Basis of Presentation and Our Divisions
Basis of Presentation
Our financial statements include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates using the equity method based on our economic ownership interest, our ability to exercise significant influence over the operating or financial decisions of these affiliates or our ability to direct their economic resources. We do not control these other affiliates, as our ownership in these other affiliates is generally 50% or less. Intercompany balances and transactions are eliminated. Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. In 2011, we had an additional week of results (53rd week).
The results of our Venezuelan businesses have been reported under highly inflationary accounting since the beginning of 2010. See further unaudited information in “Our Business Risks”, “Items Affecting Comparability” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In the first quarter of 2011, QFNA changed its method of accounting for certain U.S. inventories from the last-in, first-out (LIFO) method to the average cost method as we believe that the average cost method of accounting improves our financial reporting by better matching revenues and expenses and better reflecting the current value of inventory. The impact of this change on consolidated net income in the first quarter of 2011 was approximately $9 million (or less than a penny per share).
Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Estimates are used in determining, among other items, sales incentives accruals, tax reserves, stock-based compensation, pension and retiree medical accruals, amounts and useful lives for intangible assets, and future cash flows associated with impairment testing for perpetual brands, goodwill and other long-lived assets. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results could differ significantly from these estimates.
While our United States and Canada (North America) results are reported on a weekly calendar basis, most of our international operations report on a monthly calendar basis. The following chart details our quarterly reporting schedule for all reporting periods presented except for 2011 as noted above:
Quarter | U.S. and Canada | International | ||
First Quarter | 12 weeks | January, February | ||
Second Quarter | 12 weeks | March, April and May | ||
Third Quarter | 12 weeks | June, July and August | ||
Fourth Quarter | 16 weeks | September, October, November and December | ||
See “Our Divisions” below, and for additional unaudited information on items affecting the comparability of our consolidated results, see further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts.
Our Divisions
Through our operations, authorized bottlers, contract manufacturers and third parties, we make, market, sell and distribute a wide variety of convenient and enjoyable foods and beverages, serving customers in more than 200 countries and territories with our largest operations in North America, Russia, Mexico, the United Kingdom and Brazil. Division results are based on how our Chief Executive Officer assesses the performance of and allocates resources to our divisions. For additional unaudited information on our divisions, see “Our Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The accounting policies for the divisions are the same as those described in Note 2, except for the following allocation methodologies:
• | stock-based compensation expense; |
• | pension and retiree medical expense; and |
• | derivatives. |
Stock-Based Compensation Expense
Our divisions are held accountable for stock-based compensation expense and, therefore, this expense is allocated to our divisions as an incremental employee compensation cost. The allocation of stock-based compensation expense in 2013 was approximately 16% to FLNA, 2% to QFNA, 5% to LAF, 24% to PAB, 13% to Europe, 12% to AMEA and 28% to corporate unallocated expenses. We had similar allocations of stock-based compensation expense to our divisions in 2012 and 2011. The expense allocated to our divisions excludes any impact of changes in our assumptions during the year which reflect market conditions over which division management has no control. Therefore, any variances between allocated expense and our actual expense are recognized in corporate unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs measured at a fixed discount rate, as well as amortization of costs related to certain pension plan amendments and gains and losses due to demographics, including salary experience, are reflected in division results for North American employees. Division results also include interest costs, measured at a fixed discount rate, for retiree medical plans. Interest costs for the pension plans, pension asset returns and the impact of pension funding, and gains and losses other than those due to demographics, are all reflected in corporate unallocated expenses. In addition, corporate unallocated expenses include the difference between the service costs measured at a fixed discount rate (included in division results as noted above) and the total service costs determined using the plans’ discount rates as disclosed in Note 7 to our consolidated financial statements.
Derivatives
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses 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 net income. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.
Net revenue and operating profit of each division are as follows:
Net Revenue | Operating Profit (a) | ||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||
FLNA | $ | 14,126 | $ | 13,574 | $ | 13,322 | $ | 3,877 | $ | 3,646 | $ | 3,621 | |||||||||||
QFNA | 2,612 | 2,636 | 2,656 | 617 | 695 | 797 | |||||||||||||||||
LAF | 8,350 | 7,780 | 7,156 | 1,242 | 1,059 | 1,078 | |||||||||||||||||
PAB | 21,068 | 21,408 | 22,418 | 2,955 | 2,937 | 3,273 | |||||||||||||||||
Europe | 13,752 | 13,441 | 13,560 | 1,293 | 1,330 | 1,210 | |||||||||||||||||
AMEA | 6,507 | 6,653 | 7,392 | 1,174 | 747 | 887 | |||||||||||||||||
Total division | 66,415 | 65,492 | 66,504 | 11,158 | 10,414 | 10,866 | |||||||||||||||||
Corporate Unallocated | |||||||||||||||||||||||
Mark-to-market net (losses)/gains | (72 | ) | 65 | (102 | ) | ||||||||||||||||||
Merger and integration charges | — | — | (78 | ) | |||||||||||||||||||
Restructuring and impairment charges | (11 | ) | (10 | ) | (74 | ) | |||||||||||||||||
Venezuela currency devaluation | (124 | ) | — | — | |||||||||||||||||||
Pension lump sum settlement charge | — | (195 | ) | — | |||||||||||||||||||
53rd week | — | — | (18 | ) | |||||||||||||||||||
Other | (1,246 | ) | (1,162 | ) | (961 | ) | |||||||||||||||||
$ | 66,415 | $ | 65,492 | $ | 66,504 | $ | 9,705 | $ | 9,112 | $ | 9,633 | ||||||||||||
(a) | For information on the impact of restructuring, impairment and integration charges on our divisions, see Note 3 to our consolidated financial statements. See also Note 15 to our consolidated financial statements for more information on our transaction with Tingyi and refranchising of our beverage business in Vietnam in our AMEA segment. |
Corporate
Corporate unallocated includes costs of our corporate headquarters, centrally managed initiatives such as research and development projects, unallocated insurance and benefit programs, foreign exchange transaction gains and losses, commodity derivative gains and losses, our ongoing business transformation initiative and certain other items.
Other Division Information
Total assets and capital spending of each division are as follows:
Total Assets | Capital Spending | ||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||
FLNA | $ | 5,308 | $ | 5,332 | $ | 5,384 | $ | 423 | $ | 365 | $ | 439 | |||||||||||
QFNA | 983 | 966 | 1,024 | 38 | 37 | 43 | |||||||||||||||||
LAF | 4,829 | 4,993 | 4,721 | 384 | 436 | 413 | |||||||||||||||||
PAB | 30,350 | 30,899 | 31,142 | 716 | 702 | 1,006 | |||||||||||||||||
Europe | 18,702 | 19,218 | 18,461 | 550 | 575 | 588 | |||||||||||||||||
AMEA | 5,754 | 5,738 | 6,038 | 531 | 510 | 693 | |||||||||||||||||
Total division | 65,926 | 67,146 | 66,770 | 2,642 | 2,625 | 3,182 | |||||||||||||||||
Corporate (a) | 11,552 | 7,492 | 6,112 | 153 | 89 | 157 | |||||||||||||||||
$ | 77,478 | $ | 74,638 | $ | 72,882 | $ | 2,795 | $ | 2,714 | $ | 3,339 | ||||||||||||
(a) | Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and certain pension and tax assets. |
Amortization of intangible assets and depreciation and other amortization of each division are as follows:
Amortization of Intangible Assets | Depreciation and Other Amortization | ||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||
FLNA | $ | 7 | $ | 7 | $ | 7 | $ | 430 | $ | 445 | $ | 458 | |||||||||||
QFNA | — | — | — | 51 | 53 | 54 | |||||||||||||||||
LAF | 8 | 10 | 10 | 253 | 248 | 238 | |||||||||||||||||
PAB | 58 | 59 | 65 | 863 | 855 | 865 | |||||||||||||||||
Europe | 32 | 36 | 39 | 525 | 522 | 522 | |||||||||||||||||
AMEA | 5 | 7 | 12 | 283 | 305 | 350 | |||||||||||||||||
Total division | 110 | 119 | 133 | 2,405 | 2,428 | 2,487 | |||||||||||||||||
Corporate | — | — | — | 148 | 142 | 117 | |||||||||||||||||
$ | 110 | $ | 119 | $ | 133 | $ | 2,553 | $ | 2,570 | $ | 2,604 | ||||||||||||
Net revenue and long-lived assets by country are as follows:
Net Revenue | Long-Lived Assets(a) | ||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||
U.S. | $ | 33,626 | $ | 33,348 | $ | 33,053 | $ | 28,504 | $ | 28,344 | $ | 28,999 | |||||||||||
Russia | 4,908 | 4,861 | 4,749 | 7,890 | 8,603 | 8,121 | |||||||||||||||||
Mexico | 4,347 | 3,955 | 4,782 | 1,226 | 1,237 | 1,027 | |||||||||||||||||
Canada | 3,195 | 3,290 | 3,364 | 3,067 | 3,294 | 3,097 | |||||||||||||||||
United Kingdom | 2,115 | 2,102 | 2,075 | 1,078 | 1,053 | 1,011 | |||||||||||||||||
Brazil | 1,835 | 1,866 | 1,838 | 1,006 | 1,134 | 1,124 | |||||||||||||||||
All other countries | 16,389 | 16,070 | 16,643 | 10,297 | 10,600 | 11,041 | |||||||||||||||||
$ | 66,415 | $ | 65,492 | $ | 66,504 | $ | 53,068 | $ | 54,265 | $ | 54,420 | ||||||||||||
(a) | Long-lived assets represent property, plant and equipment, nonamortizable intangible assets, amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used. |