10-Q 1 pepsicoq2-10xq6152013.htm 10-Q Pepsico Q2-10-Q 6.15.2013
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 15, 2013 (24 weeks)
OR
 
    
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to             
Commission file number 1-1183
 
PepsiCo, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
North Carolina        
  
13-1584302  
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
 
700 Anderson Hill Road, Purchase, New York
  
10577
(Address of Principal Executive Offices)
  
(Zip Code)

914-253-2000
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   X    NO      
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   X    NO      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  X 
  
Accelerated filer     
Non-accelerated filer     
(Do not check if a smaller reporting company)
  
Smaller reporting company     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES           NO  X
Number of shares of Common Stock outstanding as of July 17, 2013: 1,542,214,401


PepsiCo, Inc. and Subsidiaries

Table of Contents
Part I Financial Information
Page No.
Item 1.
Condensed Consolidated Financial Statements
 
Condensed Consolidated Statement of Income –
12 and 24 Weeks Ended June 15, 2013 and June 16, 2012                                                                                                                  
 
 
 
 
 
Item 2.
Report of Independent Registered Public Accounting Firm
Item 3.
Item 4.
Part II Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.


2

PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts, unaudited) 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Net Revenue
$
16,807

 
$
16,458

 
$
29,388

 
$
28,886

Cost of sales
7,898

 
7,915

 
13,732

 
13,804

Selling, general and administrative expenses
6,013

 
6,136

 
11,079

 
10,928

Amortization of intangible assets
27

 
30

 
50

 
55

Operating Profit
2,869

 
2,377

 
4,527

 
4,099

Interest expense
(208
)
 
(209
)
 
(422
)
 
(407
)
Interest income and other
18

 
1

 
45

 
24

Income before income taxes
2,679

 
2,169

 
4,150

 
3,716

Provision for income taxes
654

 
668

 
1,040

 
1,082

Net income
2,025

 
1,501

 
3,110

 
2,634

Less: Net income attributable to noncontrolling interests
15

 
13

 
25

 
19

Net Income Attributable to PepsiCo
$
2,010

 
$
1,488

 
$
3,085

 
$
2,615

Net Income Attributable to PepsiCo per Common Share
 
 
 
 
 
 
Basic
$
1.30

 
$
0.95

 
$
1.99

 
$
1.67

Diluted
$
1.28

 
$
0.94

 
$
1.97

 
$
1.65

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
1,548

 
1,563

 
1,546

 
1,565

Diluted
1,567

 
1,581

 
1,565

 
1,583

Cash dividends declared per common share
$
0.5675

 
$
0.5375

 
$
1.105

 
$
1.0525

See accompanying notes to the condensed consolidated financial statements.


3

Condensed Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited) 
 
12 Weeks Ended 6/15/13
 
24 Weeks Ended 6/15/13
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income


 


 
$
2,025

 


 


 
$
3,110

Other Comprehensive Loss

 

 

 

 

 

Currency translation adjustment
$
(718
)
 
$
—

 
(718
)
 
$
(953
)
 
$
—

 
(953
)
Cash flow hedges:


 


 


 

 

 

Reclassification of net (gains)/losses to net income
(8
)
 
2

 
(6
)
 
51

 
(19
)
 
32

Net derivative gains/(losses)
5

 
(1
)
 
4

 
(18
)
 
16

 
(2
)
Pension and retiree medical:

 

 

 

 

 

Reclassification of net losses to net income
84

 
(27
)
 
57

 
163

 
(54
)
 
109

Remeasurement of net liabilities and translation
2

 
(1
)
 
1

 
45

 
(13
)
 
32

Unrealized gains on securities
20

 
(10
)
 
10

 
19

 
(10
)
 
9

Other
(1
)
—

(16
)
 
(17
)
 
(1
)
 
(16
)
 
(17
)
Total Other Comprehensive Loss
$
(616
)
 
$
(53
)
 
(669
)
 
$
(694
)
 
$
(96
)
 
(790
)
Comprehensive income
 
 
 
 
1,356

 
 
 
 
 
2,320

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(14
)
 
 
 
 
 
(23
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
1,342

 
 
 
 
 
$
2,297


 
12 Weeks Ended 6/16/12
 
24 Weeks Ended 6/16/12
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
1,501

 
 
 
 
 
$
2,634

Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
$
(2,231
)
 
$
—

 
(2,231
)
 
$
(544
)
 
$
—

 
(544
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
26

 
(9
)
 
17

 
38

 
(14
)
 
24

Net derivative losses
(22
)
 
11

 
(11
)
 
(37
)
 
12

 
(25
)
Pension and retiree medical:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net losses to net income
73

 
(24
)
 
49

 
140

 
(47
)
 
93

Remeasurement of net liabilities and translation
17

 
(5
)
 
12

 
1

 
(1
)
 
—

Unrealized (losses)/gains on securities
(10
)
 
—

 
(10
)
 
3

 
—

 
3

Other
—

 
—

 
—

 
—

 
36

 
36

Total Other Comprehensive Loss
$
(2,147
)
 
$
(27
)
 
(2,174
)
 
$
(399
)
 
$
(14
)
 
(413
)
Comprehensive (loss)/income
 
 
 
 
(673
)
 
 
 
 
 
2,221

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(11
)
 
 
 
 
 
(13
)
Comprehensive (Loss)/Income Attributable to PepsiCo
 
 
 
 
$
(684
)
 
 
 
 
 
$
2,208

See accompanying notes to the condensed consolidated financial statements.

4

Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)

 
24 Weeks Ended
 
6/15/13

 
6/16/12

Operating Activities
 
 
 
Net income
$
3,110

 
$
2,634

Depreciation and amortization
1,185

 
1,201

Stock-based compensation expense
149

 
125

Merger and integration charges
—

 
5

Cash payments for merger and integration charges
(17
)
 
(47
)
Restructuring and impairment charges
30

 
110

Cash payments for restructuring charges
(74
)
 
(140
)
Restructuring and other charges related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)
—

 
163

Cash payments for restructuring and other charges related to the transaction with Tingyi
(18
)
 
(88
)
Non-cash foreign exchange loss related to Venezuela devaluation
111

 
—

Excess tax benefits from share-based payment arrangements
(83
)
 
(53
)
Pension and retiree medical plan contributions
(180
)
 
(1,169
)
Pension and retiree medical plan expenses
306

 
271

Deferred income taxes and other tax charges and credits
(189
)
 
85

Change in accounts and notes receivable
(1,088
)
 
(1,084
)
Change in inventories
(659
)
 
(643
)
Change in prepaid expenses and other current assets
(241
)
 
(196
)
Change in accounts payable and other current liabilities
400

 
(193
)
Change in income taxes payable
543

 
432

Other, net
(270
)
 
(166
)
Net Cash Provided by Operating Activities
3,015

 
1,247

Investing Activities
 
 
 
Capital spending
(911
)
 
(901
)
Sales of property, plant and equipment
30

 
42

Cash payments related to the transaction with Tingyi
(3
)
 
(298
)
Acquisitions and investments in noncontrolled affiliates
(59
)
 
(49
)
Divestitures
174

 
14

Short-term investments, by original maturity – three months or less, net
(4
)
 
41

Other investing, net
(13
)
 
13

Net Cash Used for Investing Activities
(786
)
 
(1,138
)
 

(Continued on following page)


5

Condensed Consolidated Statement of Cash Flows (continued)
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/15/13

 
6/16/12

Financing Activities
 
 
 
Proceeds from issuances of long-term debt
$
2,491

 
$
2,733

Payments of long-term debt
(1,945
)
 
(1,034
)
Short-term borrowings, by original maturity

 


    More than three months – proceeds
6

 
53

    More than three months – payments
(481
)
 
(189
)
    Three months or less, net
1,228

 
462

Cash dividends paid
(1,677
)
 
(1,626
)
Share repurchases – common
(1,028
)
 
(1,206
)
Share repurchases – preferred
(4
)
 
(3
)
Proceeds from exercises of stock options
823

 
496

Excess tax benefits from share-based payment arrangements
83

 
53

Acquisition of noncontrolling interests
(20
)
 
(12
)
Other financing
(3
)
 
(19
)
Net Cash Used for Financing Activities
(527
)
 
(292
)
Effect of exchange rate changes on cash and cash equivalents
(206
)
 
(21
)
Net Increase/(Decrease) in Cash and Cash Equivalents
1,496

 
(204
)
Cash and Cash Equivalents, Beginning of Year
6,297

 
4,067

Cash and Cash Equivalents, End of Period
$
7,793

 
$
3,863

See accompanying notes to the condensed consolidated financial statements.


6

Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions)
 
(Unaudited)
 
 
 
6/15/13

 
12/29/12

Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
7,793

 
$
6,297

Short-term investments
346

 
322

Accounts and notes receivable, less allowance: 6/13 – $164, 12/12 – $157
7,981

 
7,041

Inventories
 
 
 
Raw materials
1,910

 
1,875

Work-in-process
351

 
173

Finished goods
1,870

 
1,533

 
4,131

 
3,581

Prepaid expenses and other current assets
1,712

 
1,479

Total Current Assets
21,963

 
18,720

Property, Plant and Equipment
35,959

 
36,162

Accumulated Depreciation
(17,569
)
 
(17,026
)
 
18,390

 
19,136

Amortizable Intangible Assets, net
1,705

 
1,781

Goodwill
16,719

 
16,971

Other nonamortizable intangible assets
14,469

 
14,744

Nonamortizable Intangible Assets
31,188

 
31,715

Investments in Noncontrolled Affiliates
1,839

 
1,633

Other Assets
1,568

 
1,653

Total Assets
$
76,653

 
$
74,638


 
(Continued on following page)

 

7

Condensed Consolidated Balance Sheet (continued)
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)
 
 
 
6/15/13

 
12/29/12

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term obligations
$
6,298

 
$
4,815

Accounts payable and other current liabilities
12,101

 
11,903

Income taxes payable
763

 
371

Total Current Liabilities
19,162

 
17,089

Long-Term Debt Obligations
23,212

 
23,544

Other Liabilities
6,414

 
6,543

Deferred Income Taxes
5,100

 
5,063

Total Liabilities
53,888

 
52,239

Commitments and Contingencies


 


Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(168
)
 
(164
)
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: 1,547 and 1,544 shares, respectively)
26

 
26

Capital in excess of par value
3,995

 
4,178

Retained earnings
44,523

 
43,158

Accumulated other comprehensive loss
(6,275
)
 
(5,487
)
Repurchased common stock, in excess of par value (319 and 322 shares,
   respectively)
(19,483
)
 
(19,458
)
Total PepsiCo Common Shareholders’ Equity
22,786

 
22,417

Noncontrolling interests
106

 
105

Total Equity
22,765

 
22,399

Total Liabilities and Equity
$
76,653

 
$
74,638


See accompanying notes to the condensed consolidated financial statements.


8

Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
24 Weeks Ended
 
6/15/13
 
6/16/12
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.6
)
 
(164
)
 
(0.6
)
 
(157
)
Redemptions
—

 
(4
)
 
—

 
(3
)
Balance, end of period
(0.6
)
 
(168
)
 
(0.6
)
 
(160
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,544

 
26

 
1,565

 
26

Repurchased common stock
3

 
—

 
(6
)
 
—

Balance, end of period
1,547

 
26

 
1,559

 
26

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
4,178

 
 
 
4,461

Stock-based compensation expense
 
 
149

 
 
 
125

Stock option exercises/RSUs converted (a)
 
 
(249
)
 
 
 
(275
)
Withholding tax on RSUs converted
 
 
(70
)
 
 
 
(60
)
Other
 
 
(13
)
 
 
 
(28
)
Balance, end of period
 
 
3,995

 
 
 
4,223

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
43,158

 
 
 
40,316

Net income attributable to PepsiCo
 
 
3,085

 
 
 
2,615

Cash dividends declared – common
 
 
(1,710
)
 
 
 
(1,649
)
Cash dividends declared – preferred
 
 
—

 
 
 
(1
)
Cash dividends declared – RSUs
 
 
(10
)
 
 
 
(7
)
Balance, end of period
 
 
44,523

 
 
 
41,274

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(5,487
)
 
 
 
(6,229
)
Currency translation adjustment
 
 
(951
)
 
 
 
(538
)
Cash flow hedges, net of tax:
 
 
 
 
 
 
 
Reclassification of net losses to net income
 
 
32

 
 
 
24

Net derivative losses
 
 
(2
)
 
 
 
(25
)
Pension and retiree medical, net of tax:
 
 
 
 
 
 
 
Reclassification of net losses to net income
 
 
109

 
 
 
93

Remeasurement of net liabilities and translation
 
 
32

 
 
 
—

Unrealized gains on securities, net of tax
 
 
9

 
 
 
3

Other
 
 
(17
)
 
 
 
36

Balance, end of period
 
 
(6,275
)
 
 
 
(6,636
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(322
)
 
(19,458
)
 
(301
)
 
(17,870
)
Share repurchases
(15
)
 
(1,123
)
 
(19
)
 
(1,253
)
Stock option exercises
15

 
962

 
11

 
676

Other
3

 
136

 
2

 
136

Balance, end of period
(319
)
 
(19,483
)
 
(307
)
 
(18,311
)
Total PepsiCo Common Shareholders’ Equity
 
 
22,786

 
 
 
20,576

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
105

 
 
 
311

Net income attributable to noncontrolling interests
 
 
25

 
 
 
19

Distributions to noncontrolling interests
 
 
(15
)
 
 
 
(15
)
Currency translation adjustment
 
 
(2
)
 
 
 
(6
)
Acquisitions and divestitures
 
 
(7
)
 
 
 
(171
)
Balance, end of period
 
 
106

 
 
 
138

Total Equity
 
 
$
22,765

 
 
 
$
20,595

(a)
Includes total tax benefits of $31 million in 2013 and $27 million in 2012.
See accompanying notes to the condensed consolidated financial statements.

9

Notes to the Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation and Our Divisions

Basis of Presentation

When used in this report, the terms “we,” “us,” “our,” “PepsiCo” and the “Company” mean PepsiCo, Inc. and its divisions and subsidiaries.
Our Condensed Consolidated Balance Sheet as of June 15, 2013 and the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 15, 2013 and June 16, 2012, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 15, 2013 and June 16, 2012 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 24 weeks are not necessarily indicative of the results expected for the full year.
While our North America (United States and Canada) results are reported on a period basis, most of our international operations report on a monthly calendar basis for which the months of March, April and May are reflected in our second quarter results.
Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives, and certain advertising and marketing costs, in proportion to revenue and volume, as applicable, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Certain reclassifications were made to the prior year’s amounts to conform to the 2013 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Our Divisions
We are organized into four business units, as follows:
1.
PepsiCo Americas Foods, which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of our Latin American food and snack businesses (LAF);
2.
PepsiCo Americas Beverages (PAB), which includes all of our North American and Latin American beverage businesses;
3.
PepsiCo Europe, which includes all beverage, food and snack businesses in Europe and South Africa; and
4.
PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in AMEA, excluding South Africa.

10

Our four business units comprise six reportable segments (also referred to as divisions), as follows:

•
FLNA,
•
QFNA,
•
LAF,
•
PAB,
•
Europe, and
•
AMEA.
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Net Revenue
 
 
 
 
 
 
 
FLNA
$
3,332

 
$
3,193

 
$
6,455

 
$
6,203

QFNA
577

 
583

 
1,211

 
1,206

LAF
2,116

 
1,948

 
3,483

 
3,183

PAB
5,260

 
5,352

 
9,680

 
9,800

Europe
3,653

 
3,617

 
5,595

 
5,462

AMEA
1,869

 
1,765

 
2,964

 
3,032

 
$
16,807

 
$
16,458

 
$
29,388

 
$
28,886

 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Operating Profit
 
 
 
 
 
 
 
FLNA
$
906

 
$
835

 
$
1,734

 
$
1,615

QFNA
133

 
154

 
313

 
341

LAF
318

 
271

 
534

 
454

PAB
882

 
840

 
1,447

 
1,365

Europe
425

 
453

 
513

 
534

AMEA
524

 
165

 
708

 
313

Total division
3,188

 
2,718

 
5,249

 
4,622

Corporate Unallocated
 
 
 
 
 
 
 
Mark-to-market net (losses)/gains
(39
)
 
(79
)
 
(55
)
 
5

Merger and integration charges
—

 
(2
)
 
—

 
(2
)
Restructuring and impairment charges
(1
)
 
(3
)
 
(2
)
 
(1
)
Venezuela currency devaluation
—

 
—

 
(124
)
 
—

Other
(279
)
 
(257
)
 
(541
)
 
(525
)
 
$
2,869

 
$
2,377

 
$
4,527

 
$
4,099



11

 
Total Assets
 
6/15/13


12/29/12

FLNA
$
5,458

 
$
5,332

QFNA
1,027

 
966

LAF
4,903

 
4,993

PAB
31,639

 
30,899

Europe
19,121

 
19,218

AMEA
5,673

 
5,738

Total division
67,821

 
67,146

Corporate (a)
8,832

 
7,492


$
76,653

 
$
74,638

(a)
Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments and property, plant and equipment.

Note 2 - Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The provisions of this new guidance were effective prospectively as of the beginning of our 2013 fiscal year. Accordingly, we have included enhanced footnote disclosure for the 12 and 24 weeks ended June 15, 2013 in Note 9.
In July 2012, the FASB issued new accounting guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance were effective as of the beginning of our 2013 fiscal year. We do not expect the new guidance to have an impact on our 2013 impairment test results.
In December 2011, the FASB issued new disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about derivative instruments accounted for in accordance with the guidance on derivatives and hedging that are eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new disclosure requirements are effective as of the beginning of our 2014 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.
Note 3 - Restructuring, Impairment and Integration Charges

In the 12 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $19 million ($15 million after-tax or $0.01 per share) in conjunction with our multi-year productivity plan (Productivity Plan). In the 24 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $30 million ($23 million after-tax or $0.01 per share) in conjunction with our Productivity Plan. All of these net charges were recorded in selling, general and administrative expenses. The majority of cash payments related to these charges are expected to be paid by the end of 2013.
In the 12 weeks ended June 16, 2012, we incurred restructuring and impairment charges of $77 million ($57 million after-tax or $0.04 per share) in conjunction with our Productivity Plan. In the 24 weeks ended June 16,

12

2012, we incurred restructuring and impairment charges of $110 million ($80 million after-tax or $0.05 per share) in conjunction with our Productivity Plan. All of these net charges were recorded in selling, general and administrative expenses. All cash payments related to these charges were paid by the end of 2012.
The Productivity Plan includes actions in every aspect of our business that we believe will strengthen our complementary food, snack and beverage businesses by leveraging new technologies and processes across PepsiCo’s operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management. The Productivity Plan is expected to enhance PepsiCo’s cost-competitiveness, provide a source of funding for future brand-building and innovation initiatives, and serve as a financial cushion for potential macroeconomic uncertainty.
A summary of our Productivity Plan charges is as follows:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

FLNA
 
$
2

 
$
24

 
$
4

 
$
32

QFNA
 
1

 
1

 
—

 
6

LAF
 
1

 
6

 
5

 
12

PAB
 
5

 
35

 
5

 
43

Europe (a)
 
8

 
—

 
12

 
(1
)
AMEA
 
1

 
8

 
2

 
17

Corporate
 
1

 
3

 
2

 
1

 
 
$
19

 
$
77

 
$
30

 
$
110

(a)
Income balance represents adjustments of previously recorded amounts.
A summary of our Productivity Plan activity in 2013 is as follows: 
 
Severance and Other
Employee Costs
 
Asset
Impairment
 
Other
Costs
 
Total
Liability as of December 29, 2012
$
91

 
$
—

 
$
36

 
$
127

2013 restructuring charges
11

 
1

 
18

 
30

Cash payments
(50
)
 
—

 
(24
)
 
(74
)
Non-cash charges and other
(5
)
 
(1
)
 
(5
)
 
(11
)
Liability as of June 15, 2013
$
47

 
$
—

 
$
25

 
$
72

In the 12 weeks ended June 15, 2013, we recorded income for merger and integration of $1 million ($1 million after-tax with a nominal amount per share) related to our acquisition of Wimm-Bill-Dann Foods OJSC (WBD). This income was recorded in selling, general and administrative expenses in the Europe segment representing adjustments of previously recorded amounts. In the 24 weeks ended June 15, 2013, merger and integration charges were nominal. Cash payments related to these charges are expected to be paid by the end of 2013.

13

In the 12 weeks ended June 16, 2012, we incurred merger and integration charges of $3 million ($2 million after-tax with a nominal amount per share) related to our acquisition of WBD, including $1 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we incurred merger and integration charges of $5 million ($4 million after-tax with a nominal amount per share) related to our acquisition of WBD, including $3 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses. These charges were recorded in selling, general and administrative expenses. Cash payments related to these charges were paid out by the end of 2012.
A summary of our merger and integration activity in 2013 is as follows: 
 
Severance and Other
Employee Costs
 
Other Costs
 
Total
Liability as of December 29, 2012
$
18

 
$
6

 
$
24

2013 merger and integration charges (a)
(2
)
 
2

 
—

Cash payments
(13
)
 
(4
)
 
(17
)
Non-cash charges and other
(1
)
 
—

 
(1
)
Liability as of June 15, 2013
$
2

 
$
4

 
$
6

(a)
Income balance represents adjustments of previously recorded amounts.

Note 4 - Intangible Assets
 
 
 
6/15/13
 
12/29/12
Amortizable intangible assets, net

 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights

 
$
918

 
$
(75
)
 
$
843

 
$
931

 
$
(67
)
 
$
864

Reacquired franchise rights

 
108

 
(75
)
 
33

 
110

 
(68
)
 
42

Brands

 
1,396

 
(974
)
 
422

 
1,422

 
(980
)
 
442

Other identifiable intangibles

 
693

 
(286
)
 
407

 
736

 
(303
)
 
433

 
 
 
$
3,115

 
$
(1,410
)
 
$
1,705

 
$
3,199

 
$
(1,418
)
 
$
1,781




14

The change in the book value of nonamortizable intangible assets is as follows: 
 
Balance
 
Acquisitions/
(Divestitures)
 
Translation
and Other
 
Balance

12/29/12
 
 
 
6/15/13
FLNA

 

 

 

Goodwill
$
316

 
$
—

 
$
(4
)
 
$
312

Brands
31

 
—

 
(1
)
 
30


347

 
—

 
(5
)
 
342

 
 
 
 
 
 
 
 
QFNA

 

 

 

Goodwill
175

 
—

 
—

 
175

 
 
 
 
 
 
 
 
LAF

 

 

 

Goodwill
716

 
—

 
(14
)
 
702

Brands
223

 
—

 
(5
)
 
218


939

 
—

 
(19
)
 
920

 
 
 
 
 
 
 
 
PAB

 

 

 

Goodwill
9,988

 
18

 
(15
)
 
9,991

Reacquired franchise rights
7,337

 
4

 
(23
)
 
7,318

Acquired franchise rights
1,573

 
(8
)
 
(5
)
 
1,560

Brands
153

 
—

 
(2
)
 
151


19,051

 
14

 
(45
)
 
19,020

 
 
 
 
 
 
 
 
Europe

 

 

 

Goodwill
5,214

 
—

 
(199
)
 
5,015

Reacquired franchise rights
772

 
—

 
(30
)
 
742

Acquired franchise rights
223

 
—

 
(4
)
 
219

Brands
4,284

 
—

 
(190
)
 
4,094


10,493

 
—

 
(423
)
 
10,070

 
 
 
 
 
 
 
 
AMEA

 

 

 

Goodwill
562

 
(4
)
 
(34
)
 
524

Brands
148

 
—

 
(11
)
 
137


710

 
(4
)
 
(45
)
 
661

 
 
 
 
 
 
 
 
Total goodwill
16,971

 
14

 
(266
)
 
16,719

Total reacquired franchise rights
8,109

 
4

 
(53
)
 
8,060

Total acquired franchise rights
1,796

 
(8
)
 
(9
)
 
1,779

Total brands
4,839

 
—

 
(209
)
 
4,630


$
31,715

 
$
10

 
$
(537
)
 
$
31,188




15

Note 5 - Income Taxes

A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
6/15/13

 
12/29/12

Balance, beginning of year
$
2,425

 
$
2,167

Additions for tax positions related to the current year
109

 
275

Additions for tax positions from prior years
7

 
161

Reductions for tax positions from prior years
(99
)
 
(172
)
Settlement payments
(68
)
 
(17
)
Statute of limitations expiration
(19
)
 
(3
)
Translation and other
(7
)
 
14

Balance, end of period
$
2,348

 
$
2,425


Note 6 - Stock-Based Compensation

The following table summarizes our total stock-based compensation expense:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Stock-based compensation expense
 
$
72

 
$
69

 
$
149

 
$
125

Merger and integration charges
 
—

 
—

 
—

 
1

Restructuring and impairment benefits
 
—

 
—

 
—

 
(7
)
Total
 
$
72

 
$
69

 
$
149

 
$
119

Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
24 Weeks Ended
 
6/15/13

 
6/16/12

Expected life
6 years

 
6 years

Risk free interest rate
1.0
%
 
1.3
%
Expected volatility (a)
17
%
 
17
%
Expected dividend yield
2.7
%
 
3.0
%
(a)
Reflects movements in our stock price over the most recent historical period equivalent to the expected life.
For the 12 weeks ended June 15, 2013, our grants of stock options, restricted stock units (RSUs) and PepsiCo equity performance units (PEPUnits) were nominal. For the 24 weeks ended June 15, 2013, we granted 2.5 million stock options, 3.9 million RSUs and 0.4 million PEPUnits at a weighted-average grant price of $75.75 under the terms of our 2007 Long-Term Incentive Plan. In connection with the Productivity Plan, the grant of the 2012 annual equity award was delayed until the second quarter of 2012. Therefore, for the 12 and 24 weeks ended June 16, 2012, we granted 3.4 million stock options and 4.2 million RSUs at a weighted-average grant price of $66.50 and 0.4 million PEPUnits at a weighted-average grant price of $66.51 under the terms of our 2007 Long-Term Incentive Plan.



16

Note 7 - Pension and Retiree Medical Benefits

The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension
 
Retiree Medical
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
U.S.
 
International
 
 
Service cost
$
108

 
$
94

 
$
27

 
$
24

 
$
11

 
$
11

Interest cost
122

 
123

 
30

 
28

 
12

 
15

Expected return on plan assets
(190
)
 
(183
)
 
(40
)
 
(35
)
 
(6
)
 
(5
)
Amortization of prior service cost/(benefit)
5

 
4

 
1

 
1

 
(5
)
 
(6
)
Amortization of net losses
66

 
59

 
16

 
12

 
—

 
—

 
111

 
97

 
34

 
30

 
12

 
15

Settlement loss
—

 
—

 
1

 
3

 
—

 
—

Special termination benefits
2

 
—

 
—

 
—

 
—

 
—

Total expense
$
113

 
$
97

 
$
35

 
$
33

 
$
12

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 

 
24 Weeks Ended
 
Pension
 
Retiree Medical
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
U.S.
 
International
 
 
Service cost
$
216

 
$
189

 
$
49

 
$
42

 
$
21

 
$
23

Interest cost
243

 
246

 
52

 
48

 
25

 
30

Expected return on plan assets
(380
)
 
(367
)
 
(70
)
 
(61
)
 
(12
)
 
(10
)
Amortization of prior service cost/(benefit)
9

 
8

 
1

 
1

 
(10
)
 
(12
)
Amortization of net losses
133

 
119

 
29

 
22

 
—

 
—


221

 
195

 
61

 
52

 
24

 
31

Settlement/curtailment (gain)/loss
—

 
(7
)
 
1

 
3

 
—

 
—

Special termination benefits
3

 
4

 
—

 
—

 
—

 
4

Total expense
$
224

 
$
192

 
$
62

 
$
55

 
$
24

 
$
35


During the first quarter of 2013, we made discretionary contributions of $13 million to our international pension plans. During the first quarter of 2012, we made discretionary contributions of $860 million to our U.S. pension plans and $140 million to our U.S. retiree medical plans.

  
Note 8 - Debt Obligations and Commitments

In the first quarter of 2013, we issued:
•
$625 million of floating rate notes maturing in February 2016, which bear interest at a rate equal to the three-month London Inter-Bank Offered Rate (LIBOR) plus 21 basis points;
•
$625 million of 0.700% senior notes maturing in February 2016; and
•
$1.250 billion of 2.750% senior notes maturing in March 2023.

17

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

In the second quarter of 2013, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 10, 2018. Subsequent to the end of the second quarter, we increased commitments under this agreement. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $2.925 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $3.5 billion. Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.

Also, in the second quarter of 2013, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 9, 2014. Subsequent to the end of the second quarter, we increased commitments under this agreement. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $2.925 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $3.5 billion. 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 then effective termination date.
The Five-Year Credit Agreement and the 2013 364-Day Credit Agreement together replaced our $2.925 billion Four-Year Credit Agreement dated as of June 14, 2011 and our $2.925 billion 364-Day Credit Agreement dated as of June 14, 2011. Funds borrowed under the Five-Year Credit Agreement and the 2013 364-Day Credit Agreement may be used for general corporate purposes of PepsiCo and our subsidiaries.
As of June 15, 2013, we had $2.4 billion of commercial paper outstanding.
Long-Term Contractual Commitments (a) 
 
Payments Due by Period
 
Total

 
2013

 
2014 –
2015

 
2016 –
2017

 
2018 and
beyond

Long-term debt obligations (b)
$
22,681

 
$
—

 
$
3,792

 
$
4,355

 
$
14,534

Interest on debt obligations (c)
8,698

 
511

 
1,560

 
1,321

 
5,306

Operating leases
1,993

 
256

 
700

 
396

 
641

Purchasing commitments (d)
1,959

 
449

 
1,082

 
208

 
220

Marketing commitments (d)
2,245

 
163

 
630

 
492

 
960

 
$
37,576

 
$
1,379

 
$
7,764

 
$
6,772

 
$
21,661

 
 
 
 
 
 
 
 
 
 
(a)
Based on quarter-end foreign exchange rates.
(b)
Excludes $3,656 million related to current maturities of long-term debt, $273 million related to the increase in carrying value of long-term debt reflecting the gains on our fair value interest rate swaps and $258 million related to the fair value step-up of debt acquired in connection with our acquisitions of The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS) in February 2010.
(c)
Interest payments on floating-rate debt are estimated using interest rates effective as of June 15, 2013.
(d)
Primarily reflects non-cancelable commitments as of June 15, 2013.

Most long-term contractual commitments, except for our long-term debt obligations, are not recorded on our balance sheet. Operating leases primarily represent building leases. Non-cancelable purchasing commitments are primarily for packaging materials and oranges and orange juice. Non-cancelable marketing commitments are primarily for sports marketing. Bottler funding to independent bottlers is not reflected in our long-term contractual commitments as it is negotiated on an annual basis. Accrued liabilities for pension and retiree medical plans are not reflected in our long-term contractual commitments because they do not represent

18

expected future cash outflows. See Note 7 for additional information regarding our pension and retiree medical obligations.

Note 9 - Accumulated Other Comprehensive Loss

The following table summarizes the reclassifications from Accumulated Other Comprehensive Loss to the Condensed Consolidated Statement of Income for the 12 and 24 weeks ended June 15, 2013:
 
 
12 Weeks Ended
 
24 Weeks Ended
 
 
 
 
6/15/13
 
6/15/13
 
 
 
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Condensed Consolidated Statement of Income
 
 
 
 
 
 
 
Losses/(gains) on cash flow hedges:
 
 
 
 
 
 
    Foreign exchange contracts
 
$
1

 
$
4

 
Cost of sales
    Interest rate derivatives
 
(18
)
 
33

 
Interest expense
    Commodity contracts
 
8

 
14

 
Cost of sales
    Commodity contracts
 
1

 
—

 
Selling, general and administrative expenses
    Total before tax
 
(8
)
 
51

 
 
    Tax amounts
 
2

 
(19
)
 
 
    (Gains)/losses after tax
 
$
(6
)
 
$
32

 
 
 
 
 
 
 
 
 
Amortization of pension and retiree medical items:
 
 
 
 
 
 
    Net prior service cost (a)
 
$
1

 
$
—

 
 
    Net actuarial losses (a)
 
83

 
163

 
 
    Total before tax
 
84

 
163

 
 
    Tax amounts
 
(27
)
 
(54
)
 
 
    Losses after tax
 
$
57

 
$
109

 
 
 
 
 
 
 
 
 
Total net losses reclassified for the period, net of tax
 
$
51

 
$
141

 


(a)
These items are included in the components of net periodic benefit cost for pension and retiree medical plans (see Note 7 for additional details).

Note 10 - Financial Instruments

We are exposed to market risks arising from adverse changes in:
•
commodity prices, affecting the cost of our raw materials and energy;
•
foreign exchange risks and currency restrictions; and
•
interest rates.

19

In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity, foreign exchange or interest rate risks are classified as operating activities in the Condensed Consolidated Statement of Cash Flows. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our business risks.
For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. If the derivative instrument is terminated, we continue to defer the related gain or loss and then include it as a component of the cost of the underlying hedged item. Upon determination that the underlying hedged item will not be part of an actual transaction, we recognize the related gain or loss on the hedge in net income immediately.
We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.
Commodity Prices
We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements and derivatives. In addition, risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for agricultural products, energy and metals. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. Ineffectiveness was not material for all periods presented. During the next 12 months, we expect to reclassify net losses of $31 million related to these hedges from accumulated other comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting are marked to market each period and reflected in our income statement.
Our open commodity derivative contracts that qualify for hedge accounting had a face value of $506 million as of June 15, 2013 and $538 million as of June 16, 2012.
Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $988 million as of June 15, 2013 and $563 million as of June 16, 2012.

20

Foreign Exchange
We are also exposed to foreign currency risk from foreign currency purchases and foreign currency assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of derivatives, primarily forward contracts with terms of no more than two years. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.
Our foreign currency derivatives had a total face value of $3.0 billion as of June 15, 2013 and $2.6 billion as of June 16, 2012. During the next 12 months, we expect to reclassify net gains of $21 million related to foreign currency contracts that qualify for hedge accounting from accumulated other comprehensive loss into net income. Additionally, ineffectiveness for our foreign currency hedges was not material for all periods presented. For foreign currency derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no net material impact on earnings.
Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.
The notional amounts of the interest rate derivative instruments outstanding as of June 15, 2013 and June 16, 2012 were $7.7 billion and $7.3 billion, respectively. For those interest rate derivative instruments that qualify for cash flow hedge accounting, any ineffectiveness is recorded immediately. Ineffectiveness was not material for all periods presented. During the next 12 months, we expect to reclassify net losses of $23 million related to these hedges from accumulated other comprehensive loss into net income.
As of June 15, 2013 and December 29, 2012, approximately 27% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates.

21

Fair Value Measurements
The fair values of our financial assets and liabilities as of June 15, 2013 and June 16, 2012 are categorized as follows:
 
2013
 
2012
 
Assets (a)
 
Liabilities (a)
 
Assets (a)
 
Liabilities (a)
Available-for-sale securities (b)
$
95

 
$
—

 
$
62

 
$
—

Short-term investments – index funds (c)
$
172

 
$
—

 
$
158

 
$
—

Prepaid forward contracts (d)
$
39

 
$
—

 
$
40

 
$
—

Deferred compensation (e)
$
—

 
$
489

 
$
—

 
$
501

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
Interest rate derivatives (f)
$
224

 
$
1

 
$
289

 
$
—

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Foreign exchange contracts (g)
$
28

 
$
5

 
$
41

 
$
14

Interest rate derivatives (f)
—

 
6

 
—

 
—

Commodity contracts (h)
3

 
38

 
—

 
79

 
$
31

 
$
49

 
$
41

 
$
93

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts (g)
$
16

 
$
26

 
$
17

 
$
16

Interest rate derivatives (f)
98

 
124

 
124

 
156

Commodity contracts (h)
6

 
71

 
17

 
72

 
$
120

 
$
221

 
$
158

 
$
244

Total derivatives at fair value
$
375

 
$
271

 
$
488

 
$
337

Total
$
681

 
$
760

 
$
748

 
$
838

 
 
 
 
 
 
 
 
(a)
Financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets, with the exception of available-for-sale securities and short-term investments, which are classified as short-term investments. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.
(b)
Based on the price of common stock. Categorized as a Level 1 asset.
(c)
Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability. Categorized as a Level 1 asset.
(d)
Based primarily on the price of our common stock.
(e)
Based on the fair value of investments corresponding to employees’ investment elections. As of June 15, 2013 and June 16, 2012, $7 million and $11 million, respectively, are categorized as Level 1 liabilities. The remaining balances are categorized as Level 2 liabilities.
(f)
Based on LIBOR forward rates and recently reported market transactions of spot and forward rates.
(g)
Based on recently reported market transactions of spot and forward rates.
(h)
Based on recently reported market transactions, primarily swap arrangements.
The fair value of our debt obligations as of June 15, 2013 was $31 billion, based upon prices of similar instruments in the marketplace.


22

The effective portion of the pre-tax losses/(gains) on our derivative instruments are categorized in the tables below.
 
12 Weeks Ended
 
Fair Value/Non-
designated Hedges
 
Cash Flow Hedges
 
Losses/(Gains)
Recognized in
Income Statement (a)
 
(Gains)/Losses
Recognized in
Accumulated Other
Comprehensive Loss
 
(Gains)/Losses
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement (b)
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Foreign exchange contracts
$
5

 
$
3

 
$
(5
)
 
$
(33
)
 
$
1

 
$
5

Interest rate derivatives
24

 
(19
)
 
(18
)
 
—

 
(18
)
 
5

Commodity contracts
38

 
72

 
18

 
55

 
9

 
16

Total
$
67

 
$
56

 
$
(5
)
 
$
22

 
$
(8
)
 
$
26


 
24 Weeks Ended
 
Fair Value/Non-
designated Hedges
 
Cash Flow Hedges
 
Losses/(Gains)
Recognized in
Income Statement (a)
 
Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
 
Losses
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement (b)
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Foreign exchange contracts
$
5

 
$
(7
)
 
$
(33
)
 
$
(4
)
 
$
4

 
$
2

Interest rate derivatives
51

 
8

 
12

 
4

 
33

 
9

Commodity contracts
49

 
23

 
39

 
37

 
14

 
27

Total
$
105

 
$
24

 
$
18

 
$
37

 
$
51

 
$
38


 
(a)
Interest rate derivatives gains/losses are primarily from fair value hedges and are included in interest expense. These gains/losses are substantially offset by increases/decreases in the value of the underlying debt, which are also included in interest expense. Foreign exchange contracts gains/losses are included in selling, general and administrative expenses. Commodity contracts gains/losses are primarily included in cost of sales.
(b)
Interest rate derivative losses are included in interest expense. All other gains/losses are primarily included in cost of sales.


23

Note 11 - Net Income Attributable to PepsiCo per Common Share

The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:
 
12 Weeks Ended
 
6/15/13

6/16/12
 
Income

Shares (a)

Income

Shares (a)
Net income attributable to PepsiCo
$
2,010




$
1,488



Preferred shares:







Dividends
(1
)



(1
)


Redemption premium
(2
)



(2
)


Net income available for PepsiCo common shareholders
$
2,007


1,548


$
1,485


1,563

Basic net income attributable to PepsiCo per common share
$
1.30




$
0.95



Net income available for PepsiCo common shareholders
$
2,007


1,548


$
1,485


1,563

Dilutive securities:







Stock options and RSUs (b)
—


18


—


17

   Employee stock ownership plan (ESOP) convertible
      preferred stock
3


1


3


1

Diluted
$
2,010


1,567


$
1,488


1,581

Diluted net income attributable to PepsiCo per common share
$
1.28




$
0.94



 
24 Weeks Ended
 
6/15/13
 
6/16/12
 
Income
 
Shares (a)
 
Income
 
Shares (a)
Net income attributable to PepsiCo
$
3,085

 
 
 
$
2,615

 
 
Preferred shares:
 
 
 
 
 
 
 
Dividends
(1
)
 
 
 
(1
)
 
 
Redemption premium
(4
)
 
 
 
(3
)
 
 
Net income available for PepsiCo common shareholders
$
3,080

 
1,546

 
$
2,611

 
1,565

Basic net income attributable to PepsiCo per common share
$
1.99

 
 
 
$
1.67

 
 
Net income available for PepsiCo common shareholders
$
3,080

 
1,546

 
$
2,611

 
1,565

Dilutive securities:
 
 
 
 
 
 
 
Stock options and RSUs (b)
—

 
18

 
—

 
17

ESOP convertible preferred stock
5

 
1

 
4

 
1

Diluted
$
3,085

 
1,565

 
$
2,615

 
1,583

Diluted net income attributable to PepsiCo per common share
$
1.97

 
 
 
$
1.65

 
 
(a)
Weighted-average common shares outstanding (in millions).
(b)
For the 12 weeks in 2013, the calculation of diluted earnings per common share was unadjusted because there were no out-of-the-money options during the period. Options to purchase 1.3 million shares for the 24 weeks in 2013 were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. These out-of-the-money options had an average exercise price of $75.69. Options to purchase 10.2 million and 19.9 million shares, respectively, for the 12 and 24 weeks in 2012 were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. Out-of-the-money options for the 12 and 24 weeks in 2012 had average exercise prices of $68.93 and $67.44, respectively.

24

Note 12 - Divestitures

Suntory Holdings Limited

During our second quarter, as part of the refranchising of our beverage business in Vietnam, we completed a transaction with Suntory Holdings Limited. Under the terms of the agreement, we sold a controlling interest in our Vietnam bottling operations. The new alliance will serve as the franchise bottler for both companies. In the 12 and 24 weeks ended June 15, 2013, we recorded a pre- and after-tax gain of $137 million (or $0.09 per share) associated with this transaction.
Tingyi-Asahi Beverages Holding Co. Ltd.
On March 31, 2012, we completed a transaction with Tingyi. Under the terms of the agreement, we contributed our company-owned and joint venture bottling operations in China to Tingyi’s beverage subsidiary, TAB, and received as consideration a 5% indirect equity interest in TAB. As a result of this transaction, TAB is now our franchise bottler in China. We also have a call option to increase our indirect holding in TAB to 20% by 2015. We recorded restructuring and other charges of $150 million ($176 million after-tax or $0.11 per share), primarily consisting of employee-related charges, in our 2012 results, of which $137 million ($163 million after-tax or $0.10 per share) was recorded in the 12 and 24 weeks ended June 16, 2012. This charge is reflected in items affecting comparability. See “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Tabular dollars are 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. Percentage changes are based on unrounded amounts.

Our Critical Accounting Policies
Sales Incentives and Advertising and Marketing Costs
We offer sales incentives and discounts through various programs to customers and consumers. These incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs, and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year incurred.
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 and volume, as applicable, to our forecasted annual gross revenue and volume, as applicable. Based on our review of the forecasts at each interim period, any changes in

25

estimates and the related allocation of sales incentives are recognized in the interim period as they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for other marketplace spending, which includes the costs of advertising and other marketing activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.

Our Business Risks

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “believe,” “expect,” “intend,” “estimate,” “project,” “anticipate,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statements. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
Our operations outside of the U.S. generated 47% of our net revenue in the 24 weeks ended June 15, 2013. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During 2012 and the first half of 2013, amid a continued recessionary economic environment in Europe, certain countries continued to experience debt and credit issues as well as currency fluctuations. In addition, political and civil unrest in the Middle East in the first half of 2013 has led to an increasingly challenging operating environment in this region. We continue to monitor the economic and operating environment in these regions closely and have identified actions to potentially mitigate the unfavorable impact, if any, on our 2013 second half financial results. In the 12 weeks ended June 15, 2013, unfavorable foreign currency decreased net revenue by 1.5 percentage points, primarily due to depreciation of the Venezuelan bolivar fuerte (bolivar), the Russian ruble, the Brazilian real and the Egyptian pound, partially offset by appreciation of the Mexican peso. In the 24 weeks ended June 15, 2013, unfavorable foreign currency movements decreased net revenue growth by 1 percentage point, primarily due to depreciation of the Venezuelan bolivar, the Brazilian real, the Russian ruble and the Egyptian pound, partially offset by appreciation of the Mexican peso. Currency declines against the U.S. dollar which are not offset could adversely impact our future results.

The results of our Venezuelan businesses have been reported under hyperinflationary accounting since the beginning of our 2010 fiscal year, at which time the functional currency of our Venezuelan entities was changed from the bolivar to the U.S. dollar. In 2013 and 2012, the majority of our transactions and net monetary assets qualified to be remeasured at the official exchange rate of obtaining U.S. dollars for dividends through the government-operated Foreign Exchange Administration Board (CADIVI). Effective February 2013, the Venezuelan government devalued the bolivar by resetting the official exchange rate from 4.3 bolivars per dollar to 6.3 bolivars per dollar. Additionally, the Transaction System for Foreign Currency

26

Denominated Securities (SITME) administered by the Central Bank of Venezuela for non-CADIVI transactions was eliminated. To replace the SITME, the government announced a new auction-based foreign exchange system (SICAD) that will function as the official channel to acquire dollars, for non-CADIVI transactions, at a rate higher than the official exchange rate. The devaluation resulted in an after-tax net charge of $111 million in the first quarter of 2013 associated with the remeasurement of bolivar-denominated net monetary assets reflected in items affecting comparability (see “Items Affecting Comparability”). We expect that the impact of this devaluation on PepsiCo's 2013 net revenue and operating profit will not be material. We continue to use available options to obtain U.S. dollars to meet our operational needs.
We expect to be able to reduce the impact of volatility in our raw material and energy costs through our hedging strategies and ongoing sourcing initiatives.
See Note 10 to our condensed consolidated financial statements for further discussion of our derivative instruments, including their fair values as of June 15, 2013 and June 16, 2012. Cautionary statements included in "Item 1A. Risk Factors and in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks," included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, should be considered when evaluating our trends and future results.
Results of Operations – Consolidated Review

Items Affecting Comparability
Our reported financial results are impacted by the following items in each of the following periods: 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
6/15/13

 
6/16/12

Operating profit
 
 
 
 
 
 
 
Mark-to-market net (losses)/gains
$
(39
)

$
(79
)
 
$
(55
)
 
$
5

Merger and integration charges
$
1


$
(3
)
 
$
—

 
$
(5
)
Restructuring and impairment charges
$
(19
)

$
(77
)
 
$
(30
)
 
$
(110
)
Venezuela currency devaluation
$
—


$
—

 
$
(111
)
 
$
—

Restructuring and other charges related to the transaction with Tingyi
$
—


$
(137
)
 
$
—

 
$
(137
)
Net income attributable to PepsiCo



 
 
 
 
Mark-to-market net (losses)/gains
$
(26
)

$
(55
)
 
$
(37
)
 
$
5

Merger and integration charges
$
1


$
(2
)
 
$
—

 
$
(4
)
Restructuring and impairment charges
$
(15
)

$
(57
)
 
$
(23
)
 
$
(80
)
Venezuela currency devaluation
$
—


$
—

 
$
(111
)
 
$
—

Restructuring and other charges related to the transaction with Tingyi
$
—


$
(163
)
 
$
—

 
$
(163
)
Net income attributable to PepsiCo per common share – diluted



 
 
 
 
Mark-to-market net (losses)/gains
$
(0.02
)

$
(0.04
)
 
$
(0.02
)
 
$
—

Merger and integration charges
$
—


$ ( — )
 
$
—

 
$ ( — )
Restructuring and impairment charges
$
(0.01
)

$
(0.04
)
 
$
(0.01
)
 
$
(0.05
)
Venezuela currency devaluation
$
—


$
—

 
$
(0.07
)
 
$
—

Restructuring and other charges related to the transaction with Tingyi
$
—


$
(0.10
)
 
$
—

 
$
(0.10
)


27

Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in net income. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.
In the 12 weeks ended June 15, 2013, we recognized $39 million ($26 million after-tax or $0.02 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses. In the 24 weeks ended June 15, 2013, we recognized $55 million ($37 million after-tax or $0.02 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses.
In the 12 weeks ended June 16, 2012, we recognized $79 million ($55 million after-tax or $0.04 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we recognized $5 million ($5 million after-tax with a nominal amount per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.
Merger and Integration Charges

In the 12 weeks ended June 15, 2013, we recorded income for merger and integration of $1 million ($1 million after-tax with a nominal amount per share) in the Europe segment related to our acquisition of WBD. In the 24 weeks ended June 15, 2013, merger and integration charges were nominal.
In the 12 weeks ended June 16, 2012, we incurred merger and integration charges of $3 million ($2 million after-tax with a nominal amount per share) related to our acquisition of WBD, including $1 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we incurred merger and integration charges of $5 million ($4 million after-tax with a nominal amount per share) related to our acquisition of WBD, including $3 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses.
Restructuring and Impairment Charges
In the 12 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $19 million ($15 million after-tax or $0.01 per share) in conjunction with our Productivity Plan, including $2 million recorded in the FLNA segment, $1 million in the QFNA segment, $1 million recorded in the LAF segment, $5 million recorded in the PAB segment, $8 million recorded in the Europe segment, $1 million recorded in the AMEA segment and $1 million recorded in corporate unallocated expenses. In the 24 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $30 million ($23 million after-tax or $0.01 per share) in conjunction with our Productivity Plan, including $4 million recorded in the FLNA segment, $5 million recorded in the LAF segment, $5 million recorded in the PAB segment, $12 million recorded in the Europe segment, $2 million recorded in the AMEA segment and $2 million recorded in corporate unallocated expenses.
In the 12 weeks ended June 16, 2012, we incurred restructuring and impairment charges of $77 million ($57 million after-tax or $0.04 per share) in conjunction with our Productivity Plan, including $24 million recorded in the FLNA segment, $1 million recorded in the QFNA segment, $6 million recorded in the LAF segment, $35 million recorded in the PAB segment, $8 million recorded in the AMEA segment and $3 million recorded in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we incurred restructuring and impairment charges of $110 million ($80 million after-tax or $0.05 per share) in conjunction with our

28

Productivity Plan, including $32 million recorded in the FLNA segment, $6 million recorded in the QFNA segment, $12 million recorded in the LAF segment, $43 million recorded in the PAB segment, $17 million recorded in the AMEA segment, $1 million recorded in corporate unallocated expenses and income of $1 million recorded in the Europe segment representing adjustments of previously recorded amounts.
In conjunction with our Productivity Plan, we expect to incur pre-tax charges of approximately $910 million, $383 million of which was reflected in our 2011 results, $279 million of which was reflected in our 2012 results, $30 million of which was reflected in our results through the second quarter of 2013, with approximately $115 million of additional charges during the remainder of 2013 and the balance of which will be reflected in our 2014 through 2015 results. These charges will consist of approximately $505 million of severance and other employee-related costs; approximately $325 million for other costs, including consulting-related costs and the termination of leases and other contracts; and approximately $80 million for asset impairments (all non-cash) resulting from plant closures and related actions. These charges resulted in cash expenditures of $30 million in 2011, $343 million in 2012, $74 million through the second quarter of 2013, with approximately $110 million of additional cash expenditures expected in the remainder of 2013 and the balance of approximately $155 million expected in 2014 through 2015. See Note 3 to our condensed consolidated financial statements. The Company continues to explore opportunities to further drive productivity.
Venezuela Currency Devaluation
In the 24 weeks ended June 15, 2013, we recorded a $111 million net charge related to the devaluation of the bolivar for our Venezuela businesses. $124 million of this charge was recorded in corporate unallocated expenses, with the balance (equity income of $13 million) recorded in our PAB segment. In total, this net charge had an after-tax impact of $111 million or $0.07 per share.
Restructuring and Other Charges Related to the Transaction with Tingyi
In the 12 and 24 weeks ended June 16, 2012, we recorded restructuring and other charges of $137 million ($163 million after-tax or $0.10 per share) related to the transaction with Tingyi.
Non-GAAP Measures
Certain measures contained in this Form 10-Q are financial measures that are adjusted for items affecting comparability (see “Items Affecting Comparability” for a detailed list and description of each of these items), as well as, in certain instances, adjusted for foreign exchange. These measures are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Items adjusted for currency assume foreign exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates. We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our ongoing performance and reflect how management evaluates our operational results and trends. These measures are not, and should not be viewed as, a substitute for U.S. GAAP reporting measures. See also “Organic Revenue Growth” and “Management Operating Cash Flow.”

29

Volume

Since our divisions each use different measures of physical unit volume, a common servings metric is necessary to reflect our consolidated physical unit volume. For the 12 and 24 weeks ended June 15, 2013, total servings increased 4%. For the 12 and 24 weeks ended June 16, 2012, total servings increased 2%. 2013 and 2012 servings growth reflects adjustments to the base years (2012 and 2011) for divestitures that occurred in 2012 and 2011, as applicable.

We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8-ounce-case metric. Most of our beverage volume is sold by our company-owned and franchise-owned bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our direct shipments to retailers and independent distributors. We report most of our international beverage volume on a monthly basis. Our second quarter includes beverage volume outside of North America for March, April and May. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to independent bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.

Consolidated Results
Total Net Revenue and Operating Profit
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12

 
Change
Total net revenue
$
16,807

 
$
16,458

 
2
 %
 
$
29,388

 
$
28,886

 
2
 %
Operating profit


 


 

 


 


 

FLNA
$
906

 
$
835

 
8
 %
 
$
1,734

 
$
1,615

 
7
 %
QFNA
133

 
154

 
(14
)%
 
313

 
341

 
(8
)%
LAF
318

 
271

 
17
 %
 
534

 
454

 
18
 %
PAB
882

 
840

 
5
 %
 
1,447

 
1,365

 
6
 %
Europe
425

 
453

 
(6
)%
 
513

 
534

 
(4
)%
AMEA
524

 
165

 
217
 %
 
708

 
313

 
126
 %
Corporate unallocated


 


 

 


 


 

Mark-to-market net (losses)/gains
(39
)
 
(79
)
 
(51
)%
 
(55
)
 
5

 
n/m

Merger and integration charges
—

 
(2
)
 
n/m

 
—

 
(2
)
 
n/m

Restructuring and impairment charges
(1
)
 
(3
)
 
(78
)%
 
(2
)
 
(1
)
 
178
 %
Venezuela currency devaluation
—

 
—

 
—

 
(124
)
 
—

 
n/m

Other
(279
)
 
(257
)
 
9
 %
 
(541
)
 
(525
)
 
3
 %
Total operating profit
$
2,869

 
$
2,377

 
21
 %
 
$
4,527

 
$
4,099

 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
Total operating profit margin
17.1
%
 
14.4
%
 
2.7

 
15.4
%
 
14.2
%
 
1.2

n/m = not meaningful
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.

30

12 Weeks
On a reported basis, total operating profit increased 21% and operating margin increased 2.7 percentage points. Operating profit performance was primarily driven by items affecting comparability (see “Items Affecting Comparability”), which increased operating profit by 11 percentage points and increased total operating margin by 1.5 percentage points. Additionally, operating profit performance benefited from effective net pricing and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases including strategic initiatives related to capacity and capability, as well as higher advertising and marketing expenses. The gain from structural changes in the current quarter due to the beverage refranchising in our Vietnam business increased reported operating profit by 6 percentage points (see Note 12 to our condensed consolidated financial statements). This gain was partially offset by incremental investments into our business, primarily in the Europe, LAF and QFNA segments and in corporate unallocated expenses, which collectively reduced reported operating profit growth by 2 percentage points. We intend to continue to make similar incremental investments into our business during the second half of 2013, which we expect will fully offset the impact of the refranchising gain for the full year. Net commodity costs increased slightly compared to the prior year period, primarily attributable to inflation in the Europe and LAF segments partially offset by deflation in the PAB segment.
24 Weeks
On a reported basis, total operating profit increased 10% and operating margin increased 1.2 percentage points. Operating profit performance was primarily driven by effective net pricing, planned cost reductions across a number of expense categories and volume growth, partially offset by certain operating cost increases including strategic initiatives related to capacity and capability, as well as higher advertising and marketing expenses. Items affecting comparability (see “Items Affecting Comparability”) increased operating profit by 2 percentage points and increased total operating margin by 0.2 percentage points. The gain from structural changes in the current quarter due to the beverage refranchising in our Vietnam business increased reported operating profit by over 3 percentage points. This gain was partially offset by incremental investments into our business, primarily in the Europe, LAF and QFNA segments and in corporate unallocated expenses, which collectively reduced reported operating profit growth by 1 percentage point. Net commodity costs decreased slightly compared to the prior year period, primarily attributable to deflation in the PAB segment, partially offset by inflation in the Europe and LAF segments.

31

Other Consolidated Results 
 
12 Weeks Ended
 
24 Weeks Ended
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12
 
Change
Interest expense, net
$
(190
)
 
$
(208
)
 
$
18

 
$
(377
)
 
$
(383
)
 
$
6

Tax rate
24.4
%
 
30.8
%
 
 
 
25.0
%
 
29.1
%
 
 
Net income attributable to PepsiCo
$
2,010

 
$
1,488

 
35
%
 
$
3,085

 
$
2,615

 
18
%
Net income attributable to PepsiCo per common share - diluted
$
1.28

 
$
0.94

 
36
%
 
$
1.97

 
$
1.65

 
19
%
Mark-to-market net losses
0.02

 
0.04

 
 
 
0.02

 
—

 
 
Merger and integration charges
—

 
—

 
 
 
—

 
—

 
 
Restructuring and impairment charges
0.01

 
0.04

 
 
 
0.01

 
0.05

 
 
Venezuela currency devaluation
—

 
—

 
 
 
0.07

 
—

 
 
Restructuring and other charges related to the transaction with Tingyi
—

 
0.10

 
 
 
—

 
0.10

 
 
Net income attributable to PepsiCo per common share - diluted, excluding above items (a)
$
1.31

 
$
1.12

 
17
%
 
$
2.08

(b) 
$
1.81

(b) 
15
%
Impact of foreign exchange translation
 
 
 
 
2

 
 
 
 
 
2

Growth in net income attributable to PepsiCo per common share - diluted, excluding above items, on a constant currency basis (a)
 
 
 
 
19
%
 
 
 
 
 
17
%
(a)   See “Non-GAAP Measures.”
(b)   Does not sum due to rounding.
12 Weeks
Net interest expense decreased $18 million, primarily reflecting gains in the market value of investments used to economically hedge a portion of our deferred compensation costs.
The reported tax rate decreased 6.4 percentage points compared to the prior year, primarily due to the favorable resolution of certain tax matters in the quarter and the lapping of the tax impact of restructuring and other charges related to the transaction with Tingyi in 2012.
Net income attributable to PepsiCo increased 35% and net income attributable to PepsiCo per common share increased 36%. Items affecting comparability (see “Items Affecting Comparability”) increased both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 19 percentage points.

24 Weeks
Net interest expense decreased $6 million, primarily reflecting gains in the market value of investments used to economically hedge a portion of our deferred compensation costs and an increase in interest income resulting from higher average cash and cash equivalents balances, partially offset by increased interest expense reflecting higher average debt balances.
The reported tax rate decreased 4.1 percentage points compared to the prior year, primarily due to favorable resolution of certain tax matters, the reversal of international tax reserves due to the expiration of a statute of limitations and the lapping of the tax impact of restructuring and other charges related to the transaction with Tingyi in 2012. These decreases were partially offset by the lapping of a 2012 tax benefit related to the pre-payment of Medicare subsidy liabilities and the impact of the 2013 Venezuela devaluation.

32

Net income attributable to PepsiCo increased 18% and net income attributable to PepsiCo per common share increased 19%. Items affecting comparability (see “Items Affecting Comparability”) increased both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 4 percentage points.

Results of Operations – Division Review
The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Accordingly, 2013 volume growth measures reflect an adjustment to the base year (2012) for divestitures that occurred in 2012. See “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding non-GAAP measures.
Furthermore, 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,” except as otherwise noted, 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.
Net Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12 Weeks Ended
 
FLNA
 
QFNA
 
LAF
 
PAB
 
Europe
 
AMEA
 
Total
6/15/13
 
$
3,332

 
$
577

 
$
2,116

 
$
5,260

 
$
3,653

 
$
1,869

 
$
16,807

6/16/12
 
$
3,193

 
$
583

 
$
1,948

 
$
5,352

 
$
3,617

 
$
1,765

 
$
16,458

% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Volume (a)
 
2
%
 
1
 %
 
1
 %
 
(4.5
)%
 
2
 %
 
7
 %
 
—
 %
Effective net pricing (b)
 
2

 
(2
)
 
10

 
3

 
2

 
7

 
4

Foreign exchange translation
 
—

 
—

 
(3
)
 
(0.5
)
 
(3
)
 
(3
)
 
(1.5
)
Acquisitions and divestitures
 
—

 
—

 
—

 
—

 
—

 
(6
)
 
(1
)
Reported Growth (c)
 
4
%
 
(1
)%
 
9
 %
 
(2
)%
 
1
 %
 
6
 %
 
2
 %

33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24 Weeks Ended
 
FLNA
 
QFNA
 
LAF
 
PAB
 
Europe
 
AMEA
 
Total
6/15/13
 
$
6,455


$
1,211


$
3,483


$
9,680


$
5,595


$
2,964


$
29,388

6/16/12
 
$
6,203

 
$
1,206

 
$
3,183

 
$
9,800

 
$
5,462

 
$
3,032

 
$
28,886

% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Volume (a)
 
3
%
 
2
 %
 
1
 %
 
(3.5
)%
 
2
 %
 
10
 %
 
1
 %
Effective net pricing (b)
 
1

 
(1
)
 
11

 
3

 
2

 
4

 
3

Foreign exchange translation
 
—

 
—

 
(3
)
 
—

 
(2
)
 
(2
)
 
(1
)
Acquisitions and divestitures
 
—

 
—

 
—

 
—

 
—

 
(14
)
 
(1.5
)
Reported Growth (c)
 
4
%
 
0.5
 %
 
9
 %
 
(1
)%
 
2
 %
 
(2
)%
 
2
 %
(a)
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. Our net revenue excludes nonconsolidated joint venture volume, and, for our beverage businesses, is based on CSE.
(b)
Includes 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.
(c)
Amounts may not sum due to rounding.

Organic Revenue Growth
Organic revenue growth is a significant measure that we use to monitor net revenue performance. However, it is not a measure provided by accounting principles generally accepted in the U.S. Therefore, this measure is not, and should not be viewed as, a substitute for U.S. GAAP net revenue growth. In order to compute our organic revenue growth results, we exclude the impact of acquisitions and divestitures and foreign exchange translation from reported net revenue growth. See also “Non-GAAP Measures.” 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12 Weeks Ended 6/15/13
 
FLNA
 
QFNA
 
LAF
 
PAB
 
Europe
 
AMEA
 
Total
Reported Growth
 
4
%
 
(1
)%
 
9
%
 
(2
)%
 
1
%
 
6
%
 
2
%
% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange translation
 
—

 
—

 
3

 
0.5

 
3

 
3

 
1.5

Acquisitions and divestitures
 
—

 
—

 
—

 
—

 
—

 
6

 
1

Organic Growth (a)
 
4.5
%
 
(1
)%
 
12
%
 
(1
)%
 
4
%
 
14
%
 
4
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24 Weeks Ended 6/15/13
 
FLNA
 
QFNA
 
LAF
 
PAB
 
Europe
 
AMEA
 
Total
Reported Growth
 
4
%
 
0.5
%
 
9
%
 
(1
)%
 
2
%
 
(2
)%
 
2
%
% Impact of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange translation
 
—

 
—

 
3

 
—

 
2

 
2

 
1

Acquisitions and divestitures
 
—

 
—

 
—

 
—

 
—

 
14

 
1.5

Organic Growth (a)
 
4
%
 
1
%
 
13
%
 
(1
)%
 
4
%
 
15
 %
 
4
%
(a)
Amounts may not sum due to rounding.


34

Frito-Lay North America  
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12

 
Change
Net revenue
$
3,332

 
$
3,193

 
4

 
$
6,455


$
6,203


4

Impact of foreign exchange translation
 
 
 
 
—

 




—

Net revenue growth, on a constant currency basis (a)
 
 
 
 
4.5

(b) 




4

 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
906

 
$
835

 
8

 
$
1,734


$
1,615


7

Restructuring and impairment charges
2

 
24

 


 
4


32



Operating profit excluding above item (a)
$
908

 
$
859

 
6

 
$
1,738

 
$
1,647

 
6

Impact of foreign exchange translation
 
 
 
 
—

 




—

Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
6

 




6

(a) See "Non-GAAP Measures."
(b) Does not sum due to rounding.

12 Weeks

Net revenue grew 4% and pound volume grew 3%. Net revenue growth was driven by the volume growth and effective net pricing. The volume growth reflects high-single-digit growth in trademark Cheetos and variety packs and double-digit growth in our Sabra joint venture, partially offset by a double-digit decline in trademark SunChips.

Operating profit grew 8%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases including strategic initiatives.

24 Weeks

Net revenue grew 4% and pound volume grew 3%. Net revenue growth was driven by the volume growth and effective net pricing. The volume growth reflects high-single-digit growth in trademark Cheetos, low-single-digit growth in trademark Lay's, double-digit growth in our Sabra joint venture and mid-single-digit growth in variety packs. These gains were partially offset by a double-digit decline in trademark SunChips.

Operating profit grew 7%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases including strategic initiatives.


35

Quaker Foods North America
 
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
 
6/15/13

 
6/16/12

 
Change
 
6/15/13
 
6/16/12
 
Change
 
Net revenue
$
577

 
$
583

 
(1
)
 
$
1,211


$
1,206

 
0.5

 
Impact of foreign exchange translation
 
 
 
 
—

 



 
—

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
(1
)
 



 
1

(b) 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
133

 
$
154

 
(14
)
 
$
313


$
341

 
(8
)
 
Restructuring and impairment charges
1

 
1

 


 
—


6

 

 
Operating profit excluding above item (a)
$
134

 
$
155

 
(14
)
 
$
313


$
347

 
(10
)
 
Impact of foreign exchange translation
 
 
 
 
—

 



 
—

 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
(14
)
 



 
(10
)
 
(a) See "Non-GAAP Measures."
(b) Does not sum due to rounding.
12 Weeks
Net revenue declined 1% and volume increased 3%. The net revenue decline reflects unfavorable product mix, partially offset by the volume growth and favorable net pricing. The volume growth primarily reflects the new Müller Quaker Dairy (MQD) products and mid-single-digit growth in Aunt Jemima syrup and mix.
Operating profit declined 14%, reflecting our share of the start-up costs of our MQD joint venture, which negatively impacted operating profit performance by 8 percentage points, the unfavorable product mix, certain operating cost increases, as well as the impact of incremental investments into our business, which negatively impacted operating profit performance by 2 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories and the favorable net pricing.
24 Weeks
Net revenue increased 0.5% and volume increased 4%. Net revenue performance benefited from the volume growth, partially offset by unfavorable product mix. The volume growth primarily reflects the new MQD products and high-single-digit growth in Aunt Jemima syrup and mix.
Operating profit declined 8%, primarily reflecting our share of the start-up costs of our MQD joint venture, which negatively impacted operating profit performance by 5.5 percentage points, the unfavorable product mix, certain operating cost increases, as well as the impact of incremental investments into our business, which negatively impacted operating profit performance by 1 percentage point. These impacts were partially offset by planned cost reductions across a number of expense categories and the volume growth.


36

Latin America Foods
 
 
12 Weeks Ended
 
%

24 Weeks Ended
 
%
 
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12
 
Change
 
Net revenue
$
2,116

 
$
1,948

 
9

 
$
3,483

 
$
3,183

 
9

 
Impact of foreign exchange translation
 
 
 
 
3

 

 

 
3

 
Net revenue growth, on a constant currency basis (a)
 
 
 
 
12

 

 

 
13

(b) 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
318

 
$
271

 
17

 
$
534

 
$
454

 
18

 
Restructuring and impairment charges
1

 
6

 

 
5

 
12

 

 
Operating profit excluding above item (a)
$
319

 
$
277

 
14

 
$
539

 
$
466

 
15

 
Impact of foreign exchange translation
 
 
 
 
2

 
 
 
 
 
5

 
Operating profit growth excluding above item, on a constant currency basis (a)
 
 
 
 
17

(b) 
 
 
 
 
20

 
(a) See "Non-GAAP Measures."
(b) Does not sum due to rounding.
12 Weeks
Net revenue increased 9%, primarily reflecting favorable effective net pricing. Unfavorable foreign exchange reduced net revenue growth by 3 percentage points.
Volume increased 1%, reflecting broad-based increases including a mid-single-digit increase in Brazil, partially offset by a low-single-digit decrease in Mexico.
Operating profit increased 17%, reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases and higher advertising and marketing expenses, as well as higher commodity costs, which reduced operating profit growth by 11 percentage points. Operating profit was also negatively impacted by incremental investments into our business, which reduced operating profit growth by 2 percentage points. Unfavorable foreign exchange reduced operating profit growth by over 2 percentage points.
24 Weeks
Net revenue increased 9%, primarily reflecting favorable effective net pricing. Unfavorable foreign exchange reduced net revenue growth by over 3 percentage points.
Volume increased 1%, reflecting broad-based increases, including a low-single-digit increase in Brazil, partially offset by a slight decrease in Mexico.
Operating profit increased 18%, reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases and higher advertising and marketing expenses, as well as higher commodity costs, which reduced operating profit growth by 13 percentage points. Operating profit was also negatively impacted by incremental investments into our business, which reduced operating profit growth by 1 percentage point. Unfavorable foreign exchange reduced operating profit growth by 5 percentage points.

37

PepsiCo Americas Beverages 
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12

 
Change
Net revenue
$
5,260


$
5,352


(2
)

$
9,680


$
9,800


(1
)
Impact of foreign exchange translation




0.5






—

Net revenue growth, on a constant currency basis (a)




(1
)
(b) 




(1
)
 

















Operating profit
$
882


$
840


5


$
1,447


$
1,365


6

Restructuring and impairment charges
5


35





5


43



Venezuela currency devaluation
—


—





(13
)

—




Operating profit excluding above items (a)
$
887


$
875


1.5


$
1,439


$
1,408


2

Impact of foreign exchange translation




2






2

Operating profit growth excluding above items, on a constant currency basis (a)




4

(b) 




4

(a) See "Non-GAAP Measures."
(b) Does not sum due to rounding.

12 Weeks

Net revenue decreased 2%, primarily reflecting volume declines, partially offset by favorable effective net pricing. Unfavorable foreign exchange reduced net revenue growth by 0.5 percentage points.
 
Volume decreased 3.5%, primarily reflecting North America volume declines of 4.5% while Latin America volume declined nearly 1%. North America volume declines were driven by a 6% decline in CSD volume and a 3% decline in non-carbonated beverage volume. The non-carbonated beverage volume decline primarily reflected a double-digit decline in our overall water portfolio. The Latin America volume decline primarily reflected a double-digit decline in Brazil and a high-single-digit decrease in Argentina, partially offset by a double-digit increase in Venezuela. In addition, Mexico volume was even with the prior year.
Reported operating profit increased 5%. Excluding the items affecting comparability in the above table (see “Items Affecting Comparability”), operating profit increased 1.5%, primarily reflecting favorable effective net pricing, lower commodity costs, which increased reported operating profit by 8 percentage points, as well as planned cost reductions across a number of expense categories. These impacts were partially offset by certain operating cost increases and the volume decline. Unfavorable foreign exchange reduced operating profit growth by 2 percentage points.

24 Weeks

Net revenue decreased 1%, primarily reflecting volume declines, partially offset by favorable effective net pricing.

Volume decreased 3%, primarily reflecting North America volume declines of 4%, while Latin America volume was even with the prior year. The North America volume declines were driven by a 6% decline in CSD volume and a 2% decline in non-carbonated beverage volume. The non-carbonated beverage volume decline primarily reflected a high-single-digit decline in our overall water portfolio. The Latin America volume reflected high-single-digit decreases in Brazil and Argentina, partially offset by a double-digit increase in Venezuela and a low-single-digit increase in Mexico.

38

Reported operating profit increased 6%. Excluding the items affecting comparability in the above table (see “Items Affecting Comparability”), operating profit increased 2%, primarily reflecting favorable effective net pricing, lower commodity costs, which increased reported operating profit by 10 percentage points, as well as planned cost reductions across a number of expense categories. These impacts were partially offset by certain operating cost increases and the volume decline. Unfavorable foreign exchange reduced operating profit growth by nearly 2 percentage points.

Europe 
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12

 
Change
Net revenue
$
3,653

 
$
3,617

 
1

 
$
5,595

 
$
5,462

 
2

Impact of foreign exchange translation
 
 
 
 
3

 
 
 
 
 
2

Net revenue growth, on a constant currency basis (a)
 
 
 
 
4

 
 
 
 
 
4

 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
425


$
453


(6
)

$
513


$
534


(4
)
Merger and integration charges
(1
)

1





—


3



Restructuring and impairment charges
8


—





12


(1
)


Operating profit excluding above items (a)
$
432


$
454


(5
)

$
525


$
536


(2
)
Impact of foreign exchange translation




3






2

Operating profit growth excluding above items, on a constant currency basis (a)




(2
)





—

(a) See "Non-GAAP Measures."

12 Weeks

Net revenue increased 1%, primarily reflecting effective net pricing and volume growth. Unfavorable foreign exchange reduced net revenue growth by 3 percentage points.

Snacks volume grew 3%, primarily reflecting high-single-digit growth in South Africa, Turkey and the Netherlands, partially offset by a mid-single-digit decline in Spain. Additionally, the United Kingdom and Russia experienced low-single-digit growth.

Beverage volume declined slightly, primarily reflecting low-single-digit declines in the United Kingdom and Germany, partially offset by low-single-digit growth in Russia and mid-single-digit growth in Turkey.

Operating profit declined 6%, primarily reflecting higher commodity costs, which reduced operating profit by 12 percentage points, as well as certain operating cost increases including strategic initiatives, higher selling and distribution expenses and higher advertising and marketing expenses, partially offset by the net revenue growth and planned cost reductions across a number of expense categories. The impact of more-favorable settlements of promotional spending accruals in the current year positively contributed 2 percentage points to operating profit performance and the impact of incremental investments into our business negatively impacted operating profit performance by 4 percentage points. Unfavorable foreign exchange and the items affecting comparability in the above table (see “Items Affecting Comparability”) negatively impacted operating profit performance by 3 percentage points and 1 percentage point, respectively.

39

24 Weeks
 
Net revenue increased 2%, primarily reflecting effective net pricing and volume growth. Unfavorable foreign exchange reduced net revenue growth by nearly 2 percentage points.

Snacks volume grew 3.5%, primarily reflecting double-digit growth in South Africa, high-single-digit growth in the Netherlands and mid-single-digit growth in Turkey, partially offset by a low-single-digit decline in Spain. Additionally, the United Kingdom and Russia both experienced low-single-digit growth.

Beverage volume was even with the prior year, primarily reflecting low-single-digit growth in Russia, mid-single-digit growth in Turkey and a slight increase in Germany, offset by a low-single-digit decline in the United Kingdom.

Operating profit declined 4%, primarily reflecting higher commodity costs, which reduced operating profit by 14 percentage points, as well as certain operating cost increases including strategic initiatives and increased advertising and marketing expenses, partially offset by the net revenue growth and planned cost reductions across a number of expense categories. The impact of more-favorable settlements of promotional spending accruals in the current year positively contributed 3 percentage points to operating profit performance, offset by incremental investments into our business, which negatively impacted operating profit performance by 3 percentage points. In addition, a pricing adjustment for certain commodity purchases negatively impacted operating profit performance by 2 percentage points. The items affecting comparability in the above table (see “Items Affecting Comparability”) and unfavorable foreign exchange each negatively impacted operating profit performance by 2 percentage points.

Asia, Middle East & Africa 
 
12 Weeks Ended
 
%
 
24 Weeks Ended
 
%
 
6/15/13

 
6/16/12

 
Change
 
6/15/13

 
6/16/12

 
Change
Net revenue
$
1,869

 
$
1,765

 
6

 
$
2,964


$
3,032

 
(2
)
Impact of foreign exchange translation

 

 
3

 



 
2

Net revenue growth, on a constant currency basis (a)

 

 
9

 



 
—

 


 


 


 





 


Operating profit
$
524

 
$
165

 
217

 
$
708


$
313

 
126

Restructuring and impairment charges
1

 
8

 


 
2


17

 

Restructuring and other charges related to the transaction with Tingyi
—

 
137

 


 
—


137

 


Operating profit excluding above items (a)
$
525

 
$
310

 
69

 
$
710


$
467

 
52

Impact of foreign exchange translation

 

 
2

 



 
2

Operating profit growth excluding above items, on a constant currency basis (a)

 

 
71

 



 
54

(a) See "Non-GAAP Measures."


40

12 Weeks

Net revenue grew 6%, reflecting favorable effective net pricing and volume growth, partially offset by the impact of the prior year transaction with Tingyi and the beverage refranchising in our Vietnam business (see Note 12 to our condensed consolidated financial statements). These transactions each negatively impacted net revenue performance by 3 percentage points. Unfavorable foreign currency reduced net revenue growth by nearly 3 percentage points.
Snacks volume grew 6%, driven by double-digit growth in China, high-single-digit growth in India and Thailand and mid-single-digit growth in the Middle East, partially offset by a double-digit decline in Australia.
Beverage volume grew 21%, driven by double-digit growth in China (including new co-branded juice products distributed through our strategic alliance with Tingyi) and double-digit growth in Pakistan and India, partially offset by a double-digit decline in Thailand. The Tingyi co-branded volume contributed 12 percentage points to AMEA's beverage volume growth. Additionally, the Middle East experienced mid-single-digit growth.

Operating profit grew 217%, reflecting the impact of restructuring and other charges related to the prior year transaction with Tingyi included in the above table (see “Items Affecting Comparability”) and a one-time gain of $137 million associated with the Vietnam beverage refranchising (which contributed 83 percentage points to reported operating profit growth). Excluding items affecting comparability, operating profit grew 69%, reflecting the one-time gain associated with the Vietnam beverage refranchising (which contributed 44 percentage points to operating profit growth excluding items affecting comparability). Operating profit performance also reflected the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases and higher advertising and marketing expenses. Unfavorable foreign currency reduced operating profit growth by 2 percentage points.

24 Weeks

Net revenue declined 2%, reflecting the impact of the prior year transaction with Tingyi, the Vietnam beverage refranchising and the prior year deconsolidation of International Dairy and Juice Limited, which negatively impacted net revenue performance by 12 percentage points, 2 percentage points and 1 percentage point, respectively. These impacts were partially offset by volume growth and favorable effective net pricing. Unfavorable foreign currency negatively impacted net revenue performance by over 2 percentage points.
Snacks volume grew 9%, reflecting double-digit growth in China and in the Middle East and high-single-digit growth in India, partially offset by a high-single-digit decline in Australia. Additionally, Thailand experienced mid-single-digit growth.
Beverage volume grew 19%, driven by double-digit growth in China (including the new co-branded juice products distributed through our strategic alliance with Tingyi) and double-digit growth in Pakistan, partially offset by a double-digit decline in Thailand. The Tingyi co-branded volume contributed 10 percentage points to AMEA's beverage volume growth. Additionally, India and the Middle East both experienced high-single-digit growth.
Operating profit grew 126%, reflecting the impact of restructuring and other charges related to the prior year transaction with Tingyi included in the above table (see “Items Affecting Comparability”) and a one-time gain of $137 million associated with the Vietnam beverage refranchising (which contributed 44 percentage points to reported operating profit growth). Excluding items affecting comparability, operating profit grew 52%, reflecting the one-time gain associated with the Vietnam beverage refranchising (which contributed

41

29 percentage points to operating profit growth excluding items affecting comparability). Operating profit performance also reflected the volume growth, effective net pricing and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases and higher advertising and marketing expenses. Unfavorable foreign currency reduced operating profit growth by nearly 2 percentage points.

Our Liquidity and Capital Resources

We believe that our cash generating capability and financial condition, together with our revolving credit facilities and other available methods of debt financing (including long-term debt financing which, depending upon market conditions, we may use to replace a portion of our commercial paper borrowings), will be adequate to meet our operating, investing and financing needs. Sources of cash available to us to fund cash outflows, such as our anticipated share repurchases and dividend payments, include cash from operations and proceeds obtained in the U.S. debt markets. 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.
As of June 15, 2013, we had cash, cash equivalents and short-term investments of $7.2 billion outside the U.S. To the extent foreign earnings are repatriated, such amounts would be subject to income tax liabilities, both in the U.S. and in various applicable foreign jurisdictions. In addition, currency restrictions enacted by the government in Venezuela have impacted our ability to pay dividends outside of the country from our snack and beverage operations in Venezuela. Effective February 2013, the Venezuelan government devalued the bolivar by resetting the official exchange rate from 4.3 bolivars to 6.3 bolivars per dollar. As of June 15, 2013, our operations in Venezuela comprised approximately 5% of our cash and cash equivalents balance. For additional information on the impact of the devaluation, see "Our Business Risks" and "Items Affecting Comparability."
Operating Activities
During the 24 weeks in 2013, net cash provided by operating activities was $3.0 billion, compared to net cash provided of $1.2 billion in the prior year period. The change in operating cash flow primarily reflects the discretionary pension and retiree medical contributions of $1.0 billion ($770 million after-tax) made in the prior year and working capital improvements.
Also see "Management Operating Cash Flow" below for certain other items impacting net cash provided by operating activities.
Investing Activities
During the 24 weeks in 2013, net cash used for investing activities was $786 million, primarily reflecting $881 million for net capital spending, partially offset by $174 million of proceeds related to divestitures, primarily the Vietnam beverage refranchising.
We expect 2013 net capital spending to be approximately $3.0 billion, within our long-term capital spending target of less than or equal to 5% of net revenue.
Financing Activities
During the 24 weeks in 2013, net cash used for financing activities was $527 million, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $2.7 billion, mostly offset by stock option activity of $906 million, net proceeds from short-term borrowings of $753 million and net proceeds from long-term debt of $546 million.

42

We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. In the first quarter of 2013, we approved a new share repurchase program providing for the repurchase of up to $10 billion of PepsiCo common stock from July 1, 2013 through June 30, 2016, which succeeded the current repurchase program that expired on June 30, 2013. In addition, we announced a 5.6% increase in our annualized dividend to $2.27 per share from $2.15 per share, effective with the dividend paid in June 2013. Under these programs, we expect to return a total of $6.4 billion to shareholders in 2013 through dividends of approximately $3.4 billion and share repurchases of approximately $3.0 billion.
Management Operating Cash Flow
We focus on management operating cash flow as an important element in evaluating our performance. 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. Additionally, we consider certain items (included in the table below) in evaluating management operating cash flow. We believe investors should consider these items in evaluating our management operating cash flow results. Management operating cash flow excluding certain items is the primary measure we use to monitor cash flow performance. However, it is not a measure provided by U.S GAAP. Therefore, this measure is not, and should not be viewed as, a substitute for U.S. GAAP cash flow measures.

The table below reconciles net cash provided by operating activities, as reflected in our statement of cash flows, to our management operating cash flow excluding the impact of the items below. 
 
24 Weeks Ended
 
6/15/13

 
6/16/12

Net cash provided by operating activities
$
3,015

 
$
1,247

Capital spending
(911
)
 
(901
)
Sales of property, plant and equipment
30

 
42

Management operating cash flow
2,134

 
388

Discretionary pension and retiree medical contributions (after-tax)
13

 
770

Merger and integration payments (after-tax)
15


34

Payments related to restructuring charges (after-tax)
71

 
100

   Payments related to income tax settlements
102

 
—

Capital investments related to the PBG/PAS integration
—

 
8

Net capital investments related to restructuring plan
(4
)
 
5

   Payments for restructuring and other charges related to the transaction with Tingyi
18

 
88

Management operating cash flow excluding above items
$
2,349

 
$
1,393

In all periods presented, management operating cash flow was used primarily to repurchase shares and pay dividends. We expect to continue to return management operating cash flow to our shareholders through dividends and share repurchases while maintaining credit ratings that provide us with ready access to global capital and credit markets. However, see "Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks", included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012 for certain factors that may impact our operating cash flows.

43

Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, could increase our future borrowing costs or 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 and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks", included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012 and Note 8 to our condensed consolidated financial statements.

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PepsiCo, Inc.:

We have reviewed the accompanying Condensed Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of June 15, 2013, the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and twenty-four weeks ended June 15, 2013 and June 16, 2012, and the related Condensed Consolidated Statements of Cash Flows and Equity for the twenty-four weeks ended June 15, 2013 and June 16, 2012. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.'s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 29, 2012, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the fiscal year then ended not presented herein; and in our report dated February 21, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of December 29, 2012, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
July 24, 2013

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” and Note 10 to our condensed consolidated financial statements. In addition, see “Item 1A. Risk Factors” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

ITEM 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During our second fiscal quarter of 2013, we continued migrating certain of our financial processing systems to an enterprise-wide systems solution. These systems implementations are part of our ongoing global business transformation initiative, and we plan to continue implementing such systems throughout other parts of our businesses over the course of the next few years. Moreover, we continue to integrate our WBD business, which was acquired in 2011. In connection with these implementations and integration, and resulting business process changes, we continue to enhance the design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting.
Except as described above, there were no changes in our internal control over financial reporting during our second fiscal quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II OTHER INFORMATION

ITEM 1. Legal Proceedings.

The following information should be read in conjunction with the discussion set forth under Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 23, 2013.

We and our subsidiaries are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. While the results of these proceedings, claims and inquiries cannot be predicted with certainty, management believes that the final outcome of the foregoing will not have a material adverse effect on our consolidated financial statements, results of operations or cash flows. See "Item 1. Business - Regulatory Environment and Environmental Compliance" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. 

ITEM 1A. Risk Factors.
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.


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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
A summary of our common stock repurchases (in millions, except average price per share) during the 12 weeks ended June 15, 2013, under the $15.0 billion repurchase program authorized by our Board of Directors and publicly announced on March 15, 2010, and which expired on June 30, 2013, is set forth in the following table. All such shares of common stock were repurchased pursuant to this authorization in open market transactions. In addition, in the first quarter of 2013, we announced a new $10 billion repurchase program for repurchases of our common stock that commenced on July 1, 2013 and expires on June 30, 2016.

Issuer Purchases of Common Stock
 
Period
Total
Number of
Shares
Repurchased
 
Average Price
Paid Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Shares That May
Yet Be
Purchased
Under the Plans
or Programs (a)
3/23/13
 
 
 
 
 
 
$
7,202

 
 
 
 
 
 
 
 
3/24/13 - 4/20/13
—

 
$
—

 
—

 
—

 

 

 

 
7,202

4/21/13 - 5/18/13
1.1

 
$
83.46

 
1.1

 
(89
)
 

 

 

 
7,113

5/19/13 - 6/15/13
5.0

 
$
81.89

 
5.0

 
(408
)
Total
6.1

 
$
82.17

 
6.1

 
$
6,705


(a) Maximum does not include shares authorized for repurchase under the $10 billion share repurchase program that commenced on July 1, 2013 and expires on June 30, 2016.




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PepsiCo also repurchases shares of its convertible preferred stock from an ESOP fund established by Quaker in connection with share redemptions by ESOP participants. The following table summarizes our convertible preferred share repurchases during the second quarter.

Issuer Purchases of Convertible Preferred Stock 
Period
Total
Number of
Shares
Repurchased
 
Average Price
Paid per Share
 
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Shares That May
Yet Be
Purchased
Under the Plans
or Programs
3/24/13 - 4/20/13
2,700

 
$
388.51

 
N/A
 
N/A
 
 
 
 
 
 
 
 
4/21/13 - 5/18/13
2,200

 
$
411.04

 
N/A
 
N/A
 
 
 
 
 
 
 
 
5/19/13 - 6/15/13
1,300

 
$
407.47

 
N/A
 
N/A
Total
6,200

 
$
400.48

 
N/A
 
N/A

ITEM 6. Exhibits
See “Index to Exhibits” on page 51.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
            PepsiCo, Inc.    
 
 
(Registrant)
 
 
 
Date:
July 24, 2013
/s/ Marie T. Gallagher                        
 
 
Marie T. Gallagher
 
 
Senior Vice President and Controller
 
 
 
Date:
July 24, 2013
/s/ Kelly Mahon Tullier                        
 
 
Kelly Mahon Tullier
 
 
Senior Vice President,
 
 
Deputy General Counsel
(Duly Authorized Officer)

50

INDEX TO EXHIBITS
ITEM 6

EXHIBITS
 
Exhibit 2.1
Agreement and Plan of Merger dated as of August 3, 2009, among PepsiCo, Inc., The Pepsi Bottling Group, Inc. and Pepsi-Cola Metropolitan Bottling Company, Inc. (the schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K), which is incorporated herein by reference to Exhibit 2.1 to PepsiCo’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2009.

Exhibit 2.2
Agreement and Plan of Merger dated as of August 3, 2009, among PepsiCo, Inc., PepsiAmericas, Inc. and Pepsi-Cola Metropolitan Bottling Company, Inc. (the schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K), which is incorporated herein by reference to Exhibit 2.2 to PepsiCo’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2009.

Exhibit 2.3
Purchase Agreement dated as of December 1, 2010 among PepsiCo, Inc., Pepsi-Cola (Bermuda) Limited, Gavril A. Yushvaev, David Iakobachvili, Mikhail V. Dubinin, Sergei A. Plastinin, Alexander S. Orlov, Mikhail I. Vishnaykov, Aladaro Limited, Tony D. Maher, Dmitry Ivanov, Wimm Bill Dann Finance Cyprus Ltd. and Wimm-Bill-Dann Finance Co. Ltd. (the schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K), which is incorporated herein by reference to Exhibit 2.1 to PepsiCo’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2010.

Exhibit 3.1
Articles of Incorporation of PepsiCo, Inc., as amended and restated, effective as of May 9, 2011, which are incorporated herein by reference to Exhibit 3.1 to PepsiCo, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2011.

Exhibit 3.2
By-laws of PepsiCo, Inc., as amended, effective as of March 8, 2012, which are incorporated herein by reference to Exhibit 3.2 to PepsiCo, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 12, 2012.

Exhibit 10.1
U.S. $2,875,000,000 Five-Year Credit Agreement, dated as of June 10, 2013, among PepsiCo, Inc., as borrower, the lenders named therein, and Citibank, N.A., as administrative agent, which is incorporated herein by reference to Exhibit 10.1 to PepsiCo, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2013.

Exhibit 12
Computation of Ratio of Earnings to Fixed Charges.
Exhibit 15
Letter re: Unaudited Interim Financial Information.
Exhibit 24
Power of Attorney executed by Indra K. Nooyi, Hugh F. Johnston, Marie T. Gallagher, Shona L. Brown, George W. Buckley, Ian M. Cook, Dina Dublon, Victor J. Dzau, Ray L. Hunt, Alberto Ibargüen, Sharon Percy Rockefeller, James J. Schiro, Lloyd G. Trotter, Daniel Vasella and Alberto Weisser, which is incorporated herein by reference to Exhibit 24 to PepsiCo, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

51

Exhibit 31
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101
The following materials from PepsiCo, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 15, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Statement of Cash Flows, (iv) the Condensed Consolidated Balance Sheet, (v) the Condensed Consolidated Statement of Equity, and (vi) Notes to the Condensed Consolidated Financial Statements.


52