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Basis of Presentation and Our Divisions | 12 Months Ended
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Dec. 26, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Basis Of Presentation and Our Divisions | Note 1 — Basis of Presentation and Our Divisions Basis of Presentation The accompanying financial statements have been prepared in accordance with U.S. GAAP and include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates using the equity method based on our economic ownership interest, our ability to exercise significant influence over the operating or financial decisions of these affiliates or our ability to direct their economic resources. We do not control these other affiliates, as our ownership in these other affiliates is generally 50% or less. Intercompany balances and transactions are eliminated. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses. The 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 perpetual 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. Prior to the end of the third quarter of 2015, the financial position and results of operations of our Venezuelan snack and beverage businesses were included in our consolidated financial statements. Effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and significant influence over our joint venture, and therefore we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting. See subsequent discussion of “Venezuela”; for further unaudited information, see “Our Business Risks” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years (and our fiscal 2016 results will include an extra week). While our North America results are reported on a weekly calendar basis, most of our international operations report on a monthly calendar basis. The following chart details our quarterly reporting schedule for all reporting periods presented:
Quarter |  | U.S. 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
See “Our Divisions” below, and for additional unaudited information on items affecting the comparability of our consolidated results, see further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Certain reclassifications were made to prior years’ amounts to conform to the current year presentation. Our Divisions Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient and enjoyable beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories with our largest operations in North America, Mexico, Russia, the United Kingdom and Brazil. Division results are based on how our Chief Executive Officer assesses the performance of and allocates resources to our divisions and are considered our reportable segments. For additional unaudited information on our divisions, see “Our Operations” contained in “Item 1. Business.” The accounting policies for the divisions are the same as those described in Note 2, except for the following allocation methodologies:
• | share-based compensation expense;
• | pension and retiree medical expense; and
• | derivatives.
Share-Based Compensation Expense Our divisions are held accountable for share-based compensation expense and, therefore, this expense is allocated to our divisions as an incremental employee compensation cost. The allocation of share-based compensation expense in 2015 was approximately 15% to FLNA, 2% to QFNA, 23% to NAB, 7% to Latin America, 13% to ESSA, 11% to AMENA and 29% to corporate unallocated expenses. We had similar allocations of share-based compensation expense to our divisions in 2014 and 2013. 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, as well as amortization of costs related to certain pension plan amendments and gains and losses due to demographics (including mortality assumptions and salary experience) are reflected in division results for North American employees. Division results also include interest costs, measured at fixed discount rates, for retiree medical plans. Interest costs for the pension plans, pension asset returns and the impact of pension funding, and gains and losses other than those due to demographics, are all reflected in corporate unallocated expenses. In addition, for our North American plans, corporate unallocated expenses include the difference between the service costs measured at a fixed discount rate (included in division results as noted above) and the total service costs determined using the plans’ discount rates as disclosed in Note 7 to our consolidated financial statements. Derivatives We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, metals and energy. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses, as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes. Net revenue and operating profit/(loss) of each division are as follows:
| Net Revenue |  | Operating Profit/(Loss) (a)
| 2015 |  |  | 2014 |  |  | 2013 |  |  | 2015 |  |  | 2014 |  |  | 2013 |
FLNA | $ | 14,782 |  |  | $ | 14,502 |  |  | $ | 14,126 |  |  | $ | 4,304 |  |  | $ | 4,054 |  |  | $ | 3,877 |
QFNA (b) | 2,543 |  |  | 2,568 |  |  | 2,612 |  |  | 560 |  |  | 621 |  |  | 617 |
NAB (c) | 20,618 |  |  | 20,171 |  |  | 20,083 |  |  | 2,785 |  |  | 2,421 |  |  | 2,580 |
Latin America (d) | 8,228 |  |  | 9,425 |  |  | 9,335 |  |  | (206 | ) |  | 1,636 |  |  | 1,617 |
ESSA | 10,510 |  |  | 13,399 |  |  | 13,828 |  |  | 1,081 |  |  | 1,389 |  |  | 1,327 |
AMENA (e) | 6,375 |  |  | 6,618 |  |  | 6,431 |  |  | 941 |  |  | 985 |  |  | 1,140 |
Total division | 63,056 |  |  | 66,683 |  |  | 66,415 |  |  | 9,465 |  |  | 11,106 |  |  | 11,158 |
Corporate Unallocated |  |  |  |  |  |  |  |  |  |  |
Mark-to-market net gains/(losses) |  |  |  |  |  |  | 11 |  |  | (68 | ) |  | (72 | )
Restructuring and impairment charges |  |  |  |  |  |  | (13 | ) |  | (41 | ) |  | (11 | )
Pension lump sum settlement charge |  |  |  |  |  |  | — |  |  | (141 | ) |  | — |
Venezuela remeasurement charges |  |  |  |  |  |  | — |  |  | (126 | ) |  | (124 | )
Other |  |  |  |  |  |  | (1,110 | ) |  | (1,149 | ) |  | (1,246 | )
| $ | 63,056 |  |  | $ | 66,683 |  |  | $ | 66,415 |  |  | $ | 8,353 |  |  | $ | 9,581 |  |  | $ | 9,705 |
(a) | For information on the impact of restructuring and impairment charges on our divisions, see Note 3 to our consolidated financial statements.
(b) | Operating profit for QFNA for the year ended December 26, 2015 includes pre-tax impairment charges of $76 million associated with our MQD joint venture investment, including a fourth quarter charge related to ceasing its operations.
(c) | Operating profit for NAB for the year ended December 26, 2015 includes pre-tax gains of $67 million associated with the settlements of pension-related liabilities from previous acquisitions.
(d) | Operating loss for Latin America for the year ended December 26, 2015 includes a pre- and after-tax charge of $1.4 billion related to our change in accounting for our investments in our wholly-owned Venezuelan subsidiaries and beverage joint venture. See subsequent “Venezuela” discussion.
(e) | Operating profit for AMENA for the year ended December 26, 2015 includes a pre-tax gain of $39 million associated with refranchising a portion of our beverage businesses in India, a pre- and after-tax charge of $73 million related to a write-off of the value of a call option to increase our holding in TAB to 20% and a pre- and after-tax impairment charge of $29 million associated with a joint venture in the Middle East.
Corporate Corporate unallocated includes costs of our corporate headquarters, centrally managed initiatives such as research and development projects, unallocated insurance and benefit programs, foreign exchange transaction gains and losses, commodity derivative gains and losses, our ongoing business transformation initiatives and certain other items. Other Division Information Total assets and capital spending of each division are as follows:
| Total Assets |  | Capital Spending
| 2015 |  |  | 2014 |  |  | 2015 |  |  | 2014 |  |  | 2013 |
FLNA | $ | 5,375 |  |  | $ | 5,307 |  |  | $ | 608 |  |  | $ | 519 |  |  | $ | 423 |
QFNA | 872 |  |  | 982 |  |  | 40 |  |  | 58 |  |  | 38 |
NAB | 28,128 |  |  | 28,665 |  |  | 695 |  |  | 708 |  |  | 705 |
Latin America (a) | 4,284 |  |  | 6,283 |  |  | 368 |  |  | 379 |  |  | 395 |
ESSA | 12,225 |  |  | 13,934 |  |  | 404 |  |  | 502 |  |  | 551 |
AMENA | 5,901 |  |  | 5,855 |  |  | 441 |  |  | 517 |  |  | 530 |
Total division | 56,785 |  |  | 61,026 |  |  | 2,556 |  |  | 2,683 |  |  | 2,642 |
Corporate (b) | 12,882 |  |  | 9,483 |  |  | 202 |  |  | 176 |  |  | 153 |
| $ | 69,667 |  |  | $ | 70,509 |  |  | $ | 2,758 |  |  | $ | 2,859 |  |  | $ | 2,795 |
(a) | The change in total assets in 2015 reflects a decrease of $1.7 billion related to the Venezuela impairment charges.
(b) | Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and pension and tax assets. In 2015, the change in total Corporate assets was primarily due to the increase in cash and cash equivalents.
Amortization of intangible assets and depreciation and other amortization of each division are as follows:
| Amortization of Intangible Assets |  | Depreciation and Other Amortization
| 2015 |  |  | 2014 |  |  | 2013 |  |  | 2015 |  |  | 2014 |  |  | 2013 |
FLNA | $ | 7 |  |  | $ | 7 |  |  | $ | 7 |  |  | $ | 427 |  |  | $ | 424 |  |  | $ | 430 |
QFNA | — |  |  | — |  |  | — |  |  | 51 |  |  | 51 |  |  | 51 |
NAB | 38 |  |  | 43 |  |  | 55 |  |  | 813 |  |  | 837 |  |  | 843 |
Latin America | 7 |  |  | 10 |  |  | 11 |  |  | 238 |  |  | 273 |  |  | 273 |
ESSA | 20 |  |  | 28 |  |  | 32 |  |  | 353 |  |  | 471 |  |  | 525 |
AMENA | 3 |  |  | 4 |  |  | 5 |  |  | 293 |  |  | 313 |  |  | 283 |
Total division | 75 |  |  | 92 |  |  | 110 |  |  | 2,175 |  |  | 2,369 |  |  | 2,405 |
Corporate | — |  |  | — |  |  | — |  |  | 166 |  |  | 164 |  |  | 148 |
| $ | 75 |  |  | $ | 92 |  |  | $ | 110 |  |  | $ | 2,341 |  |  | $ | 2,533 |  |  | $ | 2,553 |
Net revenue and long-lived assets by country are as follows:
| Net Revenue |  | Long-Lived Assets(a) |
| 2015 |  |  | 2014 |  |  | 2013 |  |  | 2015 |  |  | 2014 |  |
U.S. | $ | 35,266 |  |  | $ | 34,219 |  |  | $ | 33,626 |  |  | $ | 27,876 |  |  | $ | 27,964 |  |
Mexico | 3,687 |  |  | 4,113 |  |  | 4,347 |  |  | 994 |  |  | 1,126 |  |
Russia (b) | 2,797 |  |  | 4,414 |  |  | 4,908 |  |  | 3,614 |  |  | 4,520 |  |
Canada | 2,677 |  |  | 3,022 |  |  | 3,195 |  |  | 2,386 |  |  | 2,815 |  |
United Kingdom | 1,966 |  |  | 2,174 |  |  | 2,115 |  |  | 1,107 |  |  | 1,155 |  |
Brazil | 1,289 |  |  | 1,790 |  |  | 1,835 |  |  | 649 |  |  | 928 |  |
All other countries | 15,374 |  |  | 16,951 |  |  | 16,389 |  |  | 9,260 |  | (c) | 10,478 |  | (c)
| $ | 63,056 |  |  | $ | 66,683 |  |  | $ | 66,415 |  |  | $ | 45,886 |  |  | $ | 48,986 |  |
(a) | Long-lived assets represent property, plant and equipment, nonamortizable intangible assets, amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used.
(b) | Change in net revenue and long-lived assets in 2015 primarily reflects the depreciation of the Russian ruble.
(c) | Included in all other countries as of December 26, 2015 and December 27, 2014 is $538 million and $611 million, respectively, related to our 5% indirect equity interest in TAB.
Venezuela Prior to the end of the third quarter of 2015, the financial position and results of operations of our Venezuelan businesses, which consist of our wholly-owned subsidiaries and our beverage joint venture with our franchise bottler in Venezuela, were reported under highly inflationary accounting, with the functional currency of the U.S. dollar. The Venezuelan government has maintained currency controls and a fixed exchange rate since 2003 and has created additional exchange mechanisms and issued several exchange agreements governing the scope and applicability of each, while continuing to maintain control over the exchange rates and, to an increasingly significant extent, over the distribution of U.S. dollars under each mechanism. During 2015, there was a three-tiered exchange rate mechanism in Venezuela for exchanging bolivars into U.S. dollars: (1) the government-operated National Center of Foreign Commerce (CENCOEX); (2) the government-operated auction-based Supplementary Foreign Currency Administration System (SICAD); and (3) an open market Marginal Foreign Exchange System (SIMADI). These three mechanisms became increasingly illiquid over time. We believe that significant uncertainty continues to exist regarding the exchange mechanisms in Venezuela, including the nature of transactions that are eligible to flow through CENCOEX, SICAD or SIMADI, or any other new exchange mechanism that may emerge, how any such mechanisms will operate in the future, as well as the availability of U.S. dollars under each mechanism. The amount of U.S. dollars made available to our Venezuelan entities through CENCOEX declined significantly since 2014 and worsened during the third quarter of 2015. In addition, our Venezuelan entities were not able to participate in SICAD auctions during 2015, as the auctions that were held were not for our industry, and had limited access to the SIMADI market since its inception. The evolving conditions in Venezuela, including increasingly restrictive exchange control regulations and reduced access to dollars through official currency exchange markets, resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, which significantly impacted our ability to effectively manage our Venezuelan businesses, including restrictions on the ability of our Venezuelan businesses to import certain raw materials to maintain normal production and to settle U.S. dollar-denominated obligations. The exchange restrictions, combined with other regulations that have limited our ability to import certain raw materials, also increasingly constrained our ability to make and execute operational decisions regarding our businesses in Venezuela. In addition, the inability of our Venezuelan businesses to pay dividends, which remain subject to Venezuelan government approvals, restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future. As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries, and therefore we deconsolidated our wholly-owned Venezuelan subsidiaries effective as of the end of the third quarter of 2015. We also concluded that, effective as of the end of the third quarter of 2015, due to the above-mentioned factors and other matters impacting the operation of our joint venture and the distribution of its products, we no longer had significant influence over our joint venture, which was previously accounted for under the equity method. As a result of these conclusions, effective at the end of the third quarter of 2015, we began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting and recorded pre- and after-tax charges of $1.4 billion in our Consolidated Statement of Income to reduce the value of the cost method investments to their estimated fair values, resulting in a full impairment. The impairment charges primarily included approximately $1.2 billion related to our investments in previously consolidated Venezuelan subsidiaries and our joint venture and $111 million related to the reclassification of cumulative translation losses. The estimated fair value of the investments in our Venezuelan entities was derived using discounted cash flow analyses, including U.S. dollar exchange and discount rate assumptions that reflected the inflation and economic uncertainty in Venezuela, and are considered non-recurring Level 3 measurements within the fair value hierarchy. The factors that led to the above-mentioned conclusions at the end of the third quarter of 2015 continued to exist as of the end of 2015. During 2015 and prior to the end of the third quarter of 2015, we used the SICAD exchange rate to remeasure our net monetary assets in Venezuela, except for certain other net monetary assets that we believed qualified for the fixed exchange rate (including requests for remittance of dividends submitted to CENCOEX in certain prior years at the fixed exchange rate and payables for imports of essential goods approved by CENCOEX). During 2015, the results of our operations in Venezuela, which reflected the months of January through August, were included in our Consolidated Statement of Income using a combination of the fixed exchange and SICAD rates, as appropriate. As of the end of 2015, consistent with the end of the third quarter of 2015, we did not consolidate the assets and liabilities of our Venezuelan subsidiaries in our Consolidated Balance Sheet. Beginning in the fourth quarter of 2015, we no longer included the financial results of our Venezuelan businesses in our Consolidated Statement of Income and our financial results only included revenue relating to the sales of inventory to our Venezuelan entities to the extent cash was received for those sales. Any dividends from our Venezuelan entities will be recorded as income upon receipt of the cash. We did not receive any U.S. dollars in the fourth quarter of 2015 from our Venezuelan entities. Our ongoing contractual commitments to our Venezuelan businesses are not material.

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