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.
Effective as of the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and joint venture using the cost method of accounting. See subsequent discussion of “Venezuela.”
Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. Our fiscal 2016 results 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. Certain operations in our ESSA segment report on a weekly calendar basis. The following chart details our quarterly reporting schedule for 2016, reflecting the extra week in the fourth quarter:
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 | 17 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.
Unless otherwise noted, 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. Reclassifications were made to prior years’ amounts to conform to the current year presentation, including the presentation of certain functional support costs associated with the manufacturing and production of our products within cost of sales. These costs were previously included in selling, general and administrative expenses. For the years ended December 26, 2015 and December 27, 2014, these reclassifications resulted in an increase in cost of sales of $347 million and $354 million, respectively, with a corresponding reduction to gross profit and selling, general and administrative expenses in the same years. These reclassifications reflect changes in how we are classifying costs of certain support functions as a result of ongoing productivity and efficiency initiatives. These reclassifications had no impact on our consolidated net revenue, operating profit, net interest expense, provision for income taxes, net income or EPS.
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 2016 was approximately 14% to FLNA, 2% to QFNA, 22% to NAB, 7% to Latin America, 11% to ESSA, 10% to AMENA and 34% to corporate unallocated expenses. We had similar allocations of share-based compensation expense to our divisions in 2015 and 2014. 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.
Derivatives
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.
Net revenue and operating profit/(loss) of each division are as follows:
Net Revenue | Operating Profit/(Loss)(a) | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||||||
FLNA | $ | 15,549 | $ | 14,782 | $ | 14,502 | $ | 4,659 | $ | 4,304 | $ | 4,054 | |||||||||||
QFNA | 2,564 | 2,543 | 2,568 | 653 | 560 | 621 | |||||||||||||||||
NAB | 21,312 | 20,618 | 20,171 | 2,959 | 2,785 | 2,421 | |||||||||||||||||
Latin America | 6,820 | 8,228 | 9,425 | 887 | (206 | ) | 1,636 | ||||||||||||||||
ESSA | 10,216 | 10,510 | 13,399 | 1,108 | 1,081 | 1,389 | |||||||||||||||||
AMENA | 6,338 | 6,375 | 6,618 | 619 | 941 | 985 | |||||||||||||||||
Total division | 62,799 | 63,056 | 66,683 | 10,885 | 9,465 | 11,106 | |||||||||||||||||
Corporate Unallocated | — | — | — | (1,100 | ) | (1,112 | ) | (1,525 | ) | ||||||||||||||
$ | 62,799 | $ | 63,056 | $ | 66,683 | $ | 9,785 | $ | 8,353 | $ | 9,581 |
(a) | For further unaudited information on certain items that impacted our financial performance, see “Item 6. Selected Financial Data.” |
![\"netrevenuedivisionandoperati.jpg\"](\"netrevenuedivisionandoperati.jpg\")
Corporate Unallocated
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 | ||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2014 | |||||||||||||||
FLNA | $ | 5,759 | $ | 5,375 | $ | 801 | $ | 608 | $ | 519 | |||||||||
QFNA | 826 | 872 | 41 | 40 | 58 | ||||||||||||||
NAB | 28,452 | 28,128 | 769 | 695 | 708 | ||||||||||||||
Latin America | 4,640 | 4,284 | 507 | 368 | 379 | ||||||||||||||
ESSA | 12,406 | 12,225 | 439 | 404 | 502 | ||||||||||||||
AMENA | 5,303 | 5,901 | 381 | 441 | 517 | ||||||||||||||
Total division | 57,386 | 56,785 | 2,938 | 2,556 | 2,683 | ||||||||||||||
Corporate (a) | 16,743 | 12,882 | 102 | 202 | 176 | ||||||||||||||
$ | 74,129 | $ | 69,667 | $ | 3,040 | $ | 2,758 | $ | 2,859 |
(a) | Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment, pension and tax assets. In 2016, the change in total Corporate assets was primarily due to an increase in short-term investments. |
![\"totalassetsandcapitalspend.jpg\"](\"totalassetsandcapitalspend.jpg\")
Amortization of intangible assets and depreciation and other amortization of each division are as follows:
Amortization of Intangible Assets | Depreciation and Other Amortization | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||||||
FLNA | $ | 7 | $ | 7 | $ | 7 | $ | 435 | $ | 427 | $ | 424 | |||||||||||
QFNA | — | — | — | 50 | 51 | 51 | |||||||||||||||||
NAB | 37 | 38 | 43 | 809 | 813 | 837 | |||||||||||||||||
Latin America | 5 | 7 | 10 | 211 | 238 | 273 | |||||||||||||||||
ESSA | 18 | 20 | 28 | 321 | 353 | 471 | |||||||||||||||||
AMENA | 3 | 3 | 4 | 294 | 293 | 313 | |||||||||||||||||
Total division | 70 | 75 | 92 | 2,120 | 2,175 | 2,369 | |||||||||||||||||
Corporate | — | — | — | 178 | 166 | 164 | |||||||||||||||||
$ | 70 | $ | 75 | $ | 92 | $ | 2,298 | $ | 2,341 | $ | 2,533 |
Net revenue and long-lived assets by country are as follows:
Net Revenue | Long-Lived Assets(a) | ||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | |||||||||||||||
United States | $ | 36,732 | $ | 35,266 | $ | 34,219 | $ | 28,382 | $ | 27,876 | |||||||||
Mexico | 3,431 | 3,687 | 4,113 | 998 | 994 | ||||||||||||||
Canada | 2,692 | 2,677 | 3,022 | 2,499 | 2,386 | ||||||||||||||
Russia (b) | 2,648 | 2,797 | 4,414 | 4,373 | 3,614 | ||||||||||||||
United Kingdom | 1,737 | 1,966 | 2,174 | 852 | 1,107 | ||||||||||||||
Brazil | 1,305 | 1,289 | 1,790 | 796 | 649 | ||||||||||||||
All other countries (c) | 14,254 | 15,374 | 16,951 | 8,504 | 9,260 | ||||||||||||||
$ | 62,799 | $ | 63,056 | $ | 66,683 | $ | 46,404 | $ | 45,886 |
(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 long-lived assets in 2016 primarily reflects appreciation of the Russian ruble. Change in net revenue in 2015 primarily reflects the depreciation of the Russian ruble. |
(c) | Included in long-lived assets in all other countries as of December 31, 2016 and December 26, 2015 are $166 million and $538 million, respectively, related to our 5% indirect equity interest in TAB. |
![\"netrevenueandllaa01.jpg\"](\"netrevenueandllaa01.jpg\")
Venezuela
Prior to the end of the third quarter of 2015, the financial position and results of operations of our Venezuelan snack and beverage businesses, which consist of our wholly-owned subsidiaries and our beverage joint venture with our franchise bottler in Venezuela, were included in our consolidated financial statements and reported under highly-inflationary accounting, with the functional currency of the U.S. dollar.
Conditions in Venezuela, including restrictive exchange control regulations and reduced access to U.S. dollars through official currency exchange markets, have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. The exchange restrictions and other conditions have significantly impacted our ability to effectively manage our businesses in Venezuela, including limiting our ability to import certain raw materials and to settle U.S. dollar-denominated obligations, and have restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future.
As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries, and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela. Therefore, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments in our Venezuelan subsidiaries and joint venture using the cost method of accounting. We recorded pre- and after-tax charges of $1.4 billion in our income statement 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 through the end of 2016.
As of the end of 2016, consistent with the end of the third quarter of 2015, we did not consolidate the assets and liabilities of our Venezuelan subsidiaries in our balance sheet. Beginning in the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses. We do not have any guarantees related to our Venezuelan entities, and our ongoing contractual commitments to our Venezuelan businesses are not material. We will recognize income from dividends and sales of inventory to our Venezuelan entities, which have not been and are not expected to be material, to the extent cash in U.S. dollars is received. We did not receive any cash in U.S. dollars from our Venezuelan entities during the fourth quarter of 2015 or fiscal year 2016. We will continue to monitor the conditions in Venezuela and their impact on our accounting and disclosures. 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.