes fair value assumptions are as follows:
2019 2018 2017
Expected life 5 years 5 years 5 years
Risk-free interest rate 2.4 % 2.6 % 2.0 %
Expected volatility 14 % 12 % 11 %
Expected dividend yield 3.1 % 2.7 % 2.7 %
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 expected U.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.
A summary of our stock option activity for the year ended December 28, 2019 is
as follows:
Weighted-Average
Weighted-Average Contractual Aggregate
Exercise Life Remaining Intrinsic
Options(a) Price (years) Value(b)
Outstanding at December 29, 2018 15,589 $ 79.94
Granted 1,286 $ 118.33
Exercised (4,882 ) $ 67.34
Forfeited/expired (368 ) $ 94.30
Outstanding at December 28, 2019 11,625 $ 89.03 4.68 $ 563,942
Exercisable at December 28, 2019 7,972 $ 78.27 3.13 $ 472,512
Expected to vest as of December
28, 2019 3,364 $ 112.25
8.04
(a) Options are in thousands and include options previously granted under the PBG
plan. No additional options or shares were granted under the PBG plan after
2009.
(b) 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 and/or operational 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.
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A summary of our RSU and PSU activity for the year endedDecember 28, 2019 is as follows: Weighted-Average Contractual Life Aggregate Weighted-Average Remaining Intrinsic RSUs/PSUs(a) Grant-Date Fair Value (years) Value(a) Outstanding at December 29, 2018 7,175 $ 105.13 Granted (b) 2,754 $ 116.87 Converted (2,642 ) $ 99.35 Forfeited (852 ) $ 111.11 Actual performance change (c) (55 ) $ 108.32 Outstanding atDecember 28, 2019 (d) 6,380 $ 111.53 1.22$ 877,487 Expected to vest as of December 28, 2019 5,876 $ 111.32 1.19$ 808,220
(a) In thousands.
(b) Grant activity for all PSUs are disclosed at target.
(c) Reflects the net number of PSUs above and below target levels based on actual
performance measured at the end of the performance period.
(d) The outstanding PSUs for which the performance period has not ended as of
zero, 0.7 million and 1.3 million, respectively.
PEPunits
PEPunits provide an opportunity to earn shares of PepsiCo common stock with a value that adjusts based upon changes in PepsiCo's absolute stock price as well as PepsiCo's Total Shareholder Return relative to the S&P 500 over a three-year performance period. The fair value of PEPunits is measured using the Monte-Carlo simulation model, which incorporates into the fair-value determination the possibility that the market condition may not be satisfied, until actual performance is determined. PEPunits were last granted in 2015 and all 248,000 units outstanding atDecember 30, 2017 , with a weighted average grant date fair value of$68.94 , were converted to 278,000 shares in 2018. Long-Term Cash Certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo's Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period. Long-term cash awards that qualify as liability awards under share-based compensation guidance are valued through the end of the performance period on a mark-to-market basis using the Monte Carlo simulation model. 99
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A summary of our long-term cash activity for the year endedDecember 28, 2019 is as follows: Contractual Balance Sheet Life Long-Term Cash Date Fair Remaining Award(a) Value(a) (years) Outstanding at December 29, 2018$ 54,710 Granted (b) 16,112 Vested (15,438 ) Forfeited (9,465 ) Actual performance change (c) (1,695 )
Outstanding at
1.10
Expected to Vest at
1.10
(a) In thousands.
(b) Grant activity for all long-term cash awards are disclosed at target.
(c) Reflects the net number of long-term cash awards above and below target
levels based on actual performance measured at the end of the performance
period.
(d) The outstanding long-term cash awards for which the performance period has
not ended as of
levels were zero, 28.5 million and 57.1 million, respectively.
Other Share-Based Compensation Data
The following is a summary of other share-based compensation data:
2019 2018 2017
Stock Options Total number of options granted (a) 1,286 1,429
1,481
Weighted-average grant-date fair value of options granted$ 10.89 $ 9.80 $ 8.25 Total intrinsic value of options exercised (a)$ 275,745 $ 224,663 $ 327,860 Total grant-date fair value of options vested (a)$ 9,838 $ 15,506 $ 23,122 RSUs/PSUs Total number of RSUs/PSUs granted (a) 2,754 2,634
2,824
Weighted-average grant-date fair value of RSUs/PSUs granted
$ 116.87 $ 108.75 $ 109.92 Total intrinsic value of RSUs/PSUs converted (a)$ 333,951 $ 260,287 $ 380,269 Total grant-date fair value of RSUs/PSUs vested (a)$ 275,234 $ 232,141 $ 264,923 PEPunits Total intrinsic value of PEPunits converted (a) $ -$ 30,147 $ 39,782 Total grant-date fair value of PEPunits vested (a) $ -$ 9,430 $ 18,833 (a) In thousands. As ofDecember 28, 2019 andDecember 29, 2018 , there were approximately 269,000 and 248,000 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. Note 7 - Pension, Retiree Medical and Savings Plans 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). 100
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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). EffectiveJanuary 1, 2017 , theU.S. qualified defined benefit pension plans were reorganized into Plan A and Plan I. Actuarial gains and losses associated with Plan A are amortized over the average remaining service life of the active participants, while the actuarial gains and losses associated with Plan I are amortized over the remaining life expectancy of the inactive participants. As a result of this change, the pre-tax net periodic benefit cost decreased by$42 million ($27 million after-tax, reflecting tax rates effective for the 2017 tax year, or$0.02 per share) in 2017, primarily impacting corporate unallocated expenses. 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 liabilities, 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 10 years) and retiree medical (approximately 8 years), or the remaining life expectancy for participants in Plan I (approximately 23 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 Plan A or the remaining life expectancy for participants in Plan I. 101
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Selected financial information for our pension and retiree medical plans is as
follows:
Pension Retiree Medical
U.S. International
2019 2018 2019 2018 2019 2018
Change in projected benefit
liability
Liability at beginning of year $ 13,807 $ 14,777 $ 3,098 $ 3,490 $ 996 $ 1,187
Service cost 381 431 73 92 23 32
Interest cost 543 482 97 93 36 34
Plan amendments 15 83 1 2 - -
Participant contributions - - 2 2 - -
Experience loss/(gain) 2,091 (972 ) 515 (230 ) 36 (147 )
Benefit payments (341 ) (956 ) (100 ) (114 ) (105 ) (108 )
Settlement/curtailment (1,268 ) (74 ) (31 ) (35 ) - -
Special termination benefits 2 36 - 2 - 1
Other, including foreign
currency adjustment - - 98 (204 ) 2 (3 )
Liability at end of year $ 15,230 $ 13,807 $ 3,753 $ 3,098 $ 988 $ 996
Change in fair value of plan
assets
Fair value at beginning of year $ 12,258 $ 12,582 $ 3,090 $ 3,460 $ 285 $ 321
Actual return on plan assets 3,101 (789 ) 551 (136 ) 78 (21 )
Employer contributions/funding 550 1,495 122 120 44 93
Participant contributions - - 2 2 - -
Benefit payments (341 ) (956 ) (100 ) (114 ) (105 ) (108 )
Settlement (1,266 ) (74 ) (31 ) (32 ) - -
Other, including foreign
currency adjustment - - 98 (210 ) - -
Fair value at end of year $ 14,302 $ 12,258 $ 3,732 $ 3,090 $ 302 $ 285
Funded status $ (928 ) $ (1,549 ) $ (21 ) $ (8 ) $ (686 ) $ (711 )
Amounts recognized
Other assets $ 744 $ 185 $ 99 $ 81 $ - $ -
Other current liabilities (52 ) (107 ) (1 ) (1 ) (58 ) (41 )
Other liabilities (1,620 ) (1,627 ) (119 ) (88 ) (628 ) (670 )
Net amount recognized $ (928 ) $ (1,549 ) $ (21 ) $ (8 ) $ (686 ) $ (711 )
Amounts included in accumulated other comprehensive loss
(pre-tax)
Net loss/(gain) $ 3,516 $ 4,093 $ 914 $ 780 $ (285 ) $ (287 )
Prior service cost/(credit) 114 109 - (1 ) (32 ) (51 )
Total $ 3,630 $ 4,202 $ 914 $ 779 $ (317 ) $ (338 ) Changes recognized in net (gain)/loss included in other comprehensive loss Net (gain)/loss arising in current year
$ (120 ) $ 760 $ 152 $ 103 $ (24 ) $ (107 ) Amortization and settlement recognition (457 ) (187 ) (44 ) (56 ) 27 8 Foreign currency translation loss/(gain) - - 26 (49 ) (1 ) 1 Total$ (577 ) $ 573 $ 134 $ (2 ) $ 2 $ (98 ) Accumulated benefit obligation at end of year$ 14,255 $ 12,890 $ 3,441 $ 2,806 The net (gain)/loss arising in the current year is attributed to the change in discount rate, primarily offset by the actual asset returns different from expected returns. The amount we report in operating profit as pension and retiree medical cost is service cost, which is the 102
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value of benefits earned by employees for working during the year. 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. Curtailments
are due to events such as plant closures or the sale of a business
resulting in a 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
2019 2018 2017 2019 2018 2017 2019 2018 2017
Service cost $ 381 $ 431 $ 401 $ 73 $ 92 $ 91 $ 23 $ 32 $ 28
Other pension and retiree medical
benefits expense/(income):
Interest cost $ 543 $ 482 $ 468 $ 97 $ 93 $ 89 $ 36 $ 34 $ 36
Expected return on plan
assets (892 ) (943 ) (849 ) (188 ) (197 ) (176 ) (18 ) (19 ) (22 )
Amortization of prior service
cost/(credits) 10 3 1 - - - (19 ) (20 ) (25 )
Amortization of net
losses/(gains) 161 179 123 32 45 53 (27 ) (8 ) (12 )
Settlement/curtailment losses
(a) 296 8 8 12 6 11 - - -
Special termination benefits 1 36 60 - 2 - - 1 2
Total other pension and
retiree medical benefits
expense/(income) $ 119 $ (235 ) $ (189 ) $ (47 ) $ (51 ) $ (23 ) $ (28 ) $ (12 ) $ (21 )
Total $ 500 $ 196 $ 212 $ 26 $
41
(a) In 2019,
annuity contract of
$53 million . 103
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The following table provides the weighted-average assumptions used to determine
projected benefit liability and net periodic benefit cost for our pension and
retiree medical plans:
Pension Retiree Medical
U.S. International
2019 2018 2017 2019 2018 2017 2019 2018 2017
Liability
discount rate 3.3 % 4.4 % 3.7 % 2.5 % 3.4 % 3.0 % 3.1 % 4.2 % 3.5 %
Service cost
discount rate 4.4 % 3.8 % 4.5 % 4.2 % 3.5 % 3.6 % 4.3 % 3.6 % 4.0 %
Interest cost
discount rate 4.1 % 3.4 % 3.7 % 3.2 % 2.8 % 2.8 % 3.8 % 3.0 % 3.2 %
Expected return
on plan assets 7.1 % 7.2 % 7.5 % 5.8 % 6.0 % 6.0 % 6.6 % 6.5 % 7.5 %
Liability rate of
salary increases 3.1 % 3.1 % 3.1 % 3.3 % 3.7 % 3.7 %
Expense rate of
salary increases 3.1 % 3.1 % 3.1 % 3.7 % 3.7 % 3.6 %
The following table provides selected information about plans with accumulated
benefit obligation and total projected benefit liability in excess of plan
assets:
Pension Retiree Medical
U.S. International
2019 2018 2019 2018 2019 2018
Selected information for plans with accumulated benefit obligation in excess of plan assets
Liability for service to
date $ (9,194 ) $ (8,040 ) $ (192 ) $ (155 )
Fair value of plan assets $ 8,497 $ 7,223 $ 151 $ 121
Selected information for plans with projected benefit liability in excess of plan
assets
Benefit liability $ (10,169 ) $ (8,957 ) $ (632 ) $ (514 ) $ (988 ) $ (996 )
Fair value of plan assets $ 8,497 $ 7,223 $ 512 $ 426 $ 302 $ 285 Of the total projected pension benefit liability as of
2020 2021 2022 2023 2024 2025 - 2029
Pension $ 945 $ 915 $ 900 $ 930 $ 970 $ 5,275
Retiree medical (a) $ 100 $ 95 $ 95 $ 90 $ 85 $ 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
from 2020 through 2024 and approximately
2029.
These future benefit payments to beneficiaries include payments from both funded
and unfunded plans.
Funding
Contributions to our pension and retiree medical plans were as follows:
Pension Retiree Medical
2019 2018 2017 2019 2018 2017
Discretionary (a) $ 417 $ 1,417 $ 6 $ - $ 37 $ -
Non-discretionary 255 198 158 44 56 56
Total $ 672 $ 1,615 $ 164 $ 44 $ 93 $ 56 (a) Includes
2018 to fund Plan A in the United States .
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InJanuary 2020 , we made discretionary contributions of$150 million to Plan A inthe United States . In addition, in 2020, we expect to make non-discretionary contributions of approximately$150 million to ourU.S. and international pension benefit plans and approximately$60 million for retiree medical benefits. We 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 liabilities, 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 liabilities. 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 2020 and 2019, our expected long-term rate of return onU.S. plan assets is 6.8% and 7.1%, respectively. Our target investment allocations forU.S. plan assets are as follows: 2020 2019 Fixed income 50 % 47 % U.S. equity 25 % 29 % International equity 21 % 20 % 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 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. 105
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Plan assets measured at fair value as of year-end 2019 and 2018 are categorized consistently by level, and are as follows:
2019 2018
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Total (Level 1) (Level 2) (Level 3) Total
U.S. plan assets (a)
Equity securities,
including preferred stock
(b) $ 6,605 $ 6,605 $ - $ - $ 5,605
Government securities (c) 2,154 - 2,154 - 1,674
Corporate bonds (c) 4,737 - 4,737 - 4,145
Mortgage-backed securities
(c) 159 - 159 - 212
Contracts with insurance
companies (d) 9 - - 9 9
Cash and cash equivalents 275 275 - - 215
Sub-total
$ 9 11,860 Real estate commingled funds measured at net asset value (e) 605 618 Dividends and interest receivable, net of payables 60 65 Total U.S. plan assets $ 14,604 $ 12,543 International plan assets Equity securities (b) $ 1,973 $ 1,941 $ 32 $ - $ 1,651 Government securities (c) 524 - 524 - 433 Corporate bonds (c) 585 - 585 - 478 Fixed income commingled funds (f) 384 384 - - 356 Contracts with insurance companies (d) 42 - - 42 36 Cash and cash equivalents 24 24 - - 27 Sub-total international plan assets 3,532 $ 2,349 $ 1,141 $ 42 2,981 Real estate commingled funds measured at net asset value (e) 193 102 Dividends and interest receivable 7 7 Total international plan assets $ 3,732 $ 3,090
(a) 2019 and 2018 amounts include $302 million and $285 million, respectively, of
retiree medical plan assets that are restricted for purposes of providing
health benefits for
(b) The equity securities portfolio was invested in
stock and commingled funds, and the preferred stock portfolio in the
invested in domestic and international corporate preferred stock investments.
The common stock is based on quoted prices in active markets. The commingled
funds are based on the published price of the fund and the
funds include one large-cap fund that represents 16% and 15% of total
plan assets for 2019 and 2018, respectively. The preferred stock investments
are based on quoted bid prices for comparable securities in the marketplace
and broker/dealer quotes in active markets.
(c) These investments are based on quoted bid prices for comparable securities in
the marketplace and broker/dealer quotes in active markets. Corporate bonds
of
and 2018.
(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 28, 2019 and
December 29, 2018.
(e) 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.
(f) Based on the published price of the fund.
Retiree Medical Cost Trend Rates
2020 2019
Average increase assumed 6 % 6 %
Ultimate projected increase 5 % 5 %
Year of ultimate projected increase 2039 2039
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These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability, 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 eligible pay 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 to the 401(k) savings plan based on age and years of service regardless of employee contribution. In 2019, 2018 and 2017, our total Company contributions were $197 million, $180 million and $176 million, respectively. Note 8 - Debt Obligations The following table summarizes our debt obligations: 2019(a)
2018(a)
Short-term debt obligations (b) Current maturities of long-term debt $ 2,848 $
3,953
Other borrowings (6.4% and 6.0%) 72
73
$ 2,920 $ 4,026
Long-term debt obligations (b) Notes due 2019 (3.1%) -
3,948
Notes due 2020 (2.7% and 3.9%) 2,840
3,784
Notes due 2021 (2.4% and 3.1%) 3,276
3,257
Notes due 2022 (2.7% and 2.8%) 3,831
3,802
Notes due 2023 (2.8% and 2.9%) 1,272
1,270
Notes due 2024 (3.4% and 3.2%) 1,839
1,816
Notes due 2025-2049 (3.4% and 3.7%) 18,910
14,345
Other, due 2019-2026 (1.3% and 1.3%) 28
26
31,996 32,248
Less: current maturities of long-term debt obligations (2,848 ) (3,953 ) Total $ 29,148 $ 28,295
(a) Amounts are shown net of unamortized net discounts of $163 million and $119
million for 2019 and 2018, 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 28, 2019, our international debt of $69 million was related to
borrowings from external parties including various lines of credit. These lines
of credit are subject to normal banking terms and conditions and are fully
committed at least to the extent of our borrowings.
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In 2019, we issued the following senior notes:
Interest Rate Maturity Date Amount(a)
0.750 % March 2027 € 500 (b)
1.125 % March 2031 € 500 (b)
2.625 % July 2029 $ 1,000
3.375 % July 2049 $ 1,000
0.875 % October 2039 € 500 (b)
2.875 % October 2049 $ 1,000
(a) Represents gross proceeds from issuances of long-term debt excluding debt
issuance costs, discounts and premiums.
(b) These notes, issued in euros, were designated as net investment hedges to
partially offset the effects of foreign currency on our investments in
certain of our foreign subsidiaries.
The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper, except for an amount equivalent to the net proceeds from our 2.875% senior notes due 2049 that will be used to fund, in whole or in part, eligible green projects in the categories of investments in sustainable plastics and packaging, decarbonizing our operations and supply chain and water sustainability, which promote our selectedSustainable Development Goals , as defined by theUnited Nations . In 2019, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 3, 2024. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 billion inU.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, request renewal of the agreement for an additional one-year period. In 2019, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 1, 2020. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 billion inU.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 would mature no later than the anniversary of the then effective termination date. The Five-Year Credit Agreement and the 364-Day Credit Agreement together replaced our $3.75 billion five-year credit agreement and our $3.75 billion 364-day credit agreement, both dated as of June 4, 2018. 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 28, 2019, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement. In 2019, we entered into two unsecured bridge loan facilities (Bridge Loan Facilities) which together enable one of our consolidated subsidiaries to borrow up to 25.0 billion South African rand, or approximately $1.8 billion, to provide potential funding for our acquisition of Pioneer Foods. Each facility is available from the date the conditions precedent are met for the acquisition up through July 30, 2020 in the case of one facility and July 31, 2020 in the case of the other facility. Borrowings under the facilities are for up to one year once drawn and can be prepaid at any time. Interest rates are reset either every one month or three months. As of December 28, 2019, there were no outstanding borrowings under the Bridge Loan Facilities. In 2019, we paid $1.0 billion to redeem all $1.0 billion outstanding principal amount of our 4.50% senior notes due 2020. 108
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In 2018, we completed a cash tender offer for certain notes issued by PepsiCo
and predecessors to a PepsiCo subsidiary for $1.6 billion in cash to redeem the
following amounts:
Interest Rate Maturity Date Amount Tendered
7.290 % September 2026 $ 11
7.440 % September 2026 $ 4
7.000 % March 2029 $ 357
5.500 % May 2035 $ 138
4.875 % November 2040 $ 410
5.500 % January 2040 $ 408
Also in 2018, we completed an exchange offer for certain notes issued by
predecessors to a PepsiCo subsidiary for the following newly issued PepsiCo
notes. These notes were issued in an aggregate principal amount equal to the
exchanged notes:
Interest Rate Maturity Date Amount Exchanged
7.290 % September 2026 $ 88
7.440 % September 2026 $ 21
7.000 % March 2029 $ 516
5.500 % May 2035 $ 107
As a result of the above transactions, we recorded a pre-tax charge of $253
million ($191 million after-tax or $0.13 per share) to interest expense in 2018,
primarily representing the tender price paid over the carrying value of the
tendered notes.
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. 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
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 28,
2019 were not material.
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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. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk. 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 these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on December 28, 2019 was $415 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of December 28, 2019. 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 energy, agricultural products 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 $1.1 billion as of December 28, 2019 and December 29, 2018. 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. Our foreign currency derivatives had a total notional value of $1.9 billion as of December 28, 2019 and $2.0 billion as of December 29, 2018. The total notional amount of our debt instruments designated as net investment hedges was $2.5 billion as of December 28, 2019 and $0.9 billion as of December 29, 2018. 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. 110
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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. OurTreasury 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 $5.0 billion as of December 28, 2019 and $10.5 billion as of December 29, 2018. As of December 28, 2019, approximately 9% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 29% as of December 29, 2018. Available-for-Sale Securities Investments in debt securities are classified as available-for-sale. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Our investments in available-for-sale debt securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale debt securities are recognized in accumulated other comprehensive loss within common shareholders' equity. Unrealized gains and losses on our investments in debt securities as of December 28, 2019 and December 29, 2018 were not material. Changes in the fair value of available-for-sale debt securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We recorded no other-than-temporary impairment charges on our available-for-sale debt securities for the years ended December 28, 2019, December 29, 2018 and December 30, 2017. In 2017, we recorded a pre-tax gain of $95 million ($85 million after-tax or $0.06 per share), net of discount and fees, associated with the sale of our minority stake in Britvic. The gain on the sale of this equity investment was recorded in ourEurope segment in selling, general and administrative expenses. 111
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Fair Value Measurements
The fair values of our financial assets and liabilities as of December 28, 2019
and December 29, 2018 are categorized as follows:
2019 2018
Fair
Value
Hierarchy
Levels(a) Assets(a) Liabilities(a) Assets(a) Liabilities(a)
Available-for-sale debt 2
securities (b) $ - $ - $ 3,658 $ -
Short-term investments (c) 1 $ 229 $ - $ 196 $ -
Prepaid forward contracts 2
(d) $ 17 $ - $ 22 $ -
Deferred compensation (e) 2 $ - $ 468 $ - $ 450
Derivatives designated as
fair value hedging
instruments:
Interest rate (f) 2 $ - $ 5 $ 1 $ 108
Derivatives designated as
cash flow hedging
instruments:
Foreign exchange (g) 2 $ 5 $ 32 $ 44 $ 14
Interest rate (g) 2 - 390 - 323
Commodity (h) 1 2 5 - 1
Commodity (i) 2 2 5 - 3
$ 9 $ 432 $ 44 $ 341
Derivatives not designated
as hedging instruments:
Foreign exchange (g) 2 $ 3 $ 2 $ 3 $ 10
Commodity (h) 1 23 7 2 17
Commodity (i) 2 6 24 5 92
$ 32 $ 33 $ 10 $ 119
Total derivatives at fair
value (j) $ 41 $ 470 $ 55 $ 568
Total $ 287 $ 938 $ 3,931 $ 1,018
(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 quoted broker prices or other significant inputs derived from or
corroborated by observable market data. As of December 29, 2018, these debt
securities were primarily classified as cash equivalents. The decrease in
available-for-sale debt securities was due to maturities and sales during the
current year.
(c) 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.
(d) Based primarily on the price of our common stock.
(e) Based on the fair value of investments corresponding to employees' investment
elections.
(f) Based on LIBOR forward rates. As of December 28, 2019 and December 29, 2018,
the carrying amount of hedged fixed-rate debt was $2.2 billion and $7.7
billion, respectively, and classified on our balance sheet within short-term
and long-term debt obligations. As of December 28, 2019, the cumulative
amount of fair value hedging adjustments to hedged fixed-rate debt was $5
million. As of December 28, 2019, the cumulative amount of fair value hedging
adjustments on discontinued hedges was a $49 million 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) Based on quoted contract prices on futures exchange markets.
(i) Based on recently reported market transactions of swap arrangements.
(j) 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 28, 2019 and December 29, 2018 were not material. Collateral
received or posted against our asset or liability positions is classified as
restricted cash. See Note 15 for further information.
The carrying amounts of our cash and cash equivalents and short-term investments
approximate fair value due to their short-term maturity. The fair value of our
debt obligations as of December 28, 2019 and
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December 29, 2018 was $34 billion and $32 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)
2019 2018 2019 2018 2019 2018
Foreign exchange $ (1 ) $ 9 $ 57 $ (52 ) $ 3 $ (8 )
Interest rate (64 ) 53 67 110 7 119
Commodity (17 ) 117 7 3 4 -
Net investment - - (30 ) (77 ) - -
Total $ (82 ) $ 179 $ 101 $ (16 ) $ 14 $ 111
(a) Foreign exchange derivative losses/gains are primarily included in selling,
general and administrative expenses. Interest rate derivative losses/gains
are primarily from fair value hedges and are included in interest expense.
These losses/gains are substantially offset by decreases/increases in the
value of the underlying debt, which are also included in interest expense.
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 are included in interest
expense. 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 losses of $47
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:
2019 2018 2017
Income Shares(a) Income Shares(a) Income Shares(a)
Net income attributable to
PepsiCo $ 7,314 $ 12,515 $ 4,857
Preferred stock:
Redemption premium (b) - (2 ) (4 )
Net income available for PepsiCo
common shareholders $ 7,314 1,399 $ 12,513 1,415 $ 4,853 1,425
Basic net income attributable to
PepsiCo per common share $ 5.23 $ 8.84 $ 3.40
Net income available for PepsiCo
common shareholders $ 7,314 1,399 $ 12,513 1,415 $ 4,853 1,425
Dilutive securities:
Stock options, RSUs, PSUs,
PEPunits and Other (c) - 8 - 10 - 12
Employee stock ownership plan
(ESOP) convertible preferred
stock - - 2 - 4 1
Diluted $ 7,314 1,407 $ 12,515 1,425 $ 4,857 1,438
Diluted net income attributable
to PepsiCo per common share $ 5.20 $ 8.78 $ 3.38
(a) Weighted-average common shares outstanding (in millions).
(b) See Note 11 for further information.
(c) The dilutive effect of these securities is calculated using the treasury
stock method.
Out-of-the-money options excluded from the calculation of diluted earnings per common share are as follows:
2019 2018 2017
Out-of-the-money options (a) 0.3 0.7 0.4
Average exercise price per option $ 117.55 $ 109.83 $ 110.12
(a) In millions. Note 11 - Preferred Stock In connection with our merger withThe Quaker Oats Company (Quaker) in 2001, shares of our convertible preferred stock were authorized and issued to an ESOP fund established by Quaker. Quaker made the final award to its ESOP in June 2001. In 2018, all of the outstanding shares of our convertible preferred stock were converted into an aggregate of 550,102 shares of our common stock. As a result, there are no shares of our convertible preferred stock outstanding as of December 29, 2018 and our convertible preferred stock is retired for accounting purposes. As of December 30, 2017, there were 3 million shares of convertible preferred stock authorized, 803,953 preferred shares issued and 114,753 shares outstanding. The outstanding preferred shares had a fair value of $68 million as of December 30, 2017. Activities of our preferred stock are included in the equity statement. 114
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Note 12 - 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 Comprehensive Loss
Translation Pension and Available-For-Sale Attributable to
Adjustment Cash Flow Hedges Retiree Medical Securities Other PepsiCo
Balance as of December
31, 2016 (a) $ (11,386 ) $ 83 $ (2,645 ) $ 64 $ (35 ) $ (13,919 )
Other comprehensive
(loss)/income before
reclassifications (b) 1,049 130 (375 ) 25 - 829
Amounts reclassified
from accumulated other
comprehensive loss - (171 ) 158 (99 ) - (112 )
Net other comprehensive
(loss)/income 1,049 (41 ) (217 ) (74 ) - 717
Tax amounts 60 5 58 6 16 145
Balance as of December
30, 2017 (a) (10,277 ) 47 (2,804 ) (4 ) (19 ) (13,057 )
Other comprehensive
(loss)/income before
reclassifications (c) (1,664 ) (61 ) (813 ) 6 - (2,532 )
Amounts reclassified
from accumulated other
comprehensive loss 44 111 218 - - 373
Net other comprehensive
(loss)/income (1,620 ) 50 (595 ) 6 - (2,159 )
Tax amounts (21 ) (10 ) 128 - - 97
Balance as of December
29, 2018 (a) (11,918 ) 87 (3,271 ) 2 (19 ) (15,119 )
Other comprehensive
(loss)/income before
reclassifications (d) 636 (131 ) (89 ) (2 ) - 414
Amounts reclassified
from accumulated other
comprehensive loss - 14 468 - - 482
Net other comprehensive
(loss)/income 636 (117 ) 379 (2 ) - 896
Tax amounts (8 ) 27 (96 ) - - (77 )
Balance as of December
28, 2019 (a) $ (11,290 ) $ (3 ) $ (2,988 ) $ - $ (19 ) $ (14,300 )
(a) Pension and retiree medical amounts are net of taxes of $1,280 million as of
December 31, 2016, $1,338 million as of December 30, 2017, $1,466 million as
of December 29, 2018 and $1,370 million as of December 28, 2019.
(b) Currency translation adjustment primarily reflects the appreciation of the
euro, Russian ruble, Pound sterling and Canadian dollar.
(c) Currency translation adjustment primarily reflects the depreciation of the
Russian ruble, Canadian dollar, Pound sterling and Brazilian real.
(d) Currency translation adjustment primarily reflects the appreciation of the
Russian ruble, Canadian dollar, Mexican peso and Pound sterling.
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The following table summarizes the reclassifications from accumulated other comprehensive loss to the income statement:
Affected Line Item in
Amount Reclassified from Accumulated Other Comprehensive Loss the Income Statement
2019 2018 2017
Currency translation:
Selling, general and
Divestitures $ - $ 44 $ - administrative expenses
Cash flow hedges:
Foreign exchange contracts $ 1 $ (1 ) $ - Net revenue
Foreign exchange contracts 2 (7 ) 10 Cost of sales
Interest rate derivatives 7 119 (184 ) Interest expense
Commodity contracts 3 3 4 Cost of sales
Selling, general and
Commodity contracts 1 (3 ) (1 ) administrative expenses
Net losses/(gains) before tax 14 111 (171 )
Tax amounts (2 ) (27 ) 64
Net losses/(gains) after tax $ 12 $ 84 $ (107 )
Pension and retiree medical
items:
Other pension and
Amortization of net prior retiree medical benefits
service credit $ (9 ) $ (17 ) $ (24 ) (expense)/income
Other pension and
retiree medical benefits
Amortization of net losses 169 216 167 (expense)/income
Other pension and
retiree medical benefits
Settlement/curtailment losses 308 19 15 (expense)/income
Net losses before tax 468 218 158
Tax amounts (102 ) (45 ) (44 )
Net losses after tax $ 366 $ 173 $ 114
Available-for-sale
securities:
Selling, general and
Sale of Britvic securities $ - $ - $ (99 ) administrative expenses
Tax amount - - 10
Net gain after tax $ - $ - $ (89 )
Total net losses/(gains)
reclassified for the year,
net of tax $ 378 $ 301 $ (82 )
Note 13 - 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
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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).
Components of lease cost are as follows:
2019
Operating lease cost (a) $ 474
Variable lease cost (b) $ 101
Short-term lease cost (c) $ 379
(a) Includes right-of-use asset amortization of $412 million.
(b) Primarily related to adjustments for inflation, common-area maintenance and
property tax.
(c) Not recorded on our balance sheet.
In 2019, we recognized gains of $77 million on sale-leaseback transactions with
terms under four years.
Supplemental cash flow information and non-cash activity related to our
operating leases are as follows:
2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities $ 478
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations $ 479
Supplemental balance sheet information related to our operating leases is as
follows:
Balance Sheet Classification 2019
Right-of-use assets Other assets $ 1,548
Current lease liabilities Accounts payable and other current
liabilities $ 442
Non-current lease liabilities Other liabilities $ 1,118
Weighted-average remaining lease term and discount rate for our operating leases are as follows:
2019
Weighted-average remaining lease term 6 years
Weighted-average discount rate 4 %
Maturities of lease liabilities by year for our operating leases are as follows:
2020 $ 501
2021 374
2022 280
2023 183
2024 117
2025 and beyond 308
Total lease payments 1,763
Less: Imputed interest (203 )Present value of lease liabilities $ 1,560
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As of December 29, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows: 2019 $ 459 2020 406 2021 294 2022 210 2023 161 2024 and beyond 310 Total $ 1,840
A summary of rent expense for the years ended December 29, 2018 and December 30, 2017 is as follows:
2018 2017
Rent expense $ 771 $ 742
Lessor
We 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. Note 14 - Acquisitions and Divestitures Acquisition of Pioneer Food Group Ltd. On July 19, 2019, we entered into an agreement to acquire all of the outstanding shares of Pioneer Foods, a food and beverage company inSouth Africa with exports to countries across the globe, for 110.00 South African rand per share in cash, in a transaction valued at approximately $1.7 billion. Also in 2019, one of our consolidated subsidiaries entered into Bridge Loan Facilities to provide potential funding for our acquisition of Pioneer Foods. See Note 8 for further information. The transaction is subject to certain regulatory approvals and other customary conditions and is expected to be recorded primarily in the AMESA segment. Closing is expected in the first half of 2020. Acquisition of SodaStream International Ltd. On December 5, 2018, we acquired all of the outstanding shares of SodaStream, a manufacturer and distributor of sparkling water makers, for $144.00 per share in cash, in a transaction valued at approximately $3.3 billion. The total consideration transferred was approximately $3.3 billion (or $3.2 billion, net of cash and cash equivalents acquired). We accounted for the transaction as a business combination. We recognized and measured the identifiable assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The purchase price allocation was finalized in the fourth quarter of 2019. 118
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The following table summarizes the fair value of identifiable assets acquired and liabilities assumed in the acquisition of SodaStream and the resulting goodwill as of the acquisition date, all of which are recorded in theEurope segment. Inventories $ 176 Property, plant and equipment 193 Amortizable intangible assets 284 Nonamortizable intangible asset (brand) 1,840 Other assets and liabilities 210 Net deferred income taxes (303 ) Total identifiable net assets $ 2,400 Goodwill 943 Total purchase price $ 3,343Goodwill 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 SodaStream primarily reflects the value of expected synergies from our product portfolios and is not deductible for tax purposes. Refranchising inThailand In 2018, we refranchised our beverage business inThailand by selling a controlling interest in ourThailand bottling operations to form a joint venture, where we now have an equity method investment. We recorded a pre-tax gain of $144 million ($126 million after-tax or $0.09 per share) in selling, general and administrative expenses in our APAC segment as a result of this transaction. Refranchising inCzech Republic ,Hungary , andSlovakia In 2018, we refranchised our entire beverage bottling operations and snack distribution operations in CHS. We recorded a pre-tax gain of $58 million ($46 million after-tax or $0.03 per share) in selling, general and administrative expenses in ourEurope segment as a result of this transaction. Refranchising inJordan In 2017, we refranchised our beverage business inJordan by selling a controlling interest in ourJordan bottling operations to form a joint venture, where we now have an equity method investment. We recorded a pre-tax gain of $140 million ($107 million after-tax or $0.07 per share) in selling, general and administrative expenses in our AMESA segment as a result of this transaction. Inventory Fair Value Adjustments and Merger and Integration Charges In 2019, we recorded inventory fair value adjustments and merger and integration charges of $55 million ($47 million after-tax or $0.03 per share), including $46 million in ourEurope segment, $7 million in our AMESA segment and $2 million in corporate unallocated expenses. These charges are primarily related to fair value adjustments to the acquired inventory included in SodaStream's balance sheet at the acquisition date, recorded in cost of sales, as well as merger and integration charges, including employee-related costs, recorded in selling, general and administrative expenses. In 2018, we recorded merger and integration charges of $75 million ($0.05 per share), including $57 million in ourEurope segment and $18 million in corporate unallocated expenses, related to our acquisition of SodaStream, recorded in selling, general and administrative expenses. These charges include closing costs, advisory fees and employee-related costs. 119
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Note 15 - Supplemental Financial Information
Balance Sheet
2019 2018 2017
Accounts and notes receivable Trade receivables $ 6,447 $ 6,079 Other receivables 1,480 1,164 Total 7,927 7,243 Allowance, beginning of year 101 129 $
134
Net amounts charged to expense 22 16 26 Deductions (a) (30 ) (33 ) (35 ) Other (b) 12 (11 ) 4 Allowance, end of year 105 101 $ 129 Net receivables $ 7,822 $ 7,142 Inventories (c) Raw materials and packaging $ 1,395 $ 1,312 Work-in-process 200 178 Finished goods 1,743 1,638 Total $ 3,338 $ 3,128
Other assets Noncurrent notes and accounts receivable $ 85 $ 86 Deferred marketplace spending
147 112
Pension plans (d) 846 269
Right-of-use assets (e) 1,548 -
Other 385 293
Total $ 3,011 $ 760
Accounts payable and other current liabilities
Accounts payable $ 8,013 $ 7,213
Accrued marketplace spending 2,765 2,541
Accrued compensation and benefits 1,835 1,755
Dividends payable 1,351 1,329
SodaStream consideration payable 58 1,997
Current lease liabilities (e) 442 -
Other current liabilities 3,077 3,277
Total $ 17,541 $ 18,112
(a) Includes accounts written off.
(b) Includes adjustments related primarily to currency translation and other
adjustments.
(c) Approximately 7% and 5% of the inventory cost in 2019 and 2018, respectively,
were computed using the LIFO method. The differences between LIFO and FIFO
methods of valuing these inventories were not material.
(d) See Note 7 for further information.
(e) See Note 13 for further information.
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Statement of Cash Flows
2019 2018 2017
Interest paid (a) $ 1,076 $ 1,388 $ 1,123Income taxes paid, net of refunds (b) $ 2,226 $ 1,203 $ 1,962
(a) In 2018, excludes the premiums paid in accordance with the debt transactions
discussed in Note 8.
(b) In 2019 and 2018, includes tax payments of $423 million and $115 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.
2019 2018
Cash and cash equivalents $ 5,509 $ 8,721
Restricted cash (a) - 1,997
Restricted cash included in other assets (b) 61 51
Total cash and cash equivalents and restricted cash $ 5,570 $ 10,769
(a) In 2018, primarily represents consideration held by our paying agent in
connection with our acquisition of SodaStream.
(b) Primarily relates to collateral posted against our derivative asset or
liability positions.
Note 16 - Selected Quarterly Financial Data (unaudited) Selected financial data for 2019 and 2018 is summarized as follows and highlights certain items that impacted our quarterly results:
2019 2018
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Net revenue $ 12,884 $ 16,449 $ 17,188 $ 20,640 $ 12,562 $ 16,090 $ 16,485 $ 19,524
Gross profit $ 7,196 $ 9,045 $ 9,494 $ 11,294 $ 6,907 $ 8,827 $ 8,958 $ 10,588
Operating profit $ 2,008 $ 2,729 $ 2,855 $ 2,699 $ 1,807 $ 3,028 $ 2,844 $ 2,431
Mark-to-market net
impact (a) $ 60 $ (6 ) $ (4 ) $ 62 $ (31 ) $ 3 $ (29 ) $ (106 )
Restructuring and
impairment charges (b) $ (26 ) $ (158 ) $ (98 ) $ (88 ) $ (12 ) $ (32 ) $ (35 ) $ (229 )
Inventory fair value
adjustments and merger
and integration charges
(c) $ (15 ) $ (24 ) $ (7 ) $ (9 ) - - - $ (75 )
Pension-related
settlement charges (d) - - - $ (273 ) - - - -
Net tax related to the
TCJ Act (e) $ 29 - - $ (21 ) $ (1 ) $ (777 ) $ (76 ) $ 882
Gains on sale of assets
(f) - $ 32 - $ 45 $ 18 $ 9 $ 37 $ 12
Other net tax benefits
(g) - - - - - $ 314 $ 364 $ 4,386
Charges related to cash
tender and exchange
offers (h) - - - - - - - $ (253 )
Tax reform bonus (i) - - - - $ (87 ) - - -
Gains on beverage
refranchising (j) - - - - - $ 144 - $ 58
Provision for/(benefit
from) income
taxes (e)(f) $ 446 $ 524 $ 559 $ 430 $ 304 $ 1,070 $ 188 $ (4,932 ) Net income attributable to PepsiCo
$ 1,413 $ 2,035 $ 2,100 $ 1,766 $ 1,343 $ 1,820 $ 2,498 $ 6,854
Net income attributable
to PepsiCo per common
share
Basic $ 1.01 $ 1.45 $ 1.50 $ 1.27 $ 0.94 $ 1.28 $ 1.77 $ 4.86
Diluted $ 1.00 $ 1.44 $ 1.49 $ 1.26 $ 0.94 $ 1.28 $ 1.75 $ 4.83
Cash dividends declared
per common share $ 0.9275 $ 0.955 $ 0.955 $ 0.955 $ 0.805 $ 0.9275 $ 0.9275 $ 0.9275
(a) Mark-to-market net gains and losses on commodity derivatives in corporate
unallocated expenses.
(b) Expenses related to the 2019 and 2014 Productivity Plans. See Note 3 to our
consolidated financial statements for further information.
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(c) In 2019, inventory fair value adjustments and merger and integration charges
primarily related to our acquisition of SodaStream. In 2018, merger and
integration charges related to our acquisition of SodaStream. See Note 14 to
our consolidated financial statements for further information.
(d) In 2019, pension settlement charges of $220 million related to the purchase
of a group annuity contract and settlement charges of $53 million related to
one-time lump sum payments to certain former employees who had vested
benefits, recorded in other pension and retiree medical benefits
expense/income. See Note 7 to our consolidated financial statements for
further information.
(e) Net tax related to the TCJ Act. See Note 5 to our consolidated financial
statements for further information.
(f) In 2019, gains associated with the sale of assets in the following segments:
$31 million in FLNA and $46 million in PBNA. In 2018, gains associated with
the sale of assets in the following segments: $64 million in PBNA and $12
million in AMESA.
(g) In 2018, other net tax benefits of $4.3 billion resulting from the
reorganization of our international operations, including the intercompany
transfer of certain intangible assets. Also in 2018, non-cash tax benefits of
$717 million associated with both the conclusion of certain international tax
audits and our agreement with the
the audits of taxable years 2012 and 2013. See Note 5 to our consolidated
financial statements for further information.
(h) In 2018, interest expense in connection with our cash tender and exchange
offers, primarily representing the tender price paid over the carrying value
of the tendered notes. See Note 8 to our consolidated financial statements
for further information.
(i) In 2018, bonus extended to certain
the following segments: $44 million in FLNA, $2 million in QFNA and $41
million in PBNA.
(j) In 2018, gains of $58 million and $144 million associated with refranchising
our entire beverage bottling operations and snack distribution operations in
CHS in the
business in
consolidated financial statements for further information.
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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 28, 2019 and December 29, 2018, and
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 28, 2019 and the related notes (collectively, the consolidated
financial statements). We also have audited the Company's internal control over
financial reporting as of December 28, 2019, 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 28, 2019 and December 29, 2018, and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
December 28, 2019, 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 28,
2019, 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.
Evaluation of certain sales incentive accruals
As discussed in Note 2 of 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 primary procedures that we performed to address this critical audit matter
included the following. We tested certain internal controls over the Company's
sales incentive process, including (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, 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
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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. Assessment of the 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 28, 2019 was $30.1 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 28, 2019. We identified the assessment of the carrying value of PBNA's reacquired and acquired franchise rights and certain ofEurope's juice and dairy brands inRussia 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 primary procedures that we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's indefinite-lived assets impairment process to develop the 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. Evaluation of 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 inthe United States and in certain foreign jurisdictions in which it operates. As of December 28, 2019, the Company recorded reserves for unrecognized tax benefits of $1.4 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, or new tax law or tax authority settlements. We identified the evaluation 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 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. 125
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The primary procedures that we performed to address this critical audit matter
included the following. We tested certain internal controls over the Company's
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, and associated
external counsel opinions.
/s/ KPMG LLP
We have served as the Company's auditor since 1990.
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GLOSSARY
Acquisitions and divestitures: all mergers and acquisitions activity, including
the impact of acquisitions, divestitures and 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, retailers and independent
distributors.
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 snacks and beverages 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 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 impacts of acquisitions, divestitures and
other structural changes, foreign exchange translation and, when 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. Starting in 2018, our
reported results reflect the accounting policy election taken in conjunction
with the adoption of the revenue recognition guidance to exclude from net
revenue and cost of sales all sales, use, value-added and certain excise taxes
assessed by governmental authorities on revenue-producing transactions not
already excluded. Our 2018 organic revenue growth excludes the impact of these
taxes previously recognized in net revenue.
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Servings: common metric reflecting our consolidated physical unit volume. Our divisions' physical unit measures are converted into servings based onU.S. Food and Drug Administration guidelines for single-serving sizes of our products. 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. Translation adjustment: the impact of converting our foreign affiliates' financial statements intoU.S. dollars for the purpose of consolidating our financial statements. 128
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks."
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