PEP 10-Q Quarterly Report June 11, 2016

PEPSICO INC

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10-Q 1 pepsicoq2-10xq6112016.htm FORM 10-Q Document

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 11, 2016 ( 24 weeks )



	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 June 29, 2016 was 1,439,157,837 .

Table of Contents

PepsiCo, Inc. and Subsidiaries

Table of Contents



Part I Financial Information		Page No.
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Statement of Income – 12 and 24 Weeks Ended June 11, 2016 and June 13, 2015	3
	Condensed Consolidated Statement of Comprehensive Income – 12 and 24 Weeks Ended June 11, 2016 and June 13, 2015	4
	Condensed Consolidated Statement of Cash Flows – 24 Weeks Ended June 11, 2016 and June 13, 2015	5
	Condensed Consolidated Balance Sheet – June 11, 2016 and December 26, 2015	6
	Condensed Consolidated Statement of Equity – 24 Weeks Ended June 11, 2016 and June 13, 2015	7
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Report of Independent Registered Public Accounting Firm		48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
Part II Other Information
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	52

Table of Contents

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
	6/11/2016			6/13/2015			6/11/2016			6/13/2015
Net Revenue	$	15,395		$	15,923		$	27,257		$	28,140
Cost of sales	6,830			7,251			11,981			12,754
Gross profit	8,565			8,672			15,276			15,386
Selling, general and administrative expenses	5,584			5,753			10,662			10,654
Amortization of intangible assets	17			19			31			35
Operating Profit	2,964			2,900			4,583			4,697
Interest expense	(255		)	(217		)	(501		)	(428		)
Interest income and other	22			14			36			29
Income before income taxes	2,731			2,697			4,118			4,298
Provision for income taxes	718			703			1,160			1,073
Net income	2,013			1,994			2,958			3,225
Less: Net income attributable to noncontrolling interests	8			14			22			24
Net Income Attributable to PepsiCo	$	2,005		$	1,980		$	2,936		$	3,201
Net Income Attributable to PepsiCo per Common Share
Basic	$	1.39		$	1.34		$	2.03		$	2.16
Diluted	$	1.38		$	1.33		$	2.01		$	2.14
Weighted-average common shares outstanding
Basic	1,443			1,476			1,445			1,480
Diluted	1,456			1,491			1,458			1,497
Cash dividends declared per common share	$	0.7525		$	0.7025		$	1.455		$	1.3575

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Condensed Consolidated Statement of Comprehensive Income

PepsiCo, Inc. and Subsidiaries

(in millions, unaudited)



	12 Weeks Ended 6/11/2016									24 Weeks Ended 6/11/2016
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	2,013								$	2,958
Other comprehensive income
Currency translation adjustment	$	760		$	—		760			$	540		$	—		540
Cash flow hedges:
Reclassification of net gains to net income	(8		)	2			(6		)	(29		)	7			(22		)
Net derivative losses	(32		)	8			(24		)	(32		)	7			(25		)
Pension and retiree medical:
Reclassification of net losses to net income	46			(14		)	32			83			(26		)	57
Remeasurement of net liabilities and translation	(11		)	4			(7		)	4			(44		)	(40		)
Unrealized gains/(losses) on securities	3			(2		)	1			(9		)	5			(4		)
Total other comprehensive income	$	758		$	(2	)	756			$	557		$	(51	)	506
Comprehensive income							2,769									3,464
Comprehensive income attributable to noncontrolling interests							(8		)							(22		)
Comprehensive Income Attributable to PepsiCo							$	2,761								$	3,442



	12 Weeks Ended 6/13/2015									24 Weeks Ended 6/13/2015
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	1,994								$	3,225
Other comprehensive income/(loss)
Currency translation adjustment	$	474		$	—		474			$	(507	)	$	—		(507		)
Cash flow hedges:
Reclassification of net (gains)/losses to net income	(97		)	33			(64		)	82			(37		)	45
Net derivative gains/(losses)	48			(20		)	28			(107		)	44			(63		)
Pension and retiree medical:
Reclassification of net losses to net income	58			(18		)	40			109			(35		)	74
Remeasurement of net liabilities and translation	(16		)	5			(11		)	15			(2		)	13
Unrealized (losses)/gains on securities	(7		)	4			(3		)	9			(4		)	5
Total other comprehensive income/(loss)	$	460		$	4		464			$	(399	)	$	(34	)	(433		)
Comprehensive income							2,458									2,792
Comprehensive income attributable to noncontrolling interests							(13		)							(23		)
Comprehensive Income Attributable to PepsiCo							$	2,445								$	2,769

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Condensed Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries

(in millions, unaudited)



	24 Weeks Ended
	6/11/2016			6/13/2015
Operating Activities
Net income	$	2,958		$	3,225
Depreciation and amortization	1,044			1,075
Share-based compensation expense	123			144
Restructuring and impairment charges	79			61
Cash payments for restructuring charges	(67		)	(107		)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)	373			—
Excess tax benefits from share-based payment arrangements	(84		)	(78		)
Pension and retiree medical plan expenses	124			215
Pension and retiree medical plan contributions	(155		)	(117		)
Deferred income taxes and other tax charges and credits	119			42
Change in assets and liabilities:
Accounts and notes receivable	(1,049		)	(1,309		)
Inventories	(755		)	(862		)
Prepaid expenses and other current assets	(202		)	(264		)
Accounts payable and other current liabilities	(73		)	197
Income taxes payable	704			648
Other, net	(218		)	(109		)
Net Cash Provided by Operating Activities	2,921			2,761

Investing Activities
Capital spending	(919		)	(832		)
Sales of property, plant and equipment	47			26
Acquisitions and investments in noncontrolled affiliates	(4		)	(16		)
Divestitures	75			74
Short-term investments, by original maturity:
More than three months - purchases	(4,604		)	(1,675		)
More than three months - maturities	3,786			2,269
Three months or less, net	10			(1		)
Other investing, net	1			(3		)
Net Cash Used for Investing Activities	(1,608		)	(158		)

Financing Activities
Proceeds from issuances of long-term debt	2,532			2,487
Payments of long-term debt	(3,083		)	(2,054		)
Short-term borrowings, by original maturity:
More than three months - proceeds	35			12
More than three months - payments	(11		)	(5		)
Three months or less, net	2,795			2,240
Cash dividends paid	(2,060		)	(1,973		)
Share repurchases - common	(1,329		)	(2,130		)
Share repurchases - preferred	(2		)	(2		)
Proceeds from exercises of stock options	293			250
Excess tax benefits from share-based payment arrangements	84			78
Other financing	(4		)	(2		)
Net Cash Used for Financing Activities	(750		)	(1,099		)
Effect of exchange rate changes on cash and cash equivalents	(13		)	(76		)
Net Increase in Cash and Cash Equivalents	550			1,428
Cash and Cash Equivalents, Beginning of Year	9,096			6,134
Cash and Cash Equivalents, End of Period	$	9,646		$	7,562

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Condensed Consolidated Balance Sheet

PepsiCo, Inc. and Subsidiaries

(in millions except per share amounts)



	(Unaudited)
	6/11/2016			12/26/2015
ASSETS
Current Assets
Cash and cash equivalents	$	9,646		$	9,096
Short-term investments	3,733			2,913
Accounts and notes receivable, less allowance: 6/16 - $146 and 12/15 - $130	7,495			6,437
Inventories:
Raw materials	1,512			1,312
Work-in-process	325			161
Finished goods	1,650			1,247
	3,487			2,720
Prepaid expenses and other current assets	1,517			1,865
Total Current Assets	25,878			23,031
Property, plant and equipment	36,229			35,747
Accumulated depreciation	(20,010		)	(19,430		)
	16,219			16,317
Amortizable Intangible Assets, net	1,274			1,270
Goodwill	14,398			14,177
Other nonamortizable intangible assets	12,073			11,811
Nonamortizable Intangible Assets	26,471			25,988
Investments in Noncontrolled Affiliates	2,002			2,311
Other Assets	867			750
Total Assets	$	72,711		$	69,667

LIABILITIES AND EQUITY
Current Liabilities
Short-term obligations	$	4,774		$	4,071
Accounts payable and other current liabilities	13,685			13,507
Total Current Liabilities	18,459			17,578
Long-Term Debt Obligations	30,847			29,213
Other Liabilities	5,873			5,887
Deferred Income Taxes	5,156			4,959
Total Liabilities	60,335			57,637

Commitments and contingencies

Preferred Stock, no par value	41			41
Repurchased Preferred Stock	(188		)	(186		)
PepsiCo Common Shareholders’ Equity
Common stock, par value 1 ² / ₃ ¢ per share (authorized 3,600 shares, issued, net of repurchased common stock at par value: 1,441 and 1,448 shares, respectively)	24			24
Capital in excess of par value	3,940			4,076
Retained earnings	51,295			50,472
Accumulated other comprehensive loss	(12,813		)	(13,319		)
Repurchased common stock, in excess of par value (425 and 418 shares, respectively)	(30,051		)	(29,185		)
Total PepsiCo Common Shareholders’ Equity	12,395			12,068
Noncontrolling interests	128			107
Total Equity	12,376			12,030
Total Liabilities and Equity	$	72,711		$	69,667

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Condensed Consolidated Statement of Equity

PepsiCo, Inc. and Subsidiaries

(in millions, unaudited)



	24 Weeks Ended
	6/11/2016					6/13/2015
	Shares		Amount			Shares		Amount
Preferred Stock	0.8		$	41		0.8		$	41
Repurchased Preferred Stock
Balance, beginning of year	(0.7	)	(186		)	(0.7	)	(181		)
Redemptions	—		(2		)	—		(2		)
Balance, end of period	(0.7	)	(188		)	(0.7	)	(183		)
Common Stock
Balance, beginning of year	1,448		24			1,488		25
Repurchased common stock	(7	)	—			(16	)	—
Balance, end of period	1,441		24			1,472		25
Capital in Excess of Par Value
Balance, beginning of year			4,076					4,115
Share-based compensation expense			125					145
Stock option exercises, RSUs, PSUs and PEPunits converted ^(a)			(155		)			(170		)
Withholding tax on RSUs, PSUs and PEPunits converted			(102		)			(112		)
Other			(4		)			(5		)
Balance, end of period			3,940					3,973
Retained Earnings
Balance, beginning of year			50,472					49,092
Net income attributable to PepsiCo			2,936					3,201
Cash dividends declared – common			(2,113		)			(2,025		)
Balance, end of period			51,295					50,268
Accumulated Other Comprehensive Loss
Balance, beginning of year			(13,319		)			(10,669		)
Other comprehensive income/(loss) attributable to PepsiCo			506					(432		)
Balance, end of period			(12,813		)			(11,101		)
Repurchased Common Stock
Balance, beginning of year	(418	)	(29,185		)	(378	)	(24,985		)
Share repurchases	(14	)	(1,369		)	(23	)	(2,180		)
Stock option exercises, RSUs, PSUs and PEPunits converted	7		501			7		470
Other	—		2			—		4
Balance, end of period	(425	)	(30,051		)	(394	)	(26,691		)
Total PepsiCo Common Shareholders’ Equity			12,395					16,474
Noncontrolling Interests
Balance, beginning of year			107					110
Net income attributable to noncontrolling interests			22					24
Currency translation adjustment			—					(1		)
Other, net			(1		)			(1		)
Balance, end of period			128					132
Total Equity			$	12,376				$	16,464


(a)	Includes total tax benefits of $ 56 million in 2016 and $ 52 million in 2015 .

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

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 consolidated subsidiaries, collectively.

Our Condensed Consolidated Balance Sheet as of June 11, 2016 and Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 11, 2016 and June 13, 2015 , and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 11, 2016 and June 13, 2015 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 26, 2015 . This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 . 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 ended June 11, 2016 are not necessarily indicative of the results expected for the full year.

Effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela, and therefore we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting. See further unaudited information in “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

While our financial results in the United States and Canada (North America) are reported on a 12-week 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 or 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 materials handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.

The 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. Reclassifications were made to the prior year’s amounts to conform to the current year presentation, including the presentation of certain functional support costs associated with the manufacturing and production of our products within cost of sales. These costs were previously included in selling, general and administrative expenses. In the 12 and 24 weeks ended June 13, 2015, these reclassifications resulted in an increase in cost of sales of $84 million and $145 million , respectively, with a corresponding reduction to gross profit and selling, general and administrative expenses in the same periods. These reclassifications reflect changes in how we are classifying costs of certain support functions as a result of ongoing productivity and efficiency initiatives. These reclassifications had no impact on our consolidated net revenue, operating profit, net interest expense, provision for income taxes, net income or earnings per share.

Table of Contents

Our Divisions

We are organized into six reportable segments (also referred to as divisions), as follows:


1)	Frito-Lay North America (FLNA);


2)	Quaker Foods North America (QFNA);


3)	North America Beverages (NAB), which includes all of our beverage businesses in North America;


4)	Latin America, which includes all of our beverage, food and snack businesses in Latin America;


5)	Europe Sub-Saharan Africa (ESSA), which includes all of our beverage, food and snack businesses in Europe and Sub-Saharan Africa; and


6)	Asia, Middle East and North Africa (AMENA), which includes all of our beverage, food and snack businesses in Asia, Middle East and North Africa.

Net revenue and operating profit of each division are as follows:



	12 Weeks Ended				24 Weeks Ended
Net Revenue	6/11/2016		6/13/2015		6/11/2016		6/13/2015
FLNA	$	3,564	$	3,452	$	6,982	$	6,771
QFNA	561		546		1,178		1,185
NAB	5,145		5,113		9,506		9,411
Latin America ^(a)	1,717		2,224		2,759		3,638
ESSA	2,660		2,813		4,019		4,309
AMENA	1,748		1,775		2,813		2,826
Total division	$	15,395	$	15,923	$	27,257	$	28,140



	12 Weeks Ended						24 Weeks Ended
Operating Profit	6/11/2016			6/13/2015			6/11/2016			6/13/2015
FLNA	$	1,083		$	1,007		$	2,101		$	1,927
QFNA ^(b)	146			132			312			231
NAB	881			833			1,366			1,286
Latin America ^(a)	242			355			417			574
ESSA	337			350			404			462
AMENA ^(c)	383			373			235			603
Total division	3,072			3,050			4,835			5,083
Corporate Unallocated
Mark-to-market net gains	100			39			146			38
Restructuring and impairment charges	(1		)	(1		)	(4		)	(7		)
Other	(207		)	(188		)	(394		)	(417		)
	$	2,964		$	2,900		$	4,583		$	4,697


(a)	Effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments using the cost method of accounting. Beginning with the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses.


(b)	Operating profit for QFNA for the 24 weeks ended June 13, 2015 included a pre-tax impairment charge of $65 million associated with our Müller Quaker Dairy (MQD) joint venture investment.

(c)

Operating profit for AMENA for the 24 weeks ended June 11, 2016 includes a pre- and after-tax impairment charge of $373 million to reduce the value of our 5% indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value. Operating profit for AMENA for the 24 weeks ended June 13, 2015 included a pre-tax gain of $39 million associated with refranchising a portion of our bottling operations in India.

Table of Contents

Total assets of each division are as follows:



	Total Assets
	6/11/2016		12/26/2015
FLNA	$	5,640	$	5,375
QFNA	847		872
NAB	29,291		28,128
Latin America	4,505		4,284
ESSA	12,894		12,225
AMENA	5,628		5,901
Total division	58,805		56,785
Corporate ^(a)	13,906		12,882
	$	72,711	$	69,667


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

Note 2 - Recent Accounting Pronouncements - Not Yet Adopted

In 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance is effective in 2020 with early adoption permitted in 2019. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

In 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition in the income statement of the income tax effects of vested or settled awards. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

In 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the ability to exercise significant influence is achieved. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the timing of adoption of this guidance.

In 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets, but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

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In 2016, the FASB issued guidance that requires companies to measure investments in certain equity securities at fair value and recognize any changes in fair value in net income. The guidance is effective in 2018 and early adoption is not permitted. We are currently evaluating the impact of this guidance on our financial statements.

In 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our balance sheet. We are currently evaluating the timing of adoption of this guidance.

In 2015, the FASB issued guidance that changes the subsequent measurement for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are currently evaluating the timing of adoption of this guidance.

In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.

Note 3 - Restructuring and Impairment Charges

A summary of our restructuring and impairment charges and other productivity initiatives is as follows:



	12 Weeks Ended					24 Weeks Ended
	6/11/2016			6/13/2015		6/11/2016			6/13/2015
2014 Productivity Plan	$	49		$	21	$	79		$	51
2012 Productivity Plan	—			4		—			10
Total restructuring and impairment charges	49			25		79			61
Other productivity initiatives ^(a)	(3		)	10		(2		)	10
Total restructuring and impairment charges and other productivity initiatives	$	46		$	35	$	77		$	71


(a)	Income amount represents adjustments for changes in estimates of previously recorded amounts.

2014 Multi-Year Productivity Plan

The multi-year productivity plan we publicly announced on February 13, 2014 (2014 Productivity Plan) includes the next generation of productivity initiatives that we believe will strengthen our food, snack and beverage businesses by: accelerating our investment in manufacturing automation; further optimizing our global manufacturing footprint, including closing certain manufacturing facilities; re-engineering our go-to-market systems in developed markets; expanding shared services; and implementing simplified organization structures to drive efficiency. The 2014 Productivity Plan is in addition to the productivity plan we began implementing in 2012 and is expected to continue the benefits of that plan.

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In the 12 weeks ended June 11, 2016 and June 13, 2015 , we incurred restructuring charges of $49 million ( $31 million after-tax or $0.02 per share) and $21 million ( $16 million after-tax or $0.01 per share), respectively. In the 24 weeks ended June 11, 2016 and June 13, 2015 , we incurred restructuring charges of $79 million ( $56 million after-tax or $0.04 per share) and $51 million ( $39 million after-tax or $0.03 per share), respectively. All of these net charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash) and other costs associated with the implementation of our initiatives, including contract termination costs. The majority of the restructuring accrual at June 11, 2016 is expected to be paid by the end of 2016 .

A summary of our 2014 Productivity Plan charges by segment is as follows:



	12 Weeks Ended				24 Weeks Ended
	6/11/2016		6/13/2015		6/11/2016			6/13/2015
FLNA ^(a)	$	3	$	2	$	(1	)	$	8
QFNA	1		—		1			1
NAB	6		7		13			14
Latin America	28		5		28			6
ESSA	8		4		27			13
AMENA	2		2		7			4
Corporate	1		1		4			5
	$	49	$	21	$	79		$	51


(a)	Income amount represents adjustments for changes in estimates of previously recorded amounts.

A summary of our 2014 Productivity Plan activity for the 24 weeks ended June 11, 2016 is as follows:



	Severance and Other Employee Costs			Asset Impairments			Other Costs			Total
Liability as of December 26, 2015	$	61		$	—		$	20		$	81
2016 restructuring charges	42			16			21			79
Cash payments	(20		)	—			(30		)	(50		)
Non-cash charges and translation	3			(16		)	1			(12		)
Liability as of June 11, 2016	$	86		$	—		$	12		$	98

2012 Multi-Year Productivity Plan

The multi-year productivity plan we publicly announced on February 9, 2012 (2012 Productivity Plan) included actions in every aspect of our business that we believed would 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 2012 Productivity Plan has enhanced PepsiCo’s cost-competitiveness and provided a source of funding for future brand-building and innovation initiatives.

In the 12 weeks ended June 13, 2015 , we incurred restructuring charges of $4 million ( $3 million after-tax with a nominal amount per share). In the 24 weeks ended June 13, 2015, we incurred restructuring charges of $10 million ( $9 million after-tax or $0.01 per share). All of these charges were recorded in selling, general and administrative expenses and primarily related to severance and other employee-related costs and contract termination costs. Cash payments in the 24 weeks ended June 11, 2016 were $17 million . We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual of $20 million at June 11, 2016 is expected to be paid by the end of 2016 .

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A summary of our 2012 Productivity Plan charges by segment is as follows:



	6/13/2015
	12 Weeks Ended		24 Weeks Ended
FLNA	$	—	$	—
QFNA	—		—
NAB	—		1
Latin America	—		—
ESSA	3		6
AMENA	1		1
Corporate	—		2
	$	4	$	10

Note 4 - Intangible Assets

A summary of our amortizable intangible assets is as follows:



	6/11/2016							12/26/2015
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Acquired franchise rights	$	838	$	(101	)	$	737	$	820	$	(92	)	$	728
Reacquired franchise rights	106		(101		)	5		105		(99		)	6
Brands	1,302		(995		)	307		1,298		(987		)	311
Other identifiable intangibles	537		(312		)	225		526		(301		)	225
	$	2,783	$	(1,509	)	$	1,274	$	2,749	$	(1,479	)	$	1,270

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The change in the book value of nonamortizable intangible assets is as follows:



	Balance		Translation and Other			Balance
	12/26/2015					6/11/2016
FLNA
Goodwill	$	267	$	11		$	278
Brands	22		2			24
	289		13			302

QFNA
Goodwill	175		—			175

NAB
Goodwill	9,754		41			9,795
Reacquired franchise rights	7,042		69			7,111
Acquired franchise rights	1,507		14			1,521
Brands	108		—			108
	18,411		124			18,535

Latin America
Goodwill	521		16			537
Brands	137		7			144
	658		23			681

ESSA
Goodwill	3,042		159			3,201
Reacquired franchise rights	488		15			503
Acquired franchise rights	190		4			194
Brands	2,212		153			2,365
	5,932		331			6,263

AMENA
Goodwill	418		(6		)	412
Brands	105		(2		)	103
	523		(8		)	515

Total goodwill	14,177		221			14,398
Total reacquired franchise rights	7,530		84			7,614
Total acquired franchise rights	1,697		18			1,715
Total brands	2,584		160			2,744
	$	25,988	$	483		$	26,471

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Note 5 - Income Taxes

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



	6/11/2016			12/26/2015
Balance, beginning of year	$	1,547		$	1,587
Additions for tax positions related to the current year	107			248
Additions for tax positions from prior years	14			122
Reductions for tax positions from prior years	(35		)	(261		)
Settlement payments	(9		)	(78		)
Statutes of limitations expiration	(16		)	(34		)
Translation and other	(6		)	(37		)
Balance, end of period	$	1,602		$	1,547

Note 6 - Share-Based Compensation

Beginning in 2016, certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo’s Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period. These qualify as liability awards under share-based compensation guidance and are valued through the end of the performance period on a mark-to-market basis using a Monte Carlo simulation model until actual performance is determined.

The following table summarizes our total share-based compensation expense:



	12 Weeks Ended				24 Weeks Ended
	6/11/2016		6/13/2015		6/11/2016		6/13/2015
Share-based compensation expense - equity awards	$	54	$	68	$	123	$	144
Share-based compensation expense - liability awards	1		—		3		—
Restructuring and impairment charges	1		1		2		1
Total	$	56	$	69	$	128	$	145

For the 12 weeks ended June 11, 2016 and June 13, 2015, our grants of stock options, restricted stock units (RSUs), performance stock units (PSUs), PepsiCo equity performance units (PEPunits) and long-term cash awards were nominal.

The following table summarizes share-based awards granted under the terms of our 2007 Long-Term Incentive Plan:



	24 Weeks Ended
	6/11/2016			6/13/2015
	Granted ^(a)	Weighted-Average Grant Price		Granted ^(a)	Weighted-Average Grant Price
Stock options	1.5	$	98.75	1.6	$	99.25
RSUs and PSUs	2.9	$	98.83	2.6	$	99.25
PEPunits	—	$	—	0.3	$	99.25


(a)	In millions. All grant activity is disclosed at target.

We granted long-term cash awards to certain executive officers and other senior executives with an aggregate target value of $17 million during the 24 weeks ended June 11, 2016 .

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Our weighted-average Black-Scholes fair value assumptions are as follows:



	24 Weeks Ended
	6/11/2016		6/13/2015
Expected life	6 years		7 years
Risk-free interest rate	1.5	%	1.8	%
Expected volatility	12	%	15	%
Expected dividend yield	2.7	%	2.7	%

Note 7 - Pension and Retiree Medical Benefits

Effective as of the beginning of 2016, we prospectively changed the method we use to estimate the service and interest cost components of pension and retiree medical expense. The pre-tax reduction in net periodic benefit cost associated with this change in the 12 and 24 weeks ended June 11, 2016 was $29 million ( $19 million after-tax or $0.01 per share) and $57 million ( $37 million after-tax or $0.03 per share), respectively. See “Pension and Retiree Medical Plans” in “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on this change in accounting estimate.

The components of net periodic benefit cost for pension and retiree medical plans are as follows:



	12 Weeks Ended
	Pension												Retiree Medical
	6/11/2016			6/13/2015			6/11/2016			6/13/2015			6/11/2016			6/13/2015
	U.S.						International
Service cost	$	90		$	100		$	21		$	26		$	7		$	8
Interest cost	112			126			24			29			10			12
Expected return on plan assets	(192		)	(197		)	(42		)	(45		)	(6		)	(6		)
Amortization of prior service credit	—			—			—			—			(8		)	(9		)
Amortization of net losses/(gains)	39			48			10			18			(1		)	1
	49			77			13			28			2			6
Settlement/curtailment loss	—			—			6			—			—			—
Special termination benefits	1			1			—			—			—			—
Total expense	$	50		$	78		$	19		$	28		$	2		$	6

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	24 Weeks Ended
	Pension												Retiree Medical
	6/11/2016			6/13/2015			6/11/2016			6/13/2015			6/11/2016			6/13/2015
	U.S.						International
Service cost	$	181		$	201		$	36		$	45		$	14		$	16
Interest cost	223			252			42			51			19			24
Expected return on plan assets	(384		)	(393		)	(73		)	(78		)	(11		)	(12		)
Amortization of prior service credit	—			(1		)	—			—			(17		)	(18		)
Amortization of net losses/(gains)	77			95			18			32			(1		)	1
	97			154			23			50			4			11
Settlement/curtailment loss	—			—			6			—			—			—
Special termination benefits	1			5			—			—			—			1
Total expense	$	98		$	159		$	29		$	50		$	4		$	12

We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. During the first quarter of 2016, we made discretionary contributions of $7 million to our international pension plans. There were no discretionary contributions made in the second quarter of 2016. In addition, there were no discretionary contributions made in the first or second quarters of 2015.

Note 8 - Debt Obligations and Commitments

In the first quarter of 2016, we issued the following senior notes:



Interest Rate		Maturity Date	Amount
Floating rate		February 2019	$	400
1.500	%	February 2019	600
2.850	%	February 2026	750
4.450	%	April 2046	750
			$	2,500	^(a)


(a)	Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.

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

In the 24 weeks ended June 11, 2016 , $3.1 billion of senior notes matured and were paid.

In the second quarter of 2016, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 6, 2021. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion , subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion . Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.

Also in the second quarter of 2016, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement), which expires on June 5, 2017. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion , subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 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 anniversary of the then effective termination date. The Five-Year Credit Agreement and the 364-Day Credit Agreement together replaced our $3.7225 billion five-year credit agreement dated as of June 8, 2015 and our $3.7225 billion 364-day credit agreement

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dated as of June 8, 2015. Funds borrowed under the Five-Year Credit Agreement and the 364-Day Credit Agreement may be used for general corporate purposes. Subject to certain conditions, we may borrow, prepay and reborrow amounts under these agreements. As of June 11, 2016, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.

As of June 11, 2016 , we had $3.6 billion of commercial paper outstanding and $2.7 billion of non-cancelable purchase commitments. For further information on our long-term contractual commitments, see Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 .

Note 9 - Accumulated Other Comprehensive Loss

The reclassifications from Accumulated Other Comprehensive Loss to the Condensed Consolidated Statement of Income are summarized as follows:



	12 Weeks Ended						24 Weeks Ended
	6/11/2016			6/13/2015			6/11/2016			6/13/2015			Affected Line Item in the Condensed Consolidated Statement of Income
(Gains)/Losses on cash flow hedges:
Foreign exchange contracts	$	1		$	(2	)	$	1		$	(2	)	Net revenue
Foreign exchange contracts	(13		)	(20		)	(34		)	(42		)	Cost of sales
Interest rate derivatives	1			(81		)	(2		)	112			Interest expense
Commodity contracts	2			3			3			8			Cost of sales
Commodity contracts	1			3			3			6			Selling, general and administrative expenses
Net (gains)/losses before tax	(8		)	(97		)	(29		)	82
Tax amounts	2			33			7			(37		)
Net (gains)/losses after tax	$	(6	)	$	(64	)	$	(22	)	$	45

Pension and retiree medical items:
Amortization of prior service credit ^(a)	$	(8	)	$	(9	)	$	(17	)	$	(19	)
Amortization of net losses ^(a)	48			67			94			128
Settlement/curtailment ^(a)	6			—			6			—
Net losses before tax	46			58			83			109
Tax amounts	(14		)	(18		)	(26		)	(35		)
Net losses after tax	$	32		$	40		$	57		$	74

Total net losses/(gains) reclassified for the period, net of tax	$	26		$	(24	)	$	35		$	119


(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).

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Note 10 - Financial Instruments

Derivatives

We are exposed to market risks arising from adverse changes in:


•	commodity prices, affecting the cost of our raw materials and energy;


•	foreign exchange rates and currency restrictions; and


•	interest rates.

In the normal course of business, we manage commodity price, foreign exchange and interest rate risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging. Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include fixed-price contracts and purchase orders and pricing agreements.

Our hedging strategies include the use of derivatives. 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 price, 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.

For cash flow hedges, the effective portion of changes in fair value is 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. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.

Commodity Prices

We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, which include swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for agricultural products, metals and energy . Ineffectiveness for those derivatives that qualify for hedge accounting treatment was not material for all periods presented. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit.

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Our open commodity derivative contracts had a notional value of $0.8 billion as of June 11, 2016 and $1.0 billion as of December 26, 2015 .

Foreign Exchange

We are exposed to foreign exchange 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 notional value of $1.8 billion as of June 11, 2016 and $2.1 billion as of December 26, 2015 . Ineffectiveness for derivatives that qualify for hedge accounting treatment 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 material net impact on earnings.

Interest Rates

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness have been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.

The notional values of the interest rate derivative instruments outstanding as of June 11, 2016 and December 26, 2015 were $10.9 billion and $12.5 billion , respectively. Ineffectiveness for derivatives that qualify for cash flow hedge accounting treatment was not material for all periods presented.

As of June 11, 2016 , approximately 37% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 33% as of December 26, 2015 .

Available-for-Sale Securities

Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as available-for-sale. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale securities are recognized in accumulated other comprehensive loss within common shareholders’ equity. Unrealized gains and losses on our investments in debt securities as of June 11, 2016 and December 26, 2015 were not material. The pre-tax unrealized gains on our investments in marketable equity securities were $104 million and $115 million as of June 11, 2016 and December 26, 2015 , respectively.

Changes in the fair value of available-for-sale securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will more likely than

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not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. We recorded no other-than-temporary impairment charges on our available-for-sale securities for the 12 and 24 weeks ended June 11, 2016 and June 13, 2015 .

Tingyi-Asahi Beverages Holding Co. Ltd.

During the first quarter of 2016, we concluded that the decline in estimated fair value of our 5% indirect equity interest in TAB was other than temporary based on significant negative economic trends in China and changes in our assumptions associated with TAB’s future financial performance arising from the recent disclosure by TAB’s parent company, Tingyi, regarding the operating results of its beverage business. As a result, we recorded a pre- and after-tax impairment charge of $373 million ( $0.26 per share) in the first quarter of 2016 in the AMENA segment. This charge was recorded in selling, general and administrative expenses in our Condensed Consolidated Statement of Income and reduced the value of our 5% indirect equity interest in TAB to its estimated fair value. The estimated fair value was derived using both an income and market approach, and is considered a non-recurring Level 3 measurement within the fair value hierarchy. The carrying value of the investment in TAB was $166 million as of June 11, 2016. We continue to monitor the impact of economic and other developments on the remaining value of our investment in TAB. See further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Fair Value Measurements

The fair values of our financial assets and liabilities as of June 11, 2016 and December 26, 2015 are categorized as follows:



	6/11/2016				12/26/2015
	Assets ^(a)		Liabilities ^(a)		Assets ^(a)		Liabilities ^(a)
Available-for-sale securities:
Equity securities ^(b)	$	117	$	—	$	127	$	—
Debt securities ^(c)	8,950		—		7,231		—
	$	9,067	$	—	$	7,358	$	—
Short-term investments ^(d)	$	187	$	—	$	193	$	—
Prepaid forward contracts ^(e)	$	27	$	—	$	27	$	—
Deferred compensation ^(f)	$	—	$	465	$	—	$	474
Derivatives designated as fair value hedging instruments:
Interest rate ^(g)	$	194	$	—	$	129	$	12
Derivatives designated as cash flow hedging instruments:
Foreign exchange ^(h)	$	20	$	27	$	76	$	6
Interest rate ^(g)	—		308		—		311
Commodity ⁽ⁱ⁾	4		1		—		7
	$	24	$	336	$	76	$	324
Derivatives not designated as hedging instruments:
Foreign exchange ^(h)	$	—	$	20	$	8	$	10
Interest rate ^(g)	44		54		44		56
Commodity ⁽ⁱ⁾	54		35		12		141
	$	98	$	109	$	64	$	207
Total derivatives at fair value ⁽ ^j ⁾	$	316	$	445	$	269	$	543
Total	$	9,597	$	910	$	7,847	$	1,017

(a)

Unless otherwise noted, financial assets are classified on our Condensed Consolidated Balance Sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our Condensed Consolidated 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. These equity securities are classified as investments in noncontrolled affiliates.

(c)

Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of June 11, 2016 , $5.5 billion and $3.5 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 26, 2015, $4.5 billion and $2.7 billion of debt securities were classified as cash equivalents and short-term investments, respectively. All of our available-for-sale debt securities have maturities of one year or less.


(d)	Based on the price of index funds. Categorized as a Level 1 asset. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.


(e)	Based primarily on the price of our common stock.


(f)	Based on the fair value of investments corresponding to employees’ investment elections.


(g)	Based on LIBOR forward rates. As of June 11, 2016 and December 26, 2015, amounts related to non-designated instruments are presented on a net basis on our Condensed Consolidated Balance Sheet.


(h)	Based on recently reported market transactions of spot and forward rates.


(i)	Based on recently reported market transactions, primarily swap arrangements.

(j)

Unless otherwise noted, derivative assets and liabilities are presented on a gross basis on our Condensed Consolidated Balance Sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the Condensed Consolidated Balance Sheet as of June 11, 2016 and December 26, 2015 were immaterial. Collateral received against any of our asset positions was immaterial.

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The carrying amounts of our cash and cash equivalents and short-term investments approximate fair value due to their short-term maturity. The fair value of our debt obligations as of June 11, 2016 and December 26, 2015 was $38 billion and $35 billion , respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.

Pre-tax losses/(gains) on our derivative instruments are categorized as follows:



	12 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/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement ^(b)
	6/11/2016			6/13/2015		6/11/2016			6/13/2015			6/11/2016			6/13/2015
Foreign exchange	$	5		$	24	$	24		$	15		$	(12	)	$	(22	)
Interest rate	(10		)	30		13			(65		)	1			(81		)
Commodity	(59		)	13		(5		)	2			3			6
Total	$	(64	)	$	67	$	32		$	(48	)	$	(8	)	$	(97	)



	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/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement ^(b)
	6/11/2016			6/13/2015		6/11/2016			6/13/2015			6/11/2016			6/13/2015
Foreign exchange	$	38		$	16	$	40		$	(26	)	$	(33	)	$	(44	)
Interest rate	(79		)	7		(3		)	129			(2		)	112
Commodity	(55		)	67		(5		)	4			6			14
Total	$	(96	)	$	90	$	32		$	107		$	(29	)	$	82

(a)

Foreign exchange derivative gains/losses are primarily included in selling, general and administrative expenses. Interest rate derivative 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. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.


(b)	Foreign exchange derivative gains/losses are primarily included in cost of sales. Interest rate derivative gains/losses are included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.

Based on current market conditions, we expect to reclassify net losses of $23 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

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Note 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
	6/11/2016				6/13/2015
	Income			Shares ^(a)	Income			Shares ^(a)
Net income attributable to PepsiCo	$	2,005			$	1,980
Preferred shares:
Dividends	—				—
Redemption premium	(1		)		(1		)
Net income available for PepsiCo common shareholders	$	2,004		1,443	$	1,979		1,476
Basic net income attributable to PepsiCo per common share	$	1.39			$	1.34
Net income available for PepsiCo common shareholders	$	2,004		1,443	$	1,979		1,476
Dilutive securities:
Stock options, RSUs, PSUs, PEPunits and Other ^(b)	—			12	—			14
Employee stock ownership plan (ESOP) convertible preferred stock	1			1	1			1
Diluted	$	2,005		1,456	$	1,980		1,491
Diluted net income attributable to PepsiCo per common share	$	1.38			$	1.33



	24 Weeks Ended
	6/11/2016				6/13/2015
	Income			Shares ^(a)	Income			Shares ^(a)
Net income attributable to PepsiCo	$	2,936			$	3,201
Preferred shares:
Dividends	—				—
Redemption premium	(2		)		(2		)
Net income available for PepsiCo common shareholders	$	2,934		1,445	$	3,199		1,480
Basic net income attributable to PepsiCo per common share	$	2.03			$	2.16
Net income available for PepsiCo common shareholders	$	2,934		1,445	$	3,199		1,480
Dilutive securities:
Stock options, RSUs, PSUs, PEPunits and Other ^(b)	—			12	—			16
ESOP convertible preferred stock	2			1	2			1
Diluted	$	2,936		1,458	$	3,201		1,497
Diluted net income attributable to PepsiCo per common share	$	2.01			$	2.14


(a)	Weighted-average common shares outstanding (in millions).

(b)

For the 12 weeks ended June 11, 2016 , the calculation of diluted earnings per common share was unadjusted because there were no out-of-the-money options during the period. For the 24 weeks ended June 11, 2016 , options to purchase 1.4 million shares 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 $98.99 . For the 12 and 24 weeks ended June 13, 2015 , options to purchase 1.6 million shares 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 $99.25 .

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FINANCIAL REVIEW

Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.

Our Critical Accounting Policies

The critical accounting policies below should be read in conjunction with those outlined in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 .

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’s 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. Certain advertising and marketing costs are also based on annual targets.

For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for 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.

Pension and Retiree Medical Plans

Effective as of the beginning of 2016, we changed the method we use to estimate the service and interest cost components of net periodic benefit cost for our U.S. and the majority of our significant international pension and retiree medical plans. Historically, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation (or accumulated post-retirement benefit obligation for the retiree medical plans) at the beginning of the period. We have now elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation

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between projected benefit cash flows and the corresponding yield curve spot rates, which we believe will result in a more precise measurement of service and interest costs. This change does not affect the measurement of our benefit obligation. We have accounted for this change in estimate on a prospective basis as of the beginning of 2016. The pre-tax reduction in net periodic benefit cost associated with this change in the 12 and 24 weeks ended June 11, 2016 was $29 million ( $19 million after-tax or $0.01 per share) and $57 million ( $37 million after-tax or $0.03 per share), respectively. We expect this change to result in a pre-tax reduction in net periodic benefit cost of approximately $125 million for the full year 2016.

For our pension benefits, the 2016 weighted-average discount rates for service and interest costs under the full yield curve approach adopted as of the beginning of 2016 are 4.5% and 3.8%, respectively. For our retiree medical benefits, the 2016 weighted-average discount rates for service and interest costs under the new methodology are 4.3% and 3.3%, respectively. Under the prior methodology, the expense discount rate would have been 4.4% and 4.2% for our pension and retiree medical benefits, respectively.

Our Business Risks

This Quarterly Report on Form 10-Q (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 (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 “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “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 statement. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo’s products, as a result of changes in consumer preferences or otherwise; changes in, or failure to comply with, applicable laws and regulations; imposition of new or increased taxes, disagreements with tax authorities or additional tax liabilities; PepsiCo’s ability to compete effectively; PepsiCo’s ability to grow its business in developing and emerging markets or unstable political conditions, civil unrest or other developments and risks in the markets where PepsiCo’s products are made, manufactured, distributed or sold; unfavorable economic conditions in the countries in which PepsiCo operates; increased costs, disruption of supply or shortages of raw materials and other supplies; failure to realize anticipated benefits from PepsiCo’s productivity initiatives or global operating model; business disruptions; product contamination or tampering or issues or concerns with respect to product quality, safety and integrity; damage to PepsiCo’s reputation or brand image; failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo’s existing operations or to complete or manage divestitures or refranchisings; changes in estimates and underlying assumptions regarding future performance that could result in an impairment charge; PepsiCo’s ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; loss of any key customer or changes to the retail landscape; any downgrade or potential downgrade of PepsiCo’s credit ratings; the ability to protect information systems against, or effectively respond to, cyber attacks or other cyber incidents or other disruption; PepsiCo’s ability to implement shared services or utilize information technology systems and networks effectively; fluctuations or other changes in exchange rates; potential impacts of climate change or water scarcity, or legal, regulatory or market measures to address climate change or water scarcity; failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages; infringement of intellectual property rights; potential liabilities and costs from litigation or legal proceedings; and other factors that may adversely affect the price of PepsiCo’s common

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stock and financial performance including those described in “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 26, 2015 and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” of this Form 10-Q. 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.

In the 24 weeks ended June 11, 2016 , our operations outside of North America reflect the months of January through May . In the 24 weeks ended June 11, 2016 , our operations outside of the U.S. generated 39% of our net revenue, with Mexico, Canada, Russia, the United Kingdom and Brazil comprising approximately 18% of our net revenue. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. In each of the 12 and 24 weeks ended June 11, 2016 , unfavorable foreign exchange negatively impacted net revenue performance by 4 percentage points, primarily due to the Mexican peso, Russian ruble, Brazilian real, Canadian dollar and the Argentine peso. Currency declines against the U.S. dollar could adversely impact our future financial results.

In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Russia, China, Brazil, Greece and the Middle East, and currency fluctuations in certain of these international markets continue to result in challenging operating environments. We are also monitoring the economic and political developments related to the recent referendum in the United Kingdom to leave the European Union, and the potential impact, if any, for the ESSA segment and our other businesses. Also, regulatory initiatives, including the imposition or proposed imposition of new or increased taxes or other measures that could limit sales of our products, continue to intensify and could adversely affect our business, financial condition or results of operations.

We continue to monitor the economic, operating and political environment in Russia closely. In the 24 weeks ended June 11, 2016 and June 13, 2015 , total net revenue generated by our operations in Russia represented 4% of our net revenue. As of June 11, 2016 , our long-lived assets in Russia were $4.0 billion.

Conditions in Venezuela, including restrictive exchange control regulations and lack of access to U.S. dollars through official currency exchange markets, have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. The exchange restrictions and other conditions have significantly impacted our ability to effectively manage our businesses in Venezuela, including limiting our ability to import certain raw materials and to settle U.S. dollar-denominated obligations, and have restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future.

As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela. Therefore, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments in our Venezuelan subsidiaries and joint venture using the cost method of accounting. We reduced the value of the cost method investments to their estimated fair values, resulting in a full impairment. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of the second quarter of 2016.

Beginning with the fourth quarter of 2015, our financial results have not included the results of our Venezuelan businesses. We do not have any guarantees related to our Venezuelan entities, and our ongoing contractual commitments to our Venezuelan businesses are not material. We will recognize income from dividends and sales of inventory to our Venezuelan entities, which have not been and are not expected to be material, to

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the extent cash in U.S. dollars is received. We did not receive any cash in U.S. dollars from our Venezuelan entities during 2016. We will continue to monitor the conditions in Venezuela and their impact on our accounting and disclosures.

See Note 10 to our condensed consolidated financial statements for a discussion of our financial instruments, including their fair values as of June 11, 2016 and December 26, 2015 . Cautionary statements included above and 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 26, 2015 , should be considered when evaluating our trends and future results.

Results of Operations – Consolidated Review

Consolidated Results

Volume

Since our divisions each use different measures of physical unit volume (i.e., kilos, gallons, pounds and case sales), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products. For each of the 12 and 24 weeks ended June 11, 2016 , total servings increased 2% . For each of the 12 and 24 weeks ended June 13, 2015 , total servings increased slightly. Servings growth in 2016 reflects an adjustment to 2015 results for divestitures and other structural changes, including the deconsolidation of our Venezuelan businesses effective as of the end of the third quarter of 2015.

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 the majority of our international beverage volume on a monthly basis. Our second quarter includes beverage volume outside of North America for the months of 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.

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Total Net Revenue and Operating Profit



	12 Weeks Ended								24 Weeks Ended
	6/11/2016			6/13/2015			Change		6/11/2016			6/13/2015			Change
Total net revenue	$	15,395		$	15,923		(3	)%	$	27,257		$	28,140		(3	)%
Operating profit
FLNA	$	1,083		$	1,007		8	%	$	2,101		$	1,927		9	%
QFNA	146			132			11	%	312			231			35	%
NAB	881			833			6	%	1,366			1,286			6	%
Latin America	242			355			(32	)%	417			574			(27	)%
ESSA	337			350			(4	)%	404			462			(13	)%
AMENA	383			373			3	%	235			603			(61	)%
Corporate Unallocated
Mark-to-market net gains	100			39					146			38
Restructuring and impairment charges	(1		)	(1		)			(4		)	(7		)
Other	(207		)	(188		)			(394		)	(417		)
	$	(108	)	$	(150	)	(28	)%	$	(252	)	$	(386	)	(35	)%
Total operating profit	$	2,964		$	2,900		2	%	$	4,583		$	4,697		(2	)%

Total operating profit margin	19.2		%	18.2		%	1.0		16.8		%	16.7		%	0.1

See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.

12 Weeks

On a reported basis, total operating profit increased 2% and operating profit margin increased 1.0 percentage point. Operating profit growth was primarily driven by planned cost reductions across a number of expense categories, effective net pricing and volume growth. These impacts were partially offset by certain operating cost increases, unfavorable foreign exchange and higher advertising and marketing expenses. In addition, the deconsolidation of our Venezuelan businesses reduced operating profit growth by 2.5 percentage points. Commodity inflation had a nominal impact on operating profit growth, with inflation in the ESSA and Latin America segments largely offset by deflation in the NAB, FLNA, QFNA and AMENA segments. Other corporate unallocated expenses increased 10%, primarily due to a contribution to The PepsiCo Foundation, Inc. to fund charitable and social programs and higher foreign exchange transaction losses, partially offset by decreased corporate expenses, including pension expense reflecting the reduction in net periodic benefit cost associated with the change to the full yield curve approach. Items affecting comparability (see “Items Affecting Comparability”) increased operating profit growth by 1 percentage point and total operating profit margin by 0.2 percentage points.

24 Weeks

On a reported basis, total operating profit decreased 2% and operating profit margin increased 0.1 percentage points. Operating profit performance was primarily driven by certain operating cost increases, higher advertising and marketing expenses and unfavorable foreign exchange, as well as the deconsolidation of our Venezuelan businesses, 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, effective net pricing and volume growth. The impact of recording an impairment charge in the QFNA segment in the prior year and ceasing the operations of our MQD joint venture positively contributed 2 percentage

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points to operating profit performance. Commodity deflation positively contributed 1 percentage point to operating profit performance, primarily attributable to deflation in the NAB, FLNA, QFNA and AMENA segments, partially offset by inflation in the Latin America and ESSA segments. Other corporate unallocated expenses decreased 6%, primarily due to lower corporate expenses including pension expense, partially offset by the contributions to The PepsiCo Foundation, Inc. and higher foreign exchange transaction losses. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted operating profit performance by 6 percentage points, primarily reflecting an impairment charge to reduce our 5% indirect equity interest in TAB to its estimated fair value, and decreased total operating profit margin by 1.0 percentage point.

Other Consolidated Results



	12 Weeks Ended											24 Weeks Ended
	6/11/2016				6/13/2015			Change				6/11/2016				6/13/2015			Change
Interest expense, net	$	(233	)		$	(203	)	$	(30	)		$	(465	)		$	(399	)	$	(66	)
Tax rate	26.3		%		26.1		%					28.2		%		25.0		%
Net income attributable to PepsiCo	$	2,005			$	1,980		1		%		$	2,936			$	3,201		(8		)%
Net income attributable to PepsiCo per common share - diluted	$	1.38			$	1.33		4		%		$	2.01			$	2.14		(6		)%
Mark-to-market net gains	(0.04		)		(0.02		)					(0.06		)		(0.02		)
Restructuring and impairment charges	0.02				0.01							0.04				0.03
Charge related to the transaction with Tingyi	—				—							0.26				—
Net income attributable to PepsiCo per common share - diluted, excluding above items ^(a)	$	1.35		^(b)	$	1.32		2		%		$	2.24		^(b)	$	2.15		4		%
Impact of foreign exchange translation								3.5											4
Growth in net income attributable to PepsiCo per common share - diluted, excluding above items, on a constant currency basis ^(a)								6		%	^(b)								8		%


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net interest expense increased $30 million , primarily reflecting higher average debt balances, partially offset by higher gains on the market value of investments used to economically hedge a portion of our deferred compensation costs and higher interest income due to higher average cash balances.

The reported tax rate increased 0.2 percentage points, primarily reflecting unfavorable income mix shift.

Net income attributable to PepsiCo increased 1% and net income attributable to PepsiCo per common share increased 4% . The deconsolidation of our Venezuelan businesses reduced both net income attributable to PepsiCo and net income attributable to PepsiCo per common share growth by 3 percentage points. In addition, items affecting comparability (see “Items Affecting Comparability”) positively contributed 1 percentage point to both net income attributable to PepsiCo and net income attributable to PepsiCo per common share.

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24 Weeks

Net interest expense increased $66 million , primarily reflecting higher average debt balances and lower gains on the market value of investments used to economically hedge a portion of our deferred compensation costs, partially offset by higher interest income due to higher average cash balances.

The reported tax rate increased 3.2 percentage points, primarily reflecting the impairment charge to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value which had no corresponding tax benefit.

Net income attributable to PepsiCo decreased 8% and net income attributable to PepsiCo per common share decreased 6% . The deconsolidation of our Venezuelan businesses negatively impacted both net income attributable to PepsiCo and net income attributable to PepsiCo per common share performance by 2 percentage points. In addition, items affecting comparability (see “Items Affecting Comparability”) negatively impacted both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 10 percentage points.

Non-GAAP Measures

Certain financial measures contained in this Form 10-Q adjust for the impact of specified items and are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). We use non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance and as a factor in determining compensation for certain employees. We believe presenting non-GAAP financial measures in this Form 10-Q provides additional information to facilitate comparison of our historical operating results and trends in our underlying operating results, and provides additional transparency on how we evaluate our business. We also believe presenting these measures in this Form 10-Q allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.

We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Examples of items for which we may make adjustments include: amounts related to mark-to-market gains or losses (non-cash); gains or losses associated with mergers, acquisitions, divestitures and other structural changes; charges related to restructuring programs; asset impairments (non-cash); amounts related to the resolution of tax positions; pension and retiree medical related items; and remeasurements of net monetary assets. See below and “Items Affecting Comparability” for a description of adjustments to our U.S. GAAP financial measures in this Form 10-Q.

Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.

The following non-GAAP financial measures are contained in this Form 10-Q:


•	operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, adjusted for items affecting comparability, and the corresponding constant currency growth rates;


•	organic revenue; and


•	free cash flow.

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Operating Profit, Adjusted for Items Affecting Comparability, and Net Income Attributable to PepsiCo per Common Share - Diluted, Adjusted for Items Affecting Comparability

Operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share - diluted, adjusted for items affecting comparability, each excludes the net impact of mark-to-market gains on centrally managed commodities that do not qualify for hedge accounting, restructuring and impairment charges related to our 2014 and 2012 Productivity Plans, and a charge related to the transaction with Tingyi (see “Items Affecting Comparability” for a detailed description of each of these items). We also evaluate performance on these measures on a constant currency basis, which measures our financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current 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 these measures provide useful information in evaluating the results of our business because they exclude items that we believe are not indicative of our ongoing performance.

Organic Revenue

We define organic revenue as net revenue adjusted for the impact of foreign exchange translation, as well as the impact from acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation, for the comparable period. The Venezuela deconsolidation impact excludes the results of our Venezuelan businesses for 2015. We believe organic revenue provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior year. See “Organic Revenue Growth.”

In addition, our fiscal 2016 results will include an extra week of results (the 53 ^rd reporting week). Organic revenue will exclude the impact of the 53 ^rd reporting week in the fourth quarter of 2016.

Free Cash Flow

We define free cash flow as net cash provided by operating activities less capital spending, plus sales of property, plant and equipment. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure.

See “Free Cash Flow” in “Our Liquidity and Capital Resources.”

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Items Affecting Comparability

Our reported financial results in this Form 10-Q are impacted by the following items in each of the following periods:



	12 Weeks Ended						24 Weeks Ended
	6/11/2016			6/13/2015			6/11/2016			6/13/2015
Operating profit
Mark-to-market net gains/(losses) recognized in cost of sales	$	63		$	2		$	81		$	(16	)
Mark-to-market net gains recognized in selling, general and administrative expenses	37			37			65			54
Mark-to-market net impact	$	100		$	39		$	146		$	38
Restructuring and impairment charges	$	(49	)	$	(25	)	$	(79	)	$	(61	)
Charge related to the transaction with Tingyi	$	—		$	—		$	(373	)	$	—
Provision for income taxes
Mark-to-market net impact	$	35		$	12		$	52		$	12
Restructuring and impairment charges	$	(15	)	$	(6	)	$	(20	)	$	(13	)
Net income attributable to noncontrolling interests
Restructuring and impairment charges	$	(3	)	$	—		$	(3	)	$	—
Net income attributable to PepsiCo
Mark-to-market net impact	$	65		$	27		$	94		$	26
Restructuring and impairment charges	$	(31	)	$	(19	)	$	(56	)	$	(48	)
Charge related to the transaction with Tingyi	$	—		$	—		$	(373	)	$	—
Net income attributable to PepsiCo per common share – diluted
Mark-to-market net impact	$	0.04		$	0.02		$	0.06		$	0.02
Restructuring and impairment charges	$	(0.02	)	$	(0.01	)	$	(0.04	)	$	(0.03	)
Charge related to the transaction with Tingyi	$	—		$	—		$	(0.26	)	$	—

Mark-to-Market Net Impact

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, metals and energy . Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.

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Restructuring and Impairment Charges

In connection with our 2014 Productivity Plan, we expect to incur pre-tax charges of approximately $990 million , of which approximately $705 million represents cash expenditures, summarized by period as follows:



	Charges			Cash Expenditures
2013	$	53		$	—
2014	357			175		^(b)
2015	169			165		^(b)
First quarter 2016	30			22
Second quarter 2016	49			28
	658			390
Remainder of 2016 (expected)	65			98
2017 - 2019 (expected)	267			217
	$	990	^(a)	$	705

(a)

This total pre-tax charge is expected to consist of approximately $525 million of severance and other employee-related costs, approximately $120 million for asset impairments (all non-cash) resulting from plant closures and related actions, and approximately $345 million for other costs associated with the implementation of our initiatives, including contract termination costs. This charge is expected to impact reportable segments approximately as follows: FLNA 11%, QFNA 2%, NAB 35%, Latin America 15%, ESSA 25%, AMENA 5% and Corporate 7%.


(b)	In 2015 and 2014, cash expenditures included $2 million and $10 million, respectively, reported on the Consolidated Statement of Cash Flows in pension and retiree medical plan contributions.

See Note 3 to our condensed consolidated financial statements for further information related to our 2014 and 2012 Productivity Plans.

Charge Related to the Transaction with Tingyi

In the first quarter of 2016, we recorded a pre- and after-tax impairment charge of $373 million ($0.26 per share) in the AMENA segment to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value. See Note 10 to our condensed consolidated financial statements for further information.

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, volume growth measures exclude the 2015 results of divestitures and other structural changes, including our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015. See “Non-GAAP Measures” and “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding non-GAAP measures.

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. The impact of the structural change related to the deconsolidation of our Venezuelan businesses is presented separately.

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Net Revenue
12 Weeks Ended	FLNA			QFNA			NAB			Latin America			ESSA			AMENA			Total
6/11/2016	$	3,564		$	561		$	5,145		$	1,717		$	2,660		$	1,748		$	15,395
6/13/2015	$	3,452		$	546		$	5,113		$	2,224		$	2,813		$	1,775		$	15,923
% Impact of:
Volume ^(a)	2		%	3		%	(1		)%	1		%	2.5		%	7		%	2		%
Effective net pricing ^(b)	1			—			2			7			1			(3		)	2
Foreign exchange translation	—			(0.5		)	—			(12		)	(9		)	(5		)	(4		)
Acquisitions and divestitures	—			—			—			(0.5		)	—			—			—
Venezuela deconsolidation ^(c)	—			—			—			(19		)	—			—			(2.5		)
Reported Growth ^(d)	3		%	3		%	1		%	(23		)%	(5		)%	(1.5		)%	(3		)%



Net Revenue
24 Weeks Ended	FLNA			QFNA			NAB			Latin America			ESSA			AMENA			Total
6/11/2016	$	6,982		$	1,178		$	9,506		$	2,759		$	4,019		$	2,813		$	27,257
6/13/2015	$	6,771		$	1,185		$	9,411		$	3,638		$	4,309		$	2,826		$	28,140
% Impact of:
Volume ^(a)	2		%	0.5		%	—		%	2		%	2		%	6		%	2		%
Effective net pricing ^(b)	2			—			1			7			1			(1		)	2
Foreign exchange translation	(0.5		)	(1		)	(0.5		)	(15		)	(9		)	(5		)	(4		)
Acquisitions and divestitures	—			—			—			(0.5		)	—			—			—
Venezuela deconsolidation ^(c)	—			—			—			(18		)	—			—			(2		)
Reported Growth ^(d)	3		%	(1		)%	1		%	(24		)%	(7		)%	—		%	(3		)%

(a)

Excludes the impact of acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE, as well as the mix of beverage volume sold by our Company-owned and franchise-owned bottlers. 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)	Represents the impact of the exclusion of the 2015 results of our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015.


(d)	Amounts may not sum due to rounding.

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Organic Revenue Growth

Organic revenue is a non-GAAP financial measure. For further information on organic revenue see “Non-GAAP Measures.”



12 Weeks Ended 6/11/2016	FLNA		QFNA		NAB		Latin America		ESSA		AMENA		Total
Reported Growth	3	%	3	%	1	%	(23	)%	(5	)%	(1.5	)%	(3	)%
% Impact of:
Foreign exchange translation	—		0.5		—		12		9		5		4
Acquisitions and divestitures	—		—		—		0.5		—		—		—
Venezuela deconsolidation ^(a)	—		—		—		19		—		—		2.5
Organic Growth ^(b)	4	%	3	%	1	%	9	%	3	%	4	%	3	%



24 Weeks Ended 6/11/2016	FLNA		QFNA		NAB		Latin America		ESSA		AMENA		Total
Reported Growth	3	%	(1	)%	1	%	(24	)%	(7	)%	—	%	(3	)%
% Impact of:
Foreign exchange translation	0.5		1		0.5		15		9		5		4
Acquisitions and divestitures	—		—		—		0.5		—		—		—
Venezuela deconsolidation ^(a)	—		—		—		18		—		—		2
Organic Growth ^(b)	4	%	—	%	1.5	%	9	%	3	%	5	%	3	%


(a)	Represents the impact of the exclusion of the 2015 results of our Venezuelan businesses which were deconsolidated effective as of the end of the third quarter of 2015.


(b)	Amounts may not sum due to rounding.

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Frito-Lay North America



	12 Weeks Ended				%		24 Weeks Ended					%
	6/11/2016		6/13/2015		Change		6/11/2016			6/13/2015		Change
Net revenue	$	3,564	$	3,452	3		$	6,982		$	6,771	3
Impact of foreign exchange translation					—							0.5
Net revenue growth, on a constant currency basis ^(a)					4	^(b)						4	^(b)

Operating profit	$	1,083	$	1,007	8		$	2,101		$	1,927	9
Restructuring and impairment charges	3		2				(1		)	8
Operating profit excluding above item ^(a)	$	1,086	$	1,009	8		$	2,100		$	1,935	9
Impact of foreign exchange translation					—							0.5
Operating profit growth excluding above item, on a constant currency basis ^(a)					8							9	^(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net revenue grew 3% and volume grew 2%. Net revenue growth was primarily driven by the volume growth and effective net pricing. The volume growth reflects high-single-digit growth in variety packs, mid-single-digit growth in trademark Cheetos and Fritos and double-digit growth in trademark Smartfood. These gains were partially offset by a double-digit decline in nuts and seeds.

Operating profit grew 8%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 4 percentage points to operating profit growth, primarily fuel and cooking oil. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses .

24 Weeks

Net revenue grew 3% and volume grew 2%. The net revenue growth was driven by effective net pricing and the volume growth. The volume growth reflects double-digit growth in trademark Smartfood, mid-single-digit growth in variety packs and low-single-digit growth in trademark Doritos, Cheetos and Fritos. These gains were partially offset by a low-single-digit decline in trademark Lay’s.

Operating profit grew 9%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 4.5 percentage points to operating profit growth, primarily cooking oil and fuel. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses.

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Quaker Foods North America



	12 Weeks Ended				%		24 Weeks Ended				%
	6/11/2016		6/13/2015		Change		6/11/2016		6/13/2015		Change
Net revenue	$	561	$	546	3		$	1,178	$	1,185	(1	)
Impact of foreign exchange translation					0.5						1
Net revenue growth, on a constant currency basis ^(a)					3	^(b)					—

Operating profit	$	146	$	132	11		$	312	$	231	35
Restructuring and impairment charges	1		—				1		1
Operating profit excluding above item ^(a)	$	147	$	132	11		$	313	$	232	35
Impact of foreign exchange translation					—						1
Operating profit growth excluding above item, on a constant currency basis ^(a)					11						35		^(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net revenue grew 3%, primarily reflecting volume growth of 3%. The volume growth was driven by double-digit growth in bars, mid-single-digit growth in Aunt Jemima syrup and mix and low-single-digit growth in oatmeal.

Operating profit increased 11%, reflecting lower commodity costs, which contributed 10 percentage points to operating profit growth, planned cost reductions across a number of expense categories and the volume growth. In addition, the impact of ceasing the operations of our MQD joint venture contributed 5 percentage points to operating profit growth. These impacts were partially offset by unfavorable net pricing and mix, higher advertising and marketing expenses and certain operating cost increases, including strategic initiatives.

24 Weeks

Net revenue declined 1% and volume increased 0.5%. The net revenue performance primarily reflects unfavorable foreign exchange, which negatively impacted net revenue performance by 1 percentage point. The volume growth was driven by low-single-digit growth in Aunt Jemima syrup and mix and mid-single-digit growth in bars, partially offset by a low-single-digit decline in ready-to-eat cereals and a mid-single-digit decline in regional grains.

Operating profit increased 35%, driven by the impact of recording an impairment charge in the prior year and ceasing the operations of our MQD joint venture, which contributed 34 percentage points to operating profit growth. In addition, operating profit growth reflects lower commodity costs, which contributed 7 percentage points to operating profit growth, and planned cost reductions across a number of expense categories. These impacts were partially offset by higher advertising and marketing expenses, unfavorable net pricing and mix and certain operating cost increases, including strategic initiatives.

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North America Beverages



	12 Weeks Ended				%	24 Weeks Ended				%
	6/11/2016		6/13/2015		Change	6/11/2016		6/13/2015		Change
Net revenue	$	5,145	$	5,113	1	$	9,506	$	9,411	1
Impact of foreign exchange translation					—					0.5
Net revenue growth, on a constant currency basis ^(a)					1					1.5

Operating profit	$	881	$	833	6	$	1,366	$	1,286	6
Restructuring and impairment charges	6		7			13		15
Operating profit excluding above item ^(a)	$	887	$	840	6	$	1,379	$	1,301	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.”

12 Weeks

Net revenue increased 1%, primarily reflecting effective net pricing, partially offset by a decline in volume. Unfavorable foreign exchange slightly reduced net revenue growth.

Volume decreased 1%, driven by a 4% decline in carbonated soft drink (CSD) volume, partially offset by a 3% increase in non-carbonated beverage volume. The non-carbonated beverage volume increase primarily reflected a mid-single-digit increase in our overall water portfolio and a high-single-digit increase in Lipton ready-to-drink teas, partially offset by a low-single-digit decline in Gatorade sports drinks.

Operating profit increased 6%, primarily reflecting the effective net pricing and planned cost reductions across a number of expense categories, as well as lower commodity costs which contributed 5.5 percentage points to operating profit growth. These impacts were partially offset by certain operating cost increases and the volume decline. Favorable settlements of promotional spending accruals compared to the prior year and certain insurance adjustments contributed 3 percentage points and 1 percentage point, respectively, to operating profit growth.

24 Weeks

Net revenue increased 1%, primarily reflecting effective net pricing. Unfavorable foreign exchange reduced net revenue growth by one-half of a percentage point.

Volume increased slightly, reflecting a 5% increase in non-carbonated beverage volume, mostly offset by a 3% decline in CSD volume. The non-carbonated beverage volume increase primarily reflected a high-single-digit increase in our overall water portfolio, a double-digit increase in Lipton ready-to-drink teas, and a low-single-digit increase in Gatorade sports drinks.

Operating profit increased 6%, primarily reflecting planned cost reductions across a number of expense categories and the net revenue growth, as well as lower commodity costs which contributed 7 percentage points to operating profit growth. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses. Favorable settlements of promotional spending accruals and certain insurance adjustments each contributed 1 percentage point to operating profit growth.

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Latin America



	12 Weeks Ended				%			24 Weeks Ended				%
	6/11/2016		6/13/2015		Change			6/11/2016		6/13/2015		Change
Net revenue	$	1,717	$	2,224	(23	)		$	2,759	$	3,638	(24	)
Impact of foreign exchange translation					12							15
Net revenue growth, on a constant currency basis ^(a)					(10	)	^(b)					(9	)

Operating profit	$	242	$	355	(32	)		$	417	$	574	(27	)
Restructuring and impairment charges	28		5					28		6
Operating profit excluding above item ^(a)	$	270	$	360	(25	)		$	445	$	580	(23	)
Impact of foreign exchange translation					13							17
Operating profit growth excluding above item, on a constant currency basis ^(a)					(12	)						(7	)	^(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net revenue decreased 23%, reflecting the impact of the deconsolidation of our Venezuelan businesses, effective as of the end of the third quarter of 2015, and unfavorable foreign exchange, which negatively impacted net revenue performance by 19 percentage points and 12 percentage points, respectively. These impacts were partially offset by effective net pricing and net volume growth.

Snacks volume grew 2%, reflecting a mid-single-digit increase in Mexico, partially offset by a mid-single-digit decline in Brazil.

Beverage volume decreased 2%, reflecting a double-digit decline in Argentina and a low-single-digit decline in Mexico, partially offset by a high-single-digit increase in Guatemala and low-single-digit increases in Brazil and Honduras.

Operating profit decreased 32%, reflecting certain operating cost increases, as well as the deconsolidation of our Venezuelan businesses, which negatively impacted operating profit performance by 21 percentage points. Additionally, operating profit performance reflects higher commodity costs, which negatively impacted operating profit performance by 19 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials, driven by a strong U.S. dollar, as well as higher advertising and marketing expenses. These impacts were partially offset by the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. Unfavorable foreign exchange translation and items affecting comparability in the above table (see “Items Affecting Comparability”) negatively impacted operating profit performance by 13 percentage points and 7 percentage points, respectively.

24 Weeks

Net revenue decreased 24%, reflecting the impact of the deconsolidation of our Venezuelan businesses and unfavorable foreign exchange, which negatively impacted net revenue performance by 18 percentage points and 15 percentage points, respectively. These impacts were partially offset by effective net pricing and net volume growth.

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Snacks volume grew 2%, reflecting a mid-single-digit increase in Mexico, partially offset by a low-single-digit decline in Brazil.

Beverage volume decreased slightly, reflecting a double-digit decline in Argentina and a low-single-digit decline in Mexico, partially offset by a mid-single-digit increase in Brazil and a high-single-digit increase in Guatemala.

Operating profit decreased 27%, reflecting certain operating cost increases, as well as higher commodity costs, which negatively impacted operating profit performance by 20 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials, driven by a strong U.S. dollar. Additionally, operating profit performance reflects the deconsolidation of our Venezuelan businesses, which negatively impacted operating profit performance by 16 percentage points. These impacts were partially offset by the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. Unfavorable foreign exchange translation and items affecting comparability in the above table negatively impacted operating profit performance by 17 percentage points and 4 percentage points, respectively.

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Europe Sub-Saharan Africa



	12 Weeks Ended				%			24 Weeks Ended				%
	6/11/2016		6/13/2015		Change			6/11/2016		6/13/2015		Change
Net revenue	$	2,660	$	2,813	(5	)		$	4,019	$	4,309	(7	)
Impact of foreign exchange translation					9							9
Net revenue growth, on a constant currency basis ^(a)					3		^(b)					3		^(b)

Operating profit	$	337	$	350	(4	)		$	404	$	462	(13	)
Restructuring and impairment charges	8		7					27		19
Operating profit excluding above item ^(a)	$	345	$	357	(4	)		$	431	$	481	(10	)
Impact of foreign exchange translation					6							6
Operating profit growth excluding above item, on a constant currency basis ^(a)					2.5		^(b)					(5	)	^(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net revenue decreased 5%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 9 percentage points. The net revenue decline was partially offset by volume growth and effective net pricing.

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

Beverage volume grew 4%, primarily reflecting double-digit growth in Nigeria and high-single-digit growth in the United Kingdom and Poland, partially offset by a low-single-digit decline in Russia. Additionally, France experienced slight growth and Germany and Turkey experienced low-single-digit growth.

Operating profit decreased 4%, reflecting higher commodity costs, which negatively impacted operating profit performance by 16 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials led by a strong U.S. dollar. Additionally, operating profit performance was negatively impacted by certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by planned cost reductions across a number of expense categories, the volume growth and the effective net pricing. Additionally, unfavorable foreign exchange translation negatively impacted operating profit performance by 6 percentage points.

24 Weeks

Net revenue decreased 7%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 9 percentage points. The net revenue decline was partially offset by volume growth and effective net pricing.

Snacks volume grew 2%, primarily reflecting mid-single-digit growth in Turkey and low-single-digit growth in Spain and the Netherlands, partially offset by low-single-digit declines in Russia and the United Kingdom. Additionally, South Africa experienced slight growth.

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Beverage volume grew 3%, primarily reflecting double-digit growth in Nigeria, high-single-digit growth in the United Kingdom and mid-single-digit growth in Poland, partially offset by a low-single-digit decline in Russia. Additionally, Germany, Turkey and France experienced low-single-digit growth.

Operating profit decreased 13%, reflecting higher commodity costs, which negatively impacted operating profit performance by 20 percentage points, largely due to transaction-related foreign exchange on purchases of raw materials led by a strong U.S. dollar. Additionally, operating profit performance was negatively impacted by certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by planned cost reductions across a number of expense categories, the volume growth and the effective net pricing. Additionally, unfavorable foreign exchange translation and items affecting comparability in the above table (see “Items Affecting Comparability”) negatively impacted operating profit performance by 6 percentage points and 2 percentage points, respectively.

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Asia, Middle East and North Africa



	12 Weeks Ended				%			24 Weeks Ended				%
	6/11/2016		6/13/2015		Change			6/11/2016		6/13/2015		Change
Net revenue	$	1,748	$	1,775	(1.5	)		$	2,813	$	2,826	—
Impact of foreign exchange translation					5							5
Net revenue growth, on a constant currency basis ^(a)					4		^(b)					5

Operating profit	$	383	$	373	3			$	235	$	603	(61	)
Restructuring and impairment charges	2		3					7		5
Charge related to the transaction with Tingyi	—		—					373		—
Operating profit excluding above items ^(a)	$	385	$	376	3			$	615	$	608	1
Impact of foreign exchange translation					4							3
Operating profit growth excluding above items, on a constant currency basis ^(a)					7							4.5		^(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

12 Weeks

Net revenue decreased 1.5%, reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 5 percentage points, as well as unfavorable net pricing. These impacts were partially offset by volume growth.

Snack volume grew 4%, reflecting double-digit growth in China, high-single-digit growth in Australia and mid-single-digit growth in Pakistan, partially offset by a low-single-digit decline in India. Additionally, the Middle East experienced low-single-digit growth.

Beverage volume grew 5%, driven by double-digit growth in India, Pakistan and the Philippines and mid-single-digit growth in the Middle East, partially offset by a high-single-digit decline in China.

Operating profit increased 3%, reflecting the volume growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 3 percentage points to operating profit growth. These impacts were partially offset by the unfavorable net pricing, certain operating cost increases, including strategic initiatives, and higher advertising and marketing expenses. Unfavorable foreign exchange reduced operating profit growth by 4 percentage points.

24 Weeks

Net revenue declined slightly, reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 5 percentage points, as well as unfavorable net pricing. These impacts were partially offset by volume growth.

Snack volume grew 4.5%, reflecting double-digit growth in China and mid-single-digit growth in the Middle East, partially offset by a low-single-digit decline in India. Additionally, Australia experienced mid-single-digit growth.

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Beverage volume grew 5%, driven by double-digit growth in India, Pakistan and the Philippines, partially offset by a mid-single-digit decline in China. Additionally, the Middle East experienced mid-single-digit growth.

Operating profit decreased 61%, primarily reflecting an impairment charge to reduce our investment in TAB to its estimated fair value, reflected in items affecting comparability in the above table (see “Items Affecting Comparability”). Excluding the items affecting comparability, operating profit increased 1%, primarily reflecting the volume growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which positively contributed 3 percentage points to operating profit performance. These impacts were partially offset by certain operating cost increases, as well as the impact of a gain in the prior year from the refranchising of a portion of our beverage business in India, which negatively impacted operating profit performance by 6 percentage points. In addition, operating profit performance was negatively impacted by higher advertising and marketing expenses and the unfavorable net pricing. Unfavorable foreign exchange negatively impacted operating profit performance by 3 percentage points.

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Our Liquidity and Capital Resources

We believe that our cash generating capability and financial condition, together with our revolving credit facilities and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs. Our primary sources of cash available to fund cash outflows, such as our anticipated share repurchases, dividend payments and scheduled debt maturities, include cash from operations and proceeds obtained from issuances of commercial paper and long-term debt. However, there can be no assurance that volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us, or at all. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “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 26, 2015 .

As of June 11, 2016 , we had cash, cash equivalents and short-term investments in our consolidated subsidiaries of $12.6 billion outside the U.S. As of June 11, 2016, cash, cash equivalents and short-term investments in our consolidated subsidiaries subject to currency controls or currency exchange restrictions were not material. To the extent foreign earnings are repatriated, such amounts would be subject to certain tax liabilities, both in the U.S. and in various applicable foreign jurisdictions.

Operating Activities

During the 24 weeks in 2016 , net cash provided by operating activities was $2.9 billion , compared to $2.8 billion in the prior-year period, primarily reflecting favorable working capital comparisons (comprised of changes in accounts and notes receivable, inventories, prepaid expenses and other current assets, and accounts payable and other current liabilities, each adjusted for the effects of currency translation) to the prior year.

Investing Activities

During the 24 weeks in 2016 , net cash used for investing activities was $1.6 billion , primarily reflecting net capital spending of $0.9 billion and net purchases of debt securities greater than three months of $0.8 billion . See Note 10 to our condensed consolidated financial statements for further discussion of our investments in debt securities.

We expect 2016 net capital spending to be approximately $3 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 2016 , net cash used for financing activities was $0.8 billion , primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $3.4 billion , and net payments from long-term debt borrowings of $0.6 billion , partially offset by net proceeds from short-term borrowings of $2.8 billion and proceeds from exercises of stock options of $0.3 billion .

We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 11, 2015, we announced a new share repurchase program providing for the repurchase of up to $12.0 billion of PepsiCo common stock commencing from July 1, 2015 and expiring on June 30, 2018. In addition, on February 11, 2016, we announced a 7.1% increase in our annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend paid in June 2016. We expect to return a total of $7 billion to shareholders in 2016 through share repurchases of approximately $3 billion and dividends of approximately $4 billion . See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a description of our share repurchase program.

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Free Cash Flow

Free cash flow is a non-GAAP financial measure. For further information on free cash flow see “Non-GAAP Measures.”

The table below reconciles net cash provided by operating activities, as reflected in our cash flow statement, to our free cash flow.



	24 Weeks Ended						%
	6/11/2016			6/13/2015			Change
Net cash provided by operating activities	$	2,921		$	2,761		6
Capital spending	(919		)	(832		)
Sales of property, plant and equipment	47			26
Free cash flow ^(a)	$	2,049		$	1,955		5

(a)

See “Non-GAAP Measures.” In addition, when evaluating free cash flow, we also consider the following items impacting comparability: $7 million in discretionary pension contributions in the 24 weeks ended June 11, 2016; $67 million and $110 million of payments related to restructuring charges in the 24 weeks ended June 11, 2016 and June 13, 2015, respectively; and net cash tax benefits related to restructuring charges of $3 million and $5 million in the 24 weeks ended June 11, 2016 and June 13, 2015, respectively.

Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases while maintaining Tier 1 commercial paper access, which we believe will ensure appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “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 26, 2015 , for certain factors that may impact our credit ratings or our operating cash flows.

Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether or not as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business Risks” included in this Form 10-Q and “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 26, 2015 , 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 11, 2016, the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and twenty-four weeks ended June 11, 2016 and June 13, 2015, and the related Condensed Consolidated Statements of Cash Flows and Equity for the twenty-four weeks ended June 11, 2016 and June 13, 2015. 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 26, 2015, 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 11, 2016, 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 26, 2015, 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 7, 2016

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

See “Item 2. 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 26, 2015 .

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 Securities Exchange Act of 1934, as amended (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, as appropriate, to allow timely decisions regarding required disclosure.

During our second fiscal quarter of 2016 , 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. In connection with these implementations 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 2016 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 26, 2015 , as updated by our Quarterly Report on Form 10-Q for the quarter ended March 19, 2016.

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. Management believes that the final outcome of the foregoing will not have a material adverse effect on our financial condition, results of operations or cash flows. See also “Item 1. Business – Regulatory Environment and Environmental Compliance” and, under “Item 1A. Risk Factors,” “Changes in, or failure to comply with, laws and regulations applicable to our products or our business operations could adversely affect our business, financial condition or results of operations.”, “Imposition of new taxes, disagreements with tax authorities or additional tax liabilities could adversely affect our business, financial condition or results of operations.”, “Our business, financial condition or results of operations could be adversely affected if we are unable to grow our business in developing and emerging markets or as a result of unstable political conditions, civil unrest or other developments and risks in the markets where our products are made, manufactured, distributed or sold.”, “Climate change or water scarcity, or legal, regulatory or market measures to address climate change or water scarcity, may negatively affect our business and operations or damage our reputation.” and “Potential liabilities and costs from litigation or legal proceedings could have an adverse impact on our business, financial condition or results of operations.” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 .

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 26, 2015 .

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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 second quarter of 2016 is set forth in the table below.

Issuer Purchases of Common Stock



Period	Total Number of Shares Repurchased ^(a)	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
3/19/2016					$	9,688

3/20/2016 - 4/16/2016	2.4	$	102.78	2.4	(243		)
					9,445
4/17/2016 - 5/14/2016	2.1	$	104.08	2.1	(214		)
					9,231
5/15/2016 - 6/11/2016	2.4	$	101.88	2.4	(248		)
Total	6.9	$	102.85	6.9	$	8,983

(a)

All shares were repurchased in open market transactions pursuant to the $12 billion repurchase program authorized by our Board of Directors and publicly announced on February 11, 2015, which commenced on July 1, 2015 and expires on June 30, 2018. Such shares may be repurchased in open market transactions, in privately negotiated transactions, in accelerated stock repurchase transactions or otherwise.

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In connection with our merger with The Quaker Oats Company (Quaker) in 2001, shares of our convertible preferred stock were authorized and issued to an ESOP fund established by Quaker. The preferences, limitations and relative rights of the shares of convertible preferred stock are set forth in Exhibit A to our amended and restated articles of incorporation. Quaker made the final award to the ESOP in June 2001. The Company does not have any authorized, but unissued, “blank check preferred stock.” PepsiCo repurchases shares of its convertible preferred stock from the ESOP in connection with share redemptions by ESOP participants.

The following table summarizes our convertible preferred share repurchases during the second quarter of 2016 .

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
3/20/2016 - 4/16/2016	1,000	$	517.59	N/A	N/A

4/17/2016 - 5/14/2016	—	$	—	N/A	N/A

5/15/2016 - 6/11/2016	1,000	$	512.67	N/A	N/A
Total	2,000	$	515.13	N/A	N/A

ITEM 6. Exhibits.

See “Index to Exhibits” on page 54 .

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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 7, 2016	/s/ Marie T. Gallagher
		Marie T. Gallagher
		Senior Vice President and Controller

Date:	July 7, 2016	/s/ Tony West
		Tony West
		Executive Vice President, Government Affairs, General Counsel and Corporate Secretary
		(Duly Authorized Officer)

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INDEX TO EXHIBITS

ITEM 6



EXHIBITS
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 and restated, effective as of January 11, 2016, 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 January 11, 2016.
Exhibit 10.1	PepsiCo, Inc. Long-Term Incentive Plan (as amended and restated May 4, 2016), which is incorporated herein by reference to Exhibit B to PepsiCo’s Proxy Statement for its 2016 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on March 18, 2016.
Exhibit 10.2	Five-Year Credit Agreement, dated as of June 6, 2016, 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 8, 2016.
Exhibit 12	Computation of Ratio of Earnings to Fixed Charges.
Exhibit 15	Letter re: Unaudited Interim Financial Information.
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 11, 2016 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.

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Part I Financial Informationprint Item 1. Condensed Consolidated Financial Statementsprint Note 1 - Basis Of Presentation and Our Divisionsprint Note 2 - Recent Accounting Pronouncements - Not Yet Adoptedprint Note 3 - Restructuring and Impairment Chargesprint Note 4 - Intangible Assetsprint Note 5 - Income Taxesprint Note 6 - Share-based Compensationprint Note 7 - Pension and Retiree Medical Benefitsprint Note 8 - Debt Obligations and Commitmentsprint Note 9 - Accumulated Other Comprehensive Lossprint Note 10 - Financial Instrumentsprint Note 11 - Net Income Attributable To Pepsico Per Common Shareprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

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Big Lots, Inc.	BIG
Campbell Soup Company	CPB
The Coca-Cola Company	KO
Costco Wholesale Corporation	COST
Darden Restaurants, Inc.	DRI
Dollar General Corporation	DG
The Kroger Co.	KR
McDonald's Corporation	MCD
Sears Holdings Corporation	SHLDQ
Yum! Brands, Inc.	YUM

Supplier name	Ticker
Anheuser-Busch InBev SA/NV	BUD
The Kraft Heinz Company	KHC
Conagra Brands, Inc.	CAG
Archer-Daniels-Midland Company	ADM
Eastman Chemical Company	EMN

PEP 10-Q Quarter ended June 11, 2016