Market Overview

PepsiCo Reports Second Quarter 2015 Results and Increases Full Year Earnings Outlook

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PURCHASE, N.Y., July 9, 2015 /PRNewswire/ --

  • Organic/core1 results
    • Organic revenue grew 5.1 percent
    • Core gross margin expanded 115 basis points   
    • Core EPS was $1.32    
    • Core constant currency EPS increased 11 percent    
  • Reported (GAAP) results
    • Net revenue declined 6 percent reflecting a 10-percentage-point impact of adverse foreign currency translation   
    • Gross margin expanded 105 basis points   
    • EPS increased 3 percent to $1.33   
  • 2015 outlook   
    • Core constant currency EPS growth target raised to 8 percent (previously 7 percent)   
    • Foreign exchange translation expected to adversely impact core earnings per share by 11 percentage points   
    • On track to deliver approximately $1 billion productivity savings and $8.5 to $9 billion cash returns to shareholders

PepsiCo, Inc. (NYSE: PEP) today reported organic revenue growth of 5.1 percent and core earnings per share of $1.32 for the second quarter.

PepsiCo logo

"PepsiCo achieved strong financial performance in the second quarter. We delivered mid-single digit organic revenue growth, strong gross margin expansion and double-digit core constant currency EPS growth. Based on our year-to-date results and positive momentum in the businesses, we are increasing our full-year core constant currency EPS growth target to 8 percent," said Chairman and CEO Indra Nooyi.

"Our results also reflect our keen focus on innovation, brand building and marketplace execution. Through scientific R&D and strategic insights, we are developing sustainable innovation to offer consumers the range of food and beverage choices they're looking for and creating a powerful platform for growth. As a result, we continue to drive growth for our retail partners. Notably, in the second quarter, PepsiCo was once again the largest contributor to retail sales growth in the U.S., our largest market, among all food and beverage manufacturers, with over $400 million of retail sales growth in all measured channels. 

"The macroeconomic environment around the world remains volatile and foreign exchange headwinds persist in many of our international markets. The steps we are taking to manage our businesses responsibly - such as taking pricing actions and optimizing our global sourcing - are clearly contributing to high-quality top and bottom-line year-to-date results and position us well for the remainder of 2015.

"Additionally, our emphasis on productivity continues to help fund investments in our business while also contributing to our margin improvement. We remain on track to deliver our 5 year, $5 billion productivity savings through 2019.

"We believe we have the right strategies in place to continue delivering strong constant currency operating results and healthy cash returns to shareholders."

1 Please refer to the Glossary for the definitions of Non-GAAP financial measures including core, constant currency, organic and free cash flow.

 

Summary Second Quarter 2015 Performance (Percent Growth)

















































ORGANIC/CORE





REPORTED (GAAP)





 

Organic

Volumea

 

Organic

Revenuea

Core Constant

Currency

Operating Profitb





Net

 Revenue

Operating

Profitc

FLNA



3

7





2

7

QFNA



(1)

(1.5)

(5)





(3)

(5)

LAF



3

23

15





(6)

(12)

PAB



1

3

10





1

4

Europe



–/(6)d

0.5

(6)





(24)

(26)

AMEA



4/1d

5

3.5





(4)

2

Total Divisions



1/–d

5

6









Total PepsiCo



1/–d

5

8





(6)

 

a

Organic results are non-GAAP financial measures that adjust for impacts of acquisitions, divestitures and other structural changes and foreign exchange translation, as applicable. For more information about our organic results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for the definition of "Organic."

b

Core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability and foreign exchange translation. For more information about our core constant currency results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for definitions of "Core" and "Constant Currency."

c

The reported operating profit performance was impacted by certain items excluded from our core results in both 2015 and 2014. See "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits for more information about these items. Please refer to the Glossary for the definition of "Core."

d 

Snacks/Beverages.

 

Summary of Second Quarter Financial Performance:

  • Organic revenue grew 5.1 percent and reported net revenue declined 6 percent. Foreign exchange translation had a 10-percentage-point unfavorable impact on reported net revenue.
  • Developing and emerging market organic revenue grew 11 percent. On a reported basis, developing and emerging market net revenue declined 13 percent, reflecting unfavorable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro and Mexican peso.
  • Core gross margin and core operating margin expanded 115 basis points and 60 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by increased advertising and marketing expense as a percent of sales. Reported gross margin and reported operating margin expanded 105 basis points and 110 basis points, respectively.
  • Core constant currency operating profit increased 8 percent. Reported operating profit was even with the prior-year quarter and reflects unfavorable foreign exchange translation, restructuring charges and the mark-to-market net impact on commodity hedges.
  • The company's core effective tax rate was 26 percent, which compares to 26.3 percent in the prior-year quarter. The reported effective tax rate was 26.1 percent, below the prior-year quarter of 26.5 percent.
  • Core EPS was $1.32 and reported EPS was $1.33. Core EPS excludes $0.02 per share related to the mark-to-market net impact on commodity hedges and a $0.01 per share negative impact from restructuring charges.

Discussion of Second Quarter Division Core Constant Currency Operating Profit Results:

Core constant currency operating profit results for all divisions were impacted by organic revenue results as presented in the tables on pages 3 and A-6. In addition, results for each division were impacted by the following:

Frito-Lay North America (FLNA)

Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.

Quaker Foods North America (QFNA)

Negatively impacted by an increase in advertising and marketing expense, partially offset by favorable product mix. Productivity gains more than offset operating cost inflation.

Latin America Foods (LAF)

Positively impacted by productivity gains, partially offset by cost inflation.

PepsiCo Americas Beverages (PAB)

Positively impacted by productivity gains, lower commodity costs and certain insurance adjustments, partially offset by operating cost inflation.

Europe

Negatively impacted by cost inflation, partially offset by productivity gains.

Asia, Middle East & Africa (AMEA)

Positively impacted by productivity gains and lower commodity costs. These impacts were partially offset by operating cost inflation, an increase in advertising and marketing expense and a 6-percentage-point impact of refranchising a portion of the beverage businesses in India and the Middle East.

 

Summary Year to Date 2015 Performance (Percent Growth)

















































ORGANIC/CORE





REPORTED (GAAP)





 

Organic

Volumea

 

Organic

Revenuea

Core Constant

Currency

Operating Profitb





Net

 Revenue

Operating

Profitc

FLNA



2

3

7





2.5

7

QFNA



0.5

1

(22)e





(1)

(23)

LAF



2

21

18





(5)

(12)

PAB



2.5

8





1

6

Europe



–/(6)d

1

(5)f





(24)

(28)

AMEA



6/1d

5

11





(2)

10

Total Divisions



2/(1)d

5

6









Total PepsiCo



2/(1)d

5

8





(5)

 

a

Organic results are non-GAAP financial measures that adjust for impacts of acquisitions, divestitures and other structural changes and foreign exchange translation, as applicable. For more information about our organic results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for the definition of "Organic."

b

Core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability and foreign exchange translation. For more information about our core constant currency results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for definitions of "Core" and "Constant Currency."

c

The reported operating profit performance was impacted by certain items excluded from our core results in both 2015 and 2014. See "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits for more information about these items. Please refer to the Glossary for the definition of "Core."

d 

Snacks/Beverages.

e 

1 percent decrease excluding an impairment charge associated with our dairy joint venture in Q1 2015.

f

Even excluding a gain on the sale of agricultural assets in Q1 2014.

 

Summary of Year to Date 2015 Financial Performance:

  • Organic revenue grew 4.8 percent and reported net revenue declined 5 percent. Foreign exchange translation had a 9-percentage-point unfavorable impact on reported net revenue.
  • Developing and emerging market organic revenue grew 11 percent. On a reported basis, developing and emerging market net revenue declined 13 percent, reflecting unfavorable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro and Mexican peso.
  • Core gross margin and core operating margin expanded 130 basis points and 40 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by increased advertising and marketing expense as a percent of sales. Reported gross margin and reported operating margin expanded 100 basis points and 75 basis points, respectively.
  • Core constant currency operating profit increased 8 percent. Reported operating profit was even with the prior year and reflects unfavorable foreign exchange translation, restructuring charges, and the mark-to-market net impact on commodity hedges.
  • The company's core effective tax rate was 24.9 percent, which compares to 25.3 percent in the prior-year period. The reported effective tax rate was 25 percent, below the prior-year period of 25.6 percent.
  • Core EPS was $2.15 and reported EPS was $2.14. Core EPS excludes a $0.03 per share negative impact from restructuring charges and $0.02 per share related to the mark-to-market net impact on commodity hedges.
  • Cash flow provided by operating activities was $2.8 billion year to date. Free cash flow excluding certain items was $2.1 billion year to date, an increase of 7% from the prior-year period.

Discussion of Year to Date Division Core Constant Currency Operating Profit Results:

Core constant currency operating profit results for all divisions were positively impacted by organic revenue increases as presented in the tables on pages 6 and A-6. In addition, results for each division were impacted by the following:

Frito-Lay North America (FLNA)

Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.

Quaker Foods North America (QFNA)

Negatively impacted by an increase in advertising and marketing expense, partially offset by favorable product mix. Productivity gains more than offset operating cost inflation. Core constant currency operating profit declined 1 percent excluding the impairment charge associated with a dairy joint venture in the first quarter of 2015.

Latin America Foods (LAF)

Positively impacted by productivity gains, partially offset by cost inflation.

PepsiCo Americas Beverages (PAB)

Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.

Europe

Negatively impacted by cost inflation, partially offset by productivity gains. Core constant currency operating profit was even excluding the gain on the sale of agricultural assets in the first quarter of 2014.

Asia, Middle East & Africa (AMEA)

Positively impacted by productivity gains, lower commodity costs and a 3-percentage-point impact of refranchising a portion of the beverage businesses in India and the Middle East, which included a 7-percentage-point positive impact related to the pre-tax India gain. This was partially offset by operating cost inflation and an increase in advertising and marketing expense.

2015 Guidance and Outlook

The company expects mid-single-digit organic revenue growth and increased its core constant currency EPS growth target to 8 percent from 7 percent versus its fiscal 2014 core EPS of $4.63.

Based on the current foreign exchange market consensus, the company expects foreign exchange translation to have an unfavorable impact of approximately 9 percentage points on full year net revenue growth and approximately 11 percentage points on full year core EPS performance in 2015, reflecting current expectations for strength of the U.S. dollar.

In addition, the company expects:

  • Low- to mid-single-digit commodity inflation, which includes the estimated impact of transaction-related foreign exchange;
  • Productivity savings of approximately $1 billion;
  • Higher net interest expense driven by higher interest rates and net debt balances;
  • A core effective tax rate of approximately 25 percent;
  • Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items);
  • Net capital spending to be approximately $3 billion, within the company's long-term capital spending target of less than or equal to 5 percent of net revenue; and
  • To return a total of $8.5 to $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of $4.5 to $5 billion.

Changes to the Reportable Segments Structure:

Beginning with the third quarter of 2015, PepsiCo will realign certain of its reportable segments. As a result, its food and beverage businesses in Latin America will be combined and reported as Latin America. This realignment will create a Latin America segment consistent with PepsiCo's other international segments, Europe and AMEA, which are managed as integrated food and beverage businesses and will enable greater synergies within the segment. PepsiCo Americas Beverages will be renamed as North America Beverages and will no longer include the Latin America beverages business.

In addition, PepsiCo's Sub-Saharan Africa business, which is currently part of the Asia, Middle East and Africa (AMEA) segment, will move to the Europe segment. As a result, the AMEA segment will be renamed as Asia, Middle East and North Africa (AMENA) and the Europe segment will be renamed Europe Sub-Saharan Africa (ESSA). These changes do not impact the Frito-Lay North America or Quaker Foods North America reportable segments.

Within the next 30 days, PepsiCo expects to provide reclassified summary segment reporting for 2013, 2014 and the first two quarters of 2015 to reflect the company's new structure.

Conference Call:

At 8 a.m. (Eastern Time) today, the company will host a conference call with investors and financial analysts to discuss second quarter 2015 results and the outlook for 2015. Further details will be accessible on the company's website at www.pepsico.com/investors.

 

PepsiCo, Inc. and Subsidiaries

Condensed Consolidated Statement of Income

(in millions except per share amounts, unaudited)















































12 Weeks Ended



24 Weeks Ended



6/13/15





6/14/14





Change



6/13/15





6/14/14





Change

Net Revenue

$

15,923





$

16,894





(6)

%



$

28,140





$

29,517





(5)

%

Cost of sales

7,167





7,778





(8)

%



12,609





13,525





(7)

%

Gross profit

8,756





9,116





(4)

%



15,531





15,992





(3)

%

Selling, general and administrative expenses

5,837





6,198





(6)

%



10,799





11,246





(4)

%

Amortization of intangible assets

19





22





(15)

%



35





43





(19)

%

Operating Profit

2,900





2,896





%



4,697





4,703





%

Interest expense

(217)





(209)





4

%



(428)





(410)





4.5

%

Interest income and other

14





18





(18)

%



29





28





7

%

Income before income taxes

2,697





2,705





%



4,298





4,321





(0.5)

%

Provision for income taxes

703





718





(2)

%



1,073





1,107





(3)

%

Net income

1,994





1,987





%



3,225





3,214





%

Less: Net income attributable to noncontrolling interests

14





9





45

%



24





20





17

%

Net Income Attributable to PepsiCo

$

1,980





$

1,978





%



$

3,201





$

3,194





%

























Diluted























Net Income Attributable to PepsiCo per Common Share

$

1.33





$

1.29





3

%



$

2.14





$

2.08





3

%

Weighted-average common shares outstanding

1,491





1,532









1,497





1,536































Cash dividends declared per common share

$

0.7025





$

0.655









$

1.3575





$

1.2225







 

A - 1

 

PepsiCo, Inc. and Subsidiaries

Supplemental Financial Information

(in millions, unaudited)















































12 Weeks Ended



24 Weeks Ended



6/13/15





6/14/14





Change



6/13/15





6/14/14





Change

Net Revenue







Frito-Lay North America

$

3,452





$

3,387





2

%



$

6,771





$

6,606





2.5

%

Quaker Foods North America

546





564





(3)

%



1,185





1,198





(1)

%

Latin America Foods

2,000





2,122





(6)

%



3,279





3,460





(5)

%

PepsiCo Americas Beverages

5,337





5,281





1

%



9,770





9,707





1

%

PepsiCo Europe

2,788





3,657





(24)

%



4,265





5,618





(24)

%

PepsiCo Asia, Middle East & Africa

1,800





1,883





(4)

%



2,870





2,928





(2)

%

Total Net Revenue

$

15,923





$

16,894





(6)

%



$

28,140





$

29,517





(5)

%

























Operating Profit























Frito-Lay North America

$

1,007





$

937





7

%



$

1,927





$

1,799





7

%

Quaker Foods North America

132





139





(5)

%



231





299





(23)

%

Latin America Foods

285





323





(12)

%



489





555





(12)

%

PepsiCo Americas Beverages

903





868





4

%



1,371





1,297





6

%

PepsiCo Europe

334





451





(26)

%



434





603





(28)

%

PepsiCo Asia, Middle East & Africa

389





381





2

%



631





575





10

%

Division Operating Profit

3,050





3,099





(2)

%



5,083





5,128





(1)

%

Corporate Unallocated























Commodity Mark-to-Market Net Impact

39





31









38





65







Restructuring and Impairment Charges

(1)





(8)









(7)





(5)







Other

(188)





(226)









(417)





(485)









(150)





(203)





(26)

%



(386)





(425)





(9)

%

Total Operating Profit

$

2,900





$

2,896





%



$

4,697





$

4,703





%

 

A - 2

 

PepsiCo, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(in millions, unaudited)



















24 Weeks Ended



6/13/15





6/14/14



Operating Activities







Net income

$

3,225





$

3,214



Depreciation and amortization

1,075





1,162



Stock-based compensation expense

144





140



Restructuring and impairment charges

61





190



Cash payments for restructuring charges

(107)





(112)



Excess tax benefits from share-based payment arrangements

(78)





(64)



Pension and retiree medical plan expenses

215





243



Pension and retiree medical plan contributions

(117)





(155)



Deferred income taxes and other tax charges and credits

42





35



Change in assets and liabilities:







Accounts and notes receivable

(1,309)





(1,554)



Inventories

(862)





(822)



Prepaid expenses and other current assets

(264)





(152)



Accounts payable and other current liabilities

197





120



Income taxes payable

648





636



Other, net

(109)





(209)



Net Cash Provided by Operating Activities

2,761





2,672











Investing Activities







Capital spending

(832)





(921)



Sales of property, plant and equipment

26





42



Acquisitions and investments in noncontrolled affiliates

(16)





(31)



Divestitures

74





123



Short-term investments, net

593





(3,380)



Other investing, net

(3)





5



Net Cash Used for Investing Activities

(158)





(4,162)











Financing Activities







Proceeds from issuances of long-term debt

2,487





3,364



Payments of long-term debt

(2,054)





(1,655)



Short-term borrowings, net

2,247





1,548



Cash dividends paid

(1,973)





(1,752)



Share repurchases - common

(2,130)





(2,199)



Share repurchases - preferred

(2)





(3)



Proceeds from exercises of stock options

250





381



Excess tax benefits from share-based payment arrangements

78





64



Other financing

(2)





(3)



Net Cash Used for Financing Activities

(1,099)





(255)











Effect of exchange rate changes on cash and cash equivalents

(76)





(23)



Net Increase/(Decrease) in Cash and Cash Equivalents

1,428





(1,768)



Cash and Cash Equivalents, Beginning of Year

6,134





9,375



Cash and Cash Equivalents, End of Period

$

7,562





$

7,607



 

A - 3

 

PepsiCo, Inc. and Subsidiaries

Condensed Consolidated Balance Sheet

(in millions except per share amounts)



















6/13/15





12/27/14





(unaudited)





Assets







Current Assets







Cash and cash equivalents

$

7,562





$

6,134



Short-term investments

2,017





2,592



Accounts and notes receivable, net

7,826





6,651



Inventories:







Raw materials

1,848





1,593



Work-in-process

389





173



Finished goods

1,694





1,377





3,931





3,143



Prepaid expenses and other current assets

1,733





2,143



Total Current Assets

23,069





20,663



Property, plant and equipment, net

16,736





17,244



Amortizable intangible assets, net

1,378





1,449



Goodwill

14,912





14,965



Other nonamortizable intangible assets

12,653





12,639



Nonamortizable Intangible Assets

27,565





27,604



Investments in noncontrolled affiliates

2,626





2,689



Other assets

888





860



Total Assets

$

72,262





$

70,509











Liabilities and Equity







Current Liabilities







Short-term obligations

$

8,383





$

5,076



Accounts payable and other current liabilities

13,163





13,016



Total Current Liabilities

21,546





18,092



Long-term debt obligations

23,075





23,821



Other liabilities

5,908





5,744



Deferred income taxes

5,269





5,304



Total Liabilities

55,798





52,961











Commitments and Contingencies















Preferred stock, no par value

41





41



Repurchased preferred stock

(183)





(181)



PepsiCo Common Shareholders' Equity







Common stock, par value 12/3¢ per share (authorized 3,600 shares, issued, net of repurchased common stock at par value: 1,472 and 1,488 shares, respectively)

25





25



Capital in excess of par value

3,973





4,115



Retained earnings

50,268





49,092



Accumulated other comprehensive loss

(11,101)





(10,669)



Repurchased common stock, in excess of par value (394 and 378 shares, respectively)

(26,691)





(24,985)



Total PepsiCo Common Shareholders' Equity

16,474





17,578



Noncontrolling interests

132





110



Total Equity

16,464





17,548



  Total Liabilities and Equity

$

72,262





$

70,509



 

A - 4

 

PepsiCo, Inc. and Subsidiaries

Supplemental Share and Stock-Based Compensation Data

(in millions except dollar amounts, unaudited)



































12 Weeks Ended



24 Weeks Ended



6/13/15





6/14/14





6/13/15





6/14/14



Beginning Net Shares Outstanding

1,479





1,519





1,488





1,529



Options Exercised, Restricted Stock Units (RSUs), Performance Stock

   Units (PSUs) and PepsiCo Equity Performance Units (PEPunits) Converted

4





4





7





9



Shares Repurchased

(11)





(12)





(23)





(27)



Ending Net Shares Outstanding

1,472





1,511





1,472





1,511



















Weighted Average Basic

1,476





1,515





1,480





1,519



Dilutive Securities:















Options

9





10





9





10



RSUs, PSUs, PEPunits and Other

5





6





7





6



ESOP Convertible Preferred Stock

1





1





1





1



Weighted Average Diluted

1,491





1,532





1,497





1,536



















Average Share Price for the Period

$

95.82





$

85.55





$

96.32





$

83.32



Growth Versus Prior Year

12

%



5

%



16

%



7

%

















Options Outstanding

36





45





37





47



Options in the Money

34





45





35





47



Dilutive Shares from Options

9





10





9





10



Dilutive Shares from Options as a % of Options in the Money

27

%



22

%



27

%



20

%

















Average Exercise Price of Options in the Money

$

64.59





$

63.28





$

64.56





$

63.14



















RSUs, PSUs, PEPunits and Other Outstanding

11





13





13





13



Dilutive Shares from RSUs, PSUs, PEPunits and Other

5





6





7





6



















Average Intrinsic Value of RSUs and PSUs Outstanding (a)

$

83.25





$

74.20





$

81.42





$

74.17



Average Intrinsic Value of PEPunits Outstanding (a)

$

62.75





$

60.82





$

63.03





$

60.83



































(a) Weighted-average intrinsic value at grant date.











 

A - 5

 



PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information

Organic Revenue Growth Rates

12 and 24 Weeks Ended June 13, 2015

(unaudited)







































Percent Impact



GAAP

Measure



Non-GAAP

Measure







Reported

% Change



Organic

% Change (a)

Net Revenue Year over Year % Change

Volume



Effective

net pricing



Acquisitions and

divestitures



Foreign

exchange

translation



12 Weeks Ended 6/13/15



12 Weeks Ended 6/13/15

Frito-Lay North America





3









(1)





2





3



Quaker Foods North America





(1)









(1)





(3)





(1.5)



Latin America Foods

3





20









(29)





(6)





23



PepsiCo Americas Beverages





3









(2)





1





3



PepsiCo Europe

(4)





5









(24)





(24)





0.5



PepsiCo Asia, Middle East & Africa

3





2





(5.5)





(4)





(4)





5



Total PepsiCo





5





(1)





(10)





(6)





5











































Percent Impact



GAAP

Measure



Non-GAAP

Measure







Reported

% Change



Organic

% Change (a)

Net Revenue Year over Year % Change

Volume



Effective

net pricing



Acquisitions and

divestitures



Foreign

exchange

translation



24 Weeks Ended 6/13/15



24 Weeks Ended 6/13/15

Frito-Lay North America

1





2









(1)





2.5





3



Quaker Foods North America

1





(1)









(1)





(1)





1



Latin America Foods

1





20









(26)





(5)





21



PepsiCo Americas Beverages





3









(2)





1





2.5



PepsiCo Europe

(4)





5









(25)





(24)





1



PepsiCo Asia, Middle East & Africa

5









(4)





(3)





(2)





5



Total PepsiCo





5









(9)





(5)





5











































(a)

Organic percent change is a financial measure that is not in accordance with GAAP and is calculated by excluding the impact of acquisitions and divestitures and foreign exchange translation from reported growth.

Note – Certain amounts above may not sum due to rounding.

 

A - 6

 



PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

Year over Year Growth Rates

12 and 24 Weeks Ended June 13, 2015

(unaudited)







































GAAP

Measure







Non-GAAP
Measure







Non-GAAP
Measure



Reported

% Change



Percent Impact of Non-Core Adjustments



 Core (a)

% Change



Percent
Impact of



Core
Constant
Currency (a)

% Change

Operating Profit Year over Year % Change

12 Weeks Ended 6/13/15



Commodity

mark-to-

market net

impact



Restructuring

and

impairment

charges (b)



12 Weeks Ended 6/13/15



Foreign

exchange

translation



12 Weeks Ended 6/13/15

Frito-Lay North America

7









(1)





6





1





7



Quaker Foods North America

(5)









(0.5)





(5)









(5)



Latin America Foods

(12)









(0.5)





(12)





27





15



PepsiCo Americas Beverages

4









(3)





1





9





10



PepsiCo Europe

(26)









(2)





(28)





22





(6)



PepsiCo Asia, Middle East & Africa

2









(1)





1





2.5





3.5



Division Operating Profit

(2)









(2)





(3.5)





9





6



Impact of Corporate Unallocated

2













1





1





2



Total Operating Profit









(2)





(2)





10





8



Net Income Attributable to PepsiCo













(3)





11





8



Net Income Attributable to PepsiCo per common share - diluted

3

















11





11







































GAAP

Measure





Non-GAAP
Measure







Non-GAAP

Measure



Reported

% Change



Percent Impact of Non-Core Adjustments



Core(a)

% Change



Percent
Impact of



Core

Constant
Currency (a)

% Change

Operating Profit Year over Year % Change

24 Weeks Ended 6/13/15



Commodity

mark-to-

market net

impact



Restructuring

and

impairment

charges (b)



24 Weeks Ended 6/13/15



Foreign
exchange
translation



24 Weeks Ended 6/13/15

Frito-Lay North America

7







(1)





6





1



7



Quaker Foods North America

(23)











(23)





1



(22)



Latin America Foods

(12)







1





(11)





29



18



PepsiCo Americas Beverages

6







(8)





(2)





10



8



PepsiCo Europe

(28)











(28)





23



(5)



PepsiCo Asia, Middle East & Africa

10







(1)





9





2



11



Division Operating Profit

(1)







(2)





(3)





9



6



Impact of Corporate Unallocated

1





1







1





1



2



Total Operating Profit





1



(3)





(2)





10



8



Net Income Attributable to PepsiCo













(2)





11



9



Net Income Attributable to PepsiCo per common share - diluted

3

















11



11







(a)

Core results are financial measures that are not in accordance with GAAP and exclude the above non-core adjustments. See A-15 through A-17 for a discussion of each of these adjustments.

(b)

Restructuring and impairment charges include costs associated with the 2014 and 2012 Multi-Year Productivity Plans. See A-15 through A-16 for a discussion of these Plans.

Note – Certain amounts above may not sum due to rounding.

 

A - 7

 

PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

Certain Line Items

12 Weeks Ended June 13, 2015 and June 14, 2014 

(in millions except per share amounts, unaudited)



































GAAP
Measure











Non-GAAP

Measure



Reported



Non-Core Adjustments



Core (a)



12 Weeks

Ended

6/13/15



Commodity mark-to-
market net
impact



Restructuring and
impairment
charges (b)



12

Weeks

Ended

6/13/15



Cost of sales

$

7,167





$

2





$





$

7,169



Gross profit

$

8,756





$

(2)





$





$

8,754



Selling, general and administrative expenses

$

5,837





$

37





$

(25)





$

5,849



Operating profit

$

2,900





$

(39)





$

25





$

2,886



Provision for income taxes

$

703





$

(12)





$

6





$

697



Net income attributable to PepsiCo

$

1,980





$

(27)





$

19





$

1,972



Net income attributable to PepsiCo per common share - diluted

$

1.33





$

(0.02)





$

0.01





$

1.32



Effective tax rate

26.1

%











26.0

%

 





































GAAP

Measure











Non-GAAP

Measure



Reported



Non-Core Adjustments



Core (a)



12 Weeks

Ended

6/14/14



Commodity mark-to-
market net
impact



Restructuring and
impairment
charges (b) 



12 Weeks

Ended

6/14/14



Cost of sales

$

7,778





$

21





$





$

7,799



Gross profit

$

9,116





$

(21)





$





$

9,095



Selling, general and administrative expenses

$

6,198





$

10





$

(92)





$

6,116



Operating profit

$

2,896





$

(31)





$

92





$

2,957



Provision for income taxes

$

718





$

(11)





$

20





$

727



Noncontrolling interests

$

9





$





$

3





$

12



Net income attributable to PepsiCo

$

1,978





$

(20)





$

69





$

2,027



Net income attributable to PepsiCo per common share - diluted

$

1.29





$

(0.01)





$

0.04





$

1.32



Effective tax rate

26.5

%











26.3

%





(a)

Core results are financial measures that are not in accordance with GAAP and exclude the above non-core adjustments. See A-15 through A-17 for a discussion of each of these adjustments.

(b)

Restructuring and impairment charges include costs associated with the 2014 and 2012 Multi-Year Productivity Plans. See A-15 through A-16 for a discussion of these Plans.

Note – Certain amounts above may not sum due to rounding.

 

A - 8

 

PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

Certain Line Items

24 Weeks Ended June 13, 2015 and June 14, 2014

(in millions except per share amounts, unaudited)



































GAAP

Measure



Non-GAAP

Measure



Reported



Non-Core Adjustments



Core (a)



24 Weeks

Ended

 6/13/15



Commodity mark-to-

market net

impact



Restructuring and

impairment

charges (b)



24 Weeks

Ended

6/13/15

Cost of sales

$

12,609





$

(16)





$





$

12,593



Gross profit

$

15,531





$

16





$





$

15,547



Selling, general and administrative expenses

$

10,799





$

54





$

(61)





$

10,792



Operating profit

$

4,697





$

(38)





$

61





$

4,720



Provision for income taxes

$

1,073





$

(12)





$

13





$

1,074



Net income attributable to PepsiCo

$

3,201





$

(26)





$

48





$

3,223



Net income attributable to PepsiCo per common share - diluted

$

2.14





$

(0.02)





$

0.03





$

2.15



Effective tax rate

25.0

%











24.9

%





































GAAP

Measure







Non-GAAP

Measure



Reported



Non-Core Adjustments



Core (a)



24 Weeks

Ended

6/14/14



Commodity

mark-to-

market net

impact



Restructuring

and

impairment

charges (b)



24 Weeks

Ended

6/14/14

Cost of sales

$

13,525





$

67





$





$

13,592



Gross profit

$

15,992





$

(67)





$





$

15,925



Selling, general and administrative expenses

$

11,246





$

(2)





$

(190)





$

11,054



Operating profit

$

4,703





$

(65)





$

190





$

4,828



Provision for income taxes

$

1,107





$

(24)





$

42





$

1,125



Noncontrolling interests

$

20





$





$

3





$

23



Net income attributable to PepsiCo

$

3,194





$

(41)





$

145





$

3,298



Net income attributable to PepsiCo per common share - diluted

$

2.08





$

(0.03)





$

0.09





$

2.15



Effective tax rate

25.6

%











25.3

%





(a)

Core results are financial measures that are not in accordance with GAAP and exclude the above non-core adjustments. See A-15 through A-17 for a discussion of each of these adjustments.

(b)

Restructuring and impairment charges include costs associated with the 2014 and 2012 Multi-Year Productivity Plans. See A-15 through A-16 for a discussion of these Plans.

Note – Certain amounts above may not sum due to rounding.

 

A - 9

 

PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

Operating Profit by Division

12 Weeks Ended June 13, 2015 and June 14, 2014

(in millions, unaudited)



































GAAP

Measure



Non-Core Adjustments



Non-GAAP

Measure



Reported





Core (a)

Operating Profit

12 Weeks

Ended

6/13/15



Commodity

mark-to-market

net impact



Restructuring

and

impairment

charges (b)



12 Weeks

Ended

6/13/15

Frito-Lay North America

$

1,007





$





$

2





$

1,009



Quaker Foods North America

132













132



Latin America Foods

285









4





289



PepsiCo Americas Beverages

903









8





911



PepsiCo Europe

334









7





341



PepsiCo Asia, Middle East & Africa

389









3





392



Division Operating Profit

3,050









24





3,074



Corporate Unallocated

(150)





(39)





1





(188)



Total Operating Profit

$

2,900





$

(39)





$

25





$

2,886







































GAAP

Measure



Non-Core Adjustments



Non-GAAP

Measure



Reported





Core (a)

Operating Profit

12 Weeks

Ended

6/14/14



Commodity

mark-to-market

net impact



Restructuring

and

 impairment charges (b)



12 Weeks

Ended

6/14/14

Frito-Lay North America

$

937





$





$

13





$

950



Quaker Foods North America

139













139



Latin America Foods

323









5





328



PepsiCo Americas Beverages

868









36





904



PepsiCo Europe

451









23





474



PepsiCo Asia, Middle East & Africa

381









7





388



Division Operating Profit

3,099









84





3,183



Corporate Unallocated

(203)





(31)





8





(226)



Total Operating Profit

$

2,896





$

(31)





$

92





$

2,957







(a)

Core results are financial measures that are not in accordance with GAAP and exclude the above non-core adjustments. See A-15 through A-17 for a discussion of each of these adjustments.

(b)

Restructuring and impairment charges include costs associated with the 2014 and 2012 Multi-Year Productivity Plans. See A-15 through A-16 for a discussion of these Plans.

A - 10

 

PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

Operating Profit by Division

24 Weeks Ended June 13, 2015 and June 14, 2014

(in millions, unaudited)



































GAAP

Measure



Non-Core Adjustments



Non-GAAP

Measure



Reported





Core (a)

Operating Profit

24 Weeks

Ended

6/13/15



Commodity

mark-to-market

net impact



Restructuring and

impairment

charges (b)



24 Weeks

Ended

6/13/15

Frito-Lay North America

$

1,927





$





$

8





$

1,935



Quaker Foods North America

231









1





232



Latin America Foods

489









6





495



PepsiCo Americas Beverages

1,371









15





1,386



PepsiCo Europe

434









19





453



PepsiCo Asia, Middle East & Africa

631









5





636



Division Operating Profit

5,083









54





5,137



Corporate Unallocated

(386)





(38)





7





(417)



Total Operating Profit

$

4,697





$

(38)





$

61





$

4,720







































GAAP

Measure



Non-Core Adjustments



Non-GAAP

Measure



Reported





Core (a)

Operating Profit

24 Weeks

Ended

6/14/14



Commodity

mark-to-market

net impact



Restructuring

and

impairment

charges (b)



24 Weeks

Ended

6/14/14

Frito-Lay North America

$

1,799





$





$

26





$

1,825



Quaker Foods North America

299









2





301



Latin America Foods

555









1





556



PepsiCo Americas Beverages

1,297









122





1,419



PepsiCo Europe

603









23





626



PepsiCo Asia, Middle East & Africa

575









11





586



Division Operating Profit

5,128









185





5,313



Corporate Unallocated

(425)





(65)





5





(485)



Total Operating Profit

$

4,703





$

(65)





$

190





$

4,828







(a)

Core results are financial measures that are not in accordance with GAAP and exclude the above non-core adjustments. See A-15 through A-17 for a discussion of each of these adjustments.

(b)

Restructuring and impairment charges include costs associated with the 2014 and 2012 Multi-Year Productivity Plans. See A-15 through A-16 for a discussion of these Plans.

A - 11

 

PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

(unaudited)

Developing and Emerging Markets Net Revenue Growth Reconciliation

















12 Weeks Ended



24 Weeks Ended





6/13/15



6/13/15



Reported Developing and Emerging Markets Net Revenue Growth

(13)



%

(13)



%

Impact of Acquisitions and Divestitures

2





1





Impact of Foreign Exchange Translation

22





22





Developing and Emerging Markets Organic Revenue Growth

11



%

11



%

Gross Margin Growth Reconciliation

















12 Weeks Ended



24 Weeks Ended





6/13/15



6/13/15



Reported Gross Margin Growth

103



bps

101



bps

Commodity Mark-to-Market Net Impact

11





28





Core Gross Margin Growth

114



bps

130



bps

Operating Margin Growth Reconciliation 

















12 Weeks Ended



24 Weeks Ended





6/13/15



6/13/15



Reported Operating Margin Growth

107



bps

76



bps

Commodity Mark-to-Market Net Impact

(6)





8





Restructuring and Impairment Charges

(38)





(42)





Core Operating Margin Growth

62



bps

41



bps

 

Net Cash Provided by Operating Activities Reconciliation (in millions)























24 Weeks Ended







6/13/15





6/14/14





% Change

Net cash provided by operating activities

$

2,761





$

2,672





3

Capital spending

(832)





(921)







Sales of property, plant and equipment

26





42







Free cash flow

1,955





1,793





9

Discretionary pension and retiree medical contributions





19







Payments related to restructuring charges (after-tax)

105





117







Net capital investments related to restructuring plan





1







Free cash flow excluding above items

$

2,060





$

1,930





7

Note – Certain amounts above may not sum due to rounding.





 

A - 12

 



PepsiCo, Inc. and Subsidiaries

Reconciliation of GAAP and Non-GAAP Information (cont.)

(unaudited)

 

Quaker Operating Profit Growth Reconciliation









24 Weeks Ended





6/13/15



Reported Operating Profit Growth

(23)

%

Restructuring and Impairment Charges



Core Operating Profit Growth

(23)



Impact of Foreign Exchange Translation

1



Core Constant Currency Operating Profit Growth

(22)



Impairment Charge Associated with Our Dairy Joint Venture

22



Core Constant Currency Operating Profit Growth Excluding Impairment Charge Associated with Our Dairy Joint

    Venture

(1)

%



PepsiCo Europe Operating Profit Growth Reconciliation











24 Weeks Ended





6/13/15



Reported Operating Profit Growth

(28)

%

Restructuring and Impairment Charges



Core Operating Profit Growth

(28)



Impact of Foreign Exchange Translation

23



Core Constant Currency Operating Profit Growth

(5)



Prior Year Gain on Sale of Agricultural Assets

5



Core Constant Currency Operating Profit Growth Excluding Gain on Sale of Agricultural Assets

%



Fiscal 2014 Diluted EPS Reconciliation









Year Ended





12/27/14



Reported Diluted EPS

$

4.27



Commodity Mark-to-Market Net Impact

0.03



Restructuring and Impairment Charges

0.21



Pension Lump Sum Settlement Charge

0.06



Venezuela Remeasurement Charge

0.07



Core Diluted EPS

$

4.63





Net Cash Provided by Operating Activities Reconciliation (in billions)











2015 

Guidance



Net Cash Provided by Operating Activities

$

~

10



Net Capital Spending



~

3



Free Cash Flow



~

7



Certain Other Items (a) 



~



Free Cash Flow, Excluding Certain Other Items

$

~

7







(a)

Certain other items include discretionary pension and retiree medical contributions, payments related to restructuring charges, net capital investments related to restructuring plan and the tax impacts associated with each of these items, as applicable.

Note – Certain amounts above may not sum due to rounding.

 

A - 13

 

Cautionary Statement

Statements in this communication that are "forward-looking statements," including our 2015 guidance, are based on currently available information, operating plans and projections about future events and trends. Terminology such as "aim," "anticipate," "believe," "drive," "estimate," "expect," "expressed confidence," "forecast," "future," "goals," "guidance," "intend," "may," "objectives," "outlook," "plan," "position," "potential," "project," "seek," "should," "strategy," "target," "will" or similar statements or variations of such terms are intended to identify forward-looking statements, although not all forward-looking statements contain such terms. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. 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 the legal and regulatory environment; imposition of new 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; disruption of PepsiCo's supply chain; 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; PepsiCo's ability to 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 a cybersecurity incident 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, including changes in currency exchange mechanisms or additional governmental actions in Venezuela; climate change, or legal, regulatory or market measures to address climate change; failure to successfully negotiate collective bargaining agreements or strikes or work stoppages; any infringement of or challenge to PepsiCo's 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 stock and financial performance.

For additional information on these and other factors that could cause PepsiCo's actual results to materially differ from those set forth herein, please see PepsiCo's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. PepsiCo undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Miscellaneous Disclosures

In discussing financial results and guidance, the company may refer to certain measures not in accordance with Generally Accepted Accounting Principles (GAAP). Reconciliations of any such non-GAAP measures to the most directly comparable financial measures in accordance with GAAP can be found in the attached exhibits, as well as on the company's website at www.pepsico.com in the "Investors" section under "Events & Presentations." Our non-GAAP measures exclude from reported results those items that management believes are not indicative of our ongoing performance and reflect how management evaluates our operating results and trends.

Glossary

Acquisitions and divestitures: All merger and acquisition activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees.

Beverage volume: Volume shipped to retailers and independent distributors from both PepsiCo and our bottlers.

Constant currency: Financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates.

Core: Core results are non-GAAP financial measures which exclude certain items from our historical results. In 2015, core results exclude the commodity mark-to-market net impact included in corporate unallocated expenses and restructuring and impairment charges. In 2014, core results exclude the commodity mark-to-market net impact included in corporate unallocated expenses, restructuring and impairment charges, a pension lump sum settlement charge and a charge related to the 2014 Venezuela remeasurement. See "Reconciliation of GAAP and Non-GAAP Information" for additional information.

 

A - 14

 

Division operating profit: The aggregation of the operating profit for each of our reportable segments, which excludes the impact of corporate unallocated expenses.

Effective net pricing: Reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

Free cash flow: Net cash provided by operating activities less capital spending plus sales of property, plant and equipment. See above for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow).

Free cash flow, excluding certain items: Free cash flow, excluding: (1) payments related to restructuring charges (2) discretionary pension and retiree medical contributions, (3) net capital investments related to restructuring plan and (4) the tax impacts associated with each of these items, as applicable. This non-GAAP financial measure is our primary measure used to monitor cash flow performance. See above for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow). See "Reconciliation of GAAP and Non-GAAP Information" for additional information.

Mark-to-market gain or loss or net impact: Change in market value for commodity contracts that we purchase to mitigate the volatility in costs of energy and raw materials that we consume. The market value is determined based on average prices on national exchanges and recently reported transactions in the marketplace.

Net capital spending: Capital spending less cash proceeds from sales of property, plant and equipment.

Organic: A measure that adjusts for impacts of acquisitions, divestitures and other structural changes, and in the case of organic revenue, foreign exchange translation. In excluding the impact of foreign exchange translation, we assume constant foreign exchange rates used for translation based on the rates in effect for the comparable prior-year period. See the definition of "Constant currency" for additional information.

Reconciliation of GAAP and Non-GAAP Information (unaudited)

Division operating profit, core results, core constant currency results and organic results are non-GAAP financial measures as they exclude certain items noted below. These measures are not in accordance with GAAP. However, we believe investors should consider these measures as they are more indicative of our ongoing performance and reflect how management evaluates our operational results and trends. These measures are not, and should not be viewed as, substitutes for GAAP reporting measures.

Commodity mark-to-market net impact

In the 12 and 24 weeks ended June 13, 2015, we recognized $39 million and $38 million of mark-to-market net gains, respectively, on commodity hedges in corporate unallocated expenses. In the 12 and 24 weeks ended June 14, 2014, we recognized $31 million and $65 million of mark-to-market net gains, respectively, on commodity hedges in corporate unallocated expenses. In the year ended December 27, 2014, we recognized mark-to-market net losses of $68 million on commodity hedges in corporate unallocated expenses. We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit.

Restructuring and impairment charges

2014 Multi-Year Productivity Plan

In the 12 and 24 weeks ended June 13, 2015, we incurred restructuring charges of $21 million and $51 million, respectively, in conjunction with the multi-year productivity plan we publicly announced on February 13, 2014 (2014 Productivity Plan). In the 12 and 24 weeks ended June 14, 2014, we incurred restructuring charges of $77 million and $173 million, respectively, in conjunction with our 2014 Productivity Plan. In the year ended December 27, 2014, we incurred restructuring charges of $357 million in conjunction with our 2014 Productivity Plan. The 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.

 

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2012 Multi-Year Productivity Plan

In the 12 and 24 weeks ended June 13, 2015, we incurred restructuring charges of $4 million and $10 million, respectively, in conjunction with the multi-year productivity plan we publicly announced on February 9, 2012 (2012 Productivity Plan). In the 12 and 24 weeks ended June 14, 2014, we incurred restructuring charges of $15 million and $17 million, respectively, in conjunction with our 2012 Productivity Plan. In the year ended December 27, 2014, we incurred restructuring charges of $61 million in conjunction with our 2012 Productivity Plan. The 2012 Productivity Plan includes actions in every aspect of our business that we believe will strengthen our complementary food, snack and beverage businesses by: leveraging new technologies and processes across PepsiCo's operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management.

Pension lump sum settlement charge

In the year ended December 27, 2014, we recorded a pension lump sum settlement charge of $141 million related to payments for pension liabilities to certain former employees who had vested benefits.

Venezuela remeasurement charge

In the year ended December 27, 2014, we recorded a $105 million net charge related to our remeasurement of the bolivar for certain net monetary assets of our Venezuela businesses. $126 million of this charge was recorded in corporate unallocated expenses, with the balance (equity income of $21 million) recorded in our PAB segment.

At the end of each period, we remeasure the net monetary assets of our Venezuela entities from the bolivar to the U.S. dollar at the rate we believe is legally available to us, including for the payment of dividends. As of June 13, 2015, there was a three-tiered exchange rate mechanism in Venezuela for exchanging bolivars into U.S. dollars: (1) The government-operated National Center of Foreign Commerce (CENCOEX), which has a fixed exchange rate of 6.3 bolivars per U.S. dollar (fixed exchange rate) mainly intended for the import of essential goods and services by designated industry sectors; (2) The auction-based Supplementary Foreign Currency Administration System (SICAD), which is intended for certain transactions, including foreign investments; and (3) An open market Marginal Foreign Exchange System (SIMADI), established in February 2015, which is available to companies and individuals to exchange foreign currency based on supply and demand. As of the end of the second quarter of 2015, the SICAD exchange rate was 12.0 bolivars per U.S. dollar. Subsequent to the end of the second quarter of 2015, a SICAD auction was held at which bolivars were exchanged for U.S. dollars at the rate of 12.8 bolivars per U.S. dollar. This change in the SICAD exchange rate will not have a material impact on our financial position or results of operations.

We believe that significant uncertainty exists regarding the exchange mechanisms in Venezuela, including the nature of transactions that are eligible to flow through CENCOEX, SICAD or SIMADI, or any other new exchange mechanism that may emerge, how any such mechanisms will operate in the future, as well as the availability of U.S. dollars under each mechanism. We continue to monitor developments closely and may determine in the future that rates other than the SICAD exchange rate or the fixed exchange rate, as applicable, are appropriate for remeasurement of the net monetary assets of our Venezuelan entities, which approximated $335 million at June 13, 2015. If, at the end of the second quarter of 2015, we had used the SICAD exchange rate, which was 12.0 bolivars per U.S. dollar as of that date, to remeasure the net monetary assets that are currently recorded at the fixed exchange rate, we would have incurred a net charge of approximately $160 million. If, at the end of the second quarter of 2015, we had remeasured all net monetary assets of our Venezuelan businesses at the SIMADI exchange rate, which was approximately 199 bolivars per U.S. dollar as of that date, we would have incurred a net charge of approximately $325 million. If we were to conclude that the SIMADI exchange rate is the appropriate rate for remeasurement of our Venezuelan entities, it would also lead to an impairment of our non-monetary assets, which were approximately $720 million at June 13, 2015. Any such remeasurement and potential impairment charges, if recognized, would be reflected in "Items Affecting Comparability." In addition, if we were to conclude that the SIMADI exchange rate is the appropriate rate for remeasurement of our Venezuelan entities, our results of operations in Venezuela for the remainder of 2015 would expect to generate approximately 0% of both our net revenue and operating profit. Any further devaluation of the bolivar, change in the currency exchange mechanisms, limitation in the volume of U.S. dollars available for conversion, additional governmental actions or fluctuation of the auction-based SICAD exchange rate could adversely affect our financial position, including a potential impairment of non-monetary assets, results of operations, both for any period in which we determine to remeasure using another rate and on a going forward basis following any such remeasurement, and our ability to make effective business decisions with respect to our Venezuelan operations or to continue to operate in Venezuela in the same manner as we have historically.

 

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Free cash flow, excluding certain items

Free cash flow (excluding the items noted in the Net Cash Provided by Operating Activities Reconciliation table) is the primary measure management uses to monitor cash flow performance. This is not a measure defined by GAAP. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Additionally, we consider certain other items (included in the Net Cash Provided by Operating Activities Reconciliation table) in evaluating free cash flow that we believe investors should consider in evaluating our free cash flow results.

2015 guidance

Our 2015 core tax rate guidance and our 2015 core constant currency EPS growth guidance exclude the commodity mark-to-market net impact included in corporate unallocated expenses and restructuring and impairment charges. Our 2015 organic revenue growth guidance excludes the impact of acquisitions, divestitures and other structural changes. In addition, our 2015 organic revenue growth guidance and our 2015 core constant currency EPS growth guidance exclude the impact of foreign exchange. We are not able to reconcile our full year projected 2015 core tax rate to our full year projected 2015 reported tax rate and our full year projected 2015 core constant currency EPS growth to our full year projected 2015 reported EPS growth because we are unable to predict the 2015 impact of foreign exchange or the mark-to-market net impact on commodity hedges due to the unpredictability of future changes in foreign exchange rates and commodity prices. We are also unable to reconcile our full year projected 2015 organic revenue growth to our full year projected 2015 reported net revenue growth because we are unable to predict the 2015 impact of foreign exchange due to the unpredictability of future changes in foreign exchange rates. Therefore, we are unable to provide a reconciliation of these measures.

 

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SOURCE PepsiCo, Inc.

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