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PEPSICO (PEP)
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PEPSICO : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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10/04/2017 | 10:30pm CET
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. Unless otherwise noted, 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 31, 2016.
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 certain advertising and other marketing
activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated
annual effective tax rate which is based on our expected annual income,
statutory tax rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. Subsequent recognition, derecognition
and measurement of a tax position taken in a previous period are separately
recognized in the quarter in which they occur.
Our Business Risks
This Quarterly Report on Form 10-Q (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

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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 or proposed imposition of new or increased taxes aimed at PepsiCo's
products; imposition of labeling or warning requirements on PepsiCo's products;
changes in laws related to packaging and disposal of PepsiCo's products;
PepsiCo's ability to compete effectively; political conditions, civil unrest or
other developments and risks in the markets where PepsiCo's products are made,
manufactured, distributed or sold; PepsiCo's ability to grow its business in
developing and emerging markets; unfavorable economic conditions in the
countries in which PepsiCo operates; the ability to protect information systems
against, or effectively respond to, a cybersecurity incident or other
disruption; increased costs, disruption of supply or shortages of raw materials
and other supplies; 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; increase in income tax rates, changes in income tax laws or
disagreements with tax authorities; failure to realize anticipated benefits from
PepsiCo's productivity initiatives or global operating model; 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; PepsiCo's ability
to implement shared services or utilize information technology systems and
networks effectively; fluctuations or other changes in exchange rates; 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 publicly traded securities 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 31, 2016 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 36 weeks ended September 9, 2017, our operations outside of North America
reflect the months of January through August. In the 36 weeks ended September 9,
2017, our operations outside of the United States generated 41% of our net
revenue, with Mexico, Russia, Canada, the United Kingdom and Brazil comprising
approximately 19% 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 the 12 weeks ended September 9, 2017,
unfavorable foreign exchange reduced net revenue growth by 1 percentage point
due to declines in the Egyptian pound and Turkish lira, partially offset by
appreciation in the Russian ruble and Mexican peso. In the 36 weeks ended
September 9, 2017, unfavorable foreign exchange reduced net revenue growth by 1
percentage point due to declines in the Egyptian pound, Turkish lira, Pound
sterling and the Mexican peso, partially offset by appreciation in the Russian
ruble and Brazilian real. Currency declines against the U.S. dollar which are
not offset 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 Brazil, China, India, Mexico, the

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Middle East, Russia and Turkey, and currency fluctuations in certain of these
international markets, continue to result in challenging operating environments.
We also continue to monitor the economic and political developments related to
the United Kingdom's pending withdrawal from the European Union, and the
potential impact, if any, for the ESSA segment and our other businesses.
We continue to closely monitor the economic, operating and political environment
in Russia. In the 36 weeks ended September 9, 2017 and September 3, 2016, total
net revenue generated by our operations in Russia represented 5% and 4%,
respectively, of our net revenue. As of September 9, 2017, we have $4.6 billion
of long-lived assets in Russia.
The hurricanes and earthquakes which occurred recently in North and Central
America did not materially impact our results for the third quarter of 2017. We
continue to assess the impact of these events, which occurred just before and
subsequent to the end of our third quarter of 2017.
Due to exchange restrictions and other conditions, 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 third quarter of 2017.
We do not have any guarantees related to our Venezuelan entities, and our
ongoing contractual commitments to our Venezuelan businesses are not material.
We will recognize income from dividends and sales of inventory to our Venezuelan
entities, which have not been and are not expected to be material, to the extent
cash in U.S. dollars is received. We have not received any cash in U.S. dollars
from our Venezuelan entities since our deconsolidation at the end of the third
quarter of 2015. We continue to monitor the conditions in Venezuela and their
impact on our accounting and disclosures.

In addition, certain jurisdictions in which our products are made, manufactured,
distributed or sold have either imposed, or are considering imposing, new or
increased taxes on the manufacture, sale or distribution of our products,
ingredients or substances contained in, or attributes of, our products or
commodities used in the production of our products. These taxes vary in scope
and form: some apply to all beverages, including non-caloric beverages, while
others apply only to beverages with a caloric sweetener (e.g., sugar).
Similarly, some measures apply a single tax rate per liquid ounce while others
apply a graduated tax rate depending upon the amount of added sugar in the
beverage.

We sell a wide variety of beverages, foods and snacks in more than 200 countries
and territories and the profile of the products we sell, and the amount of
revenue attributable to such products, varies by jurisdiction. Because of this,
we cannot predict the scope or form potential taxes or other potential
limitations on our products may take, and therefore cannot predict the impact of
such taxes or limitations on our financial results. In addition, taxes and
limitations may impact us and our competitors differently. We continue to
monitor existing and proposed taxes in the jurisdictions in which our products
are made, manufactured, distributed and sold and to consider actions we may take
to potentially mitigate the unfavorable impact, if any, of such taxes or
limitations, including advocating for alternative measures with respect to the
imposition, form and scope of any such taxes or limitations.
See Note 10 to our condensed consolidated financial statements for the fair
values of our financial instruments as of September 9, 2017 and December 31,
2016 and Note 9 to our consolidated financial statements in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2016 for a discussion of these
items. 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

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in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,
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 36
weeks ended September 9, 2017, total servings was even with the prior year. For
the 12 and 36 weeks ended September 3, 2016, total servings increased 3% and
2.5%, respectively.
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 third quarter includes
beverage volume outside of North America for the months of June, July and
August. 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.
Total Net Revenue and Operating Profit
                                    12 Weeks Ended                          

36 Weeks Ended

                         9/9/2017       9/3/2016       Change        9/9/2017       9/3/2016       Change
Total net revenue      $   16,240$   16,027            1  %   $   43,999$   43,284            2  %
Operating profit
FLNA                   $    1,208$    1,148            5  %   $    3,421$    3,249            5  %
QFNA                          146            144            2  %          456            456            -  %
NAB                           817            904          (10 )%        2,216          2,270           (2 )%
Latin America                 281            247           14  %          641            664         (3.5 )%
ESSA                          436            388           12  %        1,039            792           31  %
AMENA                         267            264            1  %          745            499           49  %

Corporate Unallocated (162 ) (274 ) (41 )% (602 ) (526 ) 14 % Total operating profit $ 2,993$ 2,821

            6  %   $    7,916$    7,404            7  %

Total operating profit
margin                       18.4 %         17.6 %        0.8            

18.0 % 17.1 % 0.9


See "Results of Operations - Division Review" for a tabular presentation and
discussion of key drivers of net revenue.
12 Weeks
Total operating profit increased 6% and operating profit margin increased 0.8
percentage points. Operating profit growth was driven by planned cost reductions
across a number of expense categories, effective net pricing, as well as the
impact of prior-year incremental investments into our business, which
contributed 2 percentage points to operating profit growth. In addition, items
affecting comparability (see "Items Affecting

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Comparability") contributed 3 percentage points to operating profit growth and
increased operating profit margin by 0.5 percentage points. These impacts were
partially offset by certain operating cost increases and higher commodity costs.
Commodity inflation reduced operating profit growth by 6 percentage points,
attributable to inflation in the AMENA, Latin America, ESSA and FLNA segments.
Corporate unallocated expenses decreased 41%, primarily due to mark-to-market
net impact associated with commodity derivatives which is also included in the
items affecting comparability mentioned above.
36 Weeks
Total operating profit increased 7% and operating profit margin increased 0.9
percentage points. Operating profit growth was driven by effective net pricing
and planned cost reductions across a number of expense categories, as well as a
gain associated with the sale of our minority stake in Britvic, which
contributed 1 percentage point to operating profit growth. In addition, items
affecting comparability (see "Items Affecting Comparability") contributed 4
percentage points to operating profit growth and increased operating profit
margin by 0.7 percentage points, primarily reflecting a prior-year impairment
charge to reduce the value of our 5% indirect equity interest in TAB to its
estimated fair value. These impacts were partially offset by certain operating
cost increases, higher commodity costs and unfavorable foreign exchange.
Commodity inflation reduced operating profit growth by 6 percentage points,
primarily attributable to inflation in the AMENA, Latin America, ESSA and FLNA
segments, partially offset by deflation in the QFNA segment. Corporate
unallocated expenses increased 14%, primarily due to mark-to-market net impact
associated with commodity derivatives which is also included in the items
affecting comparability mentioned above.

© Edgar Online, source Glimpses

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